In re Belcher, Bankruptcy No. 81-00890-C

• Decision Date: 26 August 1981
• Docket Number: Bankruptcy No. 81-00890-C,Adv. No. 81-0933-C.
• Citation: 13 BR 421
• Parties: In Re Burnis Chilton BELCHER, and Lois Kathryn Belcher, Debtors. C.I.T. FINANCIAL SERVICES, INC., Plaintiff, v. Burnis Chilton BELCHER, and Lois Kathryn Belcher, Defendants.
• Court: U.S. Bankruptcy Court — Western District of Missouri

13 B.R. 421 (1981)

In Re Burnis Chilton BELCHER, and Lois Kathryn Belcher, Debtors C.I.T. FINANCIAL SERVICES, INC., Plaintiff, v. Burnis Chilton BELCHER, and Lois Kathryn Belcher, Defendants.

Bankruptcy No. 81-00890-C, Adv. No. 81-0933-C.

United States Bankruptcy Court, W.D. Missouri, C.D.

August 26, 1981.

R. L. Veit, Jefferson City, Mo., for debtors/defendants.

Victor Tell Neff, Jefferson City, Mo., for plaintiff.

ORDER DENYING MOTION TO DISMISS

FRANK P. BARKER, Jr., Chief Judge.

On May 18, 1981 plaintiff filed this complaint to determine the dischargeability of a debt, alleging that defendants obtained money and a renewal or refinancing of credit by the use of a statement in writing which was materially false, a violation of 11 U.S.C. § 523(a)(2)(B).

On June 1, 1981 defendants timely moved to dismiss the complaint, affirmatively stating that this action was barred by plaintiff's failure to raise the issue of dischargeability in adversary case No. 81-0580-C. In that case the debtors had filed their complaint styled Burnis Chilton Belcher and Lois Kathryn Belcher v. C.I.T. Financial Services, Inc. to avoid a lien on their household goods under 11 U.S.C. § 522(f).

Service was proper in the lien avoidance case. C.I.T. Financial Services, Inc. (hereafter C.I.T.) failed to answer. C.I.T. also failed to appear at the hearing on the matter April 17, 1981. This Court, on May 7, 1981 issued its Order Avoiding the nonpossessory, nonpurchase-money security interest of C.I.T. in household goods.

The issue presented is whether C.I.T. is barred from bringing this dischargeability complaint because it failed to file a counterclaim in the first adversary proceeding instigated by the debtors to avoid the lien.

Rule 713 of the Rules of Bankruptcy Procedure makes Rule 13 of the Federal Rules of Civil Procedure applicable to adversary proceedings. It states:

Rule 13 of the Federal Rules of Civil Procedure applies in adversary proceedings, except that (1) subdivision (f) does not apply, (2) a party sued by a trustee or receiver need not state as a counterclaim any claim which he has against the bankrupt, his property, or the estate, (3) when a trustee or receiver fails to set up a counterclaim through oversight, inadvertence, or excusable neglect, or when justice so requires, he may by leave of court set up the omitted counterclaim by amendment or by commencing a new adversary proceeding or separate action, and (4) persons other than the original parties to the adversary proceeding may be made parties to a counterclaim or cross-claim in accordance with Rules 719 and 720.

Rule 13 of the Federal Rules of Civil Procedure has generally been held applicable in bankruptcy cases. Harris v. Capehart-Farnsworth Corp., 225 F.2d 268, 270 (8th Cir. 1955).

Federal Rules of Civil Procedure, Rule 13, provides in pertinent part at section (a):

(a) Compulsory Counterclaims. A pleading shall state as a counterclaim any claim which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party\'s claim and does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction. But the pleader need not state the claim if (1) at the time the action was commenced the claim was the subject of another pending action, or (2) the opposing party brought suit upon his claim by attachment or other process by which the court did not acquire jurisdiction to render a personal judgment on that claim, and the pleader is not stating any counterclaim under this Rule 13.

As stated in Rule 713 of the Rules of Bankruptcy Procedure, section (f) does not apply. Section (f) reads:

(f) Omitted Counterclaim. When a pleader fails to set up a counterclaim through oversight, inadvertence, or excusable neglect, or when justice requires, he may by leave of court set up the counterclaim by amendment.

It thus appears that the Federal Bankruptcy Rule 713 is more restrictive than Federal Civil Procedure Rule 13.

The purpose of Rule 13 with respect to counterclaims is to provide complete relief to the parties; prevent fragmentation of litigation and multiplicity of actions; and to conserve judicial resources. Southern Const. Co. v. U.S. for Use of Pickard, 371 U.S. 57, 83 S.Ct. 108, 9 L.Ed.2d 31 (1962); U.S. General, Inc. v. City of Joliet, 598 F.2d 1050 (7th Cir. 1979); Bristol Farmers Market and Auction Co. v. Arlen Realty & Development Corp., 589 F.2d 1214 (3rd Cir. 1978); and Montecatini Edison, S.P.A. v. Ziegler, 486 F.2d 1279 (D.C.Cir.1973).

The provision of Rule 13 relating to compulsory counterclaims should be given a broad, realistic interpretation to avoid a multiplicity of suits. Sue & Sam Mfg. Co. v. B-L-S Const. Co., 538 F.2d 1048 (4th Cir. 1976).

The courts have generally agreed that what constitutes a "transaction or occurrence" should be interpreted liberally in order to further the general policies of the federal rules and carry out the philosophy of Rule 13(a) 6 Wright & Miller, Federal Practice and Procedure, § 1410 at page 40. See also Warshawsky & Co. v. Arcata Nat. Corp., 552 F.2d 1257, 1261 (7th Cir. 1977); Columbia Plaza Corp. v. Security Nat. Bank, 525 F.2d 620 (D.C.Cir.1975); Annis v. Dewey County Bank, 335 F.Supp. 133, 138 (D.C.S.D.1971).

The recent 8th Circuit case of Cochrane v. Iowa Beef Processors, 596 F.2d 254, 264 (8th Cir. 1979); cert. denied 442 U.S. 921, 99 S.Ct. 2848, 61 L.Ed.2d 290 (1979); see also Peterson v. United Accounts, Inc., 638 F.2d 1134, 1136 (8th Cir. 1981), set forth the following tests for determining whether the claim in question arose out of the same transaction or occurrence, within the meaning of Rule 13(a) as set forth in 6 Wright & Miller, Federal Practice and Procedure, § 1410 at page 42. The tests are as follows:

1) Are the issues of fact and law raised by the claim and counterclaim largely the same?

2) Would res judicata bar a subsequent suit on defendant\'s claim absent the compulsory counterclaim rule?

3) Will substantially the same evidence support or refute plaintiff\'s claim as well as defendant\'s counterclaim?

4) Is there any logical relation between the claim and the counterclaim? (Footnotes omitted).

In the case of each of these tests, an affirmative answer to the question posed means that the counterclaim is compulsory.

This Court finds that the dischargeability claim was not a compulsory counterclaim in the lien avoidance proceeding under any of the aforementioned tests.

The "transaction or occurrence" giving rise to the dischargeability complaint centers around the execution of a false financial statement by the debtors whereas the "transaction or occurrence" surrounding a lien avoidance proceeding centers upon the execution of a non-possessory, non-purchase money security agreement.

While the underlying note, security agreement and statement of financial condition may have been completed at the same time, the statement of financial condition would be completely irrelevant in a lien avoidance proceeding.

The issue at bar in a lien avoidance proceeding is whether the lien itself was a non-possessory, non-purchase money security interest in household goods. The issue at bar in this type of dischargeability complaint is whether the debtors are entitled to a discharge of the debt in light of their nondisclosure to the plaintiff of pre-existing debts.

Thus, the issues of fact and law raised by the claim and counterclaim would not be largely the same. Nor would substantially the same evidence support or refute both claims.

Nor would res judicata bar the dischargeability issue since the subject matter of the lien avoidance is not...