In Re: Taryn Vu-Rose, 2:16-cv-09539

Background

Debtor Taryn Vu-Rose filed Chapter 7 on July 12, 2016; Trustee Wesley Avery moved to sell real property at 215 S. Bedford Dr., Beverly Hills.
Property encumbered by large secured liens: first mortgage (~$2.67M), second mortgage (~$516k), IRS secured lien (~$1.223M secured + ~$35.5k unsecured), FTB lien (~$126k); aggregate secured liens ~$4.536M.
Trustee obtained Bankruptcy Court approval to sell the property free and clear for $4,010,000, with agreements to avoid portions of tax-penalty liens under 11 U.S.C. § 724(a) so taxing authorities would hold unsecured claims for part of their liens.
Bankruptcy Court ordered payments from sale proceeds to mortgage lenders and portions to IRS and FTB, and set aside funds for an IRS unsecured claim; deemed no sale proceeds would remain for debtor's homestead exemption.
Debtor appealed the Sale Order and moved for a stay pending appeal; Bankruptcy Court denied stay, reasoning sale would benefit unsecured creditors and that harm and public-interest factors favored the sale.
District court reviewed whether the Bankruptcy Court abused its discretion and affirmed denial of the stay, lifting the temporary stay previously issued by the district court.

Issues

Issue	Plaintiff's Argument (Vu-Rose)	Defendant's Argument (Trustee/Avery)	Held
Whether trustee may restructure tax lien treatment to produce unsecured distributions and thus justify a §363 sale	Trustee cannot alter secured/unsecured status fixed at petition date; carve-outs to create unsecured distributions are illegitimate subterfuge	Trustee and taxing authorities may agree to avoid lien portions under §724(a); such agreements can produce meaningful unsecured distributions	Court held trustee may negotiate carve-outs; Bankruptcy Court’s factual finding that sale benefits unsecured creditors stands
Whether sale should be stayed pending appeal due to likelihood of success on merits	Sale is improper and will not benefit unsecured creditors; debtor likely to succeed on appeal	Debtor unlikely to succeed; sale benefits unsecured creditors and remand is unnecessary	Court affirmed denial of stay: debtor unlikely to succeed on merits
Whether debtor’s homestead exemption prevents sale distributions to taxing authorities or prevents lien carve-outs	Homestead exemption protects debtor’s interest from surcharge via trustee manipulation	Federal supremacy allows federal tax liens and trustee actions to overcome state homestead exemption where no proceeds remain for exemption	Court held homestead exemption does not bar trustee’s actions; factual finding that no sale proceeds would attach to homestead is supported
Whether buyer is a good-faith purchaser and sale must be stayed until buyer’s good faith is tested	Debtor alleges issues about buyer’s source of funds; challenges good-faith status	Bankruptcy Court found buyer to be a good-faith purchaser; debtor submitted no evidence to rebut	Court accepted Bankruptcy Court’s good-faith finding; no basis to stay sale

Key Cases Cited

Hilton v. Braunskill, 481 U.S. 770 (stay factors standard)
Winter v. Natural Resources Defense Council, 555 U.S. 7 (preliminary injunction standard)
Am. Trucking Ass'ns, Inc. v. City of Los Angeles, 559 F.3d 1046 (preliminary injunction factors in Ninth Circuit)
Alliance for the Wild Rockies v. Cottrell, 632 F.3d 1127 (serious questions alternative test)
Sierra On–Line, Inc. v. Phoenix Software, Inc., 739 F.2d 1415 (definition of "serious question")
In re KVN Corp., 514 B.R. 1 (trustee duties; sale vs. abandonment; lien carve-outs)
In re Bolden, 327 B.R. 657 (limits of homestead exemption against federal tax liens and trustee sales)
United States v. Rodgers, 461 U.S. 677 (Supremacy Clause and federal liens overriding state exemptions)
In re City of Stockton, California, 542 B.R. 261 (abuse-of-discretion review of bankruptcy factual findings)
Paramount Land Co. LP v. California Pistachio Comm'n, 491 F.3d 1003 (irreparable harm requires likelihood of success on merits)