In re Thomas
| Citation | 626 B.R. 793 |
| Decision Date | 23 March 2021 |
| Docket Number | Bky. No. 20-12232 (PMM) |
| Parties | IN RE: Willet Walter THOMAS, Debtor. |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Charles Laputka, Laputka Law Office, Allentown, PA, for Debtor.
In September 2019, secured creditor Petra Holdings, Inc. ("Petra") obtained a mortgage foreclosure judgment by default against the debtor, Willet Walter Thomas ("the Debtor"). In September 2020, shortly after the Debtor filed this bankruptcy case, the promissory note that was the basis for the foreclosure judgment matured. Petra asserts a secured claim based upon the mortgage foreclosure judgment.
The Debtor filed an objection to Petra's proof of claim asserting that Petra failed to credit a pre-petition insurance payment that the Debtor assigned to Petra prior to the foreclosure. Petra maintains that the objection must be overruled because the Debtor may not relitigate the foreclosure judgment by way of the claims allowance process. The Debtor counters that he is not relitigating the in rem state court foreclosure judgment, but only seeks to revisit the amount owed on the in personam promissory note between him and Petra.
The outcome of this dispute turns on whether the objection runs afoul of the doctrine of res judicata, i.e., would a determination of the proper balance of the mortgage account by this court amount to an impermissible reopening of the foreclosure judgment?
For reasons discussed below, I find that:
Therefore, the Debtor's objection is barred by principles of res judicata. Accordingly, I will overrule the Debtor's objection.
On August 31, 2005, the Debtor executed a promissory note in the principal amount of $90,000.00 ("the Note") in favor of Apex Mortgage which was secured by a mortgage (the "Mortgage") on the Debtor's residence at 219 E. 9th Street, Northampton, Pennsylvania (the "Property"). See Proof of Claim, Exhibits 3 & 5. The Note and Mortgage were subsequently assigned to Petra on April 1, 2016. See Id., Exhibits 3-5.
The Note provides that Id. Thus, per its terms, the Note matured on September 10, 2020. See Id. Exhibit 5 at 6.
On October 19, 2018, Petra initiated a foreclosure action in the Court of Common Pleas in Northampton County (the "State Court") at Case No. C-48-CV-2018-9887 (the "Foreclosure"). On September 20, 2019, the State Court entered judgment by default in favor of Petra and against the Debtor in the amount of $78,969.08 (the "Judgment"). The Judgment was calculated as of August 19, 2019 and references a principal amount owed in the amount of $47,666.13. See Proof of Claim at Exhibit 2.
On March 2, 2020,1 Petra filed with the Prothonotary a Praecipe for Writ of Execution in the total amount of $82,749.31. See Proof of Claim, Exhibit 2.
On May 5, 2020, the Debtor filed a voluntary chapter 13 bankruptcy petition. The Debtor's Schedule A discloses ownership of the Property, listing a value of $169,672.00.2 The Property is encumbered by municipal liens in the total amount of approximately $15,900.00, as well as, Petra's secured claim in the amount of $82,749.31. See Schedule D. The Debtor acknowledged the State Court Foreclosure on his Statement of Financial Affairs ("SOFA").3
According to the Debtor's Schedule I, he is currently unemployed and receives unemployment compensation and social security. His gross monthly income is $2,851.40. The Debtor's monthly expenses total $2,455.00, which includes a mortgage payment of $1,000.00. See Schedule J. The Debtor has proposed a Chapter 13 plan in which he will pay Petra $1,000.00 per month directly and the Chapter 13 Trustee will pay an unspecified amount to cure the pre-petition arrears. The Debtor's proposed treatment under the plan is to cure and maintain payments. See Plan § 4(b).
On July 14, 2020, Petra filed Proof of Claim No. 6, a secured claim in the amount of $87,000.49, based upon the State Court Judgment. The amount is broken down as follows:
The Debtor filed his Objection to the Proof of Claim ("the Objection") on December 2, 2020. Doc. #20. The Objection asserts that Petra failed to credit the amount due under the Note for an insurance check in the amount of $13,396.42, which the Debtor signed over to the creditor on September 10, 2015. See Objection and exhibit thereto.
Following the January 7, 2021 hearing on the Objection, the parties each filed briefs in support of their positions. See doc. #'s 27 and 28. This matter is thus ripe for disposition.
During the January 7th hearing on the Objection, I raised the issue of whether as a preliminary matter, the doctrine of res judicata precludes consideration of the Debtor's Objection. The Debtor argues that even though there is a State Court Judgment, the doctrine of res judicata does not apply because the Foreclosure was an in rem proceeding and the Debtor seeks to reduce the amount owed on the Note, which is an in personam liability. The Debtor relies on Randall v. Bank One Nat'l Ass'n (In re Randall), 358 B.R. 145 (Bankr. E.D. Pa. 2006) to argue that due to the distinction between the mortgage judgment and the arrears owed pursuant to the Note, litigation of the Objection is not precluded.4
Petra contends that all the elements for the application of res judicata are present and either res judicata and/or the Rooker-Feldman doctrine succeed in preventing relitigation of the Judgment. According to Petra, the Debtor lost in State Court by failing to dispute the amount owed and then did not appeal the outcome. Petra relies on the Third Circuit Court of Appeals case Knapper v. Bankers Tr. Co. (In re Knapper), 407 F.3d 573 (3d Cir. 2005).
The standard for resolving a claim objection is well known and will be summarized briefly.
Pursuant to 11 U.S.C § 502(a), a proof of claim properly filed is deemed allowed unless a party in interest objects. If a party in interest objects, the court must determine the proper amount of the allowable claim. 11 U.S.C. § 502(b)(1). A proof of claim filed in accordance with the rules is prima facie "evidence of the validity and amount of the claim." Rule 3001(f).
The Third Circuit has summarized the shifting burden employed in determining a contested proof of claim:
[A] claim that alleges facts sufficient to support a legal liability to the claimant satisfies the claimant's initial obligation to go forward. The burden of going forward then shifts to the objector to produce evidence sufficient to negate the prima facie validity of the filed claim ... [T]he objector must produce evidence which, if believed, would refute at least one of the allegations that is essential to the claim's legal sufficiency. If the objector produces sufficient evidence to negate one or more of the sworn facts in the proof of claim, the burden reverts to the claimant to prove the validity of the claim by a preponderance of the evidence.
In re Allegheny Int'l, Inc., 954 F.2d 167, 173-74 (3d Cir. 1992) (internal citations omitted). In the Eastern District, this standard has been elucidated as follows: "if a proof of claim complies with the Rules of Court and is self-sustaining (i.e., it sets forth the facts necessary to state a claim and is not self-contradictory), it is prima facie valid and the objecting party has the burden of producing evidence to refute the claim." In re Sacko, 394 B.R. 90, 98 (Bankr. E.D. Pa. 2008). See also In re Ditech Holding Corp., et al., 2021 WL 219529, at *5 (Bankr. S.D.N.Y. Jan. 20, 2021).
Here, there is no dispute that Petra's Proof of Claim is at least prima facie valid. The burden thus shifts to the Debtor to provide evidence sufficient to refute that validity.
The doctrine of res judicata seeks to avoid the burden of relitigation of a matter already judicially determined and provides that "a final valid judgment upon the merits by a court of competent jurisdiction bars any future suit between the parties or their privies, on the same cause of action." Allegheny Int'l, Inc. v. Allegheny Ludlum Steel Corp., 40 F.3d 1416, 1429 (3d Cir. 1994) (citation omitted); In re Donaghy, 2020 WL 2759251, at *2 (E.D. Pa. May 28, 2020) ; see also Garman v. Angino, 2020 PA Super 75, 230 A.3d 1246, 1252 (2020). Thus, "[f]ederal courts must ‘give the same preclusive effect to state court judgments that those judgments would be given in the courts of the State from which the judgments emerged.’ " Allegheny Ludlum Steel Corp., 40 F.3d at 1429 (citing Kremer v. Chemical Constr. Corp., 456 U.S. 461, 466, 102 S. Ct. 1883, 1889, 72 L.Ed.2d 262 (1982) ).
Under Pennsylvania law,5 a determination that res judicata applies requires a proponent to establish four (4) elements: "(1) the thing sued upon or for; (2) the cause of action; (3) the persons and parties to the action; and (4) the capacity of the parties to sue or be sued." Turner v. Crawford Square Apartments III, L.P., 449 F.3d 542, 548 (3d Cir. 2006) ; Moore, 436 B.R. at 759 (citing Yamulla Trucking & Excavating Company, Inc. v. Justofin, 2001 PA Super 72, 771 A.2d 782, 784 (Pa. Super. 2001) ).
Res judicata applies to judgments entered by default. In re Sheed, 607 B.R. 470, 484 (Bankr. E.D. Pa. 2019) (...
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In re Smith
... ... judgment) that are "based on facts that occurred prior ... to the entry of judgment and defenses that were, or could ... have been raised, in the state court litigation ... are ... governed by res judicata, not Rooker-Feldman"); ... see also In re Thomas, 626 B.R. 793, 803 n.8 (Bankr ... E.D. Pa. 2021). The elements of res judicata under New Jersey ... law are satisfied here. See In re Mullarkey, 536 ... F.3d 215, 225 (3d Cir. 2008) (explaining that res judicata ... bars claims that were, or could have been, brought where: ... ...