In a case of first impression, Judge Robert Kwan of the United States Bankruptcy Court for the Central District of California, Los Angeles Division issued a recent opinion in In re Nikolay Machevsky (Case No. 14-bk-29611) addressing whether the eviction moratoriums resulting from the Covid-19 pandemic prevented a chapter 7 trustee (the “Trustee”) from taking possession and seeking turnover of an individual debtor’s real property. This case is a cautionary tale for parties considering the protections of bankruptcy to avoid eviction and/or prevent the foreclosure of property as it exemplifies the pitfalls of filing without fully assessing eligibility for relief under existing Covid-19 eviction moratoria.
The debtor resided in real property that consisted of two condominiums located in Los Angeles (the “Real Property”). During the pendency of the case, Judge Kwan entered an order approving compromise, authorizing the Trustee to transfer Real Property free and clear of liens and requiring the debtor to turn over Real Property of the estate (the “Transfer Order”). The debtor sought reconsideration which the Court denied. Pursuant to the Transfer Order the debtor was required to vacate the Real Property and if any party failed to comply the Trustee was authorized to file an ex parte motion to seek writ of possession from the Court. The Trustee filed an ex parte motion requesting writ of possession of the real property, which the debtor opposed. The debtor looked to federal and state Covid-19 relief legislation as a means of preventing the Trustee from exercising his right of turnover of the debtor’s Real Property.
To date, various state initiatives were put into legislation to address issues resulting from the Covid-19 pandemic which included Assembly Bill 3088, The Tenant, Homeowner, and Small Landlord and Stabilization Act of 2020; The COVID-19 Small Landlord and Homeowner Relief Act of 2020 (“California AB 3088”), in addition to the federal eviction moratorium issued by the Center of Disease Control and Prevention (“CDC”).
To review the applicability of federal and state eviction moratoriums to the debtor’s case, the Court analyzed the policy considerations behind such legislation. The Court noted that the eviction moratoriums were designed specifically to provide aid to those that have lost the ability to pay housing costs through no fault of their own. In the debtor’s case, the Trustee sought turnover of the debtor’s Real Property because he had filed bankruptcy in 2014, a reason that was well outside of the scope of the moratoria. The Trustee reopened the case to administer the debtor’s Real Property as an asset of the estate, and the Court authorized the sale of the debtor’s Real Property by way of the Transfer Order in September 2020. The debtor failed to proffer any evidence qualifying him as a “covered person” under the guidelines for the federal eviction moratorium.
Moreover, the Court cited Federal Register, Vol. 85, No. 731, September 4, 2020, Notices, pages 55292-55293 noting that “persons may be evicted for reasons other than not paying rent or making a housing payment.” The issue faced by the debtor in the case was not whether he would be able to pay rent because of an uncontrollable loss of income resulting from the pandemic, instead the issue was whether the debtor was obligated to cooperate with the Trustee’s request for turnover of the Real Property. The Court answered in the affirmative emphasizing that the debtor had a statutory duty to cooperate with the Trustee under sections 521 (a)(3) and 542(a) of the Bankruptcy Code.
Similarly, in reviewing state specific eviction relief, Judge Kwan held that Assembly Bill 3088 did not apply “even if the property in question is [the debtor’s] residence” because the state moratorium “only applies to renters, small landlords, and homeowners who are unable to pay their rent or mortgage due to the Covid-19 pandemic. Thus, this law does not apply to a debtor who is required to turn over property of the bankruptcy estate.” In the case, the debtor was not a tenant who was being evicted for nonpayment of rent to a landlord and who was eligible to invoke the protection of Assembly Bill 3088 due to a financial hardship caused by Covid-19. The debtor was simply “required to turn over the Real Property pursuant to an order of the court enforcing the statutory turnover requirements of 11 U.S.C. § 542(a).” Judge Kwan overruled the debtor’s objection and entered a turnover order along with a writ of execution for the Trustee.
This decision is impactful for lenders and those seeking to foreclose and/or evict tenants as these tenants will bear the burden of proving that they do in fact meet relevant federal and state requirements in order to avail themselves of present eviction moratoriums.
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