Kane v. Town of Harpswell

• Decision Date: 08 February 2001
• Docket Number: No. 00-9008,00-9008
• Citation: 254 F.3d 325
• Parties: (1st Cir. 2001) IN RE: MITCHELL E. KANE AND ALICE C. KANE, DEBTORS. MITCHELL E. KANE AND ALICE C. KANE, DEBTORS, APPELLEES, v. TOWN OF HARPSWELL, CREDITOR, APPELLANT. Heard
• Court: U.S. Court of Appeals — First Circuit

Page 325

254 F.3d 325 (1st Cir. 2001)

IN RE: MITCHELL E. KANE AND ALICE C. KANE, DEBTORS.

MITCHELL E. KANE AND ALICE C. KANE, DEBTORS, APPELLEES, v. TOWN OF HARPSWELL, CREDITOR, APPELLANT.

No. 00-9008

United States Court of Appeals For the First Circuit

Heard February 8, 2001

Decided June 22, 2001

ON APPEAL FROM THE UNITED STATES BANKRUPTCY APPELLATE PANEL FOR THE FIRST CIRCUIT

F. Bruce Sleeper with whom Jensen Baird Gardner & Henry was on brief for appellant.

Ralph W. Brown for appellees.

Before Boudin, Chief Judge, Torruella, Circuit Judge, and Stahl, Senior Circuit Judge.

Boudin, Chief Judge

This appeal arises from a prolonged effort by the Town of Harpswell, Maine, to foreclose a tax lien and expel the putative owners, Mitchell and Alice Kane, from a piece of real property subject to the lien. In 1991, the Kanes bought this piece of already mortgaged property alongside Route 123 in Harpswell from one Francis Pagurko; in accordance with an installment sales contract, the price ($15,000) was to be paid in modest monthly installments. Title was to be transferred after full payment.

Under the sales contract, the Kanes took immediate responsibility for paying real estate taxes and assessments. Thereafter, on June 14, 1996, the town's tax collector filed a tax lien certificate, stating that taxes had gone unpaid. Me. Rev. Stat. Ann. tit. 36, §§ 943 (West 1990). To settle this and a related dispute with the town, the Kanes agreed to a payment schedule for the past taxes due. Town of Harpswell v. Pagurko, No. CV-95-290 (Me. Super. Ct. July 29, 1996).

Apparently the Kanes made the payments through September 1997, but on September 18, 1997, they filed a chapter 7 bankruptcy petition, 11 U.S.C. §§ 301 (1994). In re Kane, Case No. 97-21505 (Bankr. D. Me. Jan. 9, 1998). This automatically prevented the town from enforcing the Kanes or their estate the outstanding tax lien on the property, 11 U.S.C. §§ 362(a) (1994), which would otherwise have matured on December 14, 1997--assuming that the Kanes did in fact have a property interest. If they had only a contractual interest, then that was arguably extinguished because neither the trustee nor the Kanes purported to assume or reaffirm the installment sales contract for the property. 11 U.S.C. §§§§ 365(a), 521(2) (1994).

According to Mitchell Kane, he continued to tender monthly payments as promised in the earlier settlement but, after October 1997, the town stopped accepting them. On November 4, 1997, the trustee filed a report abandoning any claim of the estate to the property. 11 U.S.C. §§ 554 (1994). Then, on November 13, the town sent the 30-day notice of foreclosure required by state law, warning that the tax lien would be foreclosed on December 15. Me. Rev. Stat. Ann. tit. 36, §§ 943 (West 1990 & Supp. 2000).

In January 1998, the Kanes were discharged from bankruptcy and the bankruptcy case was closed. The discharge freed the Kanes from personal liability on various debts but not from valid tax liens on the property, 11 U.S.C. §§§§ 522(c)(2)(B), 524(a)(1) (1994); Wrenn v. Am. Cast Iron Pipe Co. (In re Wrenn), 40 F.3d 1162, 1164-66 (11th Cir. 1994) (per curiam); IRS v. Orr, 239 B.R. 130, 134 (S.D. Tex. 1998), or from unsecured claims for certain taxes, including certain property taxes, 11 U.S.C. §§§§ 507(a)(8)(B), 523(a)(1) (1994). In the wake of the discharge, the town warned the Kanes to resume payments or face eviction.

Mitchell Kane asserts that in late January 1998 he tendered all the delinquent payments but that the town refused them. Apparently nothing then occurred until April 5, 1999, when the town wrote the Kanes, saying that it now owned the property because the tax lien had been foreclosed--automatically after the notice provided in November 1997, Me. Rev. Stat. Ann. tit. 36, §§ 943--and that the Kanes had 30 days to vacate the premises, Me. Rev. Stat. Ann. tit. 14, §§§§ 6001-02 (Supp. 2000). When the Kanes refused to leave, the town brought an eviction action in Maine state court.

On June 2, the day scheduled for the eviction hearing, the Kanes filed a petition for chapter 13 bankruptcy, again triggering an automatic stay of actions against them or their estate, 11 U.S.C. §§ 362(a). Town of Harpswell v. Kane (In re Kane), Case No. 99-20899 (Bankr. D. Me. 1999). The town then filed a motion to lift the stay as to the eviction action which, after several hearings, the bankruptcy court granted in an order of August 13 ("the relief order"). See 11 U.S.C. §§ 362(d)(2) (1994). The court ruled that the Kanes had no equity in the property because inter alia they failed to assume the installment sales contract in their chapter 7 bankruptcy.

Thereafter the bankruptcy court dismissed an intervening request by the Kanes to determine the validity of the town's lien, saying that the Kanes were bound by the court's earlier ruling that they lacked any equity in the property. In due course, the state district court in the pending eviction action determined that the town had a right to possess the property. Town of Harpswell v. Kane, No. WES-SA- 99-237 (Me. Dist. Ct. Dec. 8, 1999). The state superior court affirmed, saying that given the prior decisions of the bankruptcy court, issue preclusion established the Kanes' lack of interest in the property. Town of Harpswell v. Kane, No. AP-00-003 (Me. Super. Ct. Mar. 9, 2000).

The Kanes appealed from the relief order to the Bankruptcy Appellate Panel ("the BAP"), which stayed that order and, on May 10, 2000, reversed. Kane v. Town of Harpswell (In re Kane), 248 B.R. 216, 225 (B.A.P. 1st Cir. 2000). The BAP held inter alia that under state law, the installment sales contract effectively transferred the equity interest in the property to the Kanes at the outset, left almost nothing more to do on the seller's side, and was therefore a non-executory contract that did not have to be assumed or rejected. Id. at 224. Consequently, said the panel, the town's purported notice of imminent foreclosure in November 1997 violated the automatic stay and was therefore ineffective to cut off the Kanes' equity. Id. at 224-25.

The town has now appealed to us from the BAP's decision. In its opening brief, the town mainly asserts that under preclusion doctrine the BAP was bound by earlier determinations by other courts that the Kanes lacked an equity interest in the property. These earlier determinations, says the town, include both the "unappealed" decision by the bankruptcy court dismissing the Kanes' intervening request to rule on the validity of the town tax lien and the Maine state court decisions in the eviction proceeding.

The preclusive effect of the bankruptcy court's dismissal ruling is determined by federal law, Monarch Life Ins. Co. v. Ropes & Gray, 65 F.3d 973, 978 (1st Cir. 1995), while the preclusive effect of the Maine state court rulings depends upon Maine law, 28 U.S.C. §§ 1738 (1994); Cruz v. Melecio, 204 F.3d 14, 18 (1st Cir. 2000). But both the federal courts and the Maine courts tend to follow the general approach of the Restatement (Second) of Judgments (1982) ("Restatement"), Monarch Life Ins., 65 F.3d at 978; Mills v. Mills, 565 A.2d 323, 324 (Me. 1989); and neither the Restatement nor any precedent we have found addresses our peculiar problem. But peculiar does not necessarily mean difficult.

Under ordinary rules of issue preclusion, an issue "actually litigated and determined by a valid and final judgment," if "essential" to the judgment, binds the same parties in any subsequent action, "whether on the same or a different claim." Restatement §§ 27. The general rule applies--in most jurisdictions--even where the first, or issue preclusive, judgment is still on appeal when the second action occurs. Ruyle v. Cont'l Oil Co., 44 F.3d 837, 846 (10th Cir. 1994), cert. denied, 516 U.S. 906 (1995); Bartlett v. Pullen, 586 A.2d 1263, 1265 (Me. 1991); see also Restatement §§ 13 cmt. f.¹ Of course, one expects that, if appropriate appeals are perfected, an undoing of the first judgment will allow the second judgment to be undone as well--if it depended on the preclusive effect accorded to the first "merits" judgment. See Fed. R. Civ. P. 60(b)(5); Sender v. Nancy Elizabeth R. Heggland Family Trust (In re Hedged- Investments Assocs., Inc.), 48 F.3d 470, 472-73 (10th Cir. 1995); S.C. Nat'l Bank v. Atl. States Bankcard Ass'n, Inc., 896 F.2d 1421, 1430-31 (4th Cir. 1990); Restatement §§ 16. What is almost unique about our case is that the town is seeking to block an appeal of an original "merits" judgment by relying on the preclusive effect of later decisions which themselves relied on the original merits judgment now appealed.

Recall that the question whether the Kanes had acquired and retained an equity interest in the property was "actually litigated and determined" only once: when the bankruptcy court ruled against the Kanes on the town's original motion for relief from the stay. There were multiple later adoptions of this ruling--by the bankruptcy court in rejecting the Kanes' request to determine lien validity and by the state courts in the eviction case and its appeal.² But these adoptions were based on issue preclusion and not litigation of the merits anew. Cf. Lombard v. United States, 194 F.3d 305, 312 (1st Cir. 1999).

The Restatement itself makes clear that "actual litigation and determination" involves something more than having an issue "resolved" as a result of some determinative legal doctrine that short-circuits the merits. As examples of issues not actually litigated, the Restatement points to situations where a matter is stipulated, admitted without controversy, or determined by default leading to the entry of judgment. Restatement §§ 27 cmt. e. In all of these situations, there has been no judicial decision on the merits, and issue preclusion does not apply, unless it can be shown (as by a stipulation) that the relevant parties intended otherwise. Id. See generally 18 Wright, Miller & Cooper,...