In re Randall Scott Eastburg And Lisa Sue Eastburg

• Decision Date: 12 April 2011
• Docket Number: BAP No. NM–10–060.,Bankruptcy No. 10–10131.,Adversary No. 10–01024.
• Parties: In re Randall Scott EASTBURG and Lisa Sue Eastburg, also known as Lisa Bowling Eastburg, formerly known as Lisa Sue Bowling, Debtors.Buke, LLC, Plaintiff–Appellee,v.Randall Scott Eastburg and Lisa Sue Eastburg, Defendants–Appellants.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Tenth Circuit

447 B.R. 624

In re Randall Scott EASTBURG and Lisa Sue Eastburg, also known as Lisa Bowling Eastburg, formerly known as Lisa Sue Bowling, Debtors.Buke, LLC, Plaintiff–Appellee,

v.Randall Scott Eastburg and Lisa Sue Eastburg, Defendants–Appellants.

BAP No. NM–10–060.

Bankruptcy No. 10–10131.

Adversary No. 10–01024.

United States Bankruptcy Appellate Panel of the Tenth Circuit.

April 12, 2011.

Submitted on the briefs: ^*Chris W. Pierce of Hunt & Davis, P.C., Albuquerque, NM, for Defendants–Appellants.William R. Keleher of Modrall, Sperling, Roehl, Harris & Sisk, P.A., Albuquerque, NM, for Plaintiff–Appellee.Before MICHAEL, BROWN, and ROMERO, Bankruptcy Judges.

OPINION

MICHAEL, Bankruptcy Judge.

Most of us are familiar with the adage that in real estate, the three most important things are location, location, and location. The same can sometimes be said of litigation. Parties that seek the protection afforded under the United States Bankruptcy Code usually want matters pertaining to them to be tried in the bankruptcy court. Creditors often prefer to litigate in state courts, especially when a lawsuit was ongoing at the time of the bankruptcy case filing. The question before us today is whether a bankruptcy court may allow litigation against a debtor to continue in state court notwithstanding the filing of the bankruptcy case. The bankruptcy court said yes, and allowed state court litigation against the debtor to proceed, with the caveat that the bankruptcy court would, prior to any trial in state court, determine whether the debts owed the creditor should be discharged. ¹ While we may not agree with the analysis employed by the bankruptcy court, we take no issue with the result reached therein, and thus we affirm the decision of the bankruptcy court for the reasons set forth below.

I. BACKGROUND FACTS

Randall Scott Eastburg (“Mr. Eastburg”) was the managing member of BUKE, LLC (“BUKE”) which owned an automobile dealership and a General Motors franchise (license). He was also the managing member of three other LLCs involved in automobile sales which were owned by members different than BUKE's members, and which were not General Motors franchise dealers.

In June 2009, BUKE filed a state court action in New Mexico against Mr. Eastburg, his wife, Lisa Sue Eastburg (collectively, the “Eastburgs”), and other defendants. In the state court action, BUKE alleged Mr. Eastburg, with the knowledge of Mrs. Eastburg, used the rights and privileges associated with BUKE's General Motors franchise for the benefit of the three other LLCs he managed. BUKE alleged the Eastburgs were guilty of conversion, civil conspiracy, breach of fiduciary duty, usurpation of corporate opportunity, unfair competition, interference with contractual relations, and racketeering resulting in fraud, embezzlement, and larceny.²

The Eastburgs filed their Chapter 7 petition on January 15, 2010. Based on substantially the same facts alleged in the state court action, on March 3, 2010, BUKE filed the adversary proceeding that is the subject of this appeal. In this action, BUKE sought a judgment on the debts owed BUKE and asked that those debts be held nondischargeable under 11 U.S.C. § 523(a)(2) and (a)(4).³ The complaint contained four counts alleging: 1) conversion; 2) breach of fiduciary duty; 3) civil conspiracy, and 4) violation of the New Mexico Racketeering Act.⁴ Concurrent with the filing of its complaint, BUKE filed a motion for relief from the automatic stay in the main bankruptcy case requesting it be allowed to continue the state court proceedings against the Eastburgs.⁵

On April 21, 2010, the bankruptcy court entered a discharge order in favor of the Eastburgs pursuant to § 727(a).⁶ Shortly thereafter, BUKE filed an amended complaint in this adversary proceeding (“Amended Complaint”).⁷ The Amended Complaint contained the original four counts, together with two new counts relating to the discharge injunction. In Count Five, BUKE sought a declaratory judgment that the discharge injunction imposed pursuant to § 524 did not apply to its claims pending in this adversary proceeding or the claims in the state court action.⁸ In the alternative, in Count Six BUKE requested that the bankruptcy court modify the discharge injunction to permit the state court action to go forward.⁹

The parties briefed the discharge injunction issues raised in Counts Five and Six of the Amended Complaint. BUKE argued that because 1) the automatic stay terminates upon entry of a discharge order,¹⁰ and 2) the discharge injunction is inapplicable to the claims raised in the adversary proceeding until the bankruptcy court rules on their dischargeability, it was free to continue prosecution of its claims against the Eastburgs in state court.¹¹ The Eastburgs responded that the bankruptcy court has exclusive jurisdiction to determine dischargeability issues, and therefore it also has exclusive jurisdiction to determine the validity and amount of the claims BUKE brought against them in state court.¹² BUKE countered that the bankruptcy court and the state court have concurrent jurisdiction to establish the validity and amount of the claims against the Eastburgs, and thereafter, the bankruptcy court has exclusive jurisdiction to rule on the dischargeability of those claims.¹³ The Eastburgs “request[ed] that the Court deny [BUKE's] request to continue proceedings in State Court, and that the Court order the parties to proceed in this Adversary Proceeding as appropriate.” ¹⁴

The bankruptcy court held a hearing on the matter on August 4, 2010. After taking the matter under advisement, the bankruptcy court issued a memorandum opinion on August 23, 2010, stating the issue before it was “at its core, [ ] whether BUKE's claims against [the Eastburgs] in the State Court Action can be litigated in that action or whether they must be litigated in this adversary proceeding.” ¹⁵ The bankruptcy court noted that “[t]he parties agree that the stay terminated upon the entry of the order discharging the [Eastburgs] in their Bankruptcy Case, and that the discharge injunction does not apply to a debt when a timely objection to dischargeability of the debt is made under 11 U.S.C. § 523(a)(2), (4) or (6) unless and until the bankruptcy court determines that the debt is discharged.” ¹⁶ The bankruptcy court “agree[d] that the parties' stipulation is a correct application of the law.” ¹⁷ As a result, the bankruptcy court concluded the validity and amount of the claims need not be litigated in the adversary proceeding, and ruled BUKE could continue its action against the Eastburgs in state court. In so ruling, the bankruptcy court further opined:

After the debtor is granted a discharge, neither the automatic stay nor the discharge injunction nor the bankruptcy court's exclusive jurisdiction over dischargeability actions precludes a plaintiff from prosecuting a cause of action against a debtor in state court in furtherance of the collection, recovery or offset of any debt as a personal liability of the debtor provided 1) the cause of action to establish the debt under applicable non-bankruptcy law and a claim of non-dischargeability are based on the same conduct, transactions and occurrences, 2) the non-dischargeable character of the debt is at issue in an adversary proceeding, and 3) the creditor is prosecuting the cause of action in state court for the purpose of applying collateral estoppel to avoid relitigating in bankruptcy court the validity and extent of the debt in the nondischargeability adversary proceeding. Nevertheless, the bankruptcy court may still act as gatekeeper to determine whether those claims are to be litigated in state court or bankruptcy court. A debtor-defendant may timely remove the claims against the debtor to bankruptcy court pursuant to 28 U.S.C. § 1452(a) and Rule 9027, Fed. R. Bankr.P., and then move under Rule 42, Fed.R.Civ.P., to consolidate the removed action with the pending non-dischargeability action. The plaintiff may then move to remand. In addition, in appropriate circumstances the debtor may seek an injunction under 11 U.S.C. § 105(a) to stay the prosecution of claims in the state court action.

[The Eastburgs] did not timely seek to remove the State Court Action to this Court and have not requested the Court to stay the State Court Action. Thus, BUKE is not precluded from pursuing its claims in the State Court Action against [the Eastburgs] for fraud, breach of fiduciary duty, and RICO for the purpose of establishing facts pertinent to the non-dischargeability claims raised and preserved in this adversary proceeding.¹⁸

The Eastburgs timely appealed the bankruptcy court's decision, and filed two additional motions: 1) a motion to stay the order pending appeal; and 2) as suggested by the bankruptcy court in its decision, a motion to stay the state court action pursuant to § 105(a). On September 9, 2010, the bankruptcy court set both motions for hearing on October 7, 2010.¹⁹ On September 30, 2010, the Eastburgs withdrew their motion to stay pending appeal,²⁰ and the bankruptcy court held a final evidentiary hearing on their motion to stay the state court action.²¹

On November 4, 2010, the bankruptcy court entered a memorandum opinion and order denying the motion to stay the state court action.²² However, utilizing the “deprivation of a fresh start” criteria, the bankruptcy court found the Eastburgs had demonstrated a sufficient likelihood of success, ²³ and after considering the balancing of harms, ruled it “can and will fashion relief to mitigate the harm to both parties without issuing an injunction. The Court can conduct a trial in the adversary proceeding, and make a decision on BUKE's nondischargeability claims, before the trial in the State Court Action commences.” ²⁴ Further, the bankruptcy court stated “[u]pon resolution of the claims in this adversary proceeding, further prosecution of the claims against the Eastburgs in the State Court Acti...