Opinion
Case No. 16-33332 Adv. No. 18-3021
07-31-2018
In re: MARK S. TRASK PEGGY S. TRASK, Debtors PEGGY S. TRASK MARK S. TRASK, Plaintiffs v. GREENVILLE FEDERAL, Defendant
Copies to: Austin Buttars (Counsel for the Plaintiffs) Karl Snyder (Counsel for the Plaintiffs) Patricia J. Friesinger (Counsel for the Defendant)
Chapter 7 Memorandum Order Granting in Part Defendant Greenville Federal's Motion for Abstention and Dismissal, or in the Alternative, to Stay Proceedings
In this adversary proceeding (the "Adversary Proceeding"), Plaintiffs Peggy S. and Mark S. Trask (the "Trasks") seek monetary damages against Greenville Federal Financial Corporation, dba as "Greenville Federal," ("Greenville") for asserted violations of the automatic stay and of the discharge injunction. Greenville has moved for mandatory or discretionary abstention under 28 U.S.C. § 1334(c), or in the alternative, a stay of the Adversary Proceeding until the completion of a foreclosure action in the state court (the "Foreclosure Action").
Greenville lent money to the Trasks both on a personal basis and to a business they owned and operated, Twelve 30 Limited ("Twelve 30"). Greenville holds the first mortgage on the Trasks' residence located at 4242 State Route 722, New Madison, Ohio (the "Residence"). Twelve 30 owned a number of parcels of real estate (the "Twelve 30 Parcels"), all of which were secured through mortgages granted to Greenville. In addition, Greenville held a second mortgage on the Residence which secured obligations owed by Twelve 30 and the Trasks.
The Trasks filed a Chapter 7 bankruptcy petition on October 28, 2016, received their discharge on February 28, 2017, and the case was closed and all remaining assets of the estate were abandoned on March 22, 2017. The Trasks did not reaffirm any of the notes or other obligations with Greenville in their bankruptcy. Accordingly, all of their personal liability on the obligations owed to Greenville has been discharged.
After the bankruptcy was closed, the Trasks disposed of the five Twelve 30 Parcels which served as security for seven different notes with Greenville. Twelve 30 provided deeds in lieu of foreclosure to Greenville for the first three Twelve 30 Parcels, and sold the final two Twelve 30 Parcels. In exchange for the proceeds from that sale, Greenville released all the mortgages on the Twelve 30 Parcels. Greenville then applied the proceeds from the sale of the Twelve 30 Parcels to the notes that were secured only by mortgages on the Twelve 30 Parcels before the obligations also secured by the second mortgage on the Residence. As a result, Greenville claims to have a note with $18,750.56 due secured by the second mortgage on the Residence.
In May 2017 Greenville filed the Foreclosure Action in state court to foreclose on the second mortgage on the Residence due to an asserted default on the underlying note. The Trasks filed an answer asserting several affirmative defenses, including that Greenville misapplied the proceeds from the sale of the Twelve 30 Parcels and that the language of the releases of the mortgages securing the Twelve 30 Parcels effected the release of the note underlying the second mortgage on the Residence. The Trasks have also asserted that at the time the Foreclosure Action was filed, they were current on all payments due on the note secured by the first mortgage on the Residence. Trial in the Foreclosure Action was set for May 3, 2018.
On April 24, 2018, shortly before the scheduled trial of the Foreclosure Action, the Trasks reopened their bankruptcy case and filed the Adversary Proceeding. Upon those bankruptcy court filings, the state court stayed the Foreclosure Action. However, the state court has since lifted that stay and the Foreclosure Action is again active.
On March 28, 2018 the Trasks also filed a Complaint in the United States District Court for the Southern District of Ohio against Greenville for money damages and other relief alleging violations of the Truth in Lending Act, 15 U.S.C. § 1601 et seq.; Federal Reserve Board Regulation Z, 12 C.F.R. § 1026; and the Real Estate Settlement Procedures Act, 12 U.S.C. § 2601, et seq. Case No. 3:18-cv-00098 (the "District Court Action"). Many of the facts alleged in the District Court Complaint are the same as the facts alleged in the Adversary Complaint. On July 16, 2018 the District Court entered an order staying the District Court Action "in deference of [the] state action." Doc. 10.
The Trasks' Adversary Proceeding Complaint contains a jury demand and alleges two causes of action against Greenville. The first is that during the pendency of their bankruptcy case in late 2016 and early 2017, Greenville made several attempts to collect on a debt in violation of the automatic stay imposed by 11 U.S.C. § 362 (the "Stay Violation Claim"). The second cause of action alleges that Greenville has violated their discharge provided by 11 U.S.C. § 524 by reporting negative information to consumer credit reporting agencies concerning their discharged debts and by attempting to collect on a discharged debt through the Foreclosure Action (the "Discharge Violation Claim"). Greenville now moves this court to dismiss the Adversary Proceeding and to grant mandatory or permissive abstention to permit the underlying issues to be litigated in the state court, or in the alternative, to stay the Adversary Proceeding while the state court Foreclosure Action proceeds to conclusion.
Mandatory abstention is provided by 28 U.S.C. § 1334(c)(2). The Sixth Circuit has interpreted this provision to require a bankruptcy court's abstention from a proceeding when a party moves for abstention and the proceeding "(1) [is] based on a state law claim or cause of action; (2) lack[s] a federal jurisdictional basis absent the bankruptcy; (3) [is] commenced in a state forum of appropriate jurisdiction; (4) [is] capable of timely adjudication; and (5) [is] non-core . . . ." Lowenbraun v. Canary (In re Lowenbraun), 453 F.3d 314, 320 (6th Cir. 2006). A core proceeding "either invokes a substantive right created by federal bankruptcy law or one which could not exist outside of the bankruptcy." Bavelis v. Doukas (In re Bavelis), 773 F.3d 148, 156 (6th Cir. 2014) (quoting Lowenbraun, 453 F.3d at 320). Both of the Trasks' causes of action, the Stay Violation Claim and the Discharge Violation Claim, are core proceedings and thus not subject to mandatory abstention. See In re Johnson, 580 B.R. 766, 769 (Bankr. S.D. Ohio 2018) (stay violation action for damages under § 362(k) is a core proceeding); Branch v. 30th Dist. Court City of Highland Park (In re Branch), 525 B.R. 388, 392 (Bankr. E.D. Mich. 2015) (stay violation action and discharge injunction action are core proceedings). Therefore, the court denies Greenville's request for mandatory abstention on both counts.
Bankruptcy courts may permissively abstain from hearing a cause of action when abstention would be "in the interest of justice, or in the interest of comity with State courts or respect for State law . . . ." 28 U.S.C. § 1332(c)(1). To determine whether those interests are served by abstention, courts consider a number of factors, including:
(1) the effect or lack of effect on the efficient administration of the estate if a court abstains, (2) the extent to which state law issues predominate over bankruptcy issues, (3) the difficulty or unsettled nature of the applicable state law, (4) the presence of a related proceeding commenced in state court or other non-bankruptcy court, (5) the jurisdictional basis, if any, other than 28 U.S.C. § 1334, (6) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case, (7) the substance rather than form of an asserted core proceeding, (8) the feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court, (9) the burden on this court's docket, (10) the likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties, (11) the existence of a right to a jury trial, (12) the presence in the proceeding of nondebtor parties and (13) any unusual or other significant factors.McDaniel v. ABN Amro Mortg. Group, 364 B.R. 644, 650 (S.D. Ohio 2007) (citations omitted); Junk v. CitiMortgage, Inc. (In re Junk), 512 B.R. 584, 616-17 (Bankr. S. D. Ohio 2014) (quoting Meritage Homes Corp. v. JPMorgan Chase Bank, N.A., 474 B.R. 526, 573 (Bankr. S.D. Ohio 2012)).
Upon review and consideration of the issues presented by the Foreclosure Action and the Adversary Proceeding, this court determines that the interests of justice, comity with the state court, and respect for state law favor staying the Adversary Proceeding pending final adjudication of the issues before the state court in the Foreclosure Action. Judicial efficiency also supports staying this Adversary Proceeding pending adjudication of the Foreclosure Action. As this court understands it, the thrust of the matter before the state court in the Foreclosure Action is whether the second mortgage and the promissory note underlying it survived the transactions consummated through the disposition of the Twelve 30 Parcels and, if so, whether Twelve 30 and the Trasks were in default on the note underlying the second mortgage, thereby providing cause for Greenville to foreclose on the second mortgage. The Trasks allege that no such cause exists because Greenville misapplied the proceeds from the sale of the Twelve 30 Parcels and because the promissory note underlying the second mortgage on the Residence was satisfied and released as a result of the transactions related to the disposition of the Twelve 30 Parcels. The Trasks further argue that the true nature of the Foreclosure Action is not an in rem proceeding, which would be permissible under bankruptcy law, but rather, an in personam action seeking to collect on a note for which the Trasks' personal liability has been discharged. While this court could address these issues in adjudicating the Discharge Violation Claim, the state court is the most appropriate court to address those underlying issues.
See Johnson v. Home State Bank, 501 U.S. 78, 84 (1991) ("a bankruptcy discharge extinguishes only one mode of enforcing a claim—namely, an action against the debtor in personam—while leaving intact another—namely, an action against the debtor in rem."); and Jackson v. Carlton House Condo. Unit Owners Assoc. of Cuyahoga Cty. (In re Jackson), No. 16-4021, 2017 U.S. App. LEXIS 20649 at *3 (6th Cir. Oct. 18, 2017) aff'g, In re Jackson, 554 B.R. 156 (6th Cir. BAP 2016).
On its face the Complaint in the Foreclosure Action would appear to represent an in rem proceeding. If the issue was whether this court's discharge or an order or other relief provided by this court effected the release of the second mortgage on the Residence, this court may be the more appropriate forum to address that issue. However, the issues presented by the Trasks pertaining to the second mortgage arise out of post-bankruptcy and post-discharge transactions and their impact on Greenville's ability to enforce the second mortgage. Thus the "discharge" issue pertaining to the second mortgage does not directly implicate the interpretation of the impact of the Trasks' discharge, but rather, implicate state law issues pertaining to the enforcement of a promissory note and a mortgage - issues well within the state court's wheelhouse.
The payment misapplication and mortgage release arguments presented by the Trasks have been pending before the state court for a much longer period of time than before this court. The state court appeared prepared to address those issues at the originally scheduled May 3, 2018 trial. After originally staying the Foreclosure Action in favor of the filings made in this court and the District Court, the state court vacated its own stay and indicated a willingness and desire to proceed in adjudicating those issues. Further, those underlying issues solely involve matters of state law—not bankruptcy or other federal law. While the determination of those issues may or may not support the Trasks' theory that Greenville has been engaging in a disguised in personam collection effort related to their discharged indebtedness to Greenville, the issues of whether Greenville misapplied funds and whether the note underlying the second mortgage was released and cancelled are state law issues. While not binding on this court as to the matters before it, the District Court has already deferred to the state court's resolution of those issues. Comity with the state court, avoidance of potentially inconsistent or duplicative findings and conclusions, and judicial economy and efficiency support staying the Adversary Proceeding and deferring to the state court to allow the state court to address those issues.
These considerations support permissive abstention under 28 U.S.C. § 1334(c)(1) as to the Discharge Violation Claim as relates to those underlying facts. State law issues predominate and can be severed from the discharge issue, the state case is ready for trial, the state case has no effect on the estate administration and the timing of the complaint raises concerns of forum shopping. However, the state court is unable to provide the damages requested by the Trasks in this proceeding under either causes of action. --------
While the Stay Violation Claim and the Discharge Violation Claim are core proceedings within this court's jurisdiction, those matters will be most efficiently addressed by this court after the state court addresses the underlying arguments as to the misapplication of funds and the satisfaction and release of the second mortgage. This court can then determine whether Greenville violated the automatic stay or the Trasks' discharge through any improper reporting to credit reporting agencies or enforcement of the second mortgage.
Therefore, the court finds it appropriate to stay the Adversary Proceeding until a final order is entered and all state court appeals are exhausted in the Foreclosure Action. The stay of the Adversary Proceeding serves judicial economy and efficiency, prevents potentially inconsistent or duplicative findings and conclusions, and supports comity with the state court while deferring to the state court on state law issues which are more appropriately resolved by the state court. The outcome of the Discharge Violation Claim may, in part, be based on the result of the Foreclosure Action and the court finds it inefficient and uneconomical for the parties to proceed on the Stay Violation Claim while the state court is concurrently addressing the issues pertaining to the second mortgage. Instead, this court will await the state court's findings and conclusions rendered in the Foreclosure Action, giving appropriate deference and preclusion to those findings and conclusions in addressing the Discharge Violation Claim.
Within 30 days of the entering of a final non-appealable order in the state court, the parties shall file a report with this court to reactivate the Adversary Proceeding.
IT IS SO ORDERED.
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.
/s/ _________
Guy R. Humphrey
United States Bankruptcy Judge Dated: July 31, 2018 Copies to: Austin Buttars
(Counsel for the Plaintiffs) Karl Snyder
(Counsel for the Plaintiffs) Patricia J. Friesinger
(Counsel for the Defendant)