ROBERT H. JACOBVITZ, United States Bankruptcy Judge.
THIS MATTER is before the Court on Plaintiff, Michael Alarid, Jr.'s Objection to Notice of Removal and Motion to Remand ("Motion to Remand"). The Court heard oral argument on the Motion to Remand and took the matter under advisement. The removed cross-claim asserts a state law claim to establish the debt Mr. Alarid seeks to except from the discharge in a separate pending nondischargeability proceeding.
The Court will remand this adversary proceeding and modify the discharge injunction for the limited purpose of allowing the State Court to rule on the pending motion to reconsider its prior summary judgment. This Court otherwise will adjudicate the claim on the debt in the nondischargeability action, if and to the extent the State Court's ruling does not have preclusive effect.
Defendant Robert Pacheco filed a voluntary petition under chapter 7 of the Bankruptcy Code on March 29, 2019. The chapter 7 trustee conducted a meeting of creditors under 11 U.S.C. § 341(a) on April 26, 2019. See Bankruptcy Case No. 18-12192-j7 — Docket Nos. 1 and 7. On May 3, 2019, the Chapter 7 Trustee reported that she held and concluded the meeting of creditors. Id. Docket No. 14. The Court entered an Order of Discharge granting Mr. Pacheco a chapter 7 discharge on August 14, 2019. See Case No. 19-10733-j7 — Docket No. 29. The chapter 7 bankruptcy case was closed on the same date.
Before Mr. Pacheco filed for bankruptcy protection, he and Michael Alarid, Jr. had been involved in two different state court lawsuits: 1) Michael Alarid Jr. v. Robert Pacheco, Case No. D-412-CV-2013-00127; and 2) Ditech Financial, LLC v. Dianne M. Pacheco et al, Case No. D-412-CV-2015-0029 (the "State Court Foreclosure
In the State Court Foreclosure Action, the State Court entered summary judgment on the Cross-Claim (the "Summary Judgment") after Mr. Pacheco failed to file a response to Mr. Alarid's summary judgment motion. On December 17, 2018, Mr. Pacheco filed a motion to reconsider asking the State Court to vacate the Summary Judgment on the ground that the summary judgment motion was not properly supported by admissible evidence as required. See Motion by Defendant Robert Pacheco to Reconsider and Vacate Judgment on Cross Plaintiff's Motion for Summary Judgment on Cross Claim ("Motion to Reconsider") — Docket No. 3-7. The Motion to Reconsider has been fully briefed in the State Court Foreclosure Action. See Docket Nos. 3-8, 3-10, and 3-12.
On June 24, 2019, Mr. Alarid filed a Complaint for Determination Excepting Debt Evidenced by State Court Judgment from Discharge against Robert Pacheco, initiating adversary proceeding No. 19-1054 (the "Nondischargeability Action"). Mr. Alarid seeks to except from the discharge the debt established by the Summary Judgment pursuant to 11 U.S.C. §§ 523(a)(2)(A) and (a)(6). In the Nondischargeability Action he alleges many of the same factual allegations underlying the Cross-Claim.
On September 3, 2019, Mr. Pacheco removed the Cross-Claim asserted in the State Court Foreclosure Action to this Court, initiating this adversary proceeding. See Docket No. 1. The Motion to Reconsider remained pending at the time of removal. Mr. Alarid filed the Motion to Remand on October 23, 2019. See Docket No. 15.
Mr. Pacheco's removal of the Cross-Claim was proper. A litigant may remove one, but not all, claims asserted in a state court action. See 28 U.S.C. § 1452(a) ("A party may remove any claim or cause of action ..."); Fed. R. Bankr. P. 9027(a)(1) (procedure for removal of a "claim or cause of action") (emphasis added); S. Elizabeth Gibson, Removal of Claims Related to Bankruptcy Cases: What Is A "Claim or Cause of Action"?, 34 UCLA L.Rev. 1, 29 (1986) ("Thus the very language of the bankruptcy removal provision reveals an unmistakable congressional intent to enact a removal right that might extend to less than an entire lawsuit.").
Alarid asserts that removal of the was cross claim was untimely. Removal of a claim asserted in a state court action commenced before the filing of a bankruptcy case is timely if it is filed
Fed. R. Bankr. P. 9027(a)(2).
Removal of the Cross-Claim filed in the State Court Foreclosure Action was timely under Fed. R. Bankr. P. 9027(a)(2)(B). The automatic stay applied to the State Court Foreclosure Action upon the commencement of Mr. Pacheco's chapter 7 case on March 29, 2019 and remained in effect until the automatic stay terminated upon the entry of the discharge on August 14, 2019. See 11 U.S.C. § 362(a) (the filing of a petition operates as a stay of "the ... continuation ... of a judicial ... proceeding against the debtor that was ... commenced before the commencement of the case under this title...."); 11 U.S.C. § 362(c) (the stay of an action against the debtor terminates when the case is closed, dismissed, or the chapter 7 discharge is granted). The notice of removal, filed September 3, 2019, was timely filed within 30 days after the termination of the automatic stay upon entry of the order of discharge.
Mr. Pacheco asserts that the Motion to Remand was untimely because it seeks abstention. Abstention is governed by 28 U.S.C. § 1334(c).
However, although the Motion to Remand asserts that permissive abstention factors weigh in favor of abstention and asks the Court to permissively abstain, the title, opening paragraph, and prayer for relief of the Motion to Remand all request remand. Because Mr. Alarid has filed a motion to remand and seeks remand, the Court will not apply the time limit for a motion to abstain under the local rule, even though the considerations for equitable remand and permissive abstention are virtually identical.
The bankruptcy remand statute does not fix a time limit for filing a motion seeking equitable remand. See 28 U.S.C. § 1452(b). See Topfer v. Topfer (In re Topfer), 587 B.R. 622, 628 (Bankr. M.D. Pa. 2018) ("[N]o specific deadline for filing a motion to remand is included in 28
Mr. Alarid filed the Motion for Remand within 50 days of the notice of removal. At oral argument, Mr. Alarid no longer asserted that procedural defects in the removal of the Cross-Claim required remand and instead premised his entire argument on equitable remand. Under these circumstances, the Court finds and concludes that the Motion for Remand was timely filed.
Remand of matters related to bankruptcy cases is governed by 28 U.S.C. § 1452(b), which provides, in relevant part:
28 U.S.C. § 1452(b).
The Motion to Reconsider, which has been fully briefed to the State Court, asks the State Court to review and overturn its decision to grant summary judgment on the merits. The practical effect of this Court denying the Motion to Remand would be for it to engage in what would be tantamount to appellate review on the merits of the State Court's decision to grant summary judgment. There is a strong public policy grounded in the interest of comity between federal and state courts and the notion of federalism, that federal courts should not unnecessarily interfere with state court proceedings. That comity doctrine is embodied not only in the bankruptcy permissive abstention doctrine,
The Rooker-Feldman doctrine does not prohibit this Court from conducting a merits review of the State Court's decision to grant summary judgment by deciding the Motion to Reconsider after removal of the Cross-Claim to federal court. See Jenkins v. MTGLQ Investors, 218 Fed. App'x 719, 724 (10th Cir. 2007) ("[T]he Rooker-Feldman doctrine has no application to a properly removed case where ... there is no attack on a separate and final state-court judgment[;]" consequently, a federal court could set aside a state court default judgment following removal.).
In determining whether this Court should grant the Motion for Remand under 28 U.S.C. § 1452(b), apart from the question of whether this Court should decide the Motion to Reconsider, the Court considers the same factors used to determine whether permissive abstention is appropriate under 28 U.S.C. § 1334(c)(1).
Several of these considerations support remand, in addition to principles of comity that support remand so the State Court may decide the Motion to Reconsider. Remand will not interfere with administration of the bankruptcy estate or have any impact on other creditors. Mr. Pacheco has been granted a discharge and his bankruptcy case has been closed. Further, the Cross-Claim raises only state law issues and those issues relate to an alleged breach of the parties' settlement agreement in a prior state court action. The state court judge has presided over the litigation between these parties for many years and is familiar with what has transpired. Finally, removal by Mr. Pacheco may well have been a forum shopping tactic to get a new judge following the State Court's entry of summary judgment against him.
On the other hand, there are good reasons for this Court to hear this removed proceeding. Except for entry of summary judgment, the State Court has made no rulings relating to the Cross-Claim. The State Court has not heard any evidence on the Cross-Claim. The facts found in the summary judgment obtained by default were not "actually litigated" and, therefore, have no preclusive effect in this Court. See Murphy v. Spencer (In re Spencer), 541 B.R. 750, 756 (Bankr. D.N.M. 2015) (issue preclusion under New Mexico law requires that "the issue was actually litigated in the prior adjudication.... Default judgments cannot form the basis for issue preclusion.") (citations omitted). Remand may subject the parties to needless duplicative litigation and risk inconsistent results. The evidence relevant to Mr. Alarid's Cross-Claim and his non-dischargeability claims are essentially the same. If, upon remand, the State Court reconsiders and vacates the Summary Judgment, the parties will be litigating in State Court at the same time they litigate the non-dischargeability claims in this Court. And if the Non-Dischargeability Action proceeds at the same time as the
It makes no sense to remand and require the parties to litigate the same facts twice in two forums and create a race in which issue preclusion is applied to the facts found by the tribunal that enters a final judgment first. To avoid this possibility, Mr. Alarid argues that this Court should remand this proceeding and stay the Nondischargeability Action pending entry of a final judgment in the State Court Action. There are several problems with this approach. First, the specific findings necessary to except a debt from the discharge under 11 U.S.C. §§ 523(a)(2)(A) and/or (a)(6) will not necessarily be found in a state court adjudication of Mr. Alarid's Cross-Claim, thereby creating the possibly of two trials with duplicative evidence.
After considering the strongest reason to remand, which is to have the state court rule on the Motion to Reconsider, against the reasons to not to remand, the Court finds that the best way to proceed is to modify the discharge injunction for the sole purpose of allowing the state court to determine the pending Motion to Reconsider.
The Court granted Mr. Pacheco a discharge in August of 2019. After discharge, the automatic stay, which prevented the continued litigation of the State Court Foreclosure Action against Mr. Pacheco during the pendency of his bankruptcy case, terminated and was replaced with the discharge injunction. See Henderson v. White (In re Henderson), 560 B.R. 365, 370 (Bankr. D.N.M. 2016) ("Once the debtor receives a Chapter 7 discharge, the discharge injunction, found in 11 U.S.C. § 524, takes the place of the automatic stay.") (citations omitted). The discharge injunction operates as an injunction against the commencement or continuation of any action, or any act, to collect, recover or offset any discharged debts as a personal liability of the debtor. See 11 U.S.C. § 524 (the bankruptcy discharge "operates as an injunction against the commencement or continuation of an action ..., or any act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived...."); Ridley v. M & T Bank (In re Ridley), 572 B.R. 352, 360 (Bankr. E.D. Okla. 2017) ("Once discharge is entered, the automatic stay dissolves and the discharge injunction arises to prevent creditors from attempting to collect debts that were discharged.").
A potential problem arises when a debtor is granted a discharge while an action to except a debt from the discharge and a parallel state court action to establish the debt are both pending: does the discharge injunction apply to prevent continuation of the state court action before there has been a determination of dischargeability? Subsection (c) of 11 U.S.C. § 523 provides that "the debtor shall be discharged from a debt of a kind described in paragraph (2), (4), or (6) of subsection (a) ... unless ... the court determines such debt to be excepted from discharge...." 11 U.S.C. § 523(c)(1). If the discharge injunction does not apply unless and until the court determines such debt to be excepted from discharge, creditors would be free to take action to collect the debt from the debtor outside of bankruptcy court pending resolution of the non-dischargeability proceeding that relates to the debt.
The Court agrees that the best construction of 11 U.S.C. § 523(c)(1) is that a debt is discharged while a nondischargeability action relating to that debt is pending. To hold otherwise and allow nonbankruptcy litigation to proceed unimpeded or to allow the creditor to seize the debtor's assets to collect an unsecured debt while the non-dischargeability action relating to
Before deciding whether the Court should modify the discharge injunction, the Court must decide whether it has the authority to do so. Courts are split on whether a bankruptcy court has authority to modify the discharge injunction. The Ninth Circuit Bankruptcy Appellate Panel ("Ninth Circuit BAP") has held that bankruptcy courts have no discretion to modify the discharge injunction. In re Munoz, 287 B.R. 546, 552-53 (9th Cir. BAP 2002).
In reaching its determination, the Ninth Circuit BAP recognized a principle that bankruptcy courts, as courts of equity, have authority to modify a court-imposed injunction unless there is a "`clear and valid legislative command' constraining the bankruptcy court's discretion...." Munoz, 287 B.R. at 552. The Ninth Circuit BAP then pointed out that the discharge injunction is a statutory injunction that is neither drafted nor issued by a court but, instead, is a legal consequence of granting a discharge. Id. After examining the language of 11 U.S.C. § 524 and comparing it with other provisions in the Bankruptcy Code, including 11 U.S.C. § 362(d), which expressly authorizes to the court to modify the automatic stay, the Ninth Circuit BAP determined that "[n]othing in [the] language [of § 524 or the Bankruptcy Code] hints at the existence of discretion over the terms of the [discharge] injunction." Id. The Ninth Circuit BAP then concluded that the Bankruptcy Code's "statutory scheme constitutes a `clear and valid' legislative command that leaves no discretion in the court to `modify' the discharge injunction." Id. at 553.
Recently, the United States Supreme Court examined the interplay between 11 U.S.C. § 105(a) and 11 U.S.C. § 524 that imposes a discharge injunction upon entry of an order granting a debtor a discharge. See Taggart v. Lorenzen, ___ U.S. ___,
Id.
The Seventh Circuit, in holding that bankruptcy courts have authority to modify the discharge injunction, like the Supreme Court in Taggart, relied on traditional principles of equity practice. See Matter of Hendrix, 986 F.2d 195, 198 (7th Cir. 1993) (under the principle that "a court can modify an injunction that it has entered whenever the principles of equity require it do so" a court may modify the § 524(a) discharge injunction). Other courts similarly have applied traditional principles of equity practice in holding that bankruptcy courts may modify the discharge injunction.
The Tenth Circuit Bankruptcy Appellate Panel in Eastburg explained how modification of the discharge injunction may be necessary or appropriate to carry out other bankruptcy code provisions:
Eastburg, 447 B.R. at 633.
This Court agrees with those courts that have held that bankruptcy courts have the authority to modify the discharge injunction. The authority is derived from 11 U.S.C. § 105(a), which provides that a court may issue any order or judgment that is necessary or appropriate to carry out other bankruptcy provisions, and traditional equity principles.
The Court will exercise its discretion to modify the discharge injunction for
If the State Court denies the Motion to Reconsider and lets the Summary Judgment stand, or grants the motion in part and enters an amended final Summary Judgment as a result of that ruling, the final Summary Judgment will establish the validity and amount of the debt alleged in the Cross-Claim. See Crespin, 551 B.R. at 897-98 (prior state court judgment can be given claim-preclusive effect to establish the existence and amount of the debt).
The discharge injunction replaced the automatic stay upon entry of the order granting Mr. Pacheco a discharge. This Court has authority to modify the discharge injunction. By modifying the discharge injunction solely to permit the State Court to rule on the Motion to Reconsider the summary judgment it entered, the Court maintains its control over the bankruptcy discharge and avoids the potential for wasted duplication of litigation efforts, while at the same time giving due respect to the State Court under principles of comity. The Court will enter a separate order consistent with this Memorandum Opinion.
