In re Stabler, No. 09-6024 (8th Cir. 11/30/2009)
| Decision Date | 30 November 2009 |
| Docket Number | No. 09-6024.,09-6024. |
| Parties | In re: Brad Allen Stabler and Brenda Lee Stabler, Debtors. Brad Allen Stabler and Brenda Lee Stabler, Plaintiffs-Appellants, v. John R. Beyers, Defendant-Appellee. |
| Court | United States Courts of Appeals. United States Court of Appeals (8th Circuit) |
Appeal from the United States Bankruptcy Court for the District of South Dakota.
Before SCHERMER, MAHONEY, and VENTERS, Bankruptcy Judges.
This is an appeal of the bankruptcy court's order granting the Defendant's motion to dismiss the underlying adversary proceeding.1 The bankruptcy court dismissed the adversary proceeding based on the application of collateral estoppel to a prior state-court judgment and on a determination that permissive abstention was warranted under 28 U.S.C. § 1334(c)(1). For the reasons stated below, we affirm the bankruptcy court's decision to abstain.2
A bankruptcy court's decision to abstain from exercising jurisdiction is reviewed for an abuse of discretion.3 A court abuses its discretion "when its ruling is founded on an error of law or a misapplication of law to the facts."4 In its application, the abuse of discretion standard is nearly indistinguishable from the clearly erroneous standard.5
The Debtors filed a Chapter 7 bankruptcy petition on May 13, 2003. In their bankruptcy schedules, the Debtors listed a debt to First State Bank of Roscoe ("FSB") in the amount of $225,816.36 secured by personal property valued at $216,000. On August 12, 2003, the Debtors received a discharge.
After receiving their discharge, the Debtors entered into two transactions that eventually led to the present litigation. First, in March 2004, the Debtors and Brad Stabler's parents, Stan and Rose Marie Stabler, jointly and severally executed a note and mortgage in the amount of $650,000 in favor of FSB. The note refinanced certain pre-petition secured debt from Brad Stabler's corporation, Edmunds County Ag Services, which the Debtors had personally guaranteed, as well as some of Stan and Rose Marie Stabler's personal debt. Defendant John R. Beyers, an officer at FSB, guaranteed the note and a third party, Arnold Schurr, purchased the note. When the Debtors defaulted on the note, Arnold Schurr assigned it to Beyers.
The second transaction took place in May 2004. On this occasion, again with Beyers's assistance, the Debtors obtained a $150,000 loan from Ipswich State Bank ("ISB") which was secured by a lien on the Debtors' personal property. The Debtors used the proceeds of this loan to pay off some of their pre-petition secured debt to FSB, in order to retain the collateral securing the debt, and to pay off loans that FSB had made to the Debtors post-petition. Beyers also guaranteed this note.
In February 2005, the Debtors renewed the note to ISB and signed another security agreement. Ultimately, however, the Debtors defaulted, and ISB assigned the indebtedness and security to Beyers.
When Beyers attempted to collect these debts, the Debtors in May 2007 filed a lawsuit in the Circuit Court of McPherson County, South Dakota, against Beyers, FSB, ISB, and others. In their Complaint, the Debtors alleged, inter alia, that the debts they owed to FSB, ISB, and Beyers had been discharged in their bankruptcy. The Debtors amended their state-court Complaint about a year later alleging that FSB Beyers, and other individuals were guilty of fraud, breach of fiduciary duty, and conspiracy because they had led the Debtors to believe they owed discharged debt.
Beyers answered the amended complaint and filed counterclaims on the notes assigned to him. Count 1 of Beyers's counterclaim related to the note assigned to him by ISB. Count 2 sought to foreclose on the security interest securing that note. Counts 3 and 4 related to the $650,000 note originated by FSB. As to Counts 3 and 4, Beyers specifically stated that he was "requesting judgment against Brad and Brenda Stabler only for those amounts determined not to be discharged in their prior Chapter 7 bankruptcy."
The parties engaged in considerable discovery and motion practice in the state-court litigation. On October 13, 2008, the Debtors filed their reply to FSB's and Beyers's counterclaims. They again alleged that various debts were discharged and that Beyers was violating the discharge injunction by attempting to collect them.
On January 13, 2009, Beyers filed a motion for summary judgment on Counts 1 and 2 of his counterclaims. The Debtors resisted by claiming the debt related to those counts was discharged and that the ISB note and security agreement was an invalid effort to reaffirm discharged debt.
On the eve of the hearing on Beyers's motion for summary judgment in the state court, the Debtors filed an adversary complaint in the bankruptcy court alleging that Beyers's state-court counterclaims violated the discharge injunction. They asked the bankruptcy court to declare that certain debts were discharged and requested that Beyers be held in contempt.
On May 12, 2009, the state court sent a letter to the parties announcing its ruling on Beyers's motion for summary judgment. The court ruled that a bankruptcy discharge only affects a debtor's personal liability, not security interests or liens on a debtor's property. It found that following their bankruptcy discharge, the Debtors obtained a loan from ISB and used the proceeds in part to pay off some of FSB's pre-petition liens. With the loan assigned to Beyers and in default, the court held that Beyers was entitled to summary judgment on Counts 1 and 2 of his counterclaim.
The Debtors immediately filed an Application for a Temporary Restraining Order or Preliminary Injunction in the adversary proceeding asking the bankruptcy court to enjoin Beyers from submitting an order or judgment to the state court regarding its summary judgment decision. The Debtors again alleged that the debt in Count 1 of Beyers's counterclaim had been discharged.
On April 29, 2009, the Debtors filed a motion for summary judgment on their adversary complaint, and submitted numerous exhibits in support of their motion. Beyers did not answer the Debtors' motion for summary judgment; instead, he moved to dismiss the Debtors' adversary complaint on several grounds, including the application of collateral estoppel to the state-court order granting him partial summary judgment on his counterclaims. Alternatively, Beyers requested that the bankruptcy court abstain from hearing the adversary proceeding pursuant to 28 U.S.C. §1334(c)(1).
The bankruptcy court held a hearing on Beyers's motion to dismiss on July 1, 2009. At the hearing, the bankruptcy court invited the parties, several times, to submit additional evidence and argument in support of their positions. After both parties affirmatively stated that they had nothing more to offer, the bankruptcy court announced its ruling from the bench. The Debtors timely appealed that ruling.
As a preliminary matter, the Panel dispenses with the Debtors' contention that the bankruptcy court's dismissal of the adversary proceeding should be reversed because the bankruptcy court considered matters outside the pleadings in its decision. According to the Debtors, the bankruptcy court should have treated the Defendant's motion to dismiss as a motion for summary judgment, as required by Fed. R. Civ. P. 12(d),6 and should have given the Debtors an opportunity to respond to the Defendant's motion. This argument is without merit for two reasons.
First, the record belies the Debtors' contention that they were surprised by the bankruptcy court's consideration of matters outside the pleadings or that they were not given an adequate opportunity to respond to the Defendant's motion. Most of the matters outside the pleadings considered by the court were actually "joint" exhibits submitted by agreement between the Defendant and the Debtors. And the bankruptcy court gave the Debtors no less than three opportunities, including two short recesses, to offer additional evidence or argument in opposition to the Defendant's motion. Upon reconvening after the first recess, the Debtors accepted the bankruptcy court's invitation and offered three additional exhibits. After that, however, the Debtors affirmatively stated that they had nothing further to offer. At no point did the Debtors object to the Court's consideration of the exhibits or any other matters outside the pleadings.
The fact that the bankruptcy court never formally announced that it was treating the Defendant's motion to dismiss as a motion for summary judgment is immaterial; all that matters is that the non-moving party has an adequate opportunityto respond.7 And the record indicates that the Debtors had an adequate, if not ample, opportunity to respond to the Defendant's motion to dismiss.
Second, any error the bankruptcy court might have committed in failing to formally announce its intention to treat the Defendant's motion to dismiss as a motion for summary judgment is also harmless because the court could have reached the issue of abstention sua sponte.8 Hence, the procedure by which the issue came before the bankruptcy court is largely irrelevant, as long as the Debtors had notice that the court was considering abstention. And they did. They had from the time the Defendant filed his motion to dismiss raising the abstention issue — May 21, 2009 — to the date of the hearing — July 1, 2009.
Therefore, the Panel finds that the Debtors' objection to the procedure by which the bankruptcy court took up and ruled on the Defendant's motion to dismiss was proper and does not warrant a reversal of the bankruptcy court's order dismissing the adversary proceeding.
A. Permissive Abstention under 28 U.S.C. § 1334(c)(1).
A bankruptcy court's authority to abstain from exercising its jurisdiction over a proceeding arises under 28 U.S.C. § 1334(c)(1), which provides:
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