Carmel Financing LLC v. Mayacamas Holdings LLC

Background

E. Lynn Schoenmann, serving as the chapter 7 trustee for the estate of Mayacamas Holdings LLC, brought an adversary proceeding in bankruptcy court against 23 defendants, including Carmel Financing LLC. Carmel had loaned the debtor $2 million, secured by a first-priority deed of trust on property in eastern Sonoma County.

After the property was significantly damaged by the Tubbs Fire, the trustee received more than $2 million in insurance payments. After an approved cleanup payment, the trustee held $1,695,727.26 when the adversary proceeding began. The trustee claimed that the bankruptcy estate, rather than Carmel, was entitled to the remaining insurance proceeds because the insurance policy did not name Carmel or identify it as an additional loss payee. She also alleged that Carmel did not notify the insurer that it should be added as a loss payee as required by California law.

Carmel moved to dismiss the insurance-proceeds claims for failure to state a legally sufficient claim. Bankruptcy Judge Dennis Montali granted that motion in part and denied it in part, including denying Carmel’s motion as to the trustee’s insurance-proceeds claims. Judge Montali reasoned that Carmel had not shown that it perfected a security interest in the relevant personal property under the Uniform Commercial Code, that real property was not collateral governed by those provisions, that Carmel had not given the insurer the required written notice, and that California law did not allow an unnamed mortgagee to recover insurance proceeds for damage to mortgaged property.

Motion for leave to appeal

Carmel asked the district court for permission to appeal Judge Montali’s nonfinal bankruptcy order. Under 28 U.S.C. § 158(a)(3), a district court may allow an appeal from an interlocutory bankruptcy order. The court applied a standard requiring a potentially controlling legal question, a substantial basis for disagreement about that question, and an immediate appeal that would materially advance the litigation. The opinion states that such appeals are intended to be rare and limited to exceptional circumstances.

Carmel argued that Judge Montali had not addressed its separate argument based on what Carmel called the “Bankruptcy Freeze.” Carmel asserted that its perfected security interest in the real property automatically continued in the insurance proceeds when the property was destroyed and changed form. Carmel also maintained that its security interest in the insurance proceeds was perfected under the Uniform Commercial Code.

Ruling

Judge Orrick denied Carmel’s motion for leave to appeal. He concluded that Carmel had not shown a substantial ground for disagreement about the “Bankruptcy Freeze” issue. Although the issue might involve a controlling legal question, Carmel cited no analogous decisions showing that judges had reached different conclusions in similar circumstances. The court stated that novelty alone was insufficient, particularly because the parties appeared to agree that the issue was one of first impression.

The court therefore denied the motion for leave to file an interlocutory appeal under 28 U.S.C. § 158(a)(3). It also ordered that the appeal be dismissed and stated that the order terminated the case and all pending motions on the district court’s docket.

Caption note

The supplied case name includes Mayacamas Holdings LLC, but the opinion’s caption names E. Lynn Schoenmann as plaintiff and Carmel Financing LLC as defendant. This summary follows the opinion’s caption.