Opinion
Bankruptcy No. 02-15197DWS
November 14, 2003
Irwin Trauss, Esquire, Philadelphia, PA, Counsel for Debtor
Amy L, Santamaria, Esquire SHAFFER SCERNI, L.L.C., Mt. Laurel, NJ, for Lasalle Nat'l Bank
MEMORANDUM OPINION
Before the Court is the Motion of LaSalle National Bank ("LaSalle") for Relief from the Automatic Stay Pursuant to 11 U.S.C. § 362(d)(1) (the "Motion"). For the reasons stated below, the Motion is denied.
LaSalle brings this action as Trustee for the Registered Holders of Salomon Brothers Mortgage Securities VII, Inc., Series 1997-HUD2.
BACKGROUND
Pursuant to an Assignment of Mortgage and Other Collateral Loan Documents with respect to residential real property located at 1621 So. 53rd Street, Philadelphia, Pennsylvania (the "Property"), Exhibits D-1 and D-2, LaSalle commenced a complaint in mortgage foreclosure ("State Court Action") against the debtor "Warren Kenneth Jones and Joanne Jones, his wife and Kenneth W. Jones, a married man" in April 2001. Exhibit M-1, Kenneth W, Jones (the "Father"), now deceased, is the Debtor's father. According to LaSalle's attorney, Martin Weisberg, Esquire who handled the State Court Action, a final judgment was entered by default on July 6, 2001 in the amount of $29,446,18 and a writ of execution was issued on August 2, 2001 in that amount against the Property, Exhibit M-3. On November 13, 2001 the Property was scheduled to be sold at sheriff's sale, Exhibit M-4, but the sale was adjourned when Debtor filed for bankruptcy relief on October 23, 2001 (the "Prior Case"). Exhibit M-7. Upon receipt of the notice of bankruptcy, LaSalle's counsel notified the sheriff to continue the sale until February 5, 2002. Exhibit M-8. On December 13, 2001, Debtor's Prior Case was dismissed, Exhibit M-9, and the sale went forward on February 5th as scheduled with LaSalle purchasing the Property in an amount equal to its costs of $4,100. A Sheriff's Deed was issued to LaSalle on October 15, 2002, Exhibit M-13. However, Debtor filed the instant bankruptcy case on April 5, 2002, Exhibit D-5, and the Deed has not been recorded. LaSalle seeks relief from stay to perform that act now. Notably LaSalle does not ground its Motion on any default under the confirmed Plan.
The mortgage was assigned to LaSalle by Brokers Mortgage Service ("Brokers"). The original note and mortgage dated June 26, 1981 between Brokers and Warren Kenneth Jones and Joanne Jones, husband and wife, and Kenneth W. Jones, co-mortgagor, is attached to the Complaint introduced as Exhibit M-1.
Exhibit M-2 is the Praecipe to Enter Default Judgment with the accompanying required certifications and affidavit. A copy of the actual judgment entered is not provided although Debtor concedes the entry of the judgment, if not its validity. Exhibit D-9.
While LaSalle settled with the sheriff shortly thereafter, it had not received the deed for the Property as of August 8, 2002 and was compelled to file an Affidavit of Lost Deed. Exhibit M-12.
The Plan requires a minimal undertaking to the Trustee — $5.00 per month. The Plan is silent as to the amount of LaSalle's monthly payment, only providing that LaSalle would receive payment in an amount equal to its secured claim outside the Plan. The Motion does not allege any payment default under the Plan but rather contends that as the Debtor has only bare legal title to the Property, relief from stay is warranted.
The instant Motion comes before me with a procedural history that is relevant to the dispute. On August 5, 2002 LaSalle filed a similar motion for relief (the "First Relief Motion") which was originally scheduled for hearing on September 5, 2002. Exhibit D-6. On September 18, 2002, Debtor filed a secured proof of claim on behalf of LaSalle in the amount of "at most $13,000." Exhibit D-9. The document acknowledged the entry of judgment in mortgage foreclosure on July 6, 2001 in the amount of $29,446.18 but stated that "the judgment is void, or voidable in whole or in part." Id. No objection was lodged by LaSalle to the claim filed by the Debtor. After several agreed continuances of the First Relief Motion, it was withdrawn on October 31, 2002, the same date that Debtor's Chapter 13 plan (the "Plan") was confirmed without objection by LaSalle. Exhibit D-8. Regretably the parties did not appear before the Court to report the terms of their resolution of the First Motion nor did they memorialize their agreement in writing. The Plan, a copy of which was served on LaSalle prior to confirmation, provides that LaSalle will have a claim in the amount of the unpaid balance of less than $12,000 secured by the Debtor's interest in the Property which claim will be paid by the Debtor directly to LaSalle. Debtor is making monthly payments of $5.00 to the Chapter 13 trustee consistent with the Plan. The Plan is silent as to the Debtor's payment obligation to LaSalle pending allowance of its claim. However, LaSalle does not seek stay relief for Debtor's failure to make post-petition payments under his Plan but rather because the Debtor has no equitable interest in the Property which has been purchased by LaSalle.
On December 12, 2002 LaSalle filed its own secured proof of claim in the amount of $29,446.86. Exhibit D-10. On February 20, 2003 it filed this Motion. Debtor responded by filing an adversary proceeding (the "Adversary") on March 13, 2003 seeking to, inter alia, void the transfer of the Debtor's interest in the Property to LaSalle, and allow LaSalle a secured claim in the amount of $8,500 and a unsecured claim of 818,946.18. Exhibit D-11, Contrary to the relief sought by the Adversary, LaSalle's attorney, Martin Weinberg, Esquire testified that LaSalle's agreement to withdraw the First Relief Motion and not to object to confirmation was based on an understanding with Debtor's counsel, Irwin Trauss, Esquire ("Trauss") that the sole issue to be litigated was the amount of LaSalle's claim which when fixed would be paid over the life of the Plan but "outside the Plan" and that Debtor would not be pressing to void the foreclosure judgment and sheriff's sale, Trauss testified to another understanding of the agreement. According to Trauss, the parties merely agreed that LaSalle's proof of claim filed after the bar date would not be subject to an objection on the grounds of timeliness and Debtor would be bound by the amount that the Court determined was owed to LaSalle as opposed to the amount set forth in the Plan,
The Adversary, representing Debtor's first challenge to the judgment in foreclosure entered in July 2001, was filed on September 25, 2003, almost six months after the Chapter 13 case was commenced on April 5, 2003. On May 14, 2003, after one consensual extension, LaSalle filed its answer, affirmative defenses and counterclaims. Debtor filed its answer to the counterclaims on September 24, 2003. On September 3, 2003 LaSalle filed a motion for summary judgment and gave notice that a response was due on September 18, 2003. As of this date some 5 weeks later, no opposition to the summary judgment motion has been filed. A pretrial order was entered requiring a joint pretrial statement by October 14, 2003. It has not been filed nor was an extension been requested. A pretrial hearing was scheduled for October 28, 2003, and counsel did not appear. Rather both took the view, without consultation with the Court, that this contested matter impacted the Adversary and excused them from performance under the pretrial order. Had I been consulted, I might have agreed that it would be more cost effective to await the outcome of this Motion. However, counsel are instructed that such decision is one for the Court to make and not counsel unilaterally. Given the outcome here, the pretrial proceedings will be rescheduled by separate order.
The Complaint avers that "Debtor has agreed with LaSalle to waive both timeliness and res judicata arising out of the order confirming debtor's chapter 13 plan as a bases for objecting to the proof of claim." Exhibit D-11, Complaint ¶ 46. Trauss construes the waiver of res judicata to apply only to the proof of claim issues whereas Weinberg apparently thought the agreement foreclosed any subsequent challenge to the foreclosure judgement and sheriff's sale. Because I find that res judicata does not bar subsequent prosecution of the foreclosure judgment and sheriff's sale, the lawyers' differing views are not dispositive of this contested matter.
In response to the Motion, Debtor contends that the provisions of Debtor's confirmed plan have replaced the provisions of the mortgage and judgment, and principles of res judicata preclude the relief being sought. Additionally Debtor contends that (1) the State Court never had subject matter jurisdiction over Debtor because of LaSalle's failure to comply with the notice requirements of Act 91 of 1983, 35 Pa. Stat. § 1680.402c et. seq. and (2) the sheriff sale is void having been based on an invalid judgment in mortgage foreclosure and improper service on the owners of the Property. Notably the Property was titled to Debtor and Joanne Jones ("Joanne"), husband and wife and Kenneth W. Jones, married man. Debtor and Joanne lived together with their three children and held themselves out to LaSalle's predecessor in interest as husband and wife. However, Debtor and Joanne never married, and she vacated the Property and Debtor's life in 1983. Debtor testified that the purported service documented by a return of service, Exhibit M-2, was inconsistent with her residence at the time. Debtor also disputes that service was properly made upon Joanne and him because he does not know the individual identified on the return of service as having received the Complaint. Evidence was also presented regarding the involvement of Father who died on September 19, 1993 prior to the commencement of the State Court Action. According to Debtor, Father died without a will and his wife, who is alive, has remarried. He did not know whether Father's estate had been probated. When service of process was attempted on Father, the form was returned noting his demise. Exhibit D-13, LaSalle responded by filing a petition to discontinue the State Court Action as to Father, Exhibit M-14, but failed to join or take any other action against his estate, his personal representative or any beneficiary with an interest in the Property arising at Father's death. While the petition did not ask that the foreclosure action be dismissed as to all parties and the court docket indicates the petition was granted, Exhibit M-15, an order was entered that Debtor contends renders all subsequent actions taken by LaSalle in the State Court Action a nullity. Taking LaSalle's form of Order, the judge deleted the proposed order that this "action is dismissed as to defendant Kenneth W. Jones only" and hand interlineated the following: "is DISMISSED without prejudice to plaintiff's right to refile with proof of defendant's demise." Exhibit D-3. LaSalle neither sought clarification, reconsideration or appellate review of the order and proceeded with the State Court Action as to Debtor and Joanne. Debtor contends that the Order dismissed the State Court Action and so that the subsequent judgment in mortgage foreclosure entered in that proceeding is void.
Trauss' opening argument was that the relief sought by the Motion was barred by the res judicata effect of Debtor's confirmed plan and the hearing on the merits should not proceed. I refused his request for a ruling to that effect without the benefit of a record and directed the parties therefore to present their cases in full. It was anticipated that the parties would brief this issue and indeed LaSalle has done so without the benefit of Debtor's submitting any authority or exposition of its argument. I address the res judicata argument below.
Debtor testified that he was advised by the broker that he would not qualify for a mortgage without Joanne appearing as his wife, and thus they applied for a mortgage on that basis.
The return of service identifies "Mr. Williams (a friend)" with whom Defendants reside at the Property as receiving service of the Complaint on Joanne and Debtor. Exhibit M-2. Debtor testified that he does not know who Mr. Williams is.
DISCUSSION
I.
Debtor contends that LaSalle's request for relief is precluded by his confirmed Chapter 13 plan and that I should address this threshold issue before turning to the merits of the parties' claims and counterclaims. While I agree with Debtor that a confirmed plan is res judicata as to all issues that were or could have been raised by the confirmation,In re Szostek, 886 F.2d 1405 (3d Cir. 1989), I disagree that confirmation of the Plan has foreclosed consideration of the dispute over the validity of LaSalle's foreclosure judgment. The Plan does not so provide, and to accept this consequence of LaSalle's failure to object to confirmation is contrary to the law and the parties' agreement.
I begin with Debtor's Plan as relates to LaSalle which is treated in Class 2 and Class 3 as follows:
4.b. CLASS 2 — The claim of LaSalle National Bank, Trustee (hereinafter, "LaSalle"), filed and allowed, for prepetition payment of principal and interest which may be or may have been due under the provisions of the mortgage which LaSalle may have or may have had on the debtor's interest in his home, to the extent that the claim is a secured claim within the meaning of I1 U.S.C. § 506(a), secured by a lien on 1621 So. 53rd Street, Philadelphia, Pa. 19143 which is not void or avoidable under the provisions of the Code and which is not for interest, fees, costs or charges which are not permitted under 11 U.S.C. § 506(b) or which are not permitted under applicable bankruptcy or non bankruptcy law;
c. CLASS 3 — The claim, filed and allowed, by LaSalle or by Wilshire Credit Corporation (Wilshire) on its own behalf or on the behalf of LaSalle for the total unpaid balance due on any lien Wilshire or LaSalle may have on 1621 So. 53rd Street, Philadelphia, PA 19143, to the extent the allowed claim is a secured claim, within the meaning of 11 U.S.C. § 506(a), secured by a lien on the debtor's interest in 1621 So. 53rd Street, Philadelphia, PA 19143 which is not void or avoidable under the provisions of the Bankruptcy Code or under applicable non-bankruptcy law. This Class 3 claim shall include any secured claim of LaSalle, filed and allowed, arising by operation of 11 U.S.C. § 365(j) and 1322(b)(7), and the provision of paragraph 9 below of this plan. It is anticipated that after application of applicable bankruptcy and non-bankruptcy law, as of the effective date of the debtor's plan, the unpaid balance of LaSalle's allowed secured Class 3 claim, if any, secured by a lien on the debtor's interest in his home, will be between [sic] less than $12,000.00.
Paragraph 9 referred to above provides as follows:
Pursuant to 11 U.S.C. § 1322(b)(7), Debtor rejects any executory contract for the purchase of his home at 1621 So. 53rd Street with LaSalle that may have been created by the sheriff sale which may have taken place on February 2, 2002, to the extent the sale has not already been vitiated by the failure of LaSalle to timely complete the terms of the sale and to settle with the sheriff. Any allowed secured claim which LaSalle may have as the result of such rejection pursuant to § 365(j) shall be treated as part of any filed and allowed secured claim which LaSalle may have.
Exhibit D-7. While Debtor has failed to file a memorandum that elucidates how the above language precludes consideration of the validity of LaSalle's foreclosure judgment, as best as I can discern, the argument appears to be that the paragraph 9 rejection of "any executory contract for the purchase" of Debtor's home is intended to accomplish that result. While I agree that the enforcement of any executory contract for the purchase of Debtor's home is precluded by this language of the confirmed plan, I find there to be no such contract implicated in this dispute. The only unperformed obligation is that of the sheriff to deliver the deed to LaSalle. There is simply no executory contract between the Debtor and La Salle to be rejected, and § 365(j) has no applicability in this context.
It is not even clear that Debtor contends that such a contract exists based on the equivocal language of the Plan: "any executory contract . . . that may have been created by the sheriff sale which may have taken place. . . . Id.
Even this is not an executory contract under bankruptcy law which requires performance to be due from both parties. Sharon Steel Corp, v. Nat'l Fuel Gas Distributing Corp., 872 F.2d 36, 39 (3d Cir. 1989).
The only other relevant provision is contained in paragraph 16 which contemplates the post-confirmation survival of LaSalle's lien to secure the allowed secured claim to the extent it is not void, avoided or subject to avoidance. The Adversary filed post-confirmation would be the anticipated vehicle to effectuate this provision but it curiously does not do so. Rather it seeks to avoid the sheriff sale as an unperfected transfer pursuant to § 544 (Count III) and post-petition delivery of the deed pursuant to § 549 because it was an automatic stay violation (Count IV). Thus, prior to this contested matter, the Debtor has not challenged the validity of the foreclosure judgment itself, including at any time prior to filing bankruptcy in any state court proceedings.
The other Counts are for bifurcation under § 506(a) (Count I), T1LA violations (Count II), and contempt for stay violation (Count III).
Apart from whether Debtor's confirmed Plan binds LaSalle to accept payment of a judicially determined allowed secured claim (as opposed to recovery of the Property), a subject discussed below, it is clear that the Plan does not address the consequence of confirmation on the foreclosure judgment. Thus, the issue was neither raised nor could have been raised by the confirmation. The foreclosure judgment and resulting sheriff's sale were not voided by the Plan. As a result should Debtor default under the Plan or should the Chapter 13 case be dismissed, it does not require LaSalle to begin its enforcement anew. That is not to state that if LaSalle's foreclosure judgment is deficient on some basis that can still be challenged under state law, the Debtor will be foreclosed from mounting that attack. I have no view as to whether such a challenge can be brought at this late date. As discussed below, these are matters for the state court, not this tribunal,
I need not address whether that result could be accomplished in a plan (versus an adversary proceeding) since this Plan simply does not so provide.
Aside from the legal argument which I have rejected (i.e., that LaSalle is forever foreclosed by the confirmed Plan to seek enforcement of its foreclosure judgment), the thrust of Debtor's resistance to the Motion is his view that the foreclosure judgment is invalid. Much of the evidence at the hearing on the Motion focused on the entry of the foreclosure judgment underlying the sheriff's sale, including issues of the state court's subject matter jurisdiction, the legal consequence of the state court's dismissal order and service deficiencies. While the question of whether the state court had jurisdiction to enter the judgment is one that I may entertain, other issues would place this Court in the improper role of judging the state court's action. The Rooker-Feldman doctrine precludes this Court from disturbing a decision on the merits rendered by a state court regardless of whether said decision has yet been reduced to a formal docketed judgment. District of Columbia Court of Appeals v. Feldman. 460 U.S. 462, 478, 103 S.Ct. 1303, 1313(1983). In this case, the inappropriateness of this Court's review of the state court proceedings is patently apparent where one of Debtor's primary defenses is based on the meaning of the state court's dismissal order (which conflicts with the court docket). Thus, even if I did not find myself to be jurisdictionally impaired from reviewing the state law issues Debtor has raised for the first time here, I would abstain to allow that determination to be made in the state court. However, as noted below, resolution of these issues is not necessary to the consummation of the Debtor's Chapter 13 plan,
Preclusion and the Rooker-Feldman doctrine are "closely related legal concepts." Goetzman v. Agribank, FCB (In re Goetzmman). 91 F.3d 1173, 1177 (8th Cir.). cert. denied. 519 U.S. 1042, 117 S.Ct. 612 (1996). The differences are (1) Rooker-Feldman is broader because it does not depend on a final judgment on the merits; (2) it is a federal doctrine whereas the former depends on state law and requires that a person had a full and fair opportunity to pursue its claim in the prior state court proceeding (no procedural due process exception to Rooker-Feldman); (3) preclusion is affirmative defense and can be waived; Rooker is jurisdictional and cannot. Ferren v. Searcy Winnelson Co. (In re Ferren), 227 B.R. 279, 282 n. 7 (8th Cir. BAP 1998).
II.
While the preclusive effect of the confirmation order does not reach as far as the Debtor contends, it may still control the relief available to LaSalle in this matter. The dispositive question is whether the Plan that provides for payment of LaSalle limits it to that treatment, thereby precluding its efforts to recover the Property. Section 1327(a) upon which the Debtor relies, makes clear that only creditors are bound by a confirmed plan, LaSalle argues that it is not a creditor but rather an equitable owner of the Property and thus § 1327(a) has no applicability to it.
That section provides as follows:
The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan,
11 U.S.C, § 1327(a) (emphasis added).
The Bankruptcy Code defines a "creditor" as an "entity that has a claim against the debtor that arose at or before the order for relief." 11 U.S.C. § 101(10)(A). A claim is defined as (A) "right to payment, whether or not such right is reduced to judgment, liquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured;" or (B) "right to an equitable remedy for breach of performance if such right gives rise to a right of payment. . . ." 11 U.S.C. § 101(5). The definition of claim has been broadly construed to effectuate the purposes of the bankruptcy law. See, e.g., Air Line Pilots Assoc. v. Continental Airlines (In re Continental Airlines), 125 F.3d 120,132 (3d Cir. 1997).
LaSalle has filed a proof of claim in this bankruptcy case asserting a secured claim in the amount $29,446.18 based on its judgment entered on July 6, 2001, Exhibit D-10. Attached to the proof are the note, mortgage, assignment of mortgage and deed evidencing Debtor's ownership of the Property with Joanne and Father. Thus, contrary to its position in this litigation, LaSalle admits that it is a creditor. Moreover, even had the purchase of the Property from the sheriff been completed, there is no evidence that recovery of this collateral satisfies LaSalle's claim. Thus, LaSalle's ownership of the Property does not foreclose it holding a claim, albeit an unsecured claim. The Debtor in the Adversary asserts that the value of the Property is S10,500 and seeks to bifurcate LaSalle's claim into secured and unsecured components pursuant to § 506(a). LaSalle denies that value but the issue has not been adjudicated. Since LaSalle contends it is owed $29,446.18 plus interest since July 6, 2001, the existence of a deficiency claim would in and of itself qualify as a claim, rendering LaSalle a creditor and therefore bound by the Plan. That Plan, confirmed without objection by LaSalle, provides for monthly payments to LaSalle equal to its secured claim. Thus, so long as Debtor makes the payments contemplated by the Plan, the stay should remain in place.
Exhibit D-10 is the proof of claim docket. I have reviewed the underlying proof of claim filed in the Court as the best evidence of the claim. A court may take judicial notice of adjudicative facts "not subject to reasonable dispute . . . [and] so long as it is not unfair to a party to do so and does not undermine the trial court's factfinding authority." In re Indian Palms Assoc., 61 F.3d 197, 205 (3d Cir. 1995) (citing Fed.R.Evid. 201(f) advisory committee note (1972 proposed rules). Notably there is nothing in LaSalle's proof of claim to qualify its assertion that it has a secured claim against this estate.
The Debtor's Schedules value the Property at $12,500, and the Plan anticipates that the secured claim shall not be greater than $12,000. These values, although somewhat higher than alleged in the Complaint, are still far less than the amount of LaSalle's claim. The Property was purchased in June 1981 for $13,500. Exhibit to LaSalle proof of claim no. 12.
In short, there is no basis on this record to grant LaSalle relief from stay to conclude its purchase of the Property. Indeed it appears that Debtor and LaSalle had agreed as much when LaSalle withdrew its initial motion for relief and did not object to confirmation. Thus, one has to question what this contested matter is all about. Presumably the issue left open by the Plan is the consequence of the Debtor's default under its terms. As best as I can judge from the record, that issue has not been addressed by the Plan and remains an open issue. If either party believes it must be adjudicated in the context of this case, neither has explained the basis for such view.
While LaSalle and the Debtor disagree on the consequence of confirmation on LaSalle's foreclosure judgment, they did agree that LaSalle would be paid its secured claim over the life of the Plan. LaSalle filed a proof of claim to that effect, and both contemplated an adjudication of the amount by the Court since LaSalle's asserted claim exceeded the amount of the claim filed on its behalf by Debtor.
It appears that the filing of the Adversary after LaSalle had withdrawn its motion for relief and failed to object to confirmation triggered LaSalle's new motion for relief. LaSalle apparently views its concessions inconsistent with the subsequent Complaint pursuant to 11 U.S.C. § 544, 549 and 550 which seeks to void its sheriffs sale and deed and deliver the Property to Debtor. Based on the testimony of both lawyers involved, I conclude that LaSalle's counsel drew a logical but unfounded conclusion regarding the intent of Mr. Trauss who never agreed to the limitations on Debtor's rights and remedies that LaSalle's counsel assumed was part of the agreement. While it is likely that LaSalle would never have withdrawn its motion or allowed confirmation without objection had it known what Trauss would subsequently do, the fault is in the assumption, not the agreement. The lesson to be learned from this time consuming and costly exercise is to put agreements, if not in writing, at least on the record.
The Debtor has a confirmed Plan that contemplates payment to LaSalle directly by the Debtor. What that amount ultimately will be is presently not known due to the pendency of the Adversary. What Debtor was required to pay LaSalle in the interim was not stated in the Plan or any other written document known to the Court. In that sense, LaSalle is on its own. However, as noted above, LaSalle does not complain about performance under the Plan. Presumably if Debtor had some payment obligation to LaSalle, a default could give rise to relief from stay. Under that scenario, LaSalle would have the right to exercise its state law remedies, and Debtor presumably would assert the state law defenses that he raised here. However, that is not the case before me, and given the binding effect of the confirmed Plan, 1 will not authorize LaSalle to take actions inconsistent with that Plan. The time to prosecute its claim of ownership of the Property was before confirmation, not after it agreed to accept a payout of its claim under a Chapter 13 plan.
An Order consistent with this Memorandum Opinion shall be entered.ORDER AND NOW, this 14th day of November 2003, upon consideration of the Motion of LaSalle National Bank for Relief from the Automatic Stay Pursuant to 11 U.S.C. § 362(d)(1) (the "Motion"), after notice and hearing, and for the reasons stated in the accompanying Memorandum Opinion;
It is hereby ORDERED and DECREED that the Motion is DENIED.