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In re Willett

United States Bankruptcy Court, E.D. Virginia
May 9, 1996
Case No. 95-13066-AM, Adversary Proceeding No. 96-1118 (Bankr. E.D. Va. May. 9, 1996)

Opinion

Case No. 95-13066-AM, Adversary Proceeding No. 96-1118

May 9, 1996

Joel Steinberg, Esquire, Fairfax, VA, for the debtor/defendant

Gant Redmon, Esquire, Redmon, Boykin Braswell, L.L.P., Alexandria, VA, for the plaintiff

Office of the United States Trustee Alexandria, VA


MEMORANDUM OPINION


A hearing was held on April 29, 1996, in response to the order entered by this court sua sponte on April 16, 1996, setting a hearing to consider whether this action should be remanded to the Circuit Court of Fairfax County, Virginia, from which the debtor had removed it pursuant to the bankruptcy removal statute, 28 U.S.C. § 1452. The plaintiff and the defendant were both present by counsel. Upon consideration of the pleadings, exhibits, and argument of counsel, the court concludes that this matter should be remanded to the state court.

Facts

The debtor filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court on July 12, 1995. There were no assets to be administered, and the trustee filed a report of no distribution on October 12, 1995. The debtor received her discharge on October 24, 1995, and the case was closed the same date. Among the assets listed on the debtor's schedules and claimed exempt was "Potential proceeds from sale of 3603 Buckeye Court, Fairfax, VA" in an amount stated as "unknown." Among the listed creditors in her case was William Gerald Willett, her former father-in-law, with a $12,500 claim described as "Potential liability with regard to personal loan that was obtained by ex-spouse, Jeffrey Brett Willett." No objection was filed by the trustee or any creditor to the debtor's claimed exemptions.

The stated basis for the exemption was "VA Code Title 34." Title 34, Code of Virginia, 1950, as amended, includes a number of exemption statutes, and the debtor's schedules do not cite to a specific section. The only section of Title 34 that appears applicable to the claim of exemption is § 34-4, Code of Virginia, commonly known as the "homestead" exemption. Under the homestead exemption, a "householder," defined as any resident of Virginia, may exempt up to $5,000 worth of real property by filing an instrument known as a homestead deed with the clerk of the circuit court for the city or county where the property is located. §§ 34-1, 34-4, and 34-6, Code of Virginia. To the extent the homestead exemption is not claimed in real estate, the debtor may claim the exemption in personal property by filing a homestead deed in the city or county where the debtor resides. §§ 34-13 and 34-14, Code of Virginia. In the case of a debtor who has filed a chapter 7 petition, the homestead deed must be filed not later than five days after the meeting of creditors required by § 341, Bankruptcy Code. §§ 34-17, Code of Virginia. The meeting of creditors in this case was held on August 17, 1995, and on August 22, 1995, the debtor filed with the clerk of the Circuit Court of Fairfax County a homestead deed claiming exempt her interest, valued at $5,000.00, in "3603 Buckeye Court[,] Fairfax, Virginia."

Prior to the commencement of the debtor's bankruptcy case, a divorce decree had been entered on May 5, 1995 in the Circuit Court of Fairfax County, Virginia. In the divorce suit, Jeffrey Brett Willett was the plaintiff and cross-defendant and the debtor was the defendant and cross-plaintiff. The divorce decree incorporated the court's rulings on equitable distribution under § 20-107.3, Code of Virginia. A transcript of the hearing on equitable distribution reflects that the chancellor made the following rulings concerning the marital home:

As far as the property, I think there's not a whole lot of property. Unfortunately, as Mr. Fitzner [the husband's counsel] alluded to, this is an all too common case where by the time the couple get to equitable distribution there's nothing left to distribute, there's only debts left to allocate. The primary asset left to the parties is the marital home.

I find that the house is entirely marital. I find the husband has not proven that the $12,500 loan from his father amounted to a contribution of separate property as provided by the statute. . . . I'm going to direct that the house be actively listed until sold. . . .

Now, after the costs of the sale are paid, I've done some very rough math here, I think the husband's worksheets proposed approximately eight percent cost of sale, and I think that's very reasonable based on my knowledge of what it costs to sell property. . . . That leaves about $143,000 if the house went for the full asking price. Of course from that the first mortgage will have to be paid. And then I'm going to direct that the $12,500 loan from the husband's father be paid. I haven't included interest in that. I'm just going to direct that $12,500 be paid.

By my math, that leaves $22,928 left if the house is sold at is full present value. And I'm going to direct that those proceeds, whatever remains after paying the costs of sale, the first mortgage, and the husband's father his $12,500 back, be divided evenly between the parties.

The Final Decree of Divorce implementing the ruling contained the following language:

ADJUDGED, ORDERED and DECREED that the parties' former marital residence at 3603 Buckeye Court, Fairfax, Virginia, is entirely marital and is to be promptly listed for sale . . .; and it is further

ADJUDGED, ORDERED and DECREED that from the proceeds of the sale of said real property, shall be deducted the reasonable expenses of the sale, the pay off of any lien(s) thereon, the $12,500.00 loan from the Plaintiff/Cross-Defendant's father, and that the then remaining net proceeds shall be divided equally between the parties;

It appears that the house was duly listed for sale in accordance with the divorce decree, and that on January 22, 1996, the debtor and her husband signed a contract to sell the house to William D. Murray for $144,000. Settlement was scheduled for February 29, 1996. The debtor appeared but refused to sign a settlement statement containing a line-item deduction of $12,500.00, labeled "PAYMENT TO WILLIAM G. WILLET" [sic], but did offer to close if the $12,500 were escrowed by the closing agent "pending the resolution and authorization by both Sellers in writing as to the distribution of disbursement of such funds." William G. Willett, who appeared at the settlement as attorney-in-fact for his son, refused to close under those circumstances, and the court is advised that the purchaser subsequently declared the contract void based on the failure to close. On March 15, 1996, William G. Willett wrote to his son and the debtor offering to purchase the house "for the net sum of $5,000.00 each" after "all costs of closing and transfer of title," and with the father taking "subject to the existing mortgage." That same day, the son filed with the Circuit Court, in the divorce suit, a "Motion to Approve Sale of Property, Compel Conveyance Thereof, and For Appointment of Special Commissioner of Sale," seeking to compel the sale to the father upon the terms proposed in his offer. The motion was noticed for a hearing on March 22, 1996 but was continued to April 12, 1996. The day prior — April 11, 1996 — the debtor filed in this court a "Notice For Removal" removing to this court the "action" commenced by the March 15, 1996 Motion to Approve Sale. The debtor has subsequently filed an Amended Notice for Removal, and the plaintiff has filed an "Opposition to Notice of Removal," which the court treats as a motion to remand.

The court is advised that, after payment of closing costs, payoff of the existing deed of trust, and payment of the $12,500 to William G. Willett, the net proceeds payable to the parties under the Murray contract were $4,908.55 each.

The Murray contract was all cash to the sellers, with the purchaser obtaining a new first deed of trust loan.

The pleading that commences a removal is properly denominated a "notice of removal." F.R.Bankr.P. 9027(a). The procedure for challenging a removal is by a motion to remand. F.R.Bankr.P. 9027(d).

Conclusions of Law and Discussion I.

Removal of civil actions from other courts to bankruptcy courts is governed by 28 U.S.C. § 1452 ("Removal of claims related to bankruptcy cases"), which provides as follows:

(a) A party may remove any claim or cause of action in a civil action other than a proceeding before the United States Tax Court or a civil action by a governmental unit to enforce such governmental unit's police or regulatory power, to the district court for the district where such civil action is pending, if such district court has jurisdiction of such claim or cause of action under section 1334 of this title.

(b) The court to which such claim or cause of action is removed may remand such claim or cause of action on any equitable ground. An order entered under this subsection remanding a claim or cause of action, or a decision not to remand, is not reviewable by appeal or otherwise by the court of appeals under section 158(d), 1291, or 1292 of this title or by the Supreme Court of the United States under section 1254 of this title.

Although the statute speaks in terms of removal to the United States District Court, under 28 U.S.C. § 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984, all bankruptcy cases and all proceedings arising in bankruptcy cases or arising under the Bankruptcy Code or "related to" a bankruptcy case have been referred to the bankruptcy judges of this District. Accordingly, the removed action has been properly docketed in this court, and this court may properly determine the issues raised by the motion to remand.

Prior to the 1991 amendments to F.R.Bankr.P. 9027, the role of the bankruptcy court in connection with a motion to remand was limited to the filing of a report and recommendation with the United States District Court. That restriction was deleted by the 1991 amendments, since the Judicial Improvements Act of 1990 gave the United States District Courts jurisdiction to hear appeals of a bankruptcy court's order determining a motion for remand. See, Advisory Committee Notes to 1991 Amendments, F.R.Bankr.P. 9027.

II.

At the outset, the court is confronted by three issues: (1) whether this court properly has jurisdiction of this matter under 28 U.S.C. § 1334; (2) whether the removal is timely under F.R.Bankr.P. 9027; and (3) whether the court can hear this matter at all in the absence of an order to reopen the debtor's bankruptcy case.

A.

With respect to the first issue, under 28 U.S.C. § 1334(a) this court has original and exclusive jurisdiction of all "cases" under the Bankruptcy Code (Title 11, United States Code). In addition, under 28 U.S.C. § 1334(b), this court has original — but not exclusive — jurisdiction of all "civil proceedings arising under title 11, or arising in or related to cases under title 11." As explained by Judge Merhige of the United States District Court for this District,

In order for a proceeding to "arise under" Title 11, the claim must be predicated on a right created in Title 11. Examples of proceedings which "arise under" Title 11 include preference actions and fraudulent conveyance actions. On the other hand, "arising in" proceedings are those that are not based on any right expressly created by Title 11 but would have no practical existence but for the bankruptcy. Examples would include actions to determine the validity of liens or claims. . . . A proceeding is considered related if the outcome could in some way alter the parties' rights in bankruptcy or affect the administration of the estate.

Lux v. Spotswood Construction Loans, 176 B.R. 416, 418 (E.D.Va. 1993) (internal citations omitted). In Lux, the debtor had filed a chapter 7 petition and had received a discharge. After his case was closed, the debtor filed an adversary proceeding against the country board of supervisors and against a creditor who during the bankruptcy case had been granted relief from the automatic stay in order to foreclose under a deed of trust. The adversary proceeding alleged that the county violated the automatic stay during the case by issuing notices of building code violations and that the creditor, in conspiracy with the county, had sought to devalue the property in other to obtain relief from the automatic stay. The bankruptcy court dismissed the adversary proceeding because the claims were non-core and were unrelated to the bankruptcy case, and the District Court affirmed.

It is clear that the motion to require conveyance of the property in accordance with the final decree of divorce is not predicated on any right contained in the Bankruptcy Code. On the other hand, the debtor's defenses to the motion clearly are based on rights arising under the Bankruptcy Code. Specifically, the debtor asserts that her personal liability with respect to the $12,500 loan was discharged in her chapter 7 case and that attempted enforcement of the $12,500 debt as an "equitable lien" against her interest in the real estate is a violation of the discharge injunction and of her exemption rights under the Bankruptcy Code.

There is no question that a bankruptcy court retains jurisdiction to enforce a debtor's discharge even after administration of the case is complete. Local Loan Co. v. Hunt, 292 U.S. 234, 54 S.Ct. 695, 78 L.Ed. 1230 (1934) (Under former Bankruptcy Act, bankruptcy court had jurisdiction to entertain an action to enjoin action in state court that violated discharge); In re Banks-Davis, 148 B.R. 810, 812-3 (Bankr.E.D.Va. 1992) (Shelley, J.). While the issue of jurisdiction would be cleaner if the debtor, instead of removing the state court action, had filed an appropriate adversary proceeding or motion in this court to vindicate her discharge, nevertheless the fact that rights claimed by the debtor under the Bankruptcy Code are raised as matters of defense to a nonbankruptcy cause of action rather than affirmatively does not change the essential nature of the litigation. Accordingly, this court concludes that it has jurisdiction of the controversy under 28 U.S.C. § 1334.

In Local Loan Co. v. Hunt, the plaintiff loan company, which was the beneficiary of a pre-petition wage assignment from the debtor, had brought an action in state court against the debtor's employer to enforce the assignment and asserted that the assignment created a lien on future wages that survived the debtor's discharge. Indeed, the Supreme Court of Illinois, the state where the action had been brought, had so held in two reported decisions. 292 U.S. at 243-4, 54 S.Ct at 699. The United States Supreme Court, however, held that the "clear and unmistakable policy of the Bankruptcy Act" controlled over conflicting state law, and that any lien arising under state law against wages earned by the debtor post-petition "was ineffective as against an adjudication and discharge in bankruptcy." 292 U.S. at 242, 244, 54 S.Ct. at 698, 699.

B.

The court must next consider whether the notice of removal was timely. Under F.R.Bankr.P. 9027 ("Removal"),

(a) Notice of Removal.

* * *

(2) Time for Filing; Civil Action Initiated Before Commencement of the Case Under the Code. If the claim or cause of action in a civil action is pending when a case under the Code is commenced, a notice of removal may be filed only within the longest of (A) 90 days after the order for relief in the case under the Code, (B) 30 days after entry of an order terminating a stay, if the claim or cause of action in a civil action has been stayed under § 362 of the Code, or (C) 30 days after a trustee qualifies in a chapter 11 reorganization case but not later than 180 days after the order for relief.

(3) Time for Filing; Civil Action Initiated After Commencement of the Case Under the Code. If a case under the Code is pending when a claim or cause of action is asserted in another court, a notice of removal may be filed with the clerk only within the shorter of (A) 30 days after receipt, through service or otherwise, of a copy of the initial pleading setting forth the claim or cause of action sought to be removed or (B) 30 days after receipt of the summons if the initial pleading has been filed with the court but not served with the summons.

The question that arises, therefore, is when the "claim or cause of action" presently before the court was "asserted." If it was "pending" when the debtor filed her chapter 7 petition, the time within which a notice of removal could be filed under F.R.Bankr.P. 9027(a)(2) had long expired. On the other hand, if it was not "asserted" until March 15, 1995, when the debtor's former husband filed the Motion to Approve Sale, then it was timely. Clearly, the divorce suit had been commenced — and the final decree of divorce entered requiring the payment of the $12,500 — long before the debtor filed her chapter 7 petition. So in that sense the "civil action" — the divorce case — was pending (although a final decree had been entered, and nothing remained except to enforce the decree) at the time the chapter 7 petition was filed. The motion filed by the debtor's ex-husband on March 15, 1995, was not an independent cause of action but simply sought to enforce the rights already determined by the final decree. The issue, then, is whether a motion that simply seeks to enforce a right already fully adjudicated or decreed in a civil action is a "claim or cause of action" within the meaning of F.R.Bankr.P. 9027(a)(3) for the purpose of determining the timeliness of the removal.

It appears that Congress, by its use in 28 U.S.C. § 1452 of the phrase "claim or cause of action in a civil action" (emphasis added), specifically envisioned the removal of something less than an entire case. S. Elizabeth Gibson, Removal of Claims Related to Bankruptcy Cases: What is a "Claim or Cause of Action"?, 34 UCLA L. Rev. 1 (1986). Thus, a portion of a proceeding may be removed "if what is being sought to be removed is a severable claim or cause of action." Bank of Delaware v. Houghton (In re Straughn), 10 B.R. 28, 29 (Bankr.D.Del. 1980) (dicta). Consistent with this view, it has been held that a debtor's removal to bankruptcy court of supplementary proceedings to enforce a state court judgment did not affect the appeal of the underlying judgment. Green v. Alton Telegraph Printing Co., Inc. (In re Alton Telegraph Printing Co., Inc.), 16 B.R. 787 (Bankr. S.D. Ill. 1982). What is removed from the state court is determined by "the specific language of the removal petition." Princess Louise Corp. v. Pacific Lighting Leasing Co. (In re Princess Louise Corp.), 77 B.R. 766, 767 (Bankr. C.D. Calif. 1987). In the present case, the "Notice For Removal" filed by the debtor specifically referred to the "action" commenced by the March 15, 1996 Motion to Approve Sale. While the debtor's use of the term "action" to refer to an enforcement proceeding in an existing civil action may seem to be stretching the ordinary meaning of the term, and while the right to enforce the final decree is obviously derivative of, and dependent upon, the underlying divorce decree, nevertheless this court concludes that the issues raised by the motion to enforce the decree are sufficiently severable from the issues adjudicated by the decree that the motion may properly be considered a separate claim for the purpose both of 28 U.S.C. § 1452 and F.R.Bankr.P. 9027. Accordingly, the court concludes that the removal, which was accomplished within 30 days of the debtor's receipt of the motion, was timely.

This is in contrast to the general Federal removal statute, 28 U.S.C. § 1441, which specifically refers to the removal of "a civil action." Cases construing 28 U.S.C. § 1441 have held that removal affects the entire state court case, although the Federal court, once the case is removed, has the discretion to remand "all matters not otherwise within its original jurisdiction." Allman v. Hanley, 302 F.2d 559, 562 (5th Cir. 1962); 28 U.S.C. § 1441(c).

Straughn was decided under 28 U.S.C. § 1478, the predecessor to the current 28 U.S.C. § 1452. The underlying state court action was a foreclosure proceeding which had been commenced outside the time limits for removal. The foreclosure was stayed as a result of a chapter 11 petition filed by the debtor. The sheriff then filed against the foreclosing bank a petition for payment of costs, and the bank then filed an application to remove the petition for payment of costs to the bankruptcy court. The court, treating the petition for payment of costs as severable from the foreclosure itself, held that the removal application was timely but nevertheless declined to exercise jurisdiction because the question of responsibility for costs incurred in a state proceeding "should be decided in the state court."

Out of an abundance of caution, however, the bankruptcy court entered an order "remanding" the appeal of the underlying judgment to the state appellate court "to the extent any reviewing court should determine" that the appeal had in fact been removed to the bankruptcy court.

C.

The final procedural hurdle, before the court can address the merits of the motion to remand, is whether this court can properly hear this matter at all in the absence of an order reopening the debtor's bankruptcy case. As noted above, the debtor's case was closed on October 24, 1995, the same date as she received her discharge. A number of cases have held that a state court action may be removed to bankruptcy court only if a bankruptcy case to which it relates is pending. In re McNeil, 13 B.R. 743, 747 (Bankr.S.D.N.Y. 1981) (dicta) (declining to reopen bankruptcy case so debtors could litigate dischargeability of debt to creditor omitted from schedules in bankruptcy court rather than in state court, where they had asserted their discharge as a defense); In re Iannacone, 21 B.R. 153, 155 (Bankr.D.Mass. 1982) ("[S]ince the state court action was initiated after the bankruptcy case was closed and removal [under the bankruptcy removal statute] may be had only during the pendency of the bankruptcy case, removal is not possible absent a reopening"); In re Carter, 38 B.R. 636, 638 (Bankr.D.Conn. 1984). See, Alexandria Knolls West Condominium Homes Council of Co-Owners v. Strelsky (In re Strelsky), 46 B.R. 178 (Bankr.E.D.Va. 1985) (Bostetter, J.), where this court, in remanding a removed state court action to collect post-petition condominium assessments from the debtor, noted the "procedural confusion" resulting from the fact that the removal application had been filed two weeks before an order was entered reopening the debtor's case, 46 B.R. at 179, and implied that during the interim between the filing of the removal application and the order reopening the case the state court — which had gone ahead and entered judgment against the debtor — could properly continue to make rulings in the case. 46 B.R. at 180.

"In this case, however, debtor's case was closed when the application for removal was filed. The state court proceeded to render a judgment against debtor prior to the reopening of the case. As the following discussion will indicate, the state court decision is proper, and this case will be remanded to that court and, accordingly, that state court judgment will remain in full force and effect."

The debtor, however, cites as contrary authority the decision of this court in In re Banks-Davis, 148 B.R. 810, 813 (Bankr.E.D.Va. 1992) (Shelley, J.), in which it was stated, "A motion to reopen a closed case is not necessary prior to the filing of a complaint to determine dischargeability under 11 U.S.C. § 523(a)(3)(B) [relating to creditors not listed on the schedules in time to file a timely proof of claim or timely nondischargeability complaint]." In Banks-Davis, it was the omitted creditor who filed a motion to reopen the debtor's case for the purpose of filing a complaint to determine the dischargeability of the creditor's claims against the debtor. The court ruled (1) that it was not necessary first to reopen the case simply in order to file the nondischargeability complaint and (2) that in any event the movant would not be able to prevail even if it did file a nondischargeability complaint, and for both those reasons denied the motion to reopen. Since the court found that the creditor would not be able to prevail in any event, the analysis concerning the necessity or not of reopening a closed case in order to commence an adversary proceeding is arguably dicta. Be that as it may, the proceeding the debtor has removed to this court is not a complaint to determine dischargeability, and whatever may be the correctness of the holding in Banks-Davis, it should not — if only to avoid the procedural confusion alluded to by Chief Judge Bostetter in Strelsky, supra — be extended to permit removal of cases from as nonbankruptcy forum to a bankruptcy court when there is no pending bankruptcy case. Accordingly, the court concludes that, no motion having been filed or order entered to reopen the debtor's bankruptcy case, the removal of the Motion to Approve Sale from the Fairfax County Circuit Court to this court was improper, and on that ground alone remand would be required.

See, In re Woolard, 190 B.R. 70, 75-76 (Bankr.E.D.Va. 1995), where, quoting from an earlier unpublished opinion of this court, it was noted that one of the avenues of relief open to a debtor who is sued on account of a discharged debt was to "seek to reopen the case to file a complaint to determine whether the debt is nondischargeable."

III.

Since, however, the debtor remains free to remedy the procedural defect by filing a motion to reopen her case, the court will also consider whether, independently of the failure to reopen the case, grounds exist that would require the remand of the Motion to Approve Sale. Essentially, the debtor contends that the Motion to Approve Sale seeks to subvert the discharge granted by this court and her exemption rights under the Bankruptcy Code. While the debtor concedes that the state court has jurisdiction to determine those issues, she argues that the compelling Federal interest in protecting her "fresh start" in bankruptcy militates in favor of having this court, rather than the state court, rule on the issues she has raised.

A.

The issues raised by the Motion to Approve Sale implicate both the debtor's discharge and her exemption rights. Under § 524(a), Bankruptcy Code, a discharge in bankruptcy

(1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under . . . this title, whether or not discharge of such debt is waived; [and]

(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived.

Additionally, property that the debtor has exempted during the case "is not liable during or after the case for any debt of the debtor that arose . . . before the commencement of the case." § 522(c), Bankruptcy Code. There are only four exceptions: nondischargeable taxes, alimony and child support, debts secured by a lien that was not avoided in the course of the bankruptcy proceedings, and certain debts owed to bank regulatory agencies. Id. Under F.R.Bankr.P. 4003 and 1007(c), a debtor is required to file a list of property he or she claims as exempt with the bankruptcy petition or within 15 days thereafter. The trustee or any creditor may file objections to the claimed exemptions "within 30 days after the conclusion of the meeting of creditors." Unless a party in interest objects, "the property claimed as exempt on such list is exempt." § 522(1), Bankruptcy Code. The result, if no objection is filed, is that the debtor is entitled to keep the property even if there is no legal basis for the exemption. Taylor v. Freeland Kronz, 503 U.S. 638, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992) (trustee had no claim to personal injury settlement where debtor claimed it exempt on schedules — listing its value as "unknown" — and trustee did not object within 30 days of meeting of creditors, even when no basis for exemption existed).

Although a discharge in bankruptcy extinguishes the debtor's personal liability for the discharged debt, valid liens pass through bankruptcy unaffected and can be enforced against exempt property unless affirmative action is taken to avoid such liens or set them aside during the bankruptcy case. Farrey v. Sanderfoot, 500 U.S. 291, 111 S.Ct. 1825, 1829 (1991); Long v. Bullard, 117 U.S. 617, 6 S.Ct. 917, 29 L.Ed. 1004 (1886). The essential issue to be resolved, then, comes down to this: did the final divorce decree create or recognize a lien against the jointly-owned real estate in favor of the debtor's father-in-law for the $12,500, or did it merely recognize a liability and direct the timing and manner of its payment? If a lien was created, then

— since it is undisputed that no steps were taken during the bankruptcy to avoid it — there is no present bar to its enforcement against the real estate or its proceeds, even though the debtor has claimed her interest in the property as exempt. On the other hand, if the decree simply adjudicated a liability and directed the manner and timing of its payment, any attempt to enforce the liability against property of the debtor violates the discharge injunction of § 524(a), Bankruptcy Code.

Both parties have presented extensive argument on the issue of whether the debtor exempted in her bankruptcy case the entire value of her undivided half-interest in the real estate or only $5,000, the maximum allowed amount of the exemption available under § 34-4, Code of Virginia. The debtor, relying on Taylor v. Freeland Kronz, asserts that by claiming the entire value, which (like the personal injury claim in Taylor) was listed as being in an "unknown" amount, and since there was no timely objection to the claimed exemption, the entire value was exempted, regardless of whether applicable state law would have permitted the exemption. The issue, however, is a red herring. If the final decree created or recognized a lien, then the lien, not having been avoided, survived the debtor's discharge and may be enforced against the debtor's exempt interest in the property, whether that exempt interest is $5,000 or some larger amount. If the final decree did not create a lien, then any attempt to collect the $12,500 liability from the debtor's property (exempt or not) is prohibited by the discharge injunction.

The debtor's liability for the $12,500 could potentially have been excepted from discharge. Under § 523(a)(15), Bankruptcy Code, enacted as part of the Bankruptcy Reform Act of 1994, P.L. 103-394, October 22, 1994, 108 Stat. 4106, a chapter 7 discharge does not discharge an individual debtor from a debt incurred "in the course of a divorce or separation agreement, divorce decree or other order of a court of record" unless the bankruptcy court determines that the debtor does not have the ability to repay the debt or that the benefit to the debtor from discharging the debt outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor. However — unlike the exception from discharge in § 523(a)(5), Bankruptcy Code, for alimony or child support — the new exception from discharge only applies where the creditor has filed with the Bankruptcy Court a timely complaint to have the debt determined to be nondischargeable. § 523(c), Bankruptcy Code. Such a complaint must be filed within 60 days of the first date set for the meeting of creditors, and the time can be enlarged only if a motion to extend the deadline is filed before the deadline has expired. F.R.Bankr.P. 4007(c). In this case, a timely complaint to determine dischargeability was not filed, and the debtor's personal liability for the debt has unquestionably been discharged.

There can be little question that equitable liens are recognized under Virginia law. Hoffman v. First Nat'l Bank of Boston, 205 Va. 232, 135 S.E.2d 818 (1964). As explained by the then-Supreme Court of Appeals of Virginia,

An equitable lien arises either from a written contract which shows an intention to charge some particular property with a debt or obligation, or is declared by a court of equity out of general considerations of right and justice as applied to the relations of the parties and the circumstances of their dealings.

Id., 205 Va. at 236, 135 S.E.2d at 822. Whether the final decree entered by the Fairfax County Circuit Court effectively charged the debtor's undivided half-interest in the real estate with the repayment of the $12,500 debt is a legal issue, requiring that the language of the decree be construed in the context of the issues framed by the pleadings. The immediate question is whether that determination is best made by this court or by the Circuit Court of Fairfax County.

B.

Under 28 U.S.C. § 1452(b), a removed case may be remanded "on any equitable ground." Among the grounds that may be considered are:

(1) forum non conveniens; (2) a holding that, if the civil action has been bifurcated by removal, the entire action should be tried in the same court; (3) a holding that a state court is better able to respond to questions involving state law; (4) expertise of the particular court; (5) duplicative and uneconomic effort of judicial resources in two forums; (6) prejudice to the involuntarily removed parties; (7) comity considerations; and (8) a lessened possibility of an inconsistent result.

Browning v. Navarro, 743 F.2d 1069, 1077 (5th Cir. 1984) (internal citations omitted). Remand has also been held to be appropriate where the state court is "steeped . . . in the merits" of the case. Baren v. Devon Bank (In re Baren), 48 B.R. 752 (N.D.Ill. 1984). Certainly, where the only issues to be resolved in a removed action are bankruptcy issues, the paramount Federal interest in the area of bankruptcy would in most instances argue strongly against remand. Where, for example, a creditor brings a law suit against a debtor post-discharge on account of a debt the debtor believes has been discharged, removal of the action to the bankruptcy court is clearly one

— although not the only — method by which the debtor can have the discharge issue determined.

"There are three ways to litigate dischargeability after a case is closed. First, if a creditor pursues a lawsuit on the claim the debtor can assert the bankruptcy discharge as an affirmative defense and the court with jurisdiction over the lawsuit can decide whether the debt falls within any of the exceptions to discharge. Second, under Bankruptcy Rule 4007(b) either the debtor or the creditor can move to reopen the case for the purpose of filing a complaint to determine dischargeability. Third, the debtor can bring an action in [the bankruptcy court] to enforce the discharge injunction against the creditor attempting to collect discharged claims. . . . Fourthly, the debtor may be able to remove the collection effort to the bankruptcy court." Matter of James, 184 B.R. 147, 150-151 (N.D.Ala. 1995) (internal citation omitted).

Here, however, where the motion the debtor has removed to this court has its antecedents in prior proceedings heard by the state court, is merely supplementary and ancillary to a final decree entered by that court, and requires construction of that court's final decree in an area of the law — domestic relations — where state court have long been recognized to have special expertise, considerations of comity weigh heavily in favor of remand. The state court, of course, has an obligation to recognize and give effect to the discharge injunction, but there is no suggestion that the state court here is unwilling or unable to do so. Additionally, the Motion to Approve Sale raises other issues besides simply enforcement of the asserted equitable lien. These include a claim by the listing real estate agent for a commission resulting from the aborted sale. Accordingly, having carefully considered the competing interests, this court concludes that the Motion to Approve Sale should be remanded to the Circuit Court of Fairfax County for hearing and determination.

See, Robbins v. Robbins (In re Robbins), 964 F.2d 342, 345 (4th Cir. 1992) ("the bankruptcy court correctly placed equitable distribution disputes in the category of cases in which state courts have a special expertise and for which federal courts owe significant deference").

"This Constitution, and the Laws of the United States made in Pursuance thereof * * * shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding." U.S. Const., Art. VI.

IV.

For the foregoing reasons, a separate order will be entered remanding this action to the Circuit Court of Fairfax County, Virginia.


Summaries of

In re Willett

United States Bankruptcy Court, E.D. Virginia
May 9, 1996
Case No. 95-13066-AM, Adversary Proceeding No. 96-1118 (Bankr. E.D. Va. May. 9, 1996)
Case details for

In re Willett

Case Details

Full title:In re: CHERYL B. WILLETT, Chapter 7, Debtor JEFFREY BRETT WILLETT…

Court:United States Bankruptcy Court, E.D. Virginia

Date published: May 9, 1996

Citations

Case No. 95-13066-AM, Adversary Proceeding No. 96-1118 (Bankr. E.D. Va. May. 9, 1996)

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