In re Monas, 03-20700.

• Citation: 309 B.R. 302
• Decision Date: 24 March 2004
• Docket Number: No. 03-20700.,03-20700.
• Court: U.S. District Court — Northern District of Ohio
• Parties: In re Richard MONAS & Sharon Monas, Debtors.

Page 302

309 B.R. 302

In re Richard MONAS & Sharon Monas, Debtors.

No. 03-20700.

United States District Court, N.D. Ohio, Eastern Division.

March 24, 2004.

Glenn E. Forbes, Painesville, OH, for Debtors.

MEMORANDUM OF OPINION AND ORDER

RANDOLPH BAXTER, Chief Judge.

The matters before the Court are as follows: 1) Confirmation of the Debtors Chapter 13 Plan and objections to the same filed by IMC Mortgage Company and FirstMerit Bank, N.A.; 2) Debtor's Motion to Modify the Chapter 13 Plan and objections to the same filed by IMC Mortgage Company and the State of Ohio, Department of Taxation; 3) Debtor's Motion To Avoid Claimed Mortgages of IMC Mortgage Company and Household Realty Corporation and an objection to the same filed by IMC Mortgage Company; 4) Debtor's Objection to the Claim filed by IMC Mortgage Company and a response to the same by IMC Mortgage Company; and 5) IMC Mortgage Company's Motion for Relief From Stay and objections to the same filed by the Debtor and FirstMerit Bank, N.A. The principal dispositive issue for the Court to determine is whether IMC Mortgage Company holds a valid security interest in the Debtor's real property located at 3838 Main Street, Perry, Ohio 44081. Richard and Sharon Monas, IMC Mortgage Company, and FirstMerit Bank, N.A. filed a Joint Stipulation of Facts. Based on the Joint Stipulation of Facts, the relevant facts for deciding these matters are not contested. Core jurisdiction of this matter is acquired under provisions of 28 U.S.C. § 157(b)(2)(A),(B),(G),(K) & (L), 28 U.S.C. § 1334, and General Order No. 84 of this district. Upon a review of the stipulated facts and an examination of the record, generally, the following factual findings and conclusions of law are herein made:

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Debtors Richard and Sharon Monas ("Debtors") filed their petition for relief under Chapter 13 of the Bankruptcy Code on August 12, 2003. In their petition the Debtors scheduled certain real property located at 3838 Main Street, Perry, Ohio 44081 as an asset. This property and the alleged lien of IMC Mortgage Company ("IMC") are the subject of this dispute.

IMC asserts it holds a mortgage lien on the property which originated on July 28, 1997, with approximately $104,473.54 owed as of December 19, 2003. FirstMerit Bank, N.A. ("FirstMerit") asserts it holds a second mortgage lien on the property which originated on May 25, 2000 with approximately $52,044.16 owed as of April 1, 2003; a judgment lien which originated on November 21, 2002 with approximately $2,044.16 owed as of April 1, 2003 plus interest from July 17, 2002; a second judgment lien which originated on April 2, 2003 with approximately $9,432.23 plus interest from April 2, 2003; and a third judgment lien with approximately $54,044.16 plus interest from April 2, 2003.

FirstMerit filed a complaint in foreclosure in the Lake County Common Pleas Court, Case No. 03CF000294, with respect to the subject property naming IMC, among others, as one of the defendants. IMC failed to file an answer in the foreclosure case. On June 17, 2003 a Judgment Entry Decree in Foreclosure ("Foreclosure Judgment") was entered by the state court. On FirstMerit's default judgment motion against IMC, which the state court found was duly served, it was adjudged that IMC was in default of "answer, appearance, or other appropriate pleading." (Foreclosure Judgment, p. 1) As such, the state court forever barred IMC from asserting any right, title or interest in the property known as 3838 Main St., Perry, Ohio 44081. The state court further cancelled IMC's mortgage of record.

That same Foreclosure Judgment not only found IMC to have been in default for want of prosecution, it also made specific findings as to three other parties defendant on Plaintiff FirstMerit's Motion for Default Judgment and Motion for Summary Judgment, with accompanying Affidavit, FirstMerit's Complaint in Foreclosure, the Answer and Cross-Claim of Defendant Citifinancial, Defendants Richard and Sharon Monas' Answer, and the Answer of John S. Crocker, the Lake County Treasurer.

As to the co-defendant Household Realty Corporation ("Household"), the state court found Household to be in default and, as a result, forever barred Household from asserting any right, title or interest in the subject property. The state court also cancelled the mortgage of Household.

As to the co-defendant CitiFinancial, Inc. ("CitiFinancial"), the state count made no specific finding regarding any asserted right, title, interest, claim, or lien. Rather, the court transferred such to the net proceeds of the sale of the premises.

The state court also found that the Lake County Treasurer, a co-defendant, was owed taxes, accrued taxes, assessment, and penalties on the subject premises and those were to be determined at the time of sale. The amounts were to be a valid and good first lien against the subject property.

Additionally, the state court Foreclosure Judgment addressed and validated each of three judgment liens held by the Plaintiff FirstMerit against the subject property. That court found that each such lien was entitled to foreclosure by FirstMerit. Finally, the subject premises were to be sold free and clear of any lien, claim or interest of FirstMerit and all parties defendant. (Foreclosure Judgment, p. 6) Notedly, said Foreclosure Judgment was a consent entry approved by counsel for FirstMerit, the Lake County Treasurer, CitiFinancial and counsel for the Debtors. Subsequent to the entry of the Foreclosure Judgment, the Debtors filed their Chapter 13 bankruptcy petition and the parties have stipulated that no foreclosure occurred regarding the subject property prepetition.

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Although the parties stipulate to the relevant facts in this case, they disagree as to the preclusive effect of the Foreclosure Judgment rendered by the state court.¹ In this bankruptcy proceeding, Debtors have objected to IMC's claim, as it was filed as a secured claim and contend that any claim formerly held by IMC was cancelled of record in accordance with the above referenced state court Foreclosure Judgment against IMC. More precisely, Debtors argue that IMC is bound by reason of the rules of comity, collateral estoppel, and res judicata. They further asserted that if any claim is held by IMC, it is unsecured.

In response, IMC timely objects to the Debtors' objection of its claim. Firstly, IMC asserts that notwithstanding the issuance of the state court's Foreclosure Judgment: 1) no foreclosure sale actually occurred; 2) only an order of sale was entered on June 27, 2003; and 3) the Debtors' bankruptcy petition enjoined further state court actions. Further, IMC relies on a decision in Daneman v. Federal Home Loan Mortgage Corp. (In re Hoff), 187 B.R. 190 (Bankr.S.D.Ohio 1995) for the proposition that, under Ohio law, neither a mortgage nor the lien it creates is extinguished by the filing of a foreclosure suit. Id. at 195. IMC, citing 69 Ohio Jurisprudence 3d, Mortgage Sec. 233, further asserts that a mortgage is extinguished only after a foreclosure sale of the underlying real property. Essentially, IMC contends that although its mortgage interest was clearly cancelled by the state court it has a right to assert a secured claim in this bankruptcy proceeding because the foreclosure sale on the subject property did not occur.

Debtors responded to IMC's contentions by stating that IMC's reliance upon the Hoff opinion is misplaced. In Hoff, no specific finding was made regarding the validity of the alleged creditor's mortgage. In the subject state court action, however, a specific finding was made regarding the validity of IMC's mortgage on the subject premises. Thusly, the Debtors argue that the court's reasoning in Hoff is not applicable herein. The Debtors further contend that because of the preclusive effect of the state court's Foreclosure Judgment, IMC has no secured claim in the subject property.

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This Court is asked to determine whether IMC still has an interest in the subject property given the decision rendered by the state court in its Foreclosure Judgment. In making that determination this Court recognizes that property interests are created and defined by state law and that "[u]nless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding." Butner v. U.S., 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Further a creditor should not receive "a windfall merely by reason of the happenstance of [a debtor's] bankruptcy." Id. (citing Lewis v. Manufacturers National Bank, 364 U.S. 603, 609, 81 S.Ct. 347, 5 L.Ed.2d 323 (1961)).

Through the papers filed by IMC in this matter, IMC is attempting to enhance its rights as a claimant. This is not the intent of the Bankruptcy Code. If the Debtors had never filed for bankruptcy, IMC would be left without any secured claim because the state court clearly barred IMC from asserting any right, claim or interest in the subject property. IMC is prevented from enhancing it rights by reason of the preclusive effect of the state court judgment. A federal court must give a prior state court judgment the same preclusive effect as would be given that same judgment under the law of the state in which it was rendered. Rally Hill Prods., Inc. v. Bursack (In re Bursack), 65 F.3d 51, 53 (6th Cir.1995)(citing Migra v. Warren City School District Board of Education, 465 U.S. 75, 81, 104 S.Ct. 892, 79 L.Ed.2d 56 (1984)). Under Ohio law, the doctrine of collateral estoppel, otherwise known as issue preclusion, prevents a party from relitigating facts and issues in a subsequent suit that were fully litigated in a prior suit that was a final judgment on the merits. Thompson v. Wing, 70 Ohio St.3d 176, 183, 637 N.E.2d 917, 923 (Ohio 1994). The doctrine of collateral estoppel applies in Ohio when a fact or issue (1) was...