Case Analysis: Ly v. Che (In re Ly), 2015 WL 1787575 (9th Cir. Apr. 21, 2015), Insolvency Law e-Bulletin, Insol. L. Comm., Bus. L. Sec., Cal. State Bar (July 30, 2015).

In Ly v. Che (In re Ly), 2015 WL 1787575 (9th Cir. Apr. 21, 2015), the U.S. Court of Appeals for the Ninth Circuit affirmed the BAP’s issuance of sanctions against an appellant and its attorney for filing a frivolous appeal, but declined to issue further sanctions because (a) the BAP cases that foreclosed the appellant’s arguments were not binding on the Ninth Circuit, and (b) a non-frivolous argument could be made that the reasoning of those BAP cases should not be adopted by the Ninth Circuit.

To read the full, unpublished decision, click here:

In 2006, a forged deed was recorded with the L.A. County’s recorder’s office, purporting to transfer title of certain residential real property from Michelle Che (“Che”) to occupant Alen Ly (“Ly”).  When Che found out about it, she sued Ly and obtained a default judgment declaring the deed void and enjoining Ly from coming within 100 yards of the property.  Ly apparently refused to move out.

Ly filed for bankruptcy in April 2012; in his schedules he claimed to own the property.  A few months later, Che filed a motion for relief from stay to commence eviction proceedings.  Ly opposed the motion on the grounds that Che was not a real party in interest, and lacked standing to seek relief, because Ly had allegedly purchased the property from Che in July 2006.  Ly claimed that he had retained counsel to handle the state court litigation, and was shocked when he later received a 5-day notice to quit.

The bankruptcy court granted Che’s motion for relief from stay, and Ly appealed to the BAP.  Che responded by, among other things, filing a motion asking the BAP to sanction Ly and his counsel for filing a frivolous appeal.  Ly did not file any response to the motion.

In an unpublished decision, the BAP affirmed.  In doing so, the BAP referred to two cases it published in 2011 holding that a party moving for stay relief has a colorable claim sufficient to establish standing to prosecute the motion if it has an ownership interest in the subject property.  See Veal v. Am. Home Mortg. Servicing, Inc. (In re Veal), 450 B.R. 897, 913 (9th Cir. BAP 2011); Edwards v. Wells Fargo Bank, N.A. (In re Edwards), 454 B.R. 100, 105 (9th Cir. BAP 2011).

The BAP also sanctioned Ly and his counsel pursuant to FRBP 8020.  The BAP identified two reasons for its issuance of sanctions.  First,

[Ly’s counsel] should have known from our published opinions in In re Veal and In re Edwards that Panel precedent quite clearly recognizes that a party moving for relief from stay who has a colorable claim to ownership of the subject property has prudential standing.  We assume that he read the Panel’s opinion in In re Veal because he cited it to us in [his] Opening Brief specifically for its “exhaustive” discussion of standing and real party in interest issues.

Second, the BAP found it “particularly troubling” that when Ly’s counsel filed Ly’s original excerpts of the record, he omitted exhibits to declarations filed in support of Che’s motion for relief from stay (including the certified copy of the judgment), though he did include exhibits to his own declaration.  Ly’s counsel “had to be aware that the Judgment was a critical part of the evidentiary record before the bankruptcy court supporting its finding that Che had standing to seek stay relief.”  Ly’s counsel only supplemented the excerpts of the record to include the judgment after the BAP’s motions panel ordered Ly “to supplement the record with a complete copy, ‘including exhibits,’ of the Stay Motion.”

Ly appealed the BAP’s affirmance of the bankruptcy court’s order, and the BAP’s issuance of sanctions, to the Ninth Circuit.  Che responded by filing a motion with the Ninth Circuit requesting additional sanctions against Ly and his counsel.

First, the Ninth Circuit easily affirmed the BAP’s affirmance of the bankruptcy court’s order granting relief from stay.

Second, the Ninth Circuit ruled that the BAP did not abuse its discretion in sanctioning Ly and his attorney for filing a frivolous appeal. “Given the case law directly contradicting [Ly’s] position [i.e., Veal and Edwards], the result of Ly’s appeal was obvious and his arguments were ‘wholly without merit.’”

However, applying the exact same standard that the BAP applied when it issued its sanctions, the Ninth Circuit declined to issue further sanctions against Ly and his attorney because “the cases that foreclosed Ly’s arguments before the BAP, [Veal] and [Edwards], are not binding on this court.  Accordingly, because a non-frivolous argument could be made that the reasoning of those cases should not be adopted by this Court, although no such argument was made, we decline to impose sanctions for a frivolous appeal in the exercise of our discretion.”

Based on the facts described in the BAP’s decision, Che clearly had standing to move for relief from stay and Ly’s appeal was frivolous.  But mixed signals from the Ninth Circuit make this decision notable.  While a circuit court can certainly exercise its own discretion in deciding whether to issue sanctions, how can the further appeal to the circuit court be considered non-frivolous where the circuit court affirms a lower court’s issuance of sanctions for filing a frivolous appeal?

In any event, litigants who intend to challenge a prior BAP ruling before the circuit court should elect to proceed before the district court or should be certain to make a non-frivolous argument that the prior BAP decision should be overruled.  Otherwise, even if a non-frivolous argument could be made that the BAP’s prior ruling should not be adopted by the circuit court, a party and counsel risk sanctions simply because the BAP considers its published rulings binding on subsequent panels.  See Ball v. Payco-Gen. Am. Credits, Inc. (In re Ball), 185 B.R. 595, 597 (9th Cir. BAP 1995) (“[w]e will not overrule our prior rulings unless a Ninth Circuit Court of Appeals decision, Supreme Court decision or subsequent legislation has undermined those rulings.”); Inst. of Imaginal Studies v. Christoff (In re Christoff), 527 B.R. 624, 634 (9th Cir. BAP 2015).

These materials were written by John N. Tedford, IV, of Danning, Gill, Diamond & Kollitz, LLP (  Editorial contributions were provided by Everett L. Green of the Insolvency Law Committee. 

Thank you for your continued support of the Committee.

Best regards,

Insolvency Law Committee