In re Patterson

• Decision Date: 12 February 2019
• Docket Number: CASE NO. 18-10443
• Parties: IN RE: KERMAS A. PATTERSON DEBTOR
• Court: U.S. Bankruptcy Court — Middle District of Louisiana

IN RE: KERMAS A. PATTERSON DEBTOR

CASE NO. 18-10443

UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF LOUISIANA

February 12, 2019

CHAPTER 13

MEMORANDUM OPINION ON DEBTOR'S OBJECTION TO CLAIM OF FIDELITY NATIONAL TITLE INSURANCE COMPANY

Chapter 13 debtor Kermas Anthony Patterson objects to the claim of Fidelity National Title Insurance Company ("Fidelity") as derivative of a debt he discharged in his prior chapter 7 case.¹ Fidelity responds that the obligation was not discharged in the prior case because it arose after the debtor's discharge; and that in any case this court cannot revisit the debtor's liability to Fidelity because a state court already rendered judgment against the debtor implicitly rejecting his affirmative defense of discharge in bankruptcy.

Neither party disputes the material facts.

This opinion explains the reasons for sustaining the debtor's objection to Fidelity's proof of claim.

FACTS

Kermas Anthony Patterson has learned firsthand that "no good deed goes unpunished." After receiving a discharge in a 2009 chapter 7 case,² Fidelity later obtained a state court judgment against him in connection with a transaction involving a prebankruptcy judgment lien. Among Patterson's creditors in 2009 was EMC Mortgage Corporation, owed $148,015.38secured by a conventional mortgage on Patterson's immovable property.³ Patterson scheduled his debt to EMC,⁴ which did not file a proof of claim though it later obtained relief from the automatic stay to foreclose on the property.⁵ Patterson's personal liability for the debt was discharged while EMC retained its state law remedies against the collateral.⁶

Sometime between Patterson's 2009 bankruptcy discharge and January 11, 2011, Kondaur Capital Corporation acquired EMC's note. At Kondaur's request, Patterson gratuitously signed a deed in lieu of foreclosure in Kondaur's favor on January 16, 2011. The deed in lieu of foreclosure Patterson signed provided that the transfer was made with "all legal warranties."⁷ Fidelity issued a policy of title insurance for the transaction, but its agent failed to note in examining the title that Charles Carter⁸ held a judicial mortgage on the property. Kondaur later discovered that it did not have clear title to the property and filed a claim on Fidelity's policy. Fidelity paid Carter $85,000 to release the judgment and settled with Kondaur. Fidelity thensued Patterson in state court and obtained a judgment for $85,000 plus costs and interest.⁹ No party appealed the judgment, which is now final.

Patterson later filed a chapter 13 petition. Fidelity's proof of claim for $85,000 is based on the state court judgment.

ANALYSIS

Patterson objects to Fidelity's claim as one based on—indeed deriving from—a discharged debt. He argues that Fidelity (as Kondaur's subrogee) violated the discharge injunction¹⁰ by seeking to reaffirm a discharged debt without approval of the bankruptcy court. As the mover, Patterson bears the burden of proving¹¹ that Fidelity's judgment violated his discharge injunction.¹² To defeat Fidelity's claim, Patterson must produce "evidence at least equal in probative force to that offered by the proof of claim and which, if believed, would refute at least one of the allegations that is essential to the claim's legal sufficiency."¹³The Rooker-Feldman Doctrine does not apply when the discharge injunction

has been violated.

Fidelity counters the debtor's objection by arguing that it did not violate the discharge injunction and further, that the Rooker-Feldman doctrine¹⁴ prevents this court from revisiting its state court judgment against Patterson. The Rooker-Feldman doctrine rests on the statutory proposition that federal district courts have original, but not appellate, jurisdiction¹⁵ and lack authority to review most state court final judgments, a power reserved to the United States Supreme Court.¹⁶ The doctrine "is confined to cases of the kind from which the doctrine acquired its name: cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments."¹⁷ It "forecloses not only straightforward appeals but also more indirect attempts by federal plaintiffs to undermine state court decisions."¹⁸

Rooker-Feldman's interplay with the Bankruptcy Code is far from straightforward. The doctrine has been held to apply in bankruptcy proceedings¹⁹ but does not deprive bankruptcy courts of all authority to exercise their powers under the Bankruptcy Code. As the Ninth Circuitexplained, "The Rooker-Feldman doctrine has little or no application to bankruptcy proceedings that invoke substantive rights under the Bankruptcy Code or that, by their nature, could arise only in the context of a federal bankruptcy case. Bankruptcy courts may avoid state court judgments in core bankruptcy proceedings, see, e.g., 11 U.S.C. §§ 544, 547, 548, 549, may modify judgments, see, e.g., 11 U.S.C. §§ 1129, 1325, and...may discharge them, see, e.g., 11 U.S.C. §§ 727, 1141, 1328."²⁰

Without citing any authority for his position, the debtor argues that the claim objection process is an independent action under the Bankruptcy Code. According to the debtor, objecting to Fidelity's claim is wholly different from seeking a federal court's review and rejection of a state court judgment. The debtor's blanket proposition is incorrect: an objection to a claim based on a state court judgment indeed can be a collateral attack on that judgment, and so barred by Rooker-Feldman.²¹ But that does not mean that the debtor is without a remedy because the Fifth Circuit recognizes an exception to the Rooker-Feldman doctrine when a state court judgment violates a debtor's discharge.²² Fidelity argues that the discharge injunction exception is inapplicable because its predecessor in interest's lien on the property "rode through" the bankruptcy. Fidelity contends as a result that its claim against the debtor, which was based on the warranties in the deed in lieu of foreclosure that Patterson gave Kondaur, did not violate the discharge injunction.

Fidelity's reasoning ignores the fact that the debtor's personal liability on the mortgage lien did not "ride through" the bankruptcy. The debtor was relieved of any personal liability for that debt when he received his 2009 discharge. Fidelity, as Kondaur's successor in interest, violated the discharge injunction by relying on language in the deed that resurrected the debtor's discharged in personam liability for the lien.

Fidelity cites in support Hedges v. Resolution Trust Corp.,²³ where the Ninth Circuit Court of Appeals held that a purchaser of property at a trustee's sale was not barred by the discharge injunction from evicting the debtor and seeking post-petition rent. In reaching its decision, that court explained that the creditor "was not seeking to collect a pre-petition debt, something that would not be permitted under Section 524."²⁴ But Hedges is distinguishable because here Fidelity does indeed seek to recover from Patterson a debt he was judicially relieved of paying. So Fidelity's reliance on Hedges is misplaced and the state court judgment holding the debtor personally liable is unenforceable under 11 U.S.C. § 524.

The deed in lieu of foreclosure did not create a new, post-discharge obligation

independent of its pre-petition lien.

Fidelity argues in the alternative that the debtor's signing the deed in lieu of foreclosure created a "new" post-discharge obligation that is independent of the debtor's 2009 discharge, which only applied to pre-petition obligations.²⁵ Fidelity's argument hinges on this court's concluding that Patterson's signing the deed in lieu of foreclosure was an independent action unrelated to any pre-petition connection between the parties.

No party denies that the mortgage lien on the property survived the debtor's 2009 bankruptcy. Fidelity failed to offer any evidence that the property transfer was independent of the lienholder's attempt to satisfy its in rem rights. Indeed, Fidelity admits that its predecessor in interest's mortgage rights were still an issue when the debtor was asked to sign the deed.²⁶ The document Fidelity relies on to support its claim is a deed in lieu of foreclosure, which necessarily rests on the premise that its predecessor in interest already held an interest in the immovable property. Additionally, nothing in the record supports a finding that the debtor received anything for the transfer: his signing the document was gratuitous.

Fidelity failed to refute the evidence of a connection between the post-petition property transfer and the lienholder's in rem interest in the land.

Issue preclusion does not bar the debtor from challenging the obligation

underlying Fidelity's claim as a violation of the discharge injunction.

Finally, Fidelity alleges that the doctrines of res judicata and issue preclusion bar the debtor from asserting as a defense that the judgment violated the discharge injunction in his case.

The Ninth Circuit Bankruptcy Appellate Panel explains the issue:

Issue preclusion bars relitigation of issues that have been actually litigated. The doctrine is intended to avoid inconsistent judgments and the related misadventures associated with giving a party a second bite at the apple. Issue preclusion bars relitigation of an issue of fact or issue that: (1) is identical to a fact or issue determined in an earlier proceeding, (2) was actually decided by a court in an earlier action, (3) the issue was necessary to the judgment in such action, (4) there was a final judgment on the merits, and (5) the parties are the same.²⁷

Fidelity argues that the facts support issue preclusion. Patterson argues here,²⁸ as he did in state court,²⁹ that Fidelity's obtaining a judgment against him stemming from his signing the deed in lieu of foreclosure violated the bankruptcy discharge injunction under 11 U.S.C. §524.

Fidelity's...