res judicata

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The 9th Circuit Reviews Whether Res Judicata Applies to Exemptions

The 9th Circuit Court in Nance v Warfield is considering whether to overrule the District Court of Nevada which held that the bankruptcy court erred in overruling the trustee’s res judicata-based objection to the debtor’s federal exemptions in the property and RV. The court also concluded that the bankruptcy court exceeded its authority by sua sponte granting an exemption for the RV under the federal wildcard exemption.

Facts

Lawrence Warfield, the trustee of Johnie Lee Nance’s bankruptcy estate, objected to Nance’s claimed exemptions for his property and RV under Arizona law. After the court sustained the trustee’s objections, Nance amended his schedule to claim exemptions under Washington law, and the trustee again objected. When those objections were sustained, Nance amended his schedule to claim federal exemptions. The bankruptcy court overruled the trustee’s objections to these federal exemptions and sua sponte granted an exemption for the RV under the federal wildcard exemption.

Analysis

The district court analyzed the applicability of res judicata to the debtor’s successive exemption claims. It noted that claim preclusion, a form of res judicata, bars litigation of claims that were or could have been raised in a prior action. The court applied the three-part test for claim preclusion: identity of claims, final judgment on the merits, and identity or privity between parties. The court found that the debtor’s claims for exemptions in the property and RV, regardless of the legal framework (Arizona, Washington, or federal law), arose from the same nucleus of operative facts and involved the same property. Therefore, the claims were identical.

The court also determined that the previous rulings sustaining the trustee’s objections constituted final judgments on the merits, satisfying the second criterion. Finally, the parties involved in the objections were identical, fulfilling the third requirement for claim preclusion. Consequently, the court concluded that the bankruptcy court erred in overruling the trustee’s objections based on res judicata.

Additionally, the court addressed the bankruptcy court’s sua sponte action to grant an exemption for the RV under the federal wildcard exemption. The court emphasized the principle of party presentation, which requires courts to decide only the questions presented by the parties. The court found that the bankruptcy court exceeded its authority by granting an exemption that the debtor had not claimed, noting that the debtor, represented by counsel, could have asserted the exemption but did not. Therefore, the court held that the bankruptcy court’s action was improper and reversed its decision.

NCBRC and NACBA filed an amicus brief in support of the Debtor/Appellant.

Warfield v Nance Amici Brief NACBA-NCBRC

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Chapter 7 Trustee Bound by Pre-Conversion Agreement

The Chapter 7 trustee was bound by the Chapter 13 trustee’s pre-conversion concession that the creditor’s liens were valid. Therefore the Chapter 7 trustee could not prevent the creditor from receiving the proceeds from the sale of the property securing the liens. In re Hillis, No. 20-70372 (Bankr. M.D. Ga. Jan. 11, 2023).

When the debtors filed for Chapter 13 bankruptcy they listed Southern Pine Credit Union as a creditor with security interests in a lawn mower, two John Deere loaders, and a Nissan Armada. During the pendency of the bankruptcy, the debtors sought and received an order approving the sale of the lawn mower and the two loaders with the proceeds going to Southern Pine in satisfaction of the loans secured by all the vehicles including the Nissan Armada. The Trustee consented to the sale, and Southern Pine offered no opposition. The court approved the sale and ordered the creditor to release the lien on the Nissan Armada upon receipt of the proceeds.

The debtors completed the sale but converted to Chapter 7 before they had received the proceeds. Southern Pine moved for relief from stay because it had not yet received the proceeds from the sale. Soon after it filed the motion, the debtors transferred the proceeds to Southern Pine. The chapter 7 trustee, believing the underlying liens might be avoidable, objected to the motion for relief from stay and made a verbal demand at the meeting of creditors for turnover of the funds. Southern Pine responded that the trustee was barred by res judicata from reneging on the pre-conversion agreement. The debtors filed a turnover motion seeking an order requiring the creditor to release the lien on the Nissan as required by the court’s order approving the sale.

The court began by finding that the Chapter 7 trustee had standing in the case because, under section 348(f)(1)(A), the proceeds from the sale of the vehicles became part of the converted estate. Under that provision property in an estate converted from chapter 13 to chapter 7 consists of property the debtors held at the time of their chapter 13 petition which they continue to hold at the time of conversion. The court found that the sale agreement gave the debtor a contractual right to the proceeds which became property of the new estate.

The court agreed with Southern Pine, however, that the Chapter 7 trustee was barred by res judicata from challenging the pre-conversion agreement to transfer the proceeds to the creditor in satisfaction of its liens. The only issue in that regard was whether the Chapter 7 trustee was in privity with the Chapter 13 trustee such that the Chapter 7 trustee should be bound by an agreement entered into by his predecessor. The court found the elements for res judicata as outlined in Griswold v. County of Hillsborough, 598 F.3d 1289, 1292 (11th Cir. 2010), were satisfied. Specifically, where section 704(a)(5) empowers the Chapter 7 trustee to oppose the allowance of an improper claim, section 1302(b)(1) empowers the Chapter 13 trustee to exercise the powers granted in section 704(a)(5). The court observed that when the two trustees have corresponding duties, the performance of those duties by the first binds the second.

Here, the Chapter 13 trustee did not object to the debtor’s motion to sell the property, including the understanding in the motion that Southern Pine had valid liens. Nor was the motion contingent upon the debtors’ staying in chapter 13. The court also rejected the trustee’s argument that because section 348(f) permits him to reevaluate the property of the estate, he is entitled to challenge the validity of the liens. The court found the trustee’s reading of the statute to be too broad. Valuation of property does not include lien validity.

The court concluded that Southern Pine’s motion was moot by reason of its having received the proceeds from the sale. It ordered Southern Pine to release the lien as requested by the debtors and overruled the trustee’s objections.

Hillis Bankr MD Ga Jan 2023

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Plan Confirmation Does Not Defeat Antimodification Provision

Although the debtor’s confirmed chapter 13 plan included a provision for release of the mortgage lien upon payment of the lender’s claim, the bankruptcy court erred in releasing the lien when the claim was for arrearages only, there remained outstanding principle at the end of the plan, and the mortgagee challenged release of the lien prior to discharge. Mortgage Corp. of the South v. Bozeman, No.21-10987 (11th Cir. Jan. 10, 2023).

The chapter 13 debtor’s bankruptcy schedules listed her mortgage debt as $17,393.04 plus $6,817.42 in arrearages. The mortgagee filed a proof of claim for the arrearages only. Though the life of the debt extended beyond the terms of the plan making it amenable to the “cure and maintain” option, the debtor listed the mortgage claim as “a secured claim paid through the plan.” Another provision guaranteed secured creditors’ retention of their liens until all payments under the plan were completed but provided that “[c]reditors must file a proof of claim to be paid.” The bankruptcy court identified the plan as a “full payment” plan under which the debtor’s entire mortgage debt would be considered paid at the end of completion of the plan payments.

The debtor completed her plan after less three years and after paying only the mortgage arrearage in full. With $15,032.73 remaining on the loan principle, the mortgagee sought to foreclose. The debtor responded with a motion for an order releasing the lien. The bankruptcy court found that the debtor had complied with the terms of her confirmed plan and granted the debtor’s discharge including release of the lien. The district court affirmed. The mortgagee appealed to the Eleventh Circuit.

The circuit court framed the issue as a contest between the anti-modification provision of section 1322(b) and the finality of a confirmation order under section 1327.

The court began with section 1322, observing that because the mortgage extended beyond the life of the plan, the “short -term” exception to the anti-modification provision did not apply. Nor did the debtor’s plan fall into the “cure and maintain” avenue of mortgage provision because the plan specifically contemplated either repayment of the entire mortgage early, or repayment only of the arrearages and release of the remaining debt and lien. The court found that when the bankruptcy court deemed the mortgagee’s claim satisfied and the lien released, it modified the mortgagee’s state-established right to full repayment of the original debt at the agreed upon interest rate.

The court found its decision was controlled by Universal Am. Mortg. Co. v. Bateman (In re Bateman), 331 F.3d 821, 822 (11th Cir. 2003). In that case, the confirmed chapter 13 plan provided for only partial payment of mortgage arrears. The court reasoned that the anti-modification provision prohibited modifications to the mortgagee’s rights and therefore the creditor’s “secured claim for arrearage survived the plan, and the creditor retained its right to full satisfaction of its claim.” The Bateman court stated that, “[a]llowing the confirmed plan to extinguish the mortgagee’s rights would deny the effect of the antimodification provision.”

In this case, the court found the bankruptcy court erred by eliminating the mortgagee’s entire claim and lien upon payment only of the arrearages. “Supreme Court and our precedent require us to conclude that declaring a homestead-mortgagee’s lien satisfied before the debt the lien secures is paid in full constitutes an impermissible modification of the homestead-mortgagee’s rights under the antimodification provision.” Because Nobelman v. Am. Savs. Bank, 508 U.S. 324, 332 (1993) emphasized that the anti-modification provision protects the “rights” rather than “claims” of the creditors, it was irrelevant that the debtor may have treated the mortgage in accordance with the claim as filed by the mortgagee.

The conflict arose out of the conflict between the antimodification provision and the res judicata effect of plan confirmation in section 1327. That section provides: “[t]he provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.”

In United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010), the Supreme Court held that the interest of finality requires that parties be held to the terms of a confirmed plan. In that case the bankruptcy court confirmed a plan which discharged the interest on the debtor’s student loan without fulfilling the requisite showing of undue hardship. The Supreme Court found that where the creditor had notice of the plan terms and did not object, the res judicata effect of plan confirmation outweighed the fact that the plan terms were contrary to other requirements of the Code. This is so even if the plan contains provisions that are impermissible under the Code.

The debtor argued that Espinosa abrogated Bateman.

For five reasons, the court here found that Espinosa had no effect on the release of a lien after a confirmed plan erroneously modified the rights of the lienholder.

First, the court found that Espinosa was expressly limited to challenges brought under Federal Rule of Civil Procedure 60(b)(4), seeking relief from judgment.

Second, the procedural posture of Espinosa differed significantly from Bateman. Espinosa involved a creditor coming back six years after the debt was discharged and ten years after plan confirmation to launch a collateral challenge to the discharge. Bateman, on the other hand, involved a challenge to treatment of a claim after plan confirmation but prior to discharge and was not a collateral attack on the debt that was subject to discharge.

The court here, noted that, like the lender in Bateman, the mortgagee “timely objected to and appealed the bankruptcy court’s decision to release its lien.”

Third, the holding in Espinosa relied on whether a particular judgment was “void,” within the meaning of Rule 60(b)(4). The Supreme Court declined to “expand the universe of judgment errors” that would render an order void under the rule.

Fourth, Bateman was not decided on the basis that the plan was illegally confirmed and therefore, as in the case here, Bateman did not involve a collateral attack on the confirmed plan and was not decided on section 1327 finality.

Finally, the court noted that it had confirmed its holding in Bateman in the post-Espinosa case of Dukes v. Suncoast Credit Union (In re Dukes), 909 F.3d 1306, 1331 (11th Cir. 2018).

The court turned to whether the express terms of the debtor’s plan according to which the bankruptcy court released the mortagee’s lien should have been given effect under the finality rule set forth in section 1327. The court found that, under Bateman, the bankruptcy court should not have released the lien, stating that “even though our cases have recognized the importance of finality, they have also said time and again that secured liens survive bankruptcy proceedings.”

In sum, the court stated: “Although MCS did not timely object to the Plan’s confirmation or appeal the discharge of Bozeman’s debt, MCS did oppose Bozeman’s motion to release its lien, and it timely appealed the bankruptcy court’s order granting her motion. And because releasing MCS’s lien before MCS receives full payment would impermissibly modify MCS’s rights, MCS’s lien must survive the bankruptcy proceeding.”

Bozeman 11th Cir Jan 2023

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Post-Discharge Litigation Violates Discharge Injunction

The appellants were liable for willful violation of the discharge injunction when they pursued post-discharge state litigation and garnishment based on pre-petition conduct even though the debtor could have but did not raise the discharge as a defense in the state litigation. Morgan v. Morgan, No. 20-291 (D. Utah Oct. 25, 2021). [Read more…] about Post-Discharge Litigation Violates Discharge Injunction

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Collateral Estoppel Applied to “Death Penalty” Default Judgment

Where the family court litigation was resolved in favor of the debtor’s ex-husband after the court struck the debtor’s pleadings in a sanctions order, the elements of collateral estoppel applied to preclude the debtor from challenging the state court orders in her subsequent chapter 7 bankruptcy case. Dahlin v. Dahlin, No. 16-36169, Adv. Proc. No. 17-3425 (Bankr. S.D. Tex. May 15, 2018). [Read more…] about Collateral Estoppel Applied to “Death Penalty” Default Judgment

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No False Representation in Loan Acquisition

Creditors failed to prove that the debtor made false representations with respect to a loan acquired by the debtor’s father claiming to represent the debtor’s company. Hasley v. Irons (In re Irons), No. 15-40876, Adv. Proc. No. 15-4051 (Bankr. D. Neb. March 9, 2017).

Ronald and Vicki Hasley, d/b/a Swite Enterprise, brought an adversary proceeding against the chapter 7 debtor, Tyler B. Irons, seeking an order of nondischargeability under section 523(a) with respect to a state court judgment on a debt.

The litigation between the parties began when the Hasleys filed suit in state court against the debtor; his father, Jack Irons; and his company J & R Motors, LLC, to recover approximately $190,000 Jack Irons borrowed from the Hasleys. The state court rendered judgment against the defendants based, at least in part, on findings of facts resulting from Tyler Irons’s failure to respond to requests for admissions which the court then deemed admitted. Tyler Irons filed chapter 7 bankruptcy shortly thereafter and the Hasleys filed an adversary complaint, seeking an order that the debt was nondischargeable under sections 523(a)(2)(A) and (a)(4). [Read more…] about No False Representation in Loan Acquisition

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Res Judicata Does Not Bar Post-Confirmation Objection to POC

Plan confirmation did not adjudicate claim allowance on contested unsecured claims, therefore, res judicata did not bar the debtors’ post-confirmation challenges to the proofs of claim. LVNV Funding v. Harling, No. 16-1346, and LVNV Funding v. Rhodes, No. 16-1347 (4th Cir. March 30, 2017).

In two chapter 13 cases, LVNV filed proofs of claim prior to plan confirmation. The debtors, Derrick and Teresa Harling, and Jeffrey Rhodes, objected after plan confirmation but prior to the claims bar date. LVNV argued that the objections should have failed under the doctrine of res judicata. The bankruptcy courts found that res judicata did not apply, and disallowed the claims on the basis that the underlying debts were uncollectible due to the passage of the statute of limitations.

LVNV appealed both cases directly to the Fourth Circuit. [Read more…] about Res Judicata Does Not Bar Post-Confirmation Objection to POC