JOSEPH M. MEIER, Chief United States Bankruptcy Judge.
Sharon Bergmann ("Debtor") filed a chapter 13
At the preliminary hearing on the Stay Motion on October 30, 2018, the Court instructed Debtor, Creditor, and Trustee to submit further briefing in advance of a continued hearing on January 8, 2019. Dkt. No. 185. Creditor filed his brief on November 23, 2018. Dkt. No. 189. On December 18, 2018, Debtor and Trustee filed a joint brief supporting their objection to the Stay Motion. Dkt. No. 196. The Court heard additional oral argument on the matter on January 8, 2019, at which time counsel for the Creditor was directed to submit a stipulation of facts by February 9, 2019.
The Court has considered the evidence and arguments of the parties, and this Memorandum Decision sets forth the Court's findings, conclusions, and reasons for its disposition of the motion. Rules 7052; 9014.
On February 11, 1991, Debtor obtained a state court judgment of $202,523.13 against her ex-husband, Vernon K. Smith ("Smith")
In a separate case, Creditor obtained a judgment of $69,220.30 against the Debtor on November 8, 1999 (the "Puckett Judgment"). Dkt. No. 201-5 at 1. In her bankruptcy schedules, Debtor listed the current liability on the Puckett Judgment at $179,429.90. Dkt. No. 18 at 14. Thereafter, Creditor instructed Smith, as his attorney, to use Creditor's rights under the Puckett Judgment to force a sheriff's sale of Debtor's interests in the Smith Judgments on November 13, 2014. Oral Stipulation. Creditor was the lone bidder at the sheriff's sale and purchased roughly a dozen legal instruments, among them the Smith Judgments, on a credit bid of $100.
On December 22, 2014, Debtor filed a motion in the District Court of the Fourth Judicial District of the State of Idaho, In and For the County of Ada ("Idaho State Court") to set aside the sheriff's sale. Oral Stipulation. On February 9, 2015, the Idaho State Court granted Debtor's motion to set aside the sheriff's sale. Oral Stipulation. Ten days later, Creditor filed a motion for reconsideration of the order setting aside the sale. Dkt. No. 204-1. Shortly thereafter, Debtor filed her chapter 13 petition, that stayed the pending motion for reconsideration under § 362(a). Dkt. No. 1. More than three years later, on August 6, 2018, the Idaho State Court requested an update from the parties on the status of Debtor's bankruptcy case, the automatic stay, and whether Creditor intended to continue to pursue his motion for reconsideration.
Debtor's chapter 13 plan was confirmed by this Court on January 4, 2016. Dkt. No. 85. The confirmed plan includes provisions relevant to the Puckett Judgment and the Smith Judgments. First, the plan calls for payments to Creditor as an unsecured creditor based on the Puckett Judgment.
Dkt. No. 37 at 2.
This Court's confirmation order also discussed the Smith Judgments at length, echoing some of the language of the plan:
Dkt. No. 85 at 2-3. Thus, if Debtor successfully collects on the Smith Judgments, the net proceeds will go to the Trustee to distribute to Debtor's creditors, including Creditor, which presumably would result in a 100% payout to all creditors.
The issue of the ownership of the Smith Judgments arose at other times during Debtor's bankruptcy case. For example, Creditor filed various objections to confirmation and approval of professional fees wherein Creditor alleges the Smith Judgments are unenforceable against Smith. Dkt. No. 32 at 5, 7; Dkt. No. 65 at 8; Dkt. No. 93 at 3, 4, 6-7. In response to these pleadings, Debtor argued the sheriff's sale was invalid, and the Smith Judgments are part of her bankruptcy estate. Dkt. No. 35 at 1; Dkt. No. 64 at 3.
Section 1327(a) describes the effect of confirmation of a chapter 13 plan: "The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan." Accordingly, the Ninth Circuit has held "it is beyond cavil
Principles of claim preclusion must be applied carefully, used as "scalpels, not broadswords." Alonso v. Summerville (In re Summerville), 361 B.R. 133, 140 (9th Cir. BAP 2007); see also Enewally, 368 F.3d at 1172-73 ("[T]he principle of res judicata should be invoked only after careful inquiry because it blocks unexplored paths that may lead to truth."). As the Bankruptcy Appellate Panel of the Ninth Circuit has explained, to be accorded preclusive effect:
County of Ventura Tax Collector v. Brawders (In re Brawders), 325 B.R. 405, 411 (9th Cir. BAP 2005). Applying these standards, courts have given preclusive effect to chapter 13 plan provisions addressing issues of adequate protection, lack of equity, and the retention of property necessary for successful reorganization. Ellis v. Parr (In re Ellis), 60 B.R. 432, 434 (9th Cir. BAP 1985); Matter of Lewis, 8 B.R. 132, 137 (Bankr. D. Idaho 1981).
And while confirmed plans normally have preclusive effect on issues clearly decided by the plan, "the confirmed plan has no effect on issues that must be brought by an adversary proceeding, or were not sufficiently evidenced in a plan to provide adequate notice to the creditor." Enewally, 368 F.3d at 1173. Rule 7001(2) provides that adversary proceedings include "proceeding[s] to determine the validity, priority, or extent of a lien or other interest in property, but not a proceeding under Rule 3012 or Rule 4003(d)."
Preclusion issues are affirmative matters, "and the proponent of preclusion has the burden of proof and bears the risk of non-persuasion." Summerville, 361 B.R. at 141-42 (citing George v. Morro Bay (In re George), 318 B.R. 729, 737 (9th Cir. BAP 2004)). Federal courts apply issue preclusion by way of the Restatement (Second) of Judgments. Id. at 141 (citing New Hampshire v. Maine, 532 U.S. 742,
Id. at 144 (quoting In re Khaligh, 338 B.R. 817, 824-25 (9th Cir. BAP 2006)).
Here, Debtor and Creditor dispute the ownership of the Smith Judgments based on the validity or invalidity of the sheriff's sale held on November 13, 2014. Put differently, the parties disagree over the extent of an interest in property; thus, this is a matter of the kind identified in Rule 7001(2) that must be resolved by an adversary proceeding. As such, based on the Ninth Circuit BAP's holding in Enewally, the chapter 13 plan and accompanying confirmation order's treatment of the Smith Judgments should not be afforded issue-preclusive effect regarding the ownership of the Smith Judgments.
Even if this Court were to set Enewally aside and otherwise proceed with the substantive merits of Debtor's issue preclusion argument, Debtor has failed to show that three of the elements of issue preclusion are satisfied. While the parties to the confirmation order and this action are the same, and the confirmation order was a final order on the merits, thus satisfying two elements, the remaining threshold elements of issue preclusion have not been established.
Debtor argues the issue of the ownership of the Smith Judgments was litigated in advance of confirmation and that Creditor now raises the identical issue in his Stay Motion. Debtor and Trustee rely primarily on the contents of Paragraph F of the confirmation order, which indicates the Trustee "will retain as part of the estate the judgments which Sharon Bergmann holds against her former spouse[.]" Reading this language in isolation, and attempting to frame the issue broadly, one can see there is a colorable argument that the confirmation order addressed the same issue that Creditor seeks to return to state court to litigate—the ownership of the Smith Judgments.
If the legal issue is framed more acutely, however, in terms of the validity of the sheriff's sale under Idaho state law, then issue preclusion does not apply. Neither party argued the merits of Idaho state law on the sheriff's sale prior to confirmation, and nothing in the plan or confirmation order specifically addressed the issue of the validity of the sheriff's sale. Neither party addressed this issue in any detail in briefing or oral argument. Since it is unclear whether the issues in this case are identical, Debtor and Trustee have failed to meet their burden on this element.
Next, the validity of the sheriff's sale was not actually litigated by Debtor, Creditor,
To summarize, the parties did not actually litigate the ownership issues surrounding the Smith Judgments or the validity of the sheriff's sale at the confirmation hearing. Nor is there any language in the plan or confirmation order establishing that ownership was litigated. The parties made the Court aware that the issue of the ownership of the Smith Judgments was disputed, but nothing in the record suggests the parties briefed or argued the questions of Idaho law pertaining to the sheriff's sale before this Court. Correspondingly, no order of the Court mentioned the validity of the sheriff's sale or the possibility that someone other than Debtor might own the Smith Judgments. The Court's instructions to the Debtor and Trustee in the plan with respect to the collection of the Smith Judgments did not adjudicate the parties' state law ownership rights, which remained pending before the Idaho State Court throughout the confirmation proceedings.
Moreover, the issue of ownership was not necessarily decided by the Court at confirmation. The Court necessarily decided whether the requirements of § 1325 with respect to the confirmation of a chapter 13 plan were met. The Court confirmed Debtor's plan, which provided for payments from Debtor to Creditor via the Trustee. The Court even went so far as to order the preservation of the Trustee's right to pursue and collect any amounts due the Debtor in the future based on the Smith Judgments. But the Court did not, as a matter of necessity prerequisite to confirmation, decide the validity of the sheriff's sale and the ownership rights of the parties to the Smith Judgments based on its evaluation of Idaho state law.
Specifically, the Court ordered Debtor to cooperate with the Trustee to collect on the Smith Judgments and to turn over the proceeds to the Trustee. Dkt. No. 85 at 2-3. The Court also ordered that the Trustee retained the rights, and the responsibility, to pursue and collect the Smith Judgments, and to pay any collected amounts to creditors. Id. at 3. While the confirmation order reads Trustee "will retain as part of the estate the judgments which [Debtor] holds against [Smith]," the intent of this statement was to clarify that the Trustee was to retain any of Debtor's rights to payment under the Smith Judgments. In other words, these rights would not re-vest in the Debtor. The Court's statement on the Trustee's retention of those rights was not intended to adjudicate the state law rights of the parties or to abrogate any party's claims to ownership of the Smith Judgments under Idaho state law.
The intended effect of the Court's confirmation order on the Smith Judgments was to mandate that Trustee try to collect on the Smith Judgments, with the cooperation
Here, Debtor and Trustee, as the proponents of issue preclusion, failed to meet their burden of showing all the elements of issue preclusion were met. Issue preclusion is not available to resolve issues that must be raised as adversary proceedings, such as the instant dispute over the extent of the parties' property interests in the Smith Judgments. Furthermore, as discussed above, issue preclusion is inappropriate because Debtor did not establish the identity of issues between the two proceedings; the issues of the validity of the sheriff's sale and the Smith Judgments were not actually litigated prior to confirmation; and the issue of ownership of the Smith Judgments was not necessarily decided by the plan or the confirmation order.
Under § 362(d)(1), the automatic stay can be modified "for cause, including the lack of adequate protection of an interest in property of such party in interest." Cause can be found "when necessary to permit litigation to be concluded in another forum, particularly if the non-bankruptcy suit involves multiple parties or is ready for trial." 3 Collier on Bankruptcy, ¶ 362.07[3][a] (Alan Resnick & Henry J. Sommer eds., 16
Allied Capital v. Gibson (In re Gibson), 349 B.R. 54, 58 (Bankr. D. Idaho 2006)(quoting In re Estep, 98.3 I.B.C.R. 73, 73 (Bankr. D. Idaho 1998) (internal citations omitted)).
Creditor argues the cause in this case is the need to return to Idaho State Court to allow the adjudication of the Debtor's and/or Puckett's ownership rights in the Smith Judgments. The ownership of the Smith Judgments is relevant to the provisions of Debtor's confirmed plan because it could lead to a greater payout to creditors, or at least provide creditors with the certainty that no such payout is forthcoming. The ownership of the Smith Judgments is also relevant in Smith's chapter 11 case, as Debtor is a creditor in that case
There is no good reason for the issue of the ownership of the Smith Judgments to remain unresolved. As noted above, the automatic stay can be modified to allow parties to pursue litigation in other forums, especially where a matter is ready for trial. Here, the Idaho State Court has already decided this case once and a motion for reconsideration of the initial decision remains pending in that court. The case started in Idaho State Court and the Idaho State Court judge recently inquired about the status of the stay, suggesting readiness to adjudicate the pending motion.
Allowing the Idaho State Court to proceed with reconsideration of the validity of the sheriff's sale makes sense for many reasons. First, on a broad level, it will allow litigation pending in this Court and the Idaho State Court to proceed, thus encouraging the just and speedy determination of the legal rights of the parties in the Smith Judgments. Second, it allows the parties to continue litigation before a court familiar with the facts and issues in dispute. Third, it allows the issue to be decided by a court with greater familiarity with Idaho law over sheriff's sales and how it applies in this case. Lastly, there is nothing in the record to suggest the bankruptcy estate would be prejudiced by allowing the Idaho State Court to decide the issue.
Based on the foregoing, the Court finds good cause exists to grant Creditor's motion for relief from stay under § 362(d)(1). Therefore, Creditor's motion for relief from stay is granted to permit Creditor to adjudicate his motion for reconsideration before the Idaho State Court and any timely appeal of that determination to the appellate courts of the State of Idaho.
The Court presumes Creditor has instructed Smith to proceed as such in this case and is mindful of the unusual position Creditor has taken in this matter by virtue of the representations made by Vernon Smith, the attorney for the Creditor and the alleged assignee of whatever was purchased by Creditor at the sheriff's sale. If the sale for $100 is upheld (i.e., the Idaho State Court enters an order reversing its previous order), then Creditor and the Debtor's other creditors stand to receive nothing on the Smith Judgments. If the sheriff's sale is overturned (i.e., the Idaho State Court does not reconsider its previous order), then all creditors will presumably receive a 100% distribution.
