First State Bank of Roscoe v. Stabler

• Decision Date: 30 March 2017
• Docket Number: 1:16–CV–1029–RAL
• Citation: 247 F.Supp.3d 1034
• Parties: FIRST STATE BANK OF ROSCOE, and John R. Beyers, Appellants, v. Brad Allen STABLER, and Brenda Lee Stabler, Appellees.
• Court: U.S. District Court — District of South Dakota

247 F.Supp.3d 1034

FIRST STATE BANK OF ROSCOE, and John R. Beyers, Appellants,

v.Brad Allen STABLER, and Brenda Lee Stabler, Appellees.

1:16–CV–1029–RAL

United States District Court, D. South Dakota, Northern Division.

Signed March 30, 2017

Sander J. Morehead, Jordan J. Feist, Roger W. Damgaard, Woods, Fuller, Shultz & Smith, PC, Sioux Falls, SD, for Appellants.

Patrick T. Dougherty, Dougherty & Dougherty, Sioux Falls, SD, Lee A. Schoenbeck, Schoenbeck Law, Watertown, SD, for Appellees.

OPINION AND ORDER AFFIRMING BANKRUPTCY COURT DECISION

ROBERTO A. LANGE, UNITED STATES DISTRICT JUDGE

First State Bank of Roscoe (FSBR) and John Beyers (collectively Appellants) appeal the bankruptcy judge's decision to sanction them for violating the discharge injunction in Brad and Brenda Stablers' bankruptcy case. Appellants contend that the bankruptcy judge's decision was barred by preclusion principles and incorrect on the merits. For the reasons explained below, this Court affirms.

I. Facts

This case has a long procedural history, including a jury trial, a court trial, several opinions by a South Dakota circuit judge, two orders from a bankruptcy judge, and opinions from both the Supreme Court of South Dakota and the Bankruptcy Appellate Panel (BAP) of the Eighth Circuit. This Court draws the facts from these prior opinions and orders as well as from the Appendix filed by Appellants.¹ In 1999, Brad and his wife Brenda started an agriculture business called Edmunds County Ag Services, Inc. (ECAS). Stabler v. First State Bank of Roscoe , 865 N.W.2d 466, 469 (S.D. 2015). The Stablers funded ECAS by borrowing money from FSBR, whose president at that time was Beyers. Id. at 469 ; App. 457. FSBR's loans to the Stablers were secured by liens on the Stablers' property and a personal guarantee from Brad. Stabler , 865 N.W.2d at 469 ; App. 457–58. FSBR also held mortgages on certain property of Brad's parents, Stan and Rose Stabler, as security for some of ECAS's debt. Stabler , 865 N.W.2d at 469–70 ; App. 457.

Brad liquidated ECAS in 2002 after it proved unsuccessful. Stabler , 865 N.W.2d at 470. Beyers then discussed the idea of filing for bankruptcy with the Stablers and suggested counsel for them to do so. App. 457. Brad and Brenda filed a Chapter 7 bankruptcy petition in May 2003. Stabler , 865 N.W.2d at 470 ; App. 154–79. Brad and Brenda's bankruptcy schedules listed FSBR as a secured creditor with a claim for $225,816.36, although the debt Brad and Brenda actually owed FSBR at that time approximated $600,000. App. 06, 166. FSBR received prompt notice of the bankruptcy petition. App. 06. Brad and Brenda received a bankruptcy discharge in August 2003, and FSBR received notice of the discharge. App. 07. The discharge eliminated Brad's personal guaranty of ECAS's debt but did not eliminate FSBR's liens on Brad and Brenda's property. Stabler , 865 N.W.2d at 470 ; see also Venture Bank v. Lapides 800 F.3d 442, 445 (8th Cir. 2015).

In March 2004, Beyers convinced all four Stablers to sign a $650,000 promissory note along with a collateral real estate mortgage (CREM) covering nearly all of the Stablers' real property. Stabler , 865 N.W.2d at 470, 472 ; App. 458. The March 2004 note and CREM at least in part refinanced and secured pre-bankruptcy loans that FSBR had previously made to ECAS and all four Stablers. Stabler , 865 N.W.2d at 470, 472 ; App. 08–09, 14. According to the Supreme Court of South Dakota, the 2004 note and CREM included "the exact same amount" and "the same form of debt as existed prior to Brad and Brenda's bankruptcy." Id. at 470. The $650,000 note was divided three ways² to others with whom Beyers or FSBR had relationships: a $416,000 note assigned to a partnership called Schurss, a $213,000 note assigned to Roger Ernst, and a $21,000 note assigned to a company called H&K Acres. Id. at 472 n.6 ; App. 08–14. Brad and Brenda paid the $21,000 note off, and the other two notes were eventually assigned to Beyers. Stabler , 865 N.W.2d at 472 n.6 ; App. 08–14.

In May 2004, Beyers assisted Brad and Brenda in getting a $150,000 loan from Ipswich State Bank. Stabler , 865 N.W.2d at 470 ; Stabler v. Beyers (In re Stabler) , 418 B.R. 764, 766–67 (8th Cir. BAP 2009). Beyers guaranteed this loan, which was secured by a lien on Brad and Brenda's property. In re Stabler , 418 B.R. at 767 ; Stabler , 865 N.W.2d at 470. Brad and Brenda used the Ipswich loan to pay FSBR, although it is not entirely clear whether they were paying off valid liens and post-discharge debt or debts that had been discharged in their bankruptcy.³ In re Stabler , 418 B.R. at 767 ; Stabler , 865 N.W.2d at 470. Brad and Brenda eventually defaulted on the loan, and the Ipswich State Bank assigned the debt and security to Beyers. In re Stabler , 418 B.R. at 767 ; Stabler , 865 N.W.2d at 470.

In May 2007, after FSBR attempted to collect on some of the Stablers' debt, all four Stablers filed an action in state court asking the judge to determine how much money they actually owed FSBR, Ipswich State Bank, Ernst, and Schurrs. App. 256, 262–65. The Stablers amended their complaint in 2008 to add Beyers as a defendant and assert claims for fraud, breach of fiduciary duty, and conspiracy. App. 269–77. The amended complaint alleged that Beyers and FSBR knew that the debt refinanced in the $650,000 note had been discharged in bankruptcy yet misrepresented that Brad and Brenda still owed this money. App. 273.

FSBR and Beyers answered the amended complaint and asserted counterclaims against the Stablers. App. 491–530. Counts 1 and 2 of Beyers's counterclaim sought to recover on the loan from Ipswich State Bank and to foreclose on the property securing that loan. App. 503–06, 521. Counts 3 and 4 of Beyers's counterclaim concerned the $650,000 promissory note. App. 506–08. Count 3 of the counterclaim sought recovery on the $416,000 portion Beyers obtained from Schurrs while count 4 of the counterclaim sought recovery of the $213,000 portion Beyers obtained from Schurrs. App. 506–08, 521. Counts 3 and 4 of the counterclaim both stated that Beyers was "requesting judgment against Brad and Brenda Stabler only for those amounts determined not to be discharged in their prior Chapter 7 bankruptcy." App. 507–08, 521. As an affirmative defense, Brad and Brenda asserted that the debt Beyers sought to recover in counts 1, 3, and 4 of the counterclaim was discharged in bankruptcy. App. 290, 292, 294.

Beyers moved for summary judgment on counts 1 and 2 of his counterclaim in mid–January 2009. App. 306–07. Before the state court could rule on Beyers's motion, Brad and Brenda filed an adversary complaint against Beyers in bankruptcy court. App. 584–89. Brad and Brenda styled their filing as an adversary complaint, although in oral argument to this Court all parties recognized that the filing could have been by way of a motion. In the adversary complaint, Brad and Brenda asked the bankruptcy judge to declare that the debt Beyers sought to recover in his counterclaim was discharged and to hold him in contempt for violating the discharge injunction. App. 588.

In May 2009, the state court granted Beyers summary judgment on counts 1 and 2 of his counterclaim. App. 321–23. The state court reasoned that a bankruptcy discharge does not eliminate liens on the debtor's property, that Brad and Brenda had obtained a loan from Ipswich State Bank after receiving their discharge, and that they had used some of this loan to pay secured debts to FSBR. App. 321–22. Because Brad and Brenda were in default, the state court concluded that Beyers could foreclose on the collateral securing the loan. App. 321–22.

Appellants then moved to dismiss the adversary complaint filed in bankruptcy court. They argued that the adversary complaint's allegations concerning the Ipswich State Bank loan should be dismissed because the state court's decision on that issue had preclusive effect in the bankruptcy proceeding. App. 609–10. As to the adversary complaint's allegations concerning the $650,000 promissory note, Appellants argued that counts 3 and 4 of Beyers's counterclaim made clear that he was only seeking to recover debt that the state court determined was not discharged in Brad and Brenda's bankruptcy. App. 614–15. Alternatively, Appellants asked the bankruptcy court to abstain under 28 U.S.C. § 1334(c)(1) from deciding whether the debt Beyers sought to recover was discharged in bankruptcy. App. 615–18. Brad and Brenda responded with several arguments, including that the Ipswich State Bank loan and the $650,000 promissory note were invalid reaffirmation agreements. App. 636, 644. In bankruptcy parlance, "[a] reaffirmation agreement is one in which the debtor agrees to repay all or part of a dischargeable debt after a bankruptcy petition has been filed." Venture Bank , 800 F.3d at 445 (quotation omitted). Section 524(c) of the Bankruptcy Code provides that reaffirmation agreements are unenforceable unless, among other requirements, they are made before the; discharge and are filed with the bankruptcy court. 11 U.S.C. § 524(c)(1), (3). Brad and Brenda argued that the Ipswich State Bank loan and the $650,000 note were unenforceable because these agreements were never filed with the bankruptcy court.

In a July 2009 oral order, the bankruptcy judge dismissed Brad and Brenda's adversary complaint based on the failure to state a claim and a decision to abstain under § 1334(c)(1). App. 333–355, 699. The bankruptcy judge found that the state court's May 2009 summary judgment order was entitled to preclusive effect and thus barred Brad and Brenda's claims concerning the Ipswich State Bank loan. App. 347–48. As for the $650,000 note, the bankruptcy judge reasoned that the language of counts 3 and 4 of the counterclaim undercut Brad and Brenda's assertion that Beyers was violating the discharge injunction:

With respect to the debts described in counts three and four of Beyers' state court counterclaim, the analysis is much simpler. In both

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