United States District Court, N.D. California
E. LYNN SCHOENMANN, Plaintiff and Appellee,
CARMEL FINANCING LLC, Defendant and Appellant.
ORDER DENYING MOTION FOR LEAVE TO APPEAL RE: DKT. NO.
WILLIAM H. ORRICK UNITED STATES DISTRICT JUDGE
Carmel Financing LLC (“Carmel”) seeks leave to
appeal the September 5, 2019 decision of the Hon. Dennis
Montali of the United States Bankruptcy Court for the
Northern District of California denying in part Carmel's
motion to dismiss in an adversary proceeding. See
Motion for Leave to Appeal Interlocutory Order
(“Mot.”) [Dkt. No. 1-4]; see also id.,
Ex. B (“Bankruptcy Decision”) [Dkt. No. 1-4] 1.
Interlocutory review pursuant to 28 U.S.C. § 158(a)(3)
is not warranted because Carmel has not shown that there is a
substantial ground for difference of opinion concerning Judge
Montali's order. Accordingly, I DENY Carmel's leave
April 7, 2019, plaintiff E. Lynn Schoenmann, chapter 7
trustee (“Trustee”) of the chapter 7 estate of
Mayacamas Holdings LLC (“Debtor”), initiated an
adversary proceeding in the United States Bankruptcy Court
for the Northern District of California. See
Bankruptcy Decision at 1. She named 23 defendants, including
defendant Carmel, in her Complaint. Id. at 1-2.
Carmel moved to dismiss the adversary proceedings for failure
to state a claim upon which relief can be granted.
Id. at 2. Judge Montali denied the motion in part
and granted it in part. Id.; see Mot., Ex.
then filed a motion for leave to appeal Judge Montali's
interlocutory order, which Trustee opposed. See
Response of Appellee E. Lynn Schoenmann, Chapter 7 Trustee,
to Motion of Appellant Carmel Financing, LLC, for Leave to
Appeal Interlocutory Order and Declaration of Thomas F.
Koegel in Support (“Oppo.”) [Dkt. No. 1-4]. The
pending motion for leave is now before me.
April 10, 2014, Debtor executed a promissory note in the
principal amount of $2, 000, 000 to the order of Carmel; it
was secured by a first priority deed of trust encumbering
property located in eastern Sonoma County (the “Ranch
Parcel”). Bankruptcy Decision at 2. On April 7, 2017,
Debtor filed a chapter 11 petition and listed the Ranch
Parcel as its principal asset. Id. Trustee was
appointed as the chapter 11 trustee on October 4, 2017, and
the case was converted to chapter 7 on December 5, 2017.
October 8, 2017, four days after the appointment of Trustee,
the Tubbs Fire erupted and caused significant damage to the
Ranch Parcel. Id. As a result, Trustee received more
than $2 million from Debtor's insurance carrier for
damages to the Ranch Parcel caused by the Tubbs Fire (the
“insurance proceeds”). Id. Except for a
court-approved expenditure of $418, 541.50 for post-fire
clean-up required by law, Trustee continues to hold the
insurance proceeds, which equaled $1, 695, 727.26 as of the
commencement of the adversary proceedings. Id. at 3.
Complaint, Trustee asserted that the chapter 7 estate, and
not Carmel, is entitled to the insurance proceeds because the
insurance policy does not mention Carmel or identify it as an
additional loss payee. Bankruptcy Decision at 3. She also
alleged that Carmel did not notify the insurer that it should
be added as a loss payee on the policy in accordance with
California law. Id.; see Cal. Comm. Code
§ 9312(b)(4) (governing the creation and perfection of
security interests in insurance policies).
contended in its motion to dismiss that the remaining
insurance proceeds should be turned over to it under the
promissory note and deed of trust. Bankruptcy Decision at
2-3. Carmel argued that its “status as a secured
creditor on the [Ranch Parcel] means that it holds a
perfected security interest in the Insurance Proceeds since
it cannot be disputed that the Insurance Proceeds are the
identifiable cash proceeds of that real estate
collateral.” Id. at 9 (internal quotation
marks and citation omitted).
Montali denied Carmel's motion to dismiss Trustee's
insurance proceeds claims; Carmel seeks leave to appeal that
portion of decision. He gave four reasons for his decision.
First, he emphasized that the Uniform Commercial Code
(“UCC”) defines “security interest”
as “an interest in personal property or
fixtures that secures payment or performance of an
obligation.” Bankruptcy Decision at 10 (emphasis in
original) (quoting Cal. Comm. Code § 1201(35)). He found
that Carmel did not provide any evidence that, prior to the
petition date, it perfected a security interest in any
personal property or fixtures of Debtor, either by filing a
financing statement or taking possession of such property as
required by the UCC. Id.; see Cal. Comm.
Code §§ 9310(a), (b)(6); Cal. Comm. Code §
Judge Montali pointed out that the UCC defines
“proceeds” as “disposition of collateral,
” and, as indicated in Cal. Comm. Code §
9109(c)(11), real property is not “collateral”
that is governed by the UCC. Bankruptcy Decision at 10.
Third, he found that Carmel did not provide any written
notification to the insurer that it should be added as a loss
payee to the policy, as required by California's version
of the UCC. Id. at 11. Fourth, he held that
California law “does not permit a mortgagee who has not
been named as an insured (or who has not provided written
notification of its security interest in the policy) to
recover insurance proceeds relating to claims of damage to
the mortgaged property.” Id. (citing Zaghi
v. State Farm Gen. Ins. Co., 77 F.Supp.3d 974, 977 (N.D.
Cal. 2015)). Judge Montali concluded that Trustee
sufficiently stated a claim relating to the insurance
proceeds. Id. at 12.