In re Power Equipment Co., LLC

• Decision Date: 14 May 2004
• Docket Number: BAP No. 03-6065ND.,BAP No. 03-6066ND.,BAP No. 03-6064ND.
• Parties: In re POWER EQUIPMENT COMPANY, LLC, Hydra Mac, Inc., and Power Equipment Corporation, Debtors. Power Equipment Company, LLC, Hydra Mac, Inc., and Power Equipment Corporation, Debtors-Appellants, v. Case Credit Corporation, Movant-Appellee.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Eighth Circuit

309 B.R. 552

In re POWER EQUIPMENT COMPANY, LLC, Hydra Mac, Inc., and Power Equipment Corporation, Debtors Power Equipment Company, LLC, Hydra Mac, Inc., and Power Equipment Corporation, Debtors-Appellants, v. Case Credit Corporation, Movant-Appellee.

BAP No. 03-6064ND.

BAP No. 03-6065ND.

BAP No. 03-6066ND.

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted: March 25, 2004.

Filed: May 14, 2004.

James J. Coles, Bismarck, ND, for appellant.

Raphael T. Wallander, Daniel J. McGarry, on brief, Minneapolis, MN, for appellee.

Before KRESSEL, Chief Judge, DREHER, and MAHONEY, Bankruptcy Judges.

MAHONEY, Bankruptcy Judge.

Debtors appeal an order of the bankruptcy court¹ granting relief from the automatic stay to Case Credit Corporation (hereinafter "Case") to enable it to continue pre-petition litigation in Pennington County, Minnesota. We affirm.

FACTUAL BACKGROUND

In the Minnesota litigation, Case was attempting to obtain a declaratory judgment that none of the debtors were owners of the real estate and improvements used by the debtors in the operation of their business. Case had obtained one or more judgments against a separate entity, Magnum Resources, and another company with a name similar to that of one of the debtors, Hydra Mac International, Inc. Case transcribed the judgments as liens against the property located in Pennington County, Minnesota, and desired to foreclose the liens. Because record title to the real estate was in one or more of the debtors rather than in the name of either Hydra Mac International, Inc., or Magnum Resources, Inc., Case requested a declaratory judgment determination that, because of earlier transactions between the debtors and others, including Magnum Resources, Inc., and the execution of an unrecorded warranty deed transferring the title from the debtors, the debtors no longer had any ownership interest in the real estate.

Pre-petition, a state court judge entered a default judgment against the debtors determining that the debtors had no legal title to the property. Upon a motion for reconsideration, the default judgment was set aside, but the debtors were ordered to post a bond in the amount of $1,000,000. Being unable to post such a bond, they filed Chapter 11 cases.

At the time of the bankruptcy petition, the state court case was scheduled for trial to begin within two weeks of the bankruptcy petition date. The state court judge had a number of motions pending before him, but had nonetheless scheduled the start date for the trial.

Upon receiving notice of the bankruptcy filing, the state court judge cancelled the trial and set a scheduling conference for September 8, 2003.

Case filed a motion for relief from the automatic stay on August 7, 2003. In the motion, Case explained the history of the state court litigation and explained that the real property at issue in the Pennington County lawsuit was the only major asset left in any of the debtors' estates.

The hearing on the motion for relief from the automatic stay was held on September 3, 2003. At the hearing, Case took the position that the appropriate forum for litigating the ownership of the real estate in question was in the state court where the matter had been pending for some time and was ready for trial. The bankruptcy judge entertained lengthy oral arguments, and Case emphasized in response to arguments by counsel for the debtors and counsel for another judgment creditor that

The very purpose of our trial is to determine that Magnum Resources, who we have a three plus million dollar judgment against, was the title owner of record of the property. It's a declaratory judgment action. It is an issue of who owns the property. It is entirely relevant to this bankruptcy case. If Magnum Resources is adjudicated the owner of this property, there is nothing to reorganize. So far from being irrelevant, it is entirely relevant.

Tr. of Sept. 3, 2003, hearing, at 28:14-22 (Debtors/Appellants' App. 00035).

In addition, Case argued that if the title issues had to be tried in the bankruptcy court in North Dakota, the bankruptcy court in North Dakota did not have jurisdiction over all of the parties to the Minnesota litigation.

At the end of the hearing, the bankruptcy judge entered an oral ruling granting the motion for relief from the automatic stay. In support of his oral order, the judge stated:

Counsel, as you are aware, the parties did present me with rather voluminous documentation. I can't think of what else could possibly be added to that which has already been included.

I have to conclude principally, because this case was only a few weeks away from going forward for trial within the Minnesota state courts, that cause has been established for relief from stay. I am not going to go so far as to say that there is no prospect for reorganization. I don't believe at this juncture it is possible to say so, but that may well be the case, in any event.

Nonetheless, I do conclude that grounds exist for relief from stay for cause under 362(d)(1), and for that reason, I am granting the requested motion by Case Credit Corporation for relief from the automatic stay in the case of Power Equipment Company, LLC, Hydra Mac, Inc., and in the case of Power Equipment Corporation.

Tr. of Sept. 3, 2003, hearing, at 31:10-32:3 (Debtors/Appellants' App. 00038-39).

The oral ruling stated on the record at the end of the hearing on September 3, 2003, was memorialized in a written order dated September 9, 2003, and filed September 9, 2003, with the Clerk of the United States Bankruptcy Court for the District of North Dakota.

On September 8, 2003, prior to the entry of the written order by the bankruptcy court judge, the state court judge presiding over the Pennington County, Minnesota, litigation held a scheduling hearing. That hearing had been scheduled by the judge when the bankruptcy petition was filed and he had cancelled the trial in the matter. Neither North Dakota bankruptcy counsel nor Minnesota trial counsel for the debtors appeared at the scheduled hearing. Minnesota trial counsel for Case informed the state court judge of the oral ruling by the bankruptcy judge five days before. Upon being informed that the bankruptcy judge had orally ordered from the bench that the stay was to be lifted, the Minnesota judge, noting the absence of counsel for the debtors, reinstated the Findings of Fact, Conclusions of Law, and Order for Judgment dated March 14, 2003, in which he had found title to the real property in question was vested in Magnum Resources, Inc., and the debtors had no ownership interest in or right to possession of the real property. That order was signed on September 10, 2003, and filed of record on September 15, 2003. Appellee's App. at 058-060.

The judgment in favor of Case in the Pennington County state court case was appealed to the Court of Appeals of the State of Minnesota. Appellee's App. at 054. At the time of the arguments before the Bankruptcy Appellate Panel on March 25, 2004, the appeal was still pending in the Minnesota state courts.

JURISDICTION

The bankruptcy appellate panel must determine, independently of any consent by the parties, its jurisdiction.² In this case, to determine our jurisdiction, there are two issues that must be considered. First, the court must consider the effect, if any, of the Rooker-Feldman doctrine. This doctrine evolved from two United States Supreme Court cases: District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983) and Rooker v. Fidelity Trust Co., 263 U.S. 413, 44 S.Ct. 149, 68 L.Ed. 362 (1923).

In Feldman, the Supreme Court held that lower federal courts possess no power whatsoever to sit in direct review of state court decisions.³ In Rooker[,] the Supreme Court held that no court of the United States, other than the United States Supreme Court[,] could "entertain a proceeding to reverse or modify the judgment of a state court."⁴ The Eighth Circuit holds that the Rooker-Feldman doctrine "forecloses not only straightforward appeals but also more indirect attempts by federal plaintiffs to undermine state court decisions."⁵

Portwood v. Young (In re Portwood), 308 B.R. 351, 355 (8th Cir. BAP 2004).

The Rooker-Feldman doctrine, therefore, prohibits us from reviewing the validity of the state court decision in the Pennington County, Minnesota, case. That case is on appeal in the Minnesota courts, and this court is prohibited from reviewing any determination by the Minnesota appellate courts.

However, the decision by the Minnesota state court is not a matter that is before this Bankruptcy Appellate Panel. The question before this panel is whether the bankruptcy judge had sufficient material before him to make a factual determination that cause existed to grant relief from the automatic stay to permit the Pennington County, Minnesota, case to proceed. Adjudicating that issue on appeal does not undermine the state court decision. If, for example, we were to determine that the bankruptcy judge had erred, and therefore we reversed the grant of relief from the automatic stay, such reversal would have no impact on the state court decision that was rendered following the grant of relief from the automatic stay. That state court decision is on appeal and the reinstatement of the automatic stay would be effective to stay the appeal. Farley v. Henson, 2 F.3d 273, 275 (8th Cir.1993). Even so, reinstatement of the automatic stay and its effect of stopping proceedings in the state appeals court causes no more interference with the state court judicial process than would have existed if the original state court judgment had been rendered prior to the bankruptcy petition being filed. In that scenario, if the debtors had appealed the state court decision and then filed the bankruptcy petitions, the automatic stay would have stopped the appeal from proceeding until one of the parties obtained relief from the...