Chapman v. Wells

• Decision Date: 04 December 1996
• Docket Number: No. 960108,960108
• Citation: 557 N.W.2d 725
• Parties: Pens. Plan Guide P 23929W Daniel J. CHAPMAN, d/b/a Chapman & Chapman, P.C., Plaintiff and Appellant, v. Mary E. WELLS, and Bradley P. Wells, Defendants and Appellees. Civil
• Court: North Dakota Supreme Court

Page 725

557 N.W.2d 725

Pens. Plan Guide P 23929W

Daniel J. CHAPMAN, d/b/a Chapman & Chapman, P.C., Plaintiff and Appellant, v. Mary E. WELLS, and Bradley P. Wells, Defendants and Appellees.

Civil No. 960108.

Supreme Court of North Dakota.

Dec. 4, 1996.

Charles R. Isakson, Chapman & Chapman, Bismarck, for plaintiff and appellant.

Robert W. Palda, Minot, for defendant and appellee Mary E. Wells.

Carol K. Larson, Pringle & Herigstad, P.C., Minot, for defendant and appellee Bradley P. Wells.

SANDSTROM, Justice.

Daniel Chapman appeals from the district court's summary judgment for Mary Wells and Bradley Wells. The district court found Chapman's lien did not attach to the Individual Retirement Account (IRA). Chapman claims the IRA is not exempt from attachment and notice of the attorney's lien relates back to the time the services were performed. We affirm, holding the IRA of less than $100,000 is exempt from attachment under North Dakota law.

I

Daniel Chapman rendered legal services to Mary Wells during her divorce from Bradley Wells. In the "qualified domestic relations order," ¹ Mary Wells was awarded one-half of Bradley Wells' Employer Retirement Investment (401K). Bradley Wells' employer rolled the 401K over ² into an IRA account. The district court amended the qualified domestic relations order, allowing Mary Wells to receive one-half of the IRA. Mary Wells owed Chapman in excess of $8,000 for legal services when Chapman filed his complaint.

Mary Wells subsequently filed Chapter 7 bankruptcy in which she listed the attorney fees owed to Chapman as an unsecured debt and claimed the IRA as exempt property. Under N.D.C.C. § 35-20-08, Chapman secured an attorney's lien against the 401K. The bankruptcy court concluded the lien would not affect the property of the bankruptcy estate because it was claimed as exempt. The bankruptcy court granted Chapman relief from the automatic stay so the validity of the lien could be determined in state court. Chapman brought suit against Mary Wells, Bradley Wells, and the trustee. The district court dismissed the trustee.

The district court found attachment of the lien related back to the date the services were provided. The district court concluded the property was exempt, however; and therefore the attorney's lien did not attach to the 401K or the IRA. The district court granted summary judgment in favor of Mary Wells and Bradley Wells.

The district court had jurisdiction under N.D.C.C. § 27-05-06. The appeal is timely under N.D.R.App.P. 4(a). This Court has jurisdiction under N.D. Const. Art. VI, § 6, and N.D.C.C. § 28-27-01. ³

II

We first consider whether the doctrine of res judicata bars this separate suit to determine the validity of the attorney's lien. Second, we consider the validity of the attorney's lien against the IRA.

A

"[R]es judicata is a question of law." Americana Healthcare Center v. North Dakota Dep't of Human Serv., 513 N.W.2d 889, 891 (N.D.1994). "We review questions of law de novo." Botner v. Botner, 545 N.W.2d 188, 190 (N.D.1996). "Res judicata, or claim preclusion, prohibits the relitigation of claims or issues that were raised or could have been raised in a prior action between the same parties or their privies, and which were resolved by final judgment in a court of competent jurisdiction." Wetch v. Wetch, 539 N.W.2d 309, 311 (N.D.1995); Minex Resources, Inc. v. Morland, 518 N.W.2d 682, 687 (N.D.1994); see also K & K Implement, Inc. v. First Nat'l Bank, 501 N.W.2d 734, 739 (N.D.1993) (a claim is barred by res judicata if the issue was " 'capable of being, and should have been, raised as part of the [prior] proceeding' " (quoting Hofsommer v. Hofsommer Excavating, Inc., 488 N.W.2d 380, 385 (N.D.1992))).

"A bankruptcy court is a court of competent jurisdiction for res judicata purposes." K & K Implement at 738. Res judicata applies to subsequent claims brought by either the debtor or creditor. See, e.g., Sanders Confectionery Prods., Inc. v. Heller Fin., Inc., 973 F.2d 474 (6th Cir.1992), cert. denied, 506 U.S. 1079, 113 S.Ct. 1046, 122 L.Ed.2d 355 (1993) (affirming dismissal of debtor's lender liability action as res judicata of the prior bankruptcy proceeding); K & K Implement (affirming dismissal of creditor's action against debtor as res judicata of the prior bankruptcy proceeding). If the action enforcing the lien could have been raised in the bankruptcy proceeding, Chapman's subsequent suit would be barred by res judicata.

Chapman's action to enforce the attorney's lien in this case was not under the exclusive jurisdiction of the bankruptcy court. U.S. District Courts have exclusive and original jurisdiction of all cases under the bankruptcy code. 28 U.S.C. 1334(a). An action to enforce an attorney's lien created by state statute exists separate from a bankruptcy proceeding. See In re Marriage of Berkland, 762 P.2d 779, 782 (Colo.App.1988) (recognizing "the lien would have been enforceable in the dissolution action upon [the attorney's] withdrawal"). Chapman's attorney's lien exists outside the bankruptcy code. The lien arose under N.D.C.C. § 35-20-08. Jurisdiction of the bankruptcy court is not exclusive.

U.S. District Courts have "original but not exclusive jurisdiction" over civil proceedings "arising in or related to cases under title 11." 28 U.S.C. 1334(b). " '[A]rising in' proceedings are those that are not based on any right expressly created by Title 11, but nevertheless would have no existence outside of bankruptcy." Bankruptcy Service, L.Ed. § 2C:11. A case "arises under" Title 11 if it is the "type of proceeding typically associated with bankruptcy adjudication." Bankruptcy Service, L.Ed. § 2C:10. While the proceeding need not be based on any right expressly created by Title 11, to "arise in," the proceeding would have no existence outside bankruptcy. Bankruptcy Service, L.Ed. § 2C:10. A "related proceeding" is one in which the "outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and in any way impacts upon the handling and administration of the estate." Bankruptcy Service, L.Ed. § 2C:14.

The terms "core" and "non-core" are used in 28 U.S.C. § 157. Core proceedings are those which "arise[ ] under" or "arise[ ] in" the bankruptcy proceeding. 9 Am.Jur.2d Bankruptcy § 457 (1991). Non-core are those which do not "invoke substantive rights provided by title 11 and are not central to bankruptcy court's function in administering the estate of the debtor." J.T. Moran Fin. Corp. v. Phonetel Techs. (In re J.T. Moran Fin. Corp.), 119 B.R. 447, 451 (Bankr.S.D.N.Y.1990).

A state-law cause of action affecting the amount of property available for distribution to creditors is a "related" proceeding under 28 U.S.C. § 157(c)(1). In re J.T. Moran Fin. Corp. "[A] proceeding involving the adjudication of rights created by state law, not merely traditionally adjudicated under state common law, is not core." 9 Am.Jur.2d Bankruptcy § 458 (1991). However, "[a] determination that a proceeding is not a core proceeding shall not be made solely on the basis that its resolution may be affected by State law." 28 U.S.C. § 157.

In this case, the bankruptcy court concluded "the status of such attorney's lien would not affect the property of the estate as to the claims of creditors, due to the Debtor's claim of exemption." The bankruptcy court specifically deferred to state law for determination of the validity of the lien. "We will ordinarily give effect to bankruptcy court decisions as a matter of comity to avoid the prospect of 'the state and federal courts ... reaching different results, ultimately resulting in unseemly and unnecessary conflict as each properly sought to enforce its determinations.' " North Dakota Public Service Commission v. Woods Farmers Coop. Elevator Co., 488 N.W.2d 860, 863 (N.D.1992) (quoting NoDak Bancorporation v. Clarkson, 471 N.W.2d 140, 144 (N.D.1991)). ⁴

In K & K Implement, we concluded a creditor who fails to object to classification as an unsecured creditor cannot bring a subsequent action in state court claiming security in the debtor's property. In that case, however, the bankruptcy court did not defer to the state court for determination of the creditor's security in the debtor's property. On the contrary, the bankruptcy court specifically said the creditor's motion to determine its status was barred by res judicata. K & K Implement at 736. Thus, we distinguish K & K Implement from this case.

"[I]t is more appropriate to have a state court hear a particular matter of state law." Bankruptcy Service, L.Ed. § 2C:18. State law governs the "validity, nature and effect of a lien." In re Sea Catch, Inc., 36 B.R. 226 (Bankr.D.Alaska 1983) (citing Meyer v. United States, 375 U.S. 233, 238, 84 S.Ct. 318, 321-22, 11 L.Ed.2d 293 (1963)); see also In re Anderson at 508; In re Marriage of Berkland at 782; Saltarelli & Steponovich v. Douglas, 40 Cal.App.4th 1, 46 Cal.Rptr.2d 683, 686 (4 Dist.1995). "The federal courts must follow state law regarding attorney's liens." Rubel v. Brimacombe & Schlecte, P.C., 86 B.R. 81, 83 n. 2 (E.D.Mich.1988). Therefore, this action to enforce the attorney's lien is not barred by res judicata.

III

"Summary judgment allows disposal of a controversy if either party is entitled to judgment as a matter of law, if no dispute exists as to either the material facts or the inferences to be drawn from undisputed facts, or if resolving disputed facts would not alter the result." Osterman-Levitt v. MedQuest, Inc., 513 N.W.2d 70, 72 (N.D.1994).

A

Under 29 U.S.C. § 1056(d)(1), a 401K governed by the Employee Retirement Income Security Act of 1974 (ERISA) is "exempt from garnishment or attachment without limitation irrespective of whether the debtor reasonably needs the income." Estate of Jones by Blume v. Kvamme, 529 N.W.2d 335, 339 (Minn.1995) (citing Guidry v. Sheet Metal Workers Nat'l Pension Fund, 493 U.S. 365, 110 S.Ct. 680, 107...