Opinion
Case no. 02-64778-T, Adversary Proceeding No. 02-6919-T
January 27, 2003
MEMORANDUM OPINION
Hearing was held December 3, 2002, on plaintiff's motion for the court to abstain or withdraw reference in her complaint to determine dischargeability of debt, or alternatively to remand the proceeding to the Circuit Court of the County of Chesterfield, Virginia, or alternatively to grant relief from the automatic stay. Also on December 3, the court heard pro se debtor's motions for sanctions, to retain this adversary proceeding in the bankruptcy court, to strike certain evidence, and for summary judgment in the above-referenced complaint. At the conclusion of the hearing, all of these motions were taken under advisement, and the parties were asked to return to court on January 8, 2003.
At the January 8 hearing, the court ruled that plaintiff's motions to withdraw reference or abstain were both inappropriate. However, the court ruled that relief from the automatic stay would be granted to plaintiff. Relief from stay will permit the state-court litigation to continue in the Chesterfield Circuit Court on the plaintiff's bill of complaint to establish a will, to set aside fraudulent conveyances, for fraud and misrepresentation, to order an injunction, for her own appointment as the personal representative of the deceased, and to order a complete and proper accounting.
Also during the January 8 hearing, the court denied debtor's motions for sanctions, for the court to retain the adversary proceeding in the bankruptcy court, for the striking of certain evidence, and for summary judgment.
FACTS.
Debtor filed his chapter 7 petition on June 4, 2002, and on July 7, 2002, the trustee filed a report of no distribution in the case. On July 19, 2002, plaintiff Elizabeth Keane filed in the Chesterfield Circuit Court a complaint to establish a will and her bill of complaint for fraud and misrepresentation by debtor and other defendants, to set aside fraudulent conveyances allegedly made by debtor and other defendants, for breach of fiduciary duty by debtor and other defendants, for fraudulent and voluntary conveyances by debtor and other defendants, for a complete accounting, and for her own appointment as the personal representative of the deceased. On July 31, 2002, a hearing was scheduled to be heard in Chesterfield County Circuit Court, but was removed from the docket as resolved prior to that date.
On August 28, 2002, debtor filed amended schedules in his bankruptcy case, adding plaintiff as a creditor for $1,200,000.00. In the amended schedule debtor indicated that the debt to plaintiff was incurred between 1991 and 2001 stemming from an "alleged land transfer mistake."See Debtor's Amended Schedule F at 2.
On August 31, 2002, this adversary proceeding was filed seeking a determination of dischargeability of this debt under 11 U.S.C. § 523(a)(2)(A), (a)(4), (a)(6) and 11 U.S.C. § 544, 548. Plaintiffs factual allegations in this adversary stem directly from the above-mentioned state-court litigation where plaintiff seeks $1,200,000.00 in damages from debtor and other defendants.
DISCUSSION AND CONCLUSIONS OF LAW.
Violation of the Automatic Stay.
Although debtor has made no assertion in his papers concerning plaintiff's filing suit against him after he filed bankruptcy, it is an issue that must be considered by the court. Section 362 of the Bankruptcy Code protects debtors from
the commencement or continuation, including the issuance or employment of process, of a judicial . . . action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title.
11 U.S.C. § 362(a)(1). When plaintiff filed her petition in the Chesterfield Circuit Court on July 19, 2002, she violated the automatic stay provided in 11 U.S.C. § 362(a)(1). The scheduling of a hearing for July 31, 2002, further violated the automatic stay.
However, debtor failed to include plaintiff as a creditor on the schedules he filed with his bankruptcy petition on June 4, 2002, and plaintiff asserts that she did not have notice of debtor's bankruptcy case when she filed suit in Chesterfield. Plaintiff further claims that she has taken no action in the state-court suit since learning of debtor's bankruptcy, and debtor has not asserted otherwise. In fact, debtor has not raised § 362(a)(1) as a defense to the state court suit.
As noted, debtor amended his bankruptcy schedules to list plaintiff as a creditor on August 28, 2002.
Under these circumstances, the court finds that plaintiff's conduct in the Chesterfield Circuit Court was not a willful violation of the automatic stay under § 362(h).
Relief from Stay.
Plaintiff's complaint asks as an alternative form of relief that the court grant her relief from the automatic stay so that she may proceed in her suit against debtor in state court. Code § 362(d)(1) permits the court, at the request of a party affected by the automatic stay, to annul, terminate, modify, or condition the effect of the stay for cause. "`Cause' (other than lack of adequate protection) is not defined in the Bankruptcy Code; rather, the court is required `[to] balance potential prejudice to the bankruptcy debtor's estate against the hardships that will be incurred by the person seeking relief from the automatic stay . . .'" Stone St. Servs. v. Granati (In re Granati), 271 B.R. 89, 93 (Bankr. E.D. Va. 2001) (quoting Robbins v. Robbins (In re Robbins), 964 F.2d 342, 345 (4th Cir. 1992)). When granting relief from the automatic stay, the court must also consider "(1) whether only issues of state law are involved; (2) whether judicial economy will be promoted; (3) whether the litigation will interfere with the bankruptcy case; and (4) whether the estate can be protected by requiring that any judgment obtained be enforced only through the bankruptcy court." Granati, 271 B.R. at 93.
In balancing prejudice to the debtor and the estate with any possible hardship to the plaintiff, it is unknown what prejudice may occur to debtor at this point. Whether debtor owes a debt to plaintiff is to be determined, as is the issue of whether the debt was incurred as a result of debtor's fraud. The hardship that may be suffered by plaintiff is also not yet determinable. Until findings are made relating to the will and transfers that are being questioned, this court cannot ascertain whether there would be any hardship or prejudice to either party by keeping the stay in place.
As to the other considerations suggested by Granati, on the issue of whether state law questions predominate, Virginia Code § 64.1-75 creates jurisdiction for the establishment of a will in "[t]he circuit courts of the Commonwealth, and the clerks of such courts, and the duly qualified deputies of such clerks." Va. Code Ann. § 64.1-75 (Michie 2002). Further, the Virginia Code suggests that to impeach or establish a will, a bill may be brought on which a trial by jury shall be held. See Va. Code Ann. § 64.1-88 (Michie 2002).
The questions before the court in this adversary proceeding are predominated by questions of state law that will be better addressed by the state courts having expertise in will establishment and that are capable of providing a forum for a jury trial. On the issue of judicial economy, as this litigation involves other non-debtor parties, remanding the will-related issues will prevent both the state and bankruptcy courts from conducting trials on the same issues at separate times. Further, Congress has expressed a strong preference for litigants with claims arising under state laws to have their cases resolved by state courts as opposed to the bankruptcy courts. See Abramson v. Steingold Cos., Ltd. (In re Steingold Cos.), 960 F.2d 147, 1992 WL 81677, at *1 (4th Cir. 1992) (citing 28 U.S.C. § 1334(c));Piombo Corp. v. Castlerock Props., (In re Castlerock Props.), 781 F.2d 159, 163 (9th Cir. 1986).
The state court pleading attached to plaintiff's complaint in this adversary proceeding revealed several other defendants including Benjamin Keane, Wachovia Bank Association, Trste, Inc., and First Union National Bank. See State Ct. Compl. at 1.
The final Granati considerations relate to the preservation and protection of the bankruptcy estate. The litigation in state court will in no way interfere with the bankruptcy case, as debtor's case was near its completion at the time the adversary proceeding and plaintiff's claim were filed. Further, the court is granting relief from stay on the conditions that 1) any monetary judgment obtained in the state court litigation will be enforced only through the bankruptcy court, and 2) that the trustee act to preserve any interest the estate may have in the state court litigation.
Motion for Sanctions.
Debtor's request for sanctions under Federal Rule of Bankruptcy Procedure 9011 is based on debtor's allegations that plaintiff's suit was filed to harass debtor and that plaintiff's complaint is not supported by facts. Rule 9011(b) requires that filings with the bankruptcy court
(1) [are] not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation; . . . (3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery.
At the outset, the court notes that debtor's motion is premature. Typically, a Rule 9011 motion aimed at litigation filed is considered by the court only after there has been some evidence indicating that the suit is improper. Here, we have only debtor's bare assertion that the suit was filed for harassment purposes. Other than the plaintiff's pleadings there is no record to support the motion.
Under Rule 9011, the court is to review the pleadings with an objective standard of reasonableness, weighing ambiguities in favor of the filing party. See McGahren v. First Citizens Bank Trust Co. (In re Weiss), 111 F.3d 1159, 1170 (4th Cir. 1997), cert. denied, 522 U.S. 950 (1997) (finding that Rule 9011's standard of review is analogous to Federal Rule of Civil Procedure 11); 10 Collier on Bankruptcy ¶ 9011.04[5] (Alan N. Resnick Henry J. Sommer eds., 15th ed. 1999) (when reviewing pleadings alleged to be made without merit, the court shall resolve ambiguities in favor of the filing party).
If the court were to make its own motion under rule 9011, the code requires the court to first order the attorney or law firm who allegedly violated 9011(b) to show cause why they have not violated 9011. While this same procedural requirement is not imposed upon the parties by the code, it is helpful to a court considering a motion for sanctions to have some predicate finding prior to granting such a motion. For example, after a trial where pleadings have been shown to be unfounded, a court could make an informed decision as to whether rule 9011 sanctions should be imposed.
The facts of this case do not reveal the complaint to be unfounded. The Chesterfield Circuit Court has taken some limited action in the case before it that suggests the court has not considered plaintiff's filings to be made merely to harass the debtor. In reviewing the complaint filed by plaintiff in this adversary proceeding, the court finds that the allegations appear to be supported by allegations similar to those made in the state court.
Accordingly, the court finds that at this stage of the case debtor's claims of harassment are unfounded. The mere filing of a suit is not harassment under 9011. The court will deny the motion for sanctions.
Motion for Summary Judgment.
Debtor's motion for summary judgment is reviewed under Federal Rule of Civil Procedure 56(c), made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7056(c), which states "judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). While rule 7056 does not require affidavits to be filed with the motion for summary judgment, it does suggest that supporting documents should be filed alongside. In the instant case, debtor filed his motion with a certificate of death, a deed, and a power of attorney. Alone, these three documents do not support debtor's argument that there are no genuine issues of material fact that need to be resolved by a court. Instead, debtor's motion plainly demonstrates that there are unresolved issues of material fact. Thus, applying the analysis required by rule 7056, as there are material issues of fact in dispute debtor's motion must be denied.
Motion to Strike Certain Evidence.
Debtor's motion to strike certain evidence falls under the purview of Federal Rule of Bankruptcy Procedure 9018, permitting the court to strike evidence "(1) to protect the estate . . . (2) to protect any entity against scandalous or defamatory matter contained in any paper filed . . . or (3) to protect governmental matters that are made confidential by statute or regulation." F.R.Bankr.P. 9018. Debtor is seeking to strike only the state-court pleadings and the exhibits filed as evidence to support the allegations made in plaintiffs adversary complaint filed to commence this proceeding. Debtor's motion is based on his allegation that the pleadings and any exhibits therewith are "defamatory, inflammatory, irrelevant, prejudicial, based on hearsay, false statements, or facts not in evidence, self-serving, and generally immaterial to the claim before this Court." See Debtor's Mot. at 3.
There is no record or evidence in the court's file to support debtor's motion. His allegations pertaining to the pleadings are not supported, and the state court pleadings will not be stricken from this court's record as they do not violate Federal Rule of Bankruptcy Procedure 9018.
A separate order will be entered.