260 F.3d 654 (6th Cir. 2001), 99-4454, In re Marilyn E. Morris

Docket Nº:99-4454
Citation:260 F.3d 654
Party Name:In re: Marilyn E. Morris, Debtor. John Poss, Appellant, v. Marilyn E. Morris, Appellee.
Case Date:August 13, 2001
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit
 
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260 F.3d 654 (6th Cir. 2001)

In re: Marilyn E. Morris, Debtor.

John Poss, Appellant,

v.

Marilyn E. Morris, Appellee.

No. 99-4454

United States Court of Appeals, Sixth Circuit

August 13, 2001

Submitted: December 1, 2000

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Alexander Jurczenko, Cleveland, Ohio, for Appellant.

Carl D. Rafoth, James B. Dietz, FRIEDMAN & RUMMELL COMPANY, L.P.A., Youngstown, Ohio, for Appellee.

Before: WELLFORD, SILER, and BATCHELDER, Circuit Judges.

OPINION

ALICE M. BATCHELDER, Circuit Judge.

Marilyn E. Morris, a debtor in Chapter 13 bankruptcy proceedings, initiated an adversary proceeding against John Poss, a creditor, in the United States Bankruptcy Court for the Northern District of Ohio at Youngstown. She sought a determination of the ownership interests of the estate and Poss in certain real property. Morris moved for summary judgment, but Poss failed to respond after seeking an extension of the time to reply. The bankruptcy court granted the motion, and Poss appealed to the United States District Court for the Northern District of Ohio. In the district court, the parties consented to the exercise of jurisdiction by a magistrate, who affirmed the decision of the bankruptcy court. This appeal followed. We now reverse.

I. Statement of Facts

A. The Underlying Transactions and Initial State Court Judgment

This appeal arrives before us with a tangled history of multiple, concurrent legal proceedings arising from two transactions over fifteen years ago involving a certain plot of land. In 1982, Morris wished to relocate her precision tool manufacturing business, the Fine Cut Diamond Tool Company, from Newbury, Ohio, to Rock Creek, Ohio, but was unable to secure conventional financing. Poss, a longtime friend, agreed to loan Morris $17,500 to purchase a 17.5-acre parcel on Rome-Rock Creek Road (the "property") for the business, and Morris took title to the property. Poss did not execute a mortgage on the property, and the only evidence of the loan was a cognovit note that provided for repayment over fifteen years. Although Morris made some payments to Poss, none

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of those payments were in accordance with the terms of the note.

Soon, Morris convinced Poss to finance the construction of a building to house her business. Without taking a mortgage, promissory note, or any security interest for the loan, he advanced an additional $149,750. Instead, with an eye toward maximizing his tax position, Poss leased from Morris, for fifteen years at a nominal rent, the two-and-one-half acres on which the business was to be located. He then constructed the building to Morris's specifications and leased the structure to Morris for fifteen years with a monthly payment intended to amortize the $149,750 with interest over the life of the lease. The structure of this second transaction resulted in an anomalous situation in which Poss owned the building housing Morris's business, Morris owned the land on which the building was situated, and each leased his or her respective interest to the other. Significantly, the agreement did not account for either party's default in making lease payments. Neither Morris nor Poss made lease payments pursuant to this agreement.

By the time Poss and Morris formally executed these leases, Morris had secured a $40,000 loan from Huntington National Bank, without the knowledge of Poss, by pledging the business premises as security and giving the bank a first mortgage on the property. Although Morris had fallen behind on payments under the cognovit note and had not made any payments on the lease, Poss did not pursue a default judgment and offered to postpone commencement of payments for one year. Upon learning of the Huntington Bank mortgage, however, Poss filed suit on the cognovit note in the Ashtabula County Court of Common Pleas and secured a judgment in 1986 of $17,114.18 plus statutory interest and costs. When Morris failed to satisfy the judgment, Poss brought a foreclosure action.

In 1989, Poss brought a second action in common pleas court seeking to recover the lease payments for the building due under the terms of the second transaction. The common pleas court consolidated this suit with the foreclosure action. After a trial on these consolidated claims in 1992 before Judge Gary Yost, the court found that the remaining balance on the cognovit note was $2,300.17 and that Poss had a valid lien in this amount plus interest. In addition, after offsetting Poss's failure to make lease payments to Morris as agreed, the court entered judgment of $149,750 plus interest for Poss. Therefore, Poss secured judgment in a total amount of $152,050.17 plus interest.

B. The Settlement Agreement and Further Proceedings

When Poss experienced difficulties enforcing his judgment against Morris, the parties entered into negotiations. At a point when they broke down, Poss filed a forcible entry and detainer action against Morris claiming that her continued possession of the building and the property was unlawful. Shortly after the filing of that suit, in July 1993 the parties executed a settlement agreement. The agreement concluded the forcible entry and detainer action by requiring Morris to vacate the building by January 1, 1994. It further obligated her to convey a specific 7.735-acre parcel to Poss within sixty days. Morris consented to entry of judgment against her in the pending forcible entry and detainer action on the condition that "no order of eviction shall be issued unless [she] fail[s] to comply" with the terms of the settlement agreement. In return, the settlement relieved Morris from liability under the mortgage and judgment lien. In September 1993, Judge Yost entered

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judgment adopting the agreement and incorporating it as the order of the court to conclude Poss's foreclosure action. Judge Yost's judgment further indicated that Huntington Bank had assigned its mortgage to Poss. The judge in the forcible entry and detainer action similarly adopted the settlement agreement as the judgment of the court.

On the same day Judge Yost adopted the settlement as the judgment of the court, Morris moved for relief from the judgment. Poss countered by seeking enforcement of the settlement. In April 1994, Judge Yost denied Morris's motion and disposed of Poss's motion for enforcement by stating that "[Morris] shall comply with her settlement agreement, forthwith. Upon [her] failure to comply with the settlement agreement, [Poss] may undertake any remedy available to him, at law or in equity." Morris appealed, and the Ohio Court of Appeals affirmed on June 30, 1995. Within ten days of this decision from the state court of appeals, Poss obtained an ex parte order from the common pleas court enjoining the county recorder to convey the 7.735-acre parcel to himself. When Morris learned of the ex parte order, she immediately appealed. Poss returned to court claiming that Morris and her business had failed to comply with the terms of the settlement by not paying rent during the five-month holdover period and moved the court for a writ of restitution. Following an evidentiary hearing, the court agreed that Morris had failed to pay rent and issued the writ, ordering the sheriff to seize the building. Morris appealed both the finding that she failed to comply with the settlement and the issuance of the writ.

C. Morris's Petition for Bankruptcy under Chapter 13

On September 8, 1995, Morris filed a voluntary petition for bankruptcy under Chapter 13. Her petition listed the 17.5-acre property as having a market value of $100,000, subject to a $1,000 judgment lien obtained by the power company and a $4,000 tax lien in addition to Poss's disputed interest, to which the petition assigned a value of $90,000. Her petition also identified Poss as a secured creditor owed $150,000. The summary of her Chapter 13 plan indicated that Morris resided in a small apartment above the manufacturing facility on the 17.5-acre parcel. Morris moved the bankruptcy court for modification of the automatic stay to pursue her appeals in state court. When no party appeared in opposition, the bankruptcy court granted the motion.

Following the filing of Morris's petition, the bankruptcy court set January 23, 1996, as the bar date for filing a proof of claim against the estate. Poss had actual knowledge of Morris's Chapter 13 petition as well as the bar date. Despite the court's explicit suggestion to Poss's counsel that he file a proof of claim, he failed to do so even after the court granted him leave to request an extension of the bar date. Once the bar date passed and Poss had not filed a proof of claim, Morris filed an amended Chapter 13 plan, which updated the value of the property by increasing it to $100,800. Most importantly, the amended plan made filing a timely proof of claim and holding an allowed claim prerequisites to receiving a distribution. Understandably, Poss objected to the plan, but because he had not filed a proof of claim the bankruptcy court overruled his objections. Moreover, the court concluded that Poss's objections to the plan did not constitute an informal proof of claim; therefore, the court ruled that his objections were moot and further delay would prejudice the other creditors of the estate. Poss appealed this decision to the Bankruptcy Appellate Panel of the Sixth Circuit, which later

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dismissed the appeal as premature since the bankruptcy court had not yet entered a final, appealable order.

D. Commencement of the Adversary Proceeding

On February 16, 1996, before the bankruptcy court overruled Poss's objections to Morris's amended Chapter 13 plan as moot, Morris filed a "Complaint to Avoid Preference and Avoid Lien Impairing Exemption" with the bankruptcy court. Count One of the complaint sought to set aside the ex parte order Poss had obtained...

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