Frates v. Wells Fargo Bank, N.A. (In re Frates)
Frates v. Wells Fargo Bank, N.A. (In re Frates), 507 B.R. 298, 2014 WL 982851 (9th Cir. BAP March 13, 2014)–The United States Bankruptcy Appellate Panel for the Ninth Circuit (the "BAP") ruled in a published decision that service under Federal Rule of Bankruptcy Procedure ("FRBP") 7004(h) governs service on an insured depository institution of a motion to avoid a judgment lien against the debtors’ real property under Bankruptcy Code section 522(f) ("Code section 522(f)") rather than the service provisions of California Code of Civil Procedure ("CCP") section 684.010, which applies to proceedings affecting judgment. It also ruled that including the recording information for the judgment lien in the motion sufficiently identified the property at issue to satisfy procedural due process.
Facts:
The debtors (the "Frates") moved under Code section 522(f) to avoid a judgment lien recorded against their residence by Wells Fargo Bank (the "Bank"). In making the motion, the Frates served the Bank "by certified mail addressed to an officer of the institution," as specified by FRBP 7004(h) for service on an insured depository institution. The Bank did not respond. The Frates moved for entry of default. The bankruptcy court declined to grant the motion, holding that the Frates should have served the Bank under CCP 684.010. CCP 684.010 requires service of papers regarding a judgment lien on the "judgment creditor’s attorney of record if the judgment creditor has an attorney of record." The bankruptcy court also held that by not including a legal description of the property in the notice, the Frates failed to sufficiently identify the property to give the Bank notice of the rights at issue. The Frates appealed to the BAP.
The BAP reversed, holding that service in accordance with FRBP 7004(h) was proper and that CCP 684.010 was inapplicable. The BAP also held that the provision of recording information about the judgment lien gave the Bank sufficient notice of what was at issue.
Reasoning:
In its central analysis, the BAP noted first that FRBP 1001 provides that "the Bankruptcy Rules and Forms govern procedure in cases under title 11 of the United States Code." Next, it observed that a lien avoidance proceeding is a "motion" under FRBP 9014, which applies to a "contested matter" per FRBP 4003(d). In turn, FRBP 9014(b) requires service under FRBP 7004. And, as noted above, FRBP 7004(h) regulates service on an insured depository institution such as the Bank. The BAP then noted that in Hanna v. Plumer, 380 U.S. 460 (1965), the United States Supreme Court had sanctioned service under Federal Rule of Civil Procedure 4(d)(1) (the civil cognate of FRBP 7004) in diversity actions, rather than state procedure, reasoning that to hold that state law governs procedure in federal courts when state law substantive rights are at issue would undermine the Constitution’s bestowal of the power to determine procedure in federal courts and Congress’ enactments thereunder.
In connection with its analysis, the BAP also observed that FBRP 7004 goes beyond the minimum notice requirements of Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306 (1950), thus addressing the concern in Jones v. Flowers, 547 U.S. 220 (2006) that Mullane might require more rigorous service in the context of proceedings that might eliminate property rights than in other kinds of proceedings. The BAP disagreed with dicta set forth in a concurring opinion in All Points Cap. Corp. v. Meyer (In re Meyer), 373 B.R. 84, 92 (9th Cir. BAP 2007) that opined that CCP 684.010 does apply to lien avoidance proceedings because of the extra assurance of successful service it may provide.
Finally, the BAP concluded that identifying the recording information was a sufficient guide to the Bank regarding the rights in play to satisfy the notice requirements of Mullane.
Comment:
The opinion is correct–“No Brainer” that federal procedure (here Federal Rules of Bankruptcy Procedure) governs how to serve a Motion that is filed in a bankruptcy case. There is nothing in the federal power over procedure in federal courts in general or the FRBP in particular to indicate a deferral to state law absent an express exception in a federal rule or statute. Moreover, as stated in a separate concurring and dissenting opinion in In re Meyer that criticized the concurrence mentioned above, adopting a conceptual regime that sometimes defers to state procedure when not specified in federal rules or statutes would be a prelude to mass confusion and chaos as courts tried to figure out when state procedure applies and when it does not.
Report on this decision appeared in the California State Bar Insolvency Committee e-newsletter of 5/15/14