Opinion
Case No. 11-31590 Adv. Pro. No. 11-3386
08-14-2013
In re: PAUL A. GERACI, Debtor. Jeffrey M. Kellner, et al., Plaintiffs, v. First Ohio Banc & Lending, Inc., et al., Defendants.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
__________________
Lawrence S. Walter
United States Bankruptcy Judge
Chapter 13
Judge L. S. Walter
DECISION AND ORDER GRANTING PLAINTIFFS' MOTION TO DISMISS
CROSS-CLAIM OF FLAGSTAR BANK (Adv. Doc. 61)
This matter is before the court on the Motion to Dismiss Cross-Claim of Flagstar Bank (Adv. Doc. 61) filed by Plaintiffs Jeffrey M. Kellner, Chapter 13 Trustee, ("Trustee") and Debtor Paul Geraci ("Debtor"); the Response of Flagstar Bank to Motion to Dismiss (Adv. Doc. 67); and the Response of Defendant/Cross-Defendant Shelly A. Geraci (Adv. Doc. 70). For the reasons expressed within this decision, the motion is granted and Defendant Flagstar's cross-claim against Shelly Geraci is dismissed.
The court has jurisdiction to determine the motion to dismiss the cross-claim pursuant to 28 U.S.C. § 157 and § 1334 and the general order of reference entered in the district. The matter is not a core proceeding under 28 U.S.C. § 157(b). However, the court must still determine whether the cross-claim is a civil proceeding "related to" the underlying bankruptcy case and, thus, within the scope of the court's subject matter jurisdiction conferred by 28 U.S.C. § 157 and § 1334.
FACTUAL AND PROCEDURAL BACKGROUND
The following incorporates the facts asserted by the parties in their pleadings. The facts are provided solely as background for purposes of this decision.
A. The Amended Complaint
On February 14, 2013, the Plaintiffs, Debtor Paul Geraci and the Chapter 13 Trustee (together "Plaintiffs"), filed an amended complaint (Adv. Doc. 53) against Defendants First Ohio Banc & Lending, Inc. ("FOBL"), Flagstar Bank ("Flagstar"), Mortgage Electronic Registration Systems, Inc. ("MERS"), and Carolyn Rice. In addition, Plaintiffs named Shelly Geraci, the Debtor's wife, as a defendant.
In the amended complaint, the Plaintiffs assert that, by virtue of a deed recorded in 2007, the Debtor acquired an undivided one-half interest as a tenant in common with respect to a piece of real property, the Debtor's personal residence at 622 Franklin Avenue (the "Property") (Adv. Doc. 53, ¶¶ 15, 22 and 37). Subsequently, the Debtor executed a note, and, along with co- owner of the Property, Shelly Geraci, signed a mortgage with Defendant FOBL as the lender; the mortgage was recorded in 2008 (Id., ¶¶ 23-24). Plaintiffs believe that Defendant Flagstar is acting as servicer on the note for the benefit of FOBL and Flagstar has been served relevant documents in the bankruptcy case (Id., ¶¶ 57-59).
It is unclear from the amended complaint exactly where the Property is located. In one paragraph of the amended complaint, the property is noted as being in Dayton, Ohio (Adv. Doc. 53, ¶ 3), in another paragraph, the Property is noted as being in Union, Ohio (Adv. Doc. 53, ¶ 15), and in the same paragraph (Adv. Doc. 53, ¶ 15), the Complaint refers to the Property as the parcel identified in Debtor's Schedule A which states that it is located in Englewood, Ohio (Case No. 11-31590, Doc. 1, Schedule A). Although this particular inconsistency was not noted by Flagstar, this type of sloppy drafting exists in other areas of the amended complaint and may explain why the parties disagree over what the Plaintiffs are attempting to accomplish with this adversary proceeding.
In its cross-claim, Flagstar asserts that it is successor in interest to MERS as nominee for FOBL (Adv. Doc. 54, Cross-claim ¶ 8). Flagstar's exact relationship to FOBL is not at issue in this motion to dismiss.
The crux of the amended complaint is the Plaintiffs' allegations that the legal description of the Property in the mortgage is incorrect and describes a completely unrelated parcel of property not owned by the Debtor (Id., ¶¶ 39-42). Consequently, the Plaintiffs assert that the lien is invalid and may be avoided using the Trustee's avoidance powers pursuant to 11 U.S.C. §544(a) (Id., ¶¶46 and 48). The Plaintiffs request relief in the form of a determination "that the Mortgage did not create and does not evidence a lien upon . . . the Property . . . and an order that the Mortgage be immediately cancelled and released of record" (Id., ¶ 48 and Prayer for Relief).
The amended complaint is vague in its reference to § 544. The Plaintiffs state that they want to use the Trustee's avoidance powers as a hypothetical judicial lien holder, but reference the § 544 provision in which the Trustee obtains the hypothetical position of a bona fide purchaser (Adv. Doc. 53, ¶¶ 46 and 48). It is unclear which provision the Plaintiffs intend to use.
The Plaintiffs include a second cause of action captioned "Determination of Creditor Claims and Interests" (Id., p. 7). In this cause of action, Plaintiffs assert that Defendants FOBL, MERS and Flagstar failed to file proofs of claim before the bar date (Id., ¶¶ 54, 56 and 60). In addition, the Plaintiffs assert that these same creditors received a copy of the Debtor's proposed Chapter 13 plan that included a provision notifying of the Debtor's intent to seek avoidance of the mortgage lien and none of these creditors objected to confirmation of this plan (Id., ¶¶ 53-54, 56 and 59-60). Based on these alleged failures, Plaintiffs request:
a determination that FOBL, MERS and Flagstar are not secured creditors of Mr. Geraci or his bankruptcy estate; a determination that (by virtue of their failure to file proofs of claim before the Claims Bar Date) FOBL, MERS and Flagstar are barred from asserting any unsecured claims that all or any of them may have had against Mr. Geraci or his bankruptcy estate; and (as appropriate) an order confirming that any and all claims of FOBL, MERS, Flagstar, or any or all of them, against Mr. Geraci or his bankruptcy estate arising from or in connection with the Note, the Mortgage, or on any other basis, shall be discharged upon completion of the Confirmed Plan.(Id., ¶ 62).
B. The Answer and Cross-claim
On February 27, 2013, Flagstar filed an answer and cross-claim (Adv. Doc. 54) to the Plaintiffs' amended complaint. In the answer, Flagstar asserts certain affirmative defenses related to Plaintiffs' inclusion of Shelly Geraci as a defendant in the amended complaint. More specifically, Flagstar asserts that the court lacks subject matter jurisdiction over Shelly Geraci's interest in the Property at issue and that any action related to her interest would be non-core (Adv. Doc. 54, Affirmative Defenses ¶¶7-8).
Flagstar also includes a cross-claim against Shelly Geraci (Id., Cross-claim). In the cross-claim, Flagstar asserts that the mortgage is a valid lien on Shelly's undivided one-half interest in the Property (Id., Cross-claim ¶ 7). As such, Flagstar requests a declaration that it holds a valid mortgage lien on her half of the property and/or requests the imposition of an equitable lien / constructive trust on same (Id., Cross-claim ¶¶ 9-11 and Prayer for Relief).
C. The Motion to Dismiss Cross-claim and Responsive Documents
On March 27, 2013, Plaintiffs filed their motion to dismiss Flagstar's cross-claim against Shelly Geraci pursuant to Fed. R. Bankr. P. 7012(b) and Fed. R. Civ. P. 12(b)(1) (Adv. Doc. 61). In the motion, Plaintiffs assert that the court lacks subject matter jurisdiction to determine the validity of a lien and/or impose an equitable lien or constructive trust on Shelly Geraci's one-half interest in the Property, property that is owned by a non-debtor and that is not property of the estate.
Shelly Geraci filed a short response in support of Plaintiffs' arguments (Adv. Doc. 70).
Flagstar filed a response (Adv. Doc. 67) objecting to dismissal of the cross-claim and arguing that it is the Plaintiffs that first brought Shelly Geraci's interest into this adversary proceeding by naming her as a defendant. Flagstar argues that the cross-claim is necessary because, in the amended complaint, Plaintiffs request more than just avoidance of the mortgage on the Debtor's one-half interest in the Property; Flagstar asserts that the Plaintiffs also want to avoid the lien on Shelly Geraci's one-half interest. Consequently, Flagstar's cross-claim is intended to protect its mortgage lien, or the value thereof, on Shelly's interest in the Property.
LEGAL ANALYSIS
Plaintiffs move for dismissal of Flagstar's cross-claim pursuant to Fed. R. Bankr. P. 7012(b) and Fed. R. Civ. P. 12(b)(1) for lack of subject matter jurisdiction, an issue that may be raised at any point in a proceeding. Rhiel v. Central Mortg. Co. (In re Kebe), 444 B.R. 871, 875 (Bankr. S.D. Ohio 2011). When jurisdictional facts are challenged, it is the party claiming jurisdiction that bears the burden of demonstrating that the court has jurisdiction over the subject matter. Ohio Nat'l Life Ins. Co. v. U.S., 922 F.2d 320, 324 (6th Cir. 1990); Kebe, 444 B.R. at 875. Consequently, it is Flagstar that bears the burden of demonstrating that its cross-claim against Shelly Geraci falls within the subject matter jurisdiction of this court.
Under 28 U.S.C. § 1334(b), the district court has jurisdiction over all civil proceedings "arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b). In this case, no party disputes that the cross-claim filed by Defendant Flagstar is against a non- debtor and involves issues to be determined under non-bankruptcy state law. Nonetheless, Flagstar argues that, at the very least, its cross-claim is "related to" the bankruptcy case.
Under 28 U.S.C. § 157(a) and (c), this bankruptcy court is granted similar jurisdiction by reference from the district court.
It is true that non-debtor disputes may fall within a bankruptcy court's "related to" jurisdiction if resolution of the dispute may give rise to claims that impact the bankruptcy case. Following the Third Circuit, the Court of Appeals for the Sixth Circuit has articulated this test for determining "related to" jurisdiction:
The usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy. Thus, the proceeding need not necessarily be against the debtor or the debtor's property. An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.Michigan Emp't Sec. Comm'n v. Wolverine Radio Co., Inc. (In re Wolverine Radio Co., Inc.), 930 F.2d 1132, 1142 (6th Cir. 1991) (quoting In re Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3rd Cir. 1984)). Nonetheless, the Sixth Circuit has applied the test with the caveat that the jurisdictional requirement may not be satisfied where there is only an "extremely tenuous connection to the estate." Id. Also, a non-debtor dispute does not meet the jurisdictional requirement solely by having common facts with a controversy involving the bankruptcy estate. Kebe, 444 B.R. at 876 (noting that "[j]udicial economy itself does not justify federal jurisdiction").
In this case, Flagstar points to no demonstrable impact that the determination of its cross-claim against Shelly Geraci will have on the bankruptcy estate. Shelly Geraci's one-half interest in the Property is not property of the estate and the validity of Flagstar's lien against her half interest will neither enhance nor reduce distributions to other creditors. Indeed, at least one court has reviewed this issue and determined that the bankruptcy court lacks even "related to" jurisdiction over a dispute between a mortgagee and a non-debtor spouse regarding the validity of a lien on her half interest in real property. See Peterson v. Berg (In re Berg), 387 B.R. 524, 573-74 (Bankr. N.D. Ill. 2008) ("It has been determined here that Debtor held a one-half interest in the Property which became property of the Estate and Mrs. Berg owns the other one-half interest. Whatever happens to her interest and any claims against it has no effect at all on distribution from the Estate. Therefore, the bankruptcy court lacks either core or related subject matter jurisdiction over any claims asserted against her interest.").
Rather than argue that its cross-claim would impact the bankruptcy estate, Flagstar defends its cross-claim by arguing that it was the Plaintiffs, rather than Flagstar, that first brought Shelly Geraci's interest into this adversary proceeding by naming her as a defendant. Furthermore, Flagstar believes the Plaintiffs' complaint to avoid Flagstar's mortgage lien can be read broadly as an attempt to avoid Flagstar's lien not only on the Debtor's one-half interest but also on Shelly Geraci's one-half interest in the Property. If the amended complaint is so broadly interpreted, Flagstar argues that its cross-claim is necessary to protect its lien on Shelly Geraci's interest in the Property.
In conjunction with its arguments that the court has "related to" jurisdiction, Flagstar further argues that Shelly Geraci consented to jurisdiction when she answered the complaint. However, parties can neither waive objection nor consent to subject matter jurisdiction that exceeds the statutory authority given to this court. Wolverine Radio, 930 F.2d at 1137-38. As such, Shelly Geraci's alleged consent does not cure the court's lack of subject matter jurisdiction over an unrelated cross-claim.
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The court understands Flagstar's concerns, but finds them to be misplaced. While the Plaintiffs do name Shelly Geraci as a defendant, the amended complaint does not include any specific claims against her or her one-half interest in the Property. The court agrees with Flagstar that the Plaintiffs are somewhat vague in their request for avoidance of the mortgage lien on the "Property" (Adv. Doc. 53, ¶¶ 46 and 48), which could be broadly interpreted as a request to avoid the lien on the entire property jointly owned by Debtor Paul Geraci and non-debtor Shelly Geraci. However, such a request would be outside the scope of a bankruptcy trustee's avoidance powers under § 544 which are limited to avoiding liens on property of a debtor. See 11. U.S.C. § 544(a). See also Terlecky v. Chase Home Fin., LLC (In re Sauer), 417 B.R. 523, 541 (Bankr. S.D. Ohio 2009) (noting that a trustee may not use § 544 as a tool to avoid the claims or lien interests held by creditors of a non-debtor); Rieser v. Fifth Third Mortg., Co. (In re Wahl), 407 B.R. 883, 894 (Bankr. S.D. Ohio 2009) (avoiding a mortgage lien under 11 U.S.C. § 544(a)(3) only with respect to the debtor's one-half interest in the property). Consequently, the amended complaint will not be so broadly interpreted by this court and Flagstar's concerns, which led it to file the cross-claim, should be alleviated.
CONCLUSION
For these reasons, the court grants the Plaintiffs' motion (Adv. Doc. 61) and DISMISSES Flagstar's cross-claim against Defendant Shelly Geraci.
SO ORDERED. Copies to: Amelia A. Bower, Plunkett Cooney, 300 E. Broad St., Suite 590, Columbus, OH 43215
Jeffrey M. Kellner, Chapter 13 Trustee, 131 N. Ludlow St., Suite 900, Dayton, OH 45202-1161
Charles J. Roedersheimer, 1340 Woodman Drive, Dayton, OH 45432
David M. Hollingsworth, PO Box 52, Enon, OH 45323