Septimo v. Farmer

Filing 10

ORDER AFFIRMING BANKRUPTCY COURT'S DECISION re: 1 Bankruptcy Appeal. Signed by JUDGE DAVID ALAN EZRA on 3/5/2012. (afc)CERTIFICATE OF SERVICEParticipants registered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). All participants are registered to receive electronic notifications.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII

In re
RERI NANILEI SEPTIMO,
Debtor.
____________________________
RERI NANILEI SEPTIMO,
Appellant,
vs.
DAVID C. FARMER,
Appellee.
____________________________

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CV. NO. 11-00315 DAE-KSC
BK. NO. 09-02506 RJF

ORDER AFFIRMING BANKRUPTCY COURT’S DECISION
Pursuant to Local Rule 7.2(d), the Court finds this matter suitable for
disposition without a hearing. After reviewing Appellant Reri Nanilei Septimo’s
appeal and the supporting and opposing memoranda, the Court AFFIRMS the
Bankruptcy Court’s decision.

BACKGROUND
I.

Procedural History
On October 27, 2009, Appellant Reri Nanilei Septimo (“Appellant”)

filed a voluntary petition for bankruptcy under Chapter 7. (Bk. No. 09-02506,
Doc. # 1.) On her schedule of assets, Appellant listed an interest in real property
located at 21 Oopu Way in Wailuku. (Id., Schedule A.) The property is leased
from the State of Hawaii Department of Hawaiian Home Lands, pursuant to the
Hawaiian Homes Commission Act of 1920 (“HHCA”).1 (Doc. # 6 at 4.) In her
petition, Appellant claimed that her residence was exempt under “42 Statute 108
Chapter 42 Section 205,” an apparent reference to the HHCA. (Bk. No. 09-02506,
Doc. # 1., Schedule C.)
On January 9, 2010, Bankruptcy Trustee David C. Farmer
(“Appellee” or “Trustee”) filed an objection to Appellant’s claims of exemption.
(Bk. No. 09-02506, Doc. # 11.) The objection asserted, inter alia, that the HHCA
provides no exemption to the property and that the Trustee may sell leasehold land

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The HHCA set aside 200,000 acres of land previously ceded to the United
States “for the creation of loans and leases to benefit native Hawaiians.” Arakaki v.
Lingle, 477 F.3d 1048, 1054 (9th Cir.). These lands were to be leased exclusively
to native Hawaiians for a term of ninety-nine years at a nominal rate of one dollar
per year. HHCA § 208(1), (2) & (5).
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with any attached structures to any qualified Hawaiian Homes beneficiary. (Id. at
4.)
On February 3, 2010, Appellant filed an opposition to the Trustee’s
objection. (Bk. No. 09-02506, Doc. # 15.) On February 4, 2010, Appellant filed
an amended opposition asserting, inter alia, that the Trustee should be equitably
estopped from “backtracking on an exemption that has long been honored in this
district.” (Bk. No. 09-02506, Doc. # 17 at 3.) On February 10, 2010, the Trustee
filed a Reply. (Bk. No. 09-02506, Doc. # 20.) On February 12, 2010, Appellant
filed Debtor’s Submission of Additional Argument and Evidence in opposition to
the objection. (Bk. No. 09-02506, Doc. # 22.) Appellant argued, inter alia, that the
lease cannot be transferred without DHHL first declaring that she has forfeited the
lease. (Id. at 5.) Appellant further argued that because she has not violated the
lease conditions, DHHL cannot order her to vacate the property. (Id.)
On February 22, 2010, the Bankruptcy Court issued an Order
overruling the Trustee’s objection as to Appellant’s motor vehicle, but sustaining
the objection as to Appellant’s interest in “her residence, a Hawaiian Homes
property located at 21 Oopu Way Wailuku, Maui, Hawaii.” (Bk. No. 09-02506,
Doc. # 26, at 2.) Appellant did not appeal this order.

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On April 13, 2010, Appellant was discharged. (Bk. No. 09-02506,
Doc. # 31.)
On March 18, 2011, Appellee filed a Motion to Compel Debtor to
Cooperate with Trustee (“Motion to Compel”). (Bk. No. 09-02506, Doc. # 35.)
The Trustee asserted that Appellant had not allowed him access to the property to
permit the inspection by a potential purchaser despite his repeated requests. (Bk.
No. 09-02506, Doc. # 35-1 at 6.) The Trustee further asserted that he has the “right
and the duty to administer DHHL property so long as it complies [with] the
requirements of the Hawaiian Homes Commission Act that requires that the
property be used solely for the benefit of a qualified beneficiary.” (Id. at 7.)
On April 6, 2011, Appellant filed an opposition to the Trustee’s
Motion to Compel. (Bk. No. 09-02506, Doc. # 39.) Appellant asserted that under
the HHCA, her leasehold rights to the Subject Property can only be taken away if
she is in violation of the terms of the lease, which she was not. (Id. at 4.)
Appellant further contended that to eject her and cancel the leasehold rights,
DHHL must declare her leasehold interest null after a hearing, and an ejectment
action in court must occur. (Id. at 4–5.) Appellant also argued that Appellee had
not demonstrated how the Bankruptcy Court may “overcome[] the Department of
Hawaiian Homelands’ over the land it administers.” (Id. at 5–6.)
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On April 19, 2011, Appellant filed an amended Schedule C and listed
her interest in the leasehold property, claiming an exemption of $10,976.00. (Bk.
No. 09-02506, Doc. # 44, Schedule C.)
II.

Bankruptcy Court’s Decision
At the hearing on April 20, 2011, the Bankruptcy Court stated the

following:
Okay, so where I stand right now is, I’ve ruled in another case and
that ruling has been affirmed by the District Court that the Hawaiian Home
Lands’ leases are property of the bankruptcy estate, they’re not exempt and
they effectively belong to the trustee so the trustee can do whatever he can
with them. The value of them is limited because they could only be sold to
qualifying lessees and that’s a small market, so in some cases it may be
impossible to sell. But under the law, they do belong to the bankruptcy
estate and that’s—that’s been argued in this case and others and the District
Court has said I’m right about that.
Now, the arguments made here that the only way to get rid of this
lease or to take the lease away from Ms. Septimo is to cancel it and then
have it reissued by the Department of Hawaiian Home Lands and that’s not
correct. The lease has a provision in it that says it can be assigned with the
two qualified lessee with the approval of DHHL and that’s what the Trustee
has to do, it has to find a qualified lessee and get DHHL’s approval to do
that. If the Trustee is able to do that, the— the Trustee can sell this property.
...
[T]his motion is really about whether you need to cooperate with the
Trustee’s effort to sell the property and I think it’s probably best for you if
you do. I mean, the Trustee is going to sell this property. He has the legal
right to sell this property. At this point, the only question is what price he
gets for it. If you don’t cooperate with him, don’t let people see the inside of
the property, it’s going to be sold for less money and you’ll get less benefit
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out of it. So it really is in your interest at this point to cooperate with the
Trustee and that’s also what I think you’re required to do under bankruptcy
law. In order to get your debts discharged, you have to turn over all your
property to the Trustee so he can give it to the creditor with certain
exceptions and these leases are not one of the exceptions.
(Bk. No. 09-02506, Doc. # 69, at 2–4.)
On April 22, 2011, the Bankruptcy Court issued a written Order
Granting Motion to Compel Debtor to Cooperate with Trustee. (Bk. No. 09-02506,
Doc. # 49.) The Order states:
The Motion [to Compel Debtor to Cooperate with Trustee] was brought on
the grounds that the Trustee successfully objected to the Debtor’s claim of
exemption regarding an interest in a Department of Hawaiian Home Lands
leasehold and attached property described as 21 Oopu Way Wailuku, HI
96793 (the “Property”) and the Trustee has sought to obtain access to the
Property to permit the inspection by a potential purchaser but the Debtor has
not consented to permit the inspection. . . .
The Debtor is hereby ordered to cooperate with the Trustee and permit
inspections of the Property. Should an order enter approving the sale of the
Property that is not stayed, the Debtor is obligated to cooperate with the
Trustee and promptly quit the premises. Upon the certification of the
Trustee of the Debtor’s failure to cooperate, the Trustee shall be entitled to
apply to the Bankruptcy court to issue process that will authorize the
Debtor’s removal from the Property through an immediate writ of
possession.
(Id. at 2–3.)
On May 2, 2011, Appellant filed a Notice of Appeal regarding the
Bankruptcy Court’s April 22, 2011 Order. (Bk. No. 09-02506, Doc. # 53.) On

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January 19, 2012, Appellant filed her Opening Brief. (Doc. # 6.) On February 2,
2012, Appellee filed his Answering Brief. (Doc. # 8.) Appellant did not file a
reply brief.
STANDARD OF REVIEW
A district court applies the same standard of review applied by an
appellate court in reviewing a bankruptcy appeal. In re JTS Corp., 617 F.3d 1102,
1109 (9th Cir. 2010). “The court reviews the Bankruptcy Court’s findings of fact
under the clearly erroneous standard and its conclusions of law de novo.” In re
Kimura, 969 F.2d 806, 810 (9th Cir. 1992); see also JTS Corp., 617 F.3d at 1109
(“The Bankruptcy Court’s findings of fact are reviewed for clear error, while its
conclusions of law are reviewed de novo.” (quotations omitted)); In re Marquam
Inv. Corp., 942 F.2d 1462, 1465 (9th Cir. 1991) (“We review the Bankruptcy
Court’s findings of fact under the clearly erroneous standard and its conclusions of
law de novo.”). The court “must accept the Bankruptcy Court’s findings of fact,
unless ‘the court is left with the definite and firm conviction that a mistake has
been committed.’” JTS Corp., 617 F.3d at 1109 (quoting In re Greene, 583 F.3d
614, 618 (9th Cir. 2009). “‘Mixed questions of law and fact are reviewed de
novo.’” Id. (quoting In re Chang, 163 F.3d 1138, 1140 (9th Cir. 1998)).

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DISCUSSION
In the instant appeal, Appellant contends that the Bankruptcy Court
cannot issue orders regarding disposition of the leasehold because: (1) the Trustee
does not have a right to the lease; and (2) Appellant can only be divested of the
lease if she is not in compliance of the lease terms.
I.

Assumption of the Lease
Appellant argues that the Subject Property is not part of the estate

because the Trustee has rejected the right to the lease by not timely assuming it
pursuant to 11 U.S.C. § 365(d)(1).2 Appellant did not present this argument before
the Bankruptcy Court.
As a general rule, an appellate court will not consider arguments that
are raised for the first time on appeal absent exceptional circumstances. See In re
Home America T.V.-Appliance Audio, Inc., 232 F.3d 1046, 1052 (9th Cir. 2000).
Exceptional circumstances exist when: (1) review will prevent a miscarriage of

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11 U.S.C. § 365(d)(1) states:

In a case under chapter 7 of this title, if the trustee does not assume or reject
an executory contract or unexpired lease of residential real property or of
personal property of the debtor within 60 days after the order for relief, or
within such additional time as the court, for cause, within such 60-day
period, fixes, then such contract or lease is deemed rejected.

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justice; (2) a change in the law raises a new issue while an appeal is pending; and
(3) “the issue presented is purely one of law and either does not depend upon the
factual record developed below, or the pertinent record has been fully developed.”
Id. The decision to consider an issue not raised below is discretionary and such an
issue should not be decided if it would prejudice the other party. Kimes v. Stone,
84 F.3d 1121, 1126 (9th Cir. 1996). None of the exceptional circumstances listed
above exist here. Accordingly, the Court will not decide this issue.
Appellant also argues that because the lease was rejected by the
Trustee, “the lease reverts to her in full,” and therefore she can only be divested of
the lease if she is in violation of the lease terms. (Doc. # 6 at 7.) This argument,
however, assumes that the Trustee rejected the lease, an issue that the Court
declines to reach. Therefore, the Court will not reach the issue of whether
Appellant can now avoid being divested of her lease if she is in compliance with
the lease terms.
To the extent that Appellant argues that she generally cannot be
divested of the lease if she remains in compliance with the lease terms—regardless
of whether the Trustee rejected the lease—this argument appears to revisit the issue
of whether the property can become part of the bankruptcy estate, which was
decided by the Bankruptcy Court in its February 22, 2010 Order Regarding
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Objection to Debtor’s Exemptions. (See Bk. No. 09-02506, Doc. # 26.)
Appellant’s argument that the Trustee “has not established that he has sufficient
Hawaiian blood to qualify as a holder of the lease,” (Doc. # 6 at 9–10), also
appears to pertain to whether the property is part of the estate. As noted above, the
Bankruptcy Court issued an order sustaining the Trustee’s objection to Appellant’s
claim of exemption as to the Subject Property. (Id.) Appellant did not appeal this
order. The Court therefore will not reach these issues.
In any event, this Court’s recent decision in In Re Maunakea disposes
of these issues. See In re Maunakea, 488 B.R. 252 (D. Haw. 2011). Maunakea
involved two chapter 13 bankruptcy cases with native Hawaiian debtors whose
assets included interests in real property leased from the Department of Hawaiian
Home Lands pursuant to the HHCA. Id. at 254–55. One of the issues on appeal
was whether the leaseholds should be considered property of the estate such that
their value must be considered in a hypothetical liquidation of the debtors’ assets
analysis. Id. at 254. The Court rejected the debtors’ argument that a “forced
transfer of a leasehold interest is qualitatively the same thing as a cancellation” and
that section 210 of the HHCA sets out the limited circumstances under which a
lease may be cancelled. Id. at 265. Section 210, which Appellant also cites,
provides:
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Whenever the department has reason to believe that any condition
enumerated in section 208 or any provision of section 209, of this title has
been violated, the department shall give due notice and afford opportunity
for a hearing to the lessee of the tract in respect to which the alleged
violation relates or to the successor of the lessee’s interest therein, as the
case demands. If upon such hearing the department finds that the lessee or
the lessee's successor has violated any condition in respect to the leasing of
such tract, the department may declare the lessee’s interest in the tract and
all improvements thereon to be forfeited and the lease in respect thereto
canceled, and shall thereupon order the tract to be vacated within a
reasonable time. The right to use and occupancy of the Hawaiian home lands
contained in such tract shall thereupon revest in the department and the
department may take possession of the tract and the improvements thereon.
HHCA § 210. The Court found that the HHCA “specifically contemplates the
different circumstances in which a forced transfer and a cancellation take place,”
and therefore the argument that section 210 is the only means by which native
Hawaiians may be divested of their leaseholds is without merit. Id. at 265–66.
The Court also rejected the characterization of such a transfer as forced, stating that
“[i]t is a maxim of bankruptcy law that a trustee ‘stands in the shoes’ of the
debtor.” Id. at 266 (citing Smith v. Arthur Andersen LLP, 421 F.3d 989, 1002 (9th
Cir. 2005). The Court went on to state:
Indeed, the trustee is “the representative of the bankrupt estate and has the
capacity to sue and be sued [as well as] collect and reduce to money the
property of the estate.” [Smith, 421 F.3d at 1002.] . . . The trustee, standing
in the shoes of the debtor, would simply effectuate a transfer of the leasehold
to another native Hawaiian. For the purposes of the Bankruptcy Code and
this analysis, it would be as though Appellants themselves had voluntarily
decided to transfer the leasehold. Although couched in the negative, the
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HHCA makes provision for such a transfer. See HHCA § 208(5) (“The
lessee shall not in any manner transfer to ... any other person, except a native
Hawaiian, and then only upon the approval of the [DHHL] ... his interest in
the tract.”). Moreover, although section 210 contemplates divestiture of a
leasehold by the DHHL, see HHCA § 210 (“[If certain conditions are
satisfied] the department may declare the lessee’s interest in the tract and all
improvements thereon to be forfeited . . . .” (emphasis added)), there is
nothing in the HHCA which suggests the DHHL’s consent to a transfer, as
required by HHCA section 208(5), is conditioned on a violation of the terms
and conditions of section 210.
Id. Appellant’s arguments regarding divesting of the lease and that the Trustee
must himself be native Hawaiian to administer the leasehold are without merit.
Moreover, here, the Trustee plans to transfer Appellant’s leasehold to another
native Hawaiian. (See Bk. No. 09-02506, Doc. # 35-1 at 6; Bk. No. 09-02506,
Doc. # 35-2 ¶ 4.)
II.

Motion to Compel Cooperation
Appellant has failed to proffer any persuasive argument as to why the

Bankruptcy Court erred in granting the Motion to compel her cooperation with the
Trustee, and she has not disputed that she has refused to grant the Trustee
reasonable access to her property. The Bankruptcy Court has already determined
that the Subject Property is included in the bankruptcy estate— an issue that is not
presently before the Court on appeal—and Appellant also concedes that her house
is part of the bankruptcy estate. (See Doc. # 6 at 7 (“The house on the property can

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be sold, the trustee can have the house removed and placed on another property.”).)

Section 521 of the Bankruptcy Code requires a debtor to cooperate
with the bankruptcy trustee to allow the trustee to perform trustee duties.
Specifically, Section 521 provides:
(a) The debtor shall-(3) if a trustee is serving in the case or an auditor is serving under
section 586(f) of title 28, cooperate with the trustee as necessary to enable
the trustee to perform the trustee’s duties under this title;
(4) if a trustee is serving in the case or an auditor is serving under
section 586(f) of title 28, surrender to the trustee all property of the estate
and any recorded information, including books, documents, records, and
papers, relating to property of the estate, whether or not immunity is granted
under section 344 of this title;
11 U.S.C. § 521.
The Trustee has a duty to, inter alia, “collect and reduce to money the
property of the estate for which such trustee serves, and close such estate as
expeditiously as is compatible with the best interests of parties in interest[.]” 11
U.S.C. § 704(a)(1). Here, the Trustee wants to access Appellant’s property so that
a potential purchaser may inspect it. The Trustee is merely performing his duties.
The Bankruptcy Court simply ordered Appellant to permit property
inspections and to vacate the premises if the Bankruptcy Court approves the sale of
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the property. This is not contrary to the Bankruptcy Code, and Appellant has not
persuaded the Court otherwise.
CONCLUSION
For the reasons stated above, the Court AFFIRMS the Bankruptcy
Court’s decision. Therefore, Appellant is hereby ordered to fully cooperate with
the Trustee in his effort to properly dispose of and transfer the real property which
is the subject of this action.

IT IS SO ORDERED.
DATED: Honolulu, Hawaii, March 5, 2012.

_____________________________
David Alan Ezra
United States District Judge

Septimo v. Farmer, CV No. 11-00315 DAE-KSC; ORDER AFFIRMING
BANKRUPTCY COURT’S DECISION

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