Pulaski v. Dakota Fin., LLC, Bankruptcy Case No. 11-14135-13

CourtUnited States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Western District of Wisconsin
Citation475 B.R. 681
Docket NumberAdv. Case No. 11-282,Bankruptcy Case No. 11-14135-13
PartiesJames Paul Pulaski and Judith Pearl Pulaski, Plaintiffs, v. Dakota Financial, LLC, Defendant (In re: James Paul Pulaski and Judith Pearl Pulaski, Debtors)
Decision Date13 July 2012

475 B.R. 681

James Paul Pulaski and Judith Pearl Pulaski, Plaintiffs,
Dakota Financial, LLC, Defendant
(In re: James Paul Pulaski and Judith Pearl Pulaski, Debtors)

Bankruptcy Case No. 11-14135-13
Adv. Case No. 11-282

United States Bankruptcy Court Western District of Wisconsin

July 13, 2012

United States Bankruptcy Court
W.D. Wisconsin, Eau Claire Division

Melvyn L. Hoffman, Hoffman Law Firm, L.L.C., Onalaska, WI, for Plaintiffs
Brian P. Thill, Murphy Desmond S.C., Madison, WI, for Defendant

Thomas S. Utschig, United States Bankruptcy Judge


The Pulaskis filed this adversary proceeding in hopes of avoiding the defendant's mortgage on their homestead. The claims asserted in their adversary complaint primarily arise under Wisconsin law rather than the bankruptcy code, and include attacks on the validity of the mortgage due to unconscionability, lack of consideration, mistake, misrepresentation, unjust enrichment, breach of contract, and breach of the duty of good faith and fair dealing. In response, in the joint pretrial statement and at the initial pretrial conference, the defendant raised the argument that under the U.S. Supreme Court's decision in Stern v. Marshall, __ U.S. _, 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011), this Court lacks the constitutional authority to rule on the Pulaskis' state law claims. The matter was fully briefed. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(B) and (K), and the Court has jurisdiction under 28 U.S.C. § 1334.

James Pulaski became an independent over-the-road truck driver after losing his previous employment in the spring of 2009. He purchased a semi-tractor and trailer from the defendant. The purchase was financed through an equipment lease. After executing the lease, the defendant presented the Pulaskis with a mortgage on their home, which they also signed. They voluntarily surrendered the tractor and trailer to the defendant in April of 2011. This chapter 13 case was filed the following June. The defendant filed a proof of claim in which it asserted a secured claim in the amount of $57,684.98, ostensibly representing the balance due on the equipment lease and secured by the mortgage on their home. The

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Pulaskis objected to the claim and filed this adversary proceeding to avoid the mortgage. Both the objection and the adversary proceeding are intended to achieve a single purpose: namely, to have the bank's claim treated as an unsecured claim rather than a secured one.1

At this point, anyone with even a passing familiarity with recent developments in bankruptcy law has probably memorized the salient facts of Stern v. Marshall. Suffice it to say that Vickie Lynn Marshall (otherwise known as former Playboy Playmate Anna Nicole Smith) filed bankruptcy in California during a heated dispute over the estate of her deceased husband, J. Howard Marshall. Marshall's son Pierce filed a defamation claim in the bankruptcy proceeding and also filed a complaint to determine dischargeability. Vicki filed a counterclaim alleging that Pierce had tortiously interfered with her expectation of an inheritance. Rather than abstain in favor of the pending Texas probate proceeding (where both the defamation and tortious interference claims had been initially raised), the bankruptcy court proceeded to rule in Vickie's favor on both issues. In a subsequent series of developments truly worthy of the many comparisons to the byzantine legal proceedings at the heart of Charles Dickens' Bleak House, both litigants died during the ensuing decade while the case went to the Supreme Court not once, but twice.

On the second trip, the Supreme Court ruled that while the bankruptcy court had the statutory authority to consider Vickie's counterclaim under 28 U.S.C. § 157(b)(2)(C) (which considers "counterclaims by the estate against persons filing claims against the estate" to be "core proceedings" which may be adjudicated to final judgment by bankruptcy judges), the court lacked the constitutional authority to do so under Article III of the U.S. Constitution. As the Court observed:

When a suit is made of "the stuff of the traditional actions at common law tried by the courts at Westminister in 1789," and is brought within the bounds of federal jurisdiction, the responsibility for deciding that suit rests with Article III judges in Article III courts.

131 S. Ct. at 2609 (quoting Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 90, 102 S. Ct. 2858, 73 L. Ed. 2d 598 (1982) (Rehnquist, J., concurring in judgment)). The Court characterized Vickie's counterclaim as arising "under state common law between two private parties" and observed that adjudication of such a claim implicated "the most prototypical exercise of judicial

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power: the entry of a final, binding judgment by a court with broad substantive jurisdiction . . . when the action neither derives from nor depends upon any agency regulatory regime." Id. at 2614-15.

In the wake of Stern, and despite the Court's assurance that the issue before it was a "narrow" one,2 the nation's bankruptcy courts were left to ponder whether the foundations of the system were merely shaken or completely upended. See e.g., Gecker v. Flynn (In re Emerald Casino), 467 B.R. 128, 131 (N.D. Ill. 2012) ("In the months since the Supreme Court's ruling in Stern, dozens of courts have considered its impact on pending bankruptcy proceedings."); Tabor v. Kelly (In re Davis), No. 07-05181, 2011 WL 5429095, at *15 (Bankr. W.D. Tenn. Oct. 5, 2011) ("The impact of Stern is that neither the bankruptcy court nor the parties may simply rely upon the list of core proceedings provided by Congress to determine whether a bankruptcy judge may finally determine a particular proceeding. Instead, the bankruptcy court must determine whether the proceeding is a matter of public or private right."); In re Black, Davis & Shue Agency, Inc. v. Frontier Ins. Co. (In re Black, Davis & Shue Agency, Inc.), No. 11-00160, 2012 WL 360062, at *11-12 (Bankr. M.D. Pa. Feb. 2, 2012) (noting the two lines of reasoning regarding Stern: the "minimal impact" approach and the competing perspective that the decision "significantly limits a bankruptcy court's constitutional authority to adjudicate claims that arise outside the Bankruptcy Code").

In Ortiz v. Aurora Health Care, Inc., 665 F.3d 906 (7th Cir. 2011), the Seventh Circuit had its first (but likely not its last) opportunity to address the impact of Stern on the multiplicity of issues which have, for many years, routinely been handled by bankruptcy courts. In Ortiz, a creditor filed numerous claims in various bankruptcy cases and included information which allegedly violated a Wisconsin statute governing the confidentiality of health care records. The debtors filed a class action lawsuit against the creditor in the bankruptcy court. The bankruptcy judge granted summary judgment to the creditor based upon an interpretation of state law (essentially finding that the debtors had failed to identify any actual damage suffered as a result of the alleged violation). On appeal, the Seventh Circuit concluded that as the bankruptcy judge lacked the authority under Article III of the Constitution to enter a final judgment on the debtors' claims, the grant of summary judgment was improper. Id. at 909. The appeal was dismissed and remanded.

In doing so, the Seventh Circuit synthesized the holding in Stern this way: "The Court held that Article III prohibited Congress from giving bankruptcy courts authority to adjudicate claims that went beyond the claims allowance process." Id.

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at 911.3 The alleged violations at issue in Ortiz were, according to the circuit court, a private matter involving liability under Wisconsin law and did not flow from a federal statutory scheme. Id. at 914. The claims were "ordinary state-law claims" and would not be resolved in the claims allowance process but rather were an attempt to "augment" the bankruptcy estate; as such, the bankruptcy court lacked the authority to enter a final judgment. Id. In this case, the defendant contends that the complaint raises claims which fall within the same basic construct: namely, state law claims among private parties which seek to "augment" the bankruptcy estate by removal of the mortgage lien and recovering various (albeit unspecified and, according to the Pulaskis, unsought) damages.

Were there a pending state court action between the parties, this Court's historical practice in a case such as this would have been to entertain (or invite) a motion for abstention under 28 U.S.C. § 1334(b).4 The final result would have been given preclusive effect in these proceedings and the issue of constitutional authority (as wonderfully intellectually compelling as such matters are) would have been subsumed into the practical realities of reorganization. Now perhaps one can quibble about whether a court may "abstain" from hearing a matter that it may lack the constitutional authority to decide, but regardless of the label the outcome would have been a decision by a court with unquestioned power to resolve the merits.5

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However, there is no pending state court matter. The defendant does not deny that this Court has the statutory authority (or jurisdiction) to hear these claims. Since the notions of comity and deference only go so far, this Court cannot simply tell the Pulaskis to go file a state court lawsuit when they have already raised the issues here...

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  • Pulaski v. Dakota Fin., LLC (In re Pulaski), Bankruptcy No. 11–14135–13.
    • United States
    • United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Western District of Wisconsin
    • July 13, 2012
    ...475 B.R. 681In re James Paul PULASKI and Judith Pearl Pulaski, Debtors.James Paul Pulaski and Judith Pearl Pulaski, Plaintiffs,v.Dakota Financial, LLC, Defendant.Bankruptcy No. 11–14135–13.Adversary No. 11–282.United States Bankruptcy Court,W.D. Wisconsin.July 13, [475 B.R. 682]Melvyn L. Ho......

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