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limiting appellate review to reliance element where parties did not dispute bankruptcy court's findings as to first three elements of § 523
Summary of this case from Casper v. O'Sullivan (In re O'Sullivan)Opinion
Case No. 18-40052 Adversary No. 18-4183 Civil Case No. 4:19-CV-00411-BCW
07-22-2020
IN RE: Quinton D. KINARD and Candice M. Kinard, Debtors. Excellent Home Properties, Inc. Appellant, v. Candice Kinard, Debtor.
Michael M. Tamburini, Richard Davis, Levy Craig Law Firm, PC, Kansas City, MO, for Appellant. Erlene W. Krigel, Krigel & Krigel, PC, Kansas City, MO, for Debtor.
Michael M. Tamburini, Richard Davis, Levy Craig Law Firm, PC, Kansas City, MO, for Appellant.
Erlene W. Krigel, Krigel & Krigel, PC, Kansas City, MO, for Debtor.
ORDER AND JUDGMENT
BRIAN C. WIMES, JUDGE
Before the Court is a bankruptcy appeal filed by Excellent Home Properties, Inc. pursuant to 28 U.S.C. § 158(a) and Fed. R. Bankr. P. 8001. Excellent Home appeals the Bankruptcy Court's judgment in favor of Candice Kinard entered on April 25, 2019, in the matter captioned Excellent Home Properties, Inc. v. Candice M. Kinard, Adversary No. 18-4183. The District Court has jurisdiction to hear this appeal pursuant to 28 U.S.C. § 158(a) and (c)(1). The Court, being duly advised of the premises, affirms the Bankruptcy Court's ruling.
The Honorable Cynthia A. Norton, United States Bankruptcy Judge for the Western District of Missouri.
See In re Quinton D. Kinard & Candice M. Kinard, 18-40052-can13; Excellent Home Props., Inc. v. Kinard, 18-04183-can.
Appellant Excellent Home Properties, Inc. is a real estate development company located in California that is operated by Victor Kuo. ("Excellent Home"). Appellee Candice M. Kinard is a Missouri resident, and is the daughter of Cheryl Thompson. In May 2001, Thompson started Manor Place, LLC, which purchased rundown residential properties in Missouri, repaired and rehabilitated ("flipped") them, and then sold the rehabilitated properties for profit.
Thompson is not a party to the above-captioned action, the adversary proceeding giving rise to this appeal, or the underlying bankruptcy proceeding filed by Kinard and her spouse. Thompson was a debtor in another bankruptcy case in which Excellent Home sought, and succeeded on, a similar claim for nondischargeability of a debt against Thompson.
While Kinard was not an owner or member of Manor Place, she did perform services for the company. Kinard mainly performed secretarial and bookkeeping work for Manor Place, and, along with Thompson, had access to and used the email account for pinkdevelopmentkc@yahoo.com. Though Manor Place did not pay Kinard a salary, Manor Place did pay for fees associated with Kinard's real estate license and associated continuing education classes for that license.
At some point before and leading into 2016, Manor Place experienced some financial difficulties, and was the subject of numerous collection lawsuits. During this time, Manor Place transferred almost $150,000.00 to Kinard's personal bank accounts, from which Manor Place's bills could be paid while also hiding Manor Place's assets from its creditors.
In March 2016, Kuo and Thompson met online through an entity called FortuneBuilder. Thompson emailed Kuo to solicit his investment in some property she was purchasing. Thompson's email offered "12 percent on a nine-month loan," and referenced a "private investor package," a "team" working on eight properties, and her 23-year history rehabbing homes.
Although Kuo did not invest based on Thompson's initial contact, the two exchanged emails over the subsequent few months. In the postscript of an email Thompson sent to Kuo on March 10, 2016, she referred to Kinard as her "business partner."
On June 7, 2016, Thompson emailed Kuo the following:
Hi Victor. Sorry it's been so long since I've been in touch. We've had a move and a death in the family since we talked, so life has been a bit of a zoon. We do have a property that fits your criteria. Total investment $47,000 at 12 percent for 9 months. (Anticipated will be six at most.) 1103 Main, Independence, Missouri. Purchase price $30,000. Rehab costs $17,000. After repair value $99,000 to $105,000. Three bedroom bungalow, 1 ½ baths, 1,700 square feet. Please let me know if you're interested. We have a short window of time. We're supposed to close on June 9th. You would have first position and we can prepare the promissory note, deed of trust, and make sure you are listed on our policy as the additional insured. We have a long track record of successful rehabs. Looking forward to talking with you. Let me know what additional information you would need and if you would like to move forward. Thanks. Cheryl Thompson.
(Doc. #7 at 13).
In response to this email, Kuo asked Thompson to confirm the address of the property and requested documentation to support the estimated after-repair value. Thompson responded she had "an updated set of comparable comps coming now and that they were tight on closing." The parties then exchanged emails on logistics, like wiring instructions. One of Thompson's emails again references Kinard as Thompson's business partner, with whom Kuo would communicate about wiring funds. Kinard then emailed Kuo from pinkdevelopmentkc@yahoo.com with wiring instructions, and to discuss interest payments.
The Bankruptcy Court concluded the foregoing facts provided a sufficient basis for Kuo's reasonable belief that Kinard was Thompson's business partner, even if Kinard was not legally Thompson's business partner.
On June 13, 2016, Excellent Home wired $47,000.00 to Manor Place ("the Loan") so that Manor Place could purchase the property located at 1103 Main, Independence, Missouri ("the Property"). Manor Place would purchase the Property for $30,000.00 and use the remaining $17,000.00 to make repairs. Thereafter, Manor Place would sell the Property for a profit, and repay the Loan to Excellent Home, principal plus interest, out of the sale proceeds.
The Loan was secured by a deed of trust for the Property. Kinard was not a signatory on either the promissory note evidencing the Loan, or the deed of trust securing it.
Manor Place purchased the Property but made no repairs nor renovations. As the maturity date of the Loan approached, and for several months thereafter, Thompson led Kuo to believe the Property had been renovated and was under contract for sale in an amount sufficient to repay to Excellent Home the Loan balance. Kinard was the listing agent for the Property. Thompson fabricated at least five false closing dates in succession, and provided excuses to Kuo about why the supposedly scheduled closings could not occur, e.g. title issues, etc.
By the Loan's maturity date, Manor Place had only made a few interest payments to Excellent Home, and the Property had not been sold. Excellent Home, through Kuo, (hereinafter, "Excellent Home") thus elected to foreclose on the deed of trust.
In the fall of 2017, Excellent Home retained an attorney in Missouri and foreclosed on the deed of trust for the Property. At no point leading up to and after the foreclosure sale did Excellent Home observe the condition of the Property. Instead, Excellent Home directed its representative to make a full credit bid for the Property in an amount of $50,000.00.
"[T]he usual consequence of a [full credit] bid is a release of other collateral (because of the extinguishment of the debt.)" Vestin Realty Mortg., I, Inc. v. Pickwick Partners, 279 S.W.3d 536, 540 (Mo. Ct. App. 2009).
Excellent Home's full credit bid in an amount of $50,000.00 was the winning, and only, bid for the Property at the foreclosure sale. Excellent Home thus directed its representative to bid on the Property through a full credit bid in the amount of the outstanding balance of the Loan, based on the assumption that Manor Place had rehabbed the Property as had been represented to Excellent Home. Excellent Home did not discover Manor Place had not flipped the Property until after it took possession of it.
In sum, $50,000.000 did not reflect the Property's actual value at the foreclosure sale. After discovering that Manor Place had not undertaken to have the Property rehabbed as Manor Place had represented, Excellent Home hired a contractor to bid on the necessary repairs for the Property. The contractor estimated the Property's repairs would cost an estimated $68,000.00 to complete, in contrast with Manor Place's estimated cost of repair of $17,000.00.
Excellent Home elected not to make the repairs to the Property and sold it for $19,000.00. Excellent Home asserts a loss of $31,000.00, which equates to Excellent Home's $50,000.00 bid, less the $19,000.00 Excellent Home was able to recoup through sale.
Manor Place collapsed during the real estate downturn. Thompson and Kinard, along with their respective spouses, filed separate bankruptcy proceedings.
Kinard, in her bankruptcy proceeding filed under Chapter 13, did not schedule Excellent Home as a creditor. However, Excellent Home filed an unsecured proof of claim for $50,000.00 in Kinard's bankruptcy case. The proof of claim stated it was for "fraud as set forth in Jackson County, Missouri Case No. 1716-CV-30066," but included no supporting documents.
Subsequently, Excellent Home filed a timely adversary complaint against Kinard alleging, as set forth in the amended complaint, four claims: (I) fraudulent misrepresentation; (II) negligent misrepresentation; (III) civil conspiracy; and (IV) "objection to discharge." Counts I, II, and III each seek damages in an amount of $50,000.00. Count IV seeks a determination under 11 U.S.C. § 523(a)(2)(A) that the debt owed to Excellent Home is nondischargeable. Adv. No. 18-4183-can (Doc. #40).
The Bankruptcy Court held a trial in the adversary proceeding filed by Excellent Home against Kinard. Subsequently, the Bankruptcy Court stated its findings of fact and conclusions of law on the record, and entered judgment in favor of Kinard as follows (Doc. #1-1).
On Counts I, II, and III, the Bankruptcy Court found in favor of Kinard and against Excellent Home "for failure to state a claim for nondischargeability" under the Bankruptcy Code. (Doc. #1-1 at 1). On Count IV, the Bankruptcy Court found in favor of Kinard and against Excellent Home "for nondischargeability based on fraud under 11 U.S.C. § 523(a)(2)(A), because any purported debt owed by the [Kinard] to [Excellent Home] was extinguished by [Excellent Home's] full credit bid at foreclosure sale." (Doc. #1-1 at 2).
Excellent Home appealed this judgment to the District Court, thus giving rise to the above-captioned action. Excellent Home argues the Bankruptcy Court's judgment is incorrect in at least two ways and seeks remand to the Bankruptcy Court "for proper consideration in light of the evidence presented at trial." 4:19-CV-00411-BCW (Doc. #7 at 23).
First, with respect to the nondischargeability claim (IV), Excellent Home argues the Bankruptcy Court misapplied the "justifiable reliance" standard. Second, with respect to the claims for fraudulent misrepresentation (I), negligent misrepresentation (II), and civil conspiracy (III), Excellent Home argues the Bankruptcy Court erred in granting judgment for Kinard because even if the Bankruptcy Court determined Excellent Home's state law claims did not state a claim for nondischargeability, the Bankruptcy Court should have dismissed these state claims for lack of jurisdiction so that Excellent Home could pursue them in state court.
LEGAL STANDARD
The Court reviews the Bankruptcy Court's findings of fact for clear error and its conclusions of law de novo. Fed. R. Civ. P. Bankr. 8013; In re SRC Holding Corp., 545 F.3d 661, 666 (8th Cir. 2008) (citation omitted).
The "clearly erroneous" standard requires the district court's "definite and firm conviction that a mistake has been committed" before disturbing the factual finding at issue. Willis v. Henderson, 262 F.3d 801, 808 (8th Cir. 2001) (citing Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) ). The de novo standard requires the district court to "independently determine questions of law or mixed questions of law or fact." In re Richardson, 78 B.R. 960, 961 (W.D. Mo. 1987) (citing In re Multiponics, Inc., 622 F.2d 709, 713 (5th Cir. 1980) ; In re Hammons, 614 F.2d 399, 403 (5th Cir. 1980) ).
ANALYSIS
A federal district court sitting in the same judicial district in which the underlying bankruptcy case is filed has jurisdiction to hear appeals "from final judgments, orders, and decrees ... of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title." 28 U.S.C. § 158(a)(1).
A. The Bankruptcy Court properly entered judgment against Excellent Home for nondischargeability on Count IV in concluding the $50,000.00 bid at the foreclosure sale extinguished the debt and Excellent Home did not justifiably rely on the representation that the Property had been renovated.
Excellent Home argues the Bankruptcy Court misapplied the justifiable reliance standard in concluding that, based on the Bankruptcy Court's findings of fact with respect to Count IV, Excellent Home was not justified in relying upon Thompson's fraudulent misrepresentations that the Property had been renovated. In opposition, Kinard argues the Bankruptcy Court properly applied the justifiable reliance standard to the facts and did not err in concluding that the debt owed to Excellent Home was fully satisfied by the $50,000.00 foreclosure bid.
The parties do not dispute that this issue on appeal is a legal one, such that the district court reviews the Bankruptcy Court's decision de novo.
"The principle purpose of the Bankruptcy Code is to grant a ‘fresh start’ to the ‘honest but unfortunate debtor.’ " Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007) (citing Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ). Chapter 13 of the Bankruptcy Code "authorizes an individual with regular income to obtain a discharge after the successful completion of a payment plan approved by the bankruptcy court." Id. "A proposed bankruptcy plan becomes effective upon confirmation, see §§ 1324, 1325, and will result in a discharge of the debts listed in the plan if the debtor completes the payments the plan requires, see § 1328(a)." United Student Aid Funds Inc. v. Espinosa, 559 U.S. 260, 264, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010).
"The provisions for discharge of a bankrupt's debts, 11 U.S.C. §§ 727, 1141, 1228, and 1328(b), are subject to exception under 11 U.S.C. § 523(a), which carries 16 subjections setting out categories of nondischargeable debts." Field v. Mans, 516, U.S. 59, 64, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). As relevant here, § 523(a)(2)(A) provides an exception to discharge for a debt incurred through money received by "false pretenses, a false representation, or actual fraud." Id. (citing 11 U.S.C. § 523(a)(2)(A) ).
"[T]he standard of proof that a creditor must satisfy in order to establish a valid claim against a bankrupt estate and the standard that a creditor who has established a valid claim must still satisfy in order to avoid dischargeability" are different. Grogan v. Garner, 498 U.S. 279, 282, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). While the validity of a creditor's claim against an estate "is determined by rules of state law," "the issue of nondischargeability has been a matter of federal law governed by the terms of the Bankruptcy Code." Id. (citations omitted). "[T]he standard of proof for the dischargeability exceptions in 11 U.S.C. § 523(a) is the ordinary preponderance-of-the-evidence standard." Id.
"To prove actual fraud, a creditor must prove the following by a preponderance of the evidence: (1) the debtor made a false representation; (2) at the time the representation was made the debtor knew it was false; (3) the debtor subjectively intended to deceive the creditor at the time he made the representation; (4) the creditor justifiably relied upon the representation; and (5) the creditor was damaged." In re Eccles, 407 B.R. 338, 342 (B.A.P. 8th Cir. 2009) (citing Universal Bank, N.A. v. Grause (In re Grause), 245 B.R. 95, 99 (B.A.P. 8th Cir. 2000) (citing Thul v. Ophaug (In re Ophaug), 827 F.2d 340, 342 n.1 (8th Cir. 1987) )).
In this case, the parties do not dispute that the Bankruptcy Court properly found that Excellent Home demonstrated the first three elements of nondischargeability under § 523(a)(2)(A). However, the parties dispute the fourth element: whether a preponderance of the evidence demonstrates that Excellent Home justifiably relied on Thompson's fraudulent statements that the Bankruptcy Court found imputed to Kinard.
The Bankruptcy Court's factual findings attribute no fraudulent statement or representation to Kinard directly, and Thompson's fraudulent statements or representations are properly imputed to Kinard based on applicable agency principles. In re Miller, 276 F.3d 424, 429 (8th Cir. 2002) (citing Strang v Bradner, 114 U.S. 555, 561, 5 S.Ct. 1038, 29 L.Ed. 248 (1885) ).
Excellent Home asserts the Bankruptcy Court misapplied Field v. Mans, 516 U.S. 59, 70, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) by concluding Excellent Home did not establish justifiable reliance by a preponderance of the evidence. Kinard also cites Field but disputes that the Bankruptcy Court misapplied it under the facts.
Field holds § 523(a)(2)(A)'s "justifiable reliance" requirement is a "less demanding" standard than reasonable reliance. 516 U.S. at 61, 116 S.Ct. 437. The Field court's discussion of justifiable reliance includes the following:
The Restatement [ (Second) of Torts (1976) ] expounds upon justifiable reliance by explaining that if a person is justified in relying on a representation of fact ‘although he might have ascertained the falsity of the representation had he made an investigation.’ Significantly for our purposes, the illustration is given of a seller of land who says it is free of encumbrances; according to the Restatement, a buyer's reliance on this factual representation is justifiable, even if he could have ‘walk[ed] across the street to the office of the register of deeds in the courthouse' and easily have learned of an unsatisfied mortgage.’
Field, 516 U.S. at 70, 116 S.Ct. 437. Further,
Justification is a matter of the qualities and characteristics of the particular plaintiff, and the circumstances of the particular case, rather than of the application of a community standard of conduct to all cases. Justifiability is not without some limits, however .... [A] person is required to use his senses, and cannot recover if he blindly relies upon a misrepresentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation. Thus, if one induces another to buy a horse by representing it to be sound, the purchaser cannot recover even though the horse has but one eye, if the horse is shown to the purchaser before he buys it and the slightest inspection would have disclosed the defect. On the other hand, the rule ... applies only when the recipient of the misrepresentation is capable of appreciating its falsity at the time by the use of his senses. Thus a defect that any experienced horseman would at once recognize at first glance may not be patent to a person who has no experience with horses.
Id. at 71, 116 S.Ct. 437 (citing Restatement (Second) of Torts, §§ 545A, 541 cmt. a (1976)).
In sum, the existence of justifiable reliance "turn[s] upon an individual standard of the plaintiff's own capacity and the knowledge which he has, or which may fairly be charged against him from the facts within his observation in light of his individual case." Id. Though justifiable reliance is a less stringent standard than reasonable reliance, the issue of reasonableness in the inquiry is not irrelevant. Field, 516 U.S. at 76, 116 S.Ct. 437. Rather,
[t]he greater the distance between the reliance claimed and the limits of the
reasonable, the greater the doubt about reliance in fact. Naifs may recover, at common law and in bankruptcy, but lots of creditors are not at all naïve. The subjectiveness of justifiability cuts both ways, and reasonableness goes to the probability of actual reliance.
Id.
The facts relevant to the justifiable reliance inquiry, as set forth by Excellent Home, are as follows. Excellent Home is a California company that connected with Thompson electronically. The Loan arose through electronic, remote transfers in reliance on Thompson's representations. Manor Place made a few interest payments to Excellent Home related to the Loan but did not repay Excellent Home on or after the maturity date of the Loan. Rather, Thompson made numerous representations that the Property had been renovated, but obstacles continually arose that precluded the Property's sale so that the Loan could be repaid. Thompson represented to Excellent Home that the closing date for the Property was delayed multiple times.
In fall of 2017, Excellent Home hired a lawyer to conduct a trustee sale for the property under the deed of trust. Excellent Home provided instructions to its representative about what to bid for the Property at the foreclosure sale. Excellent Home's representative made a full credit bid of $50,000.00 and took possession of the Property. It was only after Excellent Home took possession of the Property that it learned that no renovations or repairs had been done.
Excellent Home argues that based on the foregoing facts, the Bankruptcy Court misapplied the justifiable reliance standard by concluding Excellent Home should have undertaken an investigation as to the condition of the Property. To the contrary, however, the factual record establishes Excellent Home, though a remote investor, was sufficiently sophisticated that Manor Place's repeated failures to fulfil its obligations under the Loan should have raised Excellent Home's suspicions.
Though Excellent Home was not required to make an investigation, the factual circumstances undermine Excellent Home's ability to demonstrate justifiable reliance at the time of the $50,000 credit bid. Even if Excellent Home justifiably relied on Thompson's representations in the time period leading up to the decision to foreclose on the deed of trust, that reliance was not justifiable once Excellent Home decided to exercise its right to foreclose under the deed of trust. At some point, Excellent Home began to suspect Manor Place could not satisfy its obligations under the Loan. For example, the closing date for the Property was delayed six times, Excellent Home stopped receiving interest payments, and Manor Place cut off phone contact.
Excellent Home asserts this conclusion is improper because Thompson's misrepresentations related to the interior of the Property, which Excellent Home did not have access to until after it took possession after foreclosure. However, the record demonstrates multiple "red flags" which suggested to Excellent Home that it should exercise its right to foreclose in order to recover under the Loan. These same red flags should have indicated to Excellent Home, as a non-novice real estate investor with the sophistication to hire a local attorney to arrange for the foreclosure of the Property, the possibility that Manor Place did not complete its other obligations under the Loan, i.e. the Property's renovation and repair. These circumstances present an extreme situation that should have, at a minimum, suggested to Excellent Home that its representative should have at least confirmed with him, on the day of the foreclosure sale, that the $50,000.00 bid could reflect the condition of the Property as it existed on that day. In re Holmes, 570 B.R. 610, 620 (Bankr. W.D. Mo. 2017) (citing In re Treadwell, 423 B.R. 309, 315 (B.A.P. 8th Cir. 2010), rev'd on other grounds, 637 F.3d 855 (8th Cir. 2011) ).
Furthermore, even if Excellent Home could be said to have demonstrated, by a preponderance of the evidence, that its reliance on Thompson's misrepresentations were justified, the Court otherwise concludes the record does not establish damages such that Excellent Home's assertion of nondischargeability fails.
As set forth above, a creditor seeking to establish § 523(a)(2)(A) nondischargeability must demonstrate it incurred damages. Though Excellent Home argues it incurred damages in the amount of $31,000.00 ($50,000.00 minus the subsequent sale price of $19,000.00 for the Property), Excellent Home successfully made a full credit bid for the Property at the foreclosure sale.
The relationship between these alleged damages and the misrepresentations are tenuous, if they exist at all. At the time of the full credit bid, Excellent Home was exercising its right to foreclose on the deed of trust and directed its representative to bid $50,000.00 for the Property, which was the amount owed under the Loan.
"Under general principles of law, when the creditor makes a full credit bid at the foreclosure sale, the creditor completely extinguishes the indebtedness of the debtor. The extinguishment of the debt, of course, would preclude enforcement of any additional collateral securing the note." Vestin Realty Mortg. v. Pickwick Partners, L.L.C., 279 S.W.3d 536, 537 (Mo. Ct. App. 2009).
Section 523(a) for nondischargeability applies only if there is first a debt. Wilson v. Walker (In re Walker), 528 B.R. 418, 428 (B.A.P. 8th Cir. 2015). In foreclosing on the deed of trust, even if mistakenly overvaluing the Property, Excellent Home extinguished the debt.
To the extent Excellent Home would assert a mistake of fact attributable to the misrepresentations in valuing the Property before foreclosure, "a non-judicial public foreclosure sale is generally the epitome of caveat emptor, and the courts are very reluctant to vacate foreclosure sales due to bidding errors." Vestin, 279 S.W.3d at 540 ; In re Newby, 344 B.R. 597 (Bankr. W.D. Mo. 2006).
For all of these reasons, the Court concludes the Bankruptcy Court's judgment on Excellent Home's Count IV for nondischargeability under § 523(a)(2)(A) is not improper under the law and should be affirmed.
B. The Bankruptcy Court properly entered judgment against Excellent Home for failure to state a claim for nondischargeability with respect to Counts I, II, and III.
Excellent Home argues the Bankruptcy Court erred in entering judgment against Excellent Home "for failure to state a claim for nondischargeability under the Bankruptcy Code." (Doc. #1-1 at 1). Excellent Home argues the Bankruptcy Court improperly treated Excellent Home's claims alleged under Missouri law as core proceedings. Excellent Home argues its claims for fraudulent misrepresentation (I); negligent misrepresentation (II); and conspiracy (III) were only within the Bankruptcy Court's jurisdiction as "non-core, related to" proceedings, and the Bankruptcy Court did not, therefore, have subject matter jurisdiction to enter judgment against Excellent Home. In opposition, Kinard argues the Bankruptcy Court properly exercised subject matter jurisdiction over Excellent Home's Counts I, II, and III, and properly concluded these claims failed to state a claim under the bankruptcy code.
The Court also reviews this issue de novo.
The U.S. District Courts have jurisdiction over bankruptcy proceedings and may refer to the bankruptcy court proceedings under the bankruptcy code. 28 U.S.C. § 1334 ; 28 U.S.C. § 157(a) ; In re Farmland Indus., 567 F.3d 1010, 1017 (8th Cir. 2009) ("Bankruptcy courts have jurisdiction over civil proceedings ‘arising under,’ ‘arising in,’ or ‘related to’ title 11.").
The way the bankruptcy court handles matters referred to it is set forth in § 157(b) and § 157(c). In re Hospitality Ventures / LaVista, 358 B.R. 462, 469 (Bankr. N.D. Ga. 2007). "It is the bankruptcy court's responsibility to determine whether each claim before it is core or non-core." Exec. Benefits Ins. Agency v. Arkison, 573 U.S. 25, 33, 134 S.Ct. 2165, 189 L.Ed.2d 83 (2014) (citing 28 U.S.C. § 157(b)(3) ).
Section 157(b) authorizes bankruptcy judges to hear, and enter judgment on, "all core proceedings arising under title 11, or arising in a case under title 11 ...." 28 U.S.C. § 157(b). Section 157(c) authorizes bankruptcy judges to also hear a proceeding "that is not a core proceeding but that is otherwise related to a case under title 11." 28 U.S.C. § 157(c). If a proceeding is before the bankruptcy judge as one that is "non-core," and "otherwise related to a [bankruptcy] case," the bankruptcy judge may hear the matter, but issue only proposed findings and conclusions to the district court, which then reviews the issues de novo to issue any final order or judgment. LaVista, 358 B.R. at 469. "There is one statutory exception to this rule: [i]f all parties ‘consent,’ the statute permits the bankruptcy judge ‘to hear and determine and to enter appropriate orders and judgments’ as if the proceeding were core." Exec. Benefits, 573 U.S. at 33, 134 S.Ct. 2165 (citing 28 U.S.C. § 157(b)(3) ).
Put simply, [i]f a matter is core, the statute empowers the bankruptcy judge to enter final judgment on the claim, subject to appellate review by the district court. If a matter is non-core, and the parties have not consented to final adjudication by the bankruptcy court, the bankruptcy judge must propose findings of fact and conclusions of law. Then, the district court must review the proceeding de novo and enter final judgment.
Id. In sum, " § 157 permits a bankruptcy court to adjudicate a claim to final judgment in two circumstances – in core proceedings, see § 157(b), and in non-core proceedings, with the consent of all the parties, § 157(c)(2)." Id. at 38, 134 S.Ct. 2165.
In this case, the Bankruptcy Court entered judgment against Excellent Home after finding it had jurisdiction under 28 U.S.C. § 1334 and 11 U.S.C. § 523, and concluding the matter was a core proceeding under 28 U.S.C. § 157(b). Adv. No. 18-04183-can, Doc. #85 at 4.
Excellent Home does not dispute the Bankruptcy Court's jurisdiction to enter judgment on Count IV for "objection to discharge"; indeed, "determinations as to the dischargeability of particular debts" is a "core proceeding" under the plain language of the statute. 28 U.S.C. § 157(b)(I). By contrast, however, Excellent Home disputes the Bankruptcy Court's jurisdiction to enter final judgment on Excellent Home's Counts I, II, and III alleged under Missouri state law. The issue presented by Excellent Home appears to be a procedural one that is attributable to the manner Excellent Home presented its claims in the underlying Chapter 13 case.
In filing its proof of claim in the Chapter 13 bankruptcy case, Excellent Home made a written claim for a right to payment as a creditor in bankruptcy. In re Dove-Nation, 318 B.R. 147, 150 (B.A.P. 8th Cir. 2004) (citing 11 U.S.C. § 501 ). The filing of a timely proof of claim, like Excellent Home's claim here, requires the Bankruptcy Court to determine whether the claim is allowed under § 502(a). Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 449, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007).
"A claim of interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest, including a creditor of a general partner in a partnership that is a debtor in a case under chapter 7 of this title, objects." 11 U.S.C. § 502(a).
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"The determination of a claims allowability is a judicial act within the exclusive province of the bankruptcy judge." In re Hydorn, 94 B.R. 608, 612 (Bankr. W.D. Mo. 1988). Generally, a timely claim is deemed allowed, even if the debtor objects, "except to the extent the claim implicates any of the nine exceptions enumerated in § 502(b)." Travelers, 549 U.S. at 449, 127 S.Ct. 1199.
" Section 502(b)(1) disallows claims that are unenforceable against the debtor under any agreement or applicable law ....", including state law. In re Sears, 863 F.3d 973, 977 (8th Cir. 2017) (citing Travelers, 549 U.S. at 449, 127 S.Ct. 1199 ).
"[B]y filing a claim against a bankruptcy estate the creditor triggers the process of allowance and disallowance of claims, thereby subjecting himself to the bankruptcy's equitable power." Langenkamp v. Culp, 498 U.S. 42, 44, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990). In filing its claims arising under state law in the underlying Chapter 13 case, Excellent Home put itself "within the equitable jurisdiction of the Bankruptcy Court." Id. at 45, 111 S.Ct. 330.
In a Chapter 13 case, "the only proper functions of the bankruptcy court (other than determining dischargeability issues) are to determine whether the Plaintiffs claim against the bankruptcy estate should be allowed and, if allowed, whether the proposed treatment of that claim passes muster under the Code's standards for confirmation of a Chapter 13 plan." In re Aslansan, 490 B.R. 675, 679-80 (Bankr. E.D. Pa. 2013) (citing 11 U.S.C. §§ 1322, 1325 ).
Because Excellent Home filed a proof of claim in Kinard's bankruptcy case based on state law causes of action, "the resolution of those claims would be core, inasmuch as the allowance or disallowance of claims against a debtor's bankruptcy estate is a matter that arises under the Bankruptcy Code pursuant to 11 U.S.C. § 502." In re Schmidt, 453 B.R. 346, 351 (B.A.P. 8th Cir. 2011) ; see also In re Civic Partners Sioux City, LLC, 2012 WL 761361, at *9 (Bankr. N.D. Iowa Mar. 8, 2012) (creditors' proof of claims based on the claims in the adversary complaint makes them core proceedings under Schmidt ).
Therefore, the Bankruptcy Court properly considered Excellent Home's state law claims as core, pursuant to § 502 based on how Excellent Homes presented these claims in the underlying Chapter 13 case. 28 U.S.C. § 157(b)(2)(B) (core proceedings include "allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interest for the purposes of confirming a plan under chapter 11, 12, or 13 of title 11 ....").
After concluding Excellent Homes claim for payment from the bankruptcy estate was allowed, as a core proceeding under 28 U.S.C. § 157(b)(2)(B), the Bankruptcy Court otherwise considered Excellent Homes right to payment notwithstanding any discharge under the Bankruptcy Code based on the adversary complaint. 28 U.S.C § 157(b)(2)(I). Notably, Excellent Home filed the adversary complaint in the underlying bankruptcy case, alleged "this complaint is a core proceeding pursuant to 28 U.S.C. § 157(b)(2), and also sought "other such relief as the court finds just and equitable." No. 18-04183-can, Doc. #40 at 6, 7, 8, 9; In re Ungar, 633 F.3d 675, 680 (8th Cir. 2011) (creditor's complaint seeking non-dischargeability including prayer for other relief deemed just and equitable subjected party to bankruptcy courts broad equitable powers).
In a chapter 13 case, a discharge under § 1328(b) "discharges the debtor from all unsecured debts provided for by the plan or disallowed under 502 of this title, except any debt ... of a kind specified in section 523(a) of this title." 11 U.S.C. § 1328(c)(2).
As previously mentioned, § 523(a) sets forth exceptions to the general discharge of debts in bankruptcy. 11 U.S.C. § 523(a). The only state-law torts referenced in § 523(a) are for fraud or misrepresentation in § 523(a)(2), breach of fiduciary duty, embezzlement, or larceny in § 523(a)(4), and/or willful and malicious injury in § 523(a)(6).
The issue of dischargeability is also a core proceeding under 28 U.S.C. § 157(b)(2)(I), to which the provisions of the Bankruptcy Code apply. 28 U.S.C. § 157(b)(1) (core proceedings are those arising under or in Title 11).
The Bankruptcy Court properly determined Excellent Home's state law claims for fraudulent misrepresentation, negligent misrepresentation, and civil conspiracy were potentially cognizable under the dischargeability exception for fraud or misrepresentation under § 523(a)(2). Therefore, the Bankruptcy Court construed the allegations of the complaint in favor of Excellent Home to determine whether Counts I, II, or III alleged under Missouri state law satisfied the elements of a claim for nondischargeability based on § 523(a)(2) fraud or misrepresentation under "federal law governed by the terms of the Bankruptcy Code." Grogan, 498 U.S. at 289, 111 S.Ct. 654 (nondischargeability is "a question of federal law independent of the issue of the validity of the underlying claim.")
The Bankruptcy Court properly found Excellent Home's claims, alleged under state law, did not establish the elements for fraud or misrepresentation for an exception to discharge. In re Eccles, 407 B.R. at 342 (citation omitted). Therefore, the Bankruptcy Court did not err in entering judgment against Excellent Home on the core issue of nondischargeability under § 523.
Moreover, to the extent Excellent Home argues the Bankruptcy Court should have considered its state law claims pursuant to its "related to" jurisdiction, Excellent Home at a minimum impliedly consented to the Bankruptcy Court's entry of final order of dismissal. In re AFY, 902 F.3d 884, 889 (8th Cir. 2018) (citing Abramowitz v. Palmer, 999 F.2d 1274, 1280 (8th Cir. 1993) ) (citing 28 U.S.C. § 157(c)(2) ).
Additionally, even if the Bankruptcy Court should have analyzed Excellent Homes state claims pursuant to its "related to" jurisdiction, this Court construes the Bankruptcy Courts judgment as proposed findings of fact and conclusions of law, and has jurisdiction to enter final judgment on Excellent Home's state law claims to the extent necessary. Exec. Benefits, 573 U.S. at 39, 134 S.Ct. 2165 (citing 28 U.S.C. § 1334(b) ).
Under Missouri law, a viable claim of fraudulent misrepresentation requires a plaintiff to demonstrate consequent and proximately caused injury. Renaissance Leasing, LLC v. Vermeer Mfg. Co., 322 S.W.3d 112, 131-32 (Mo. 2010). Missouri negligent misrepresentation and civil conspiracy have similar requirements to establish damage. Dancin' Dev., L.L.C. v. NRT Mo., Inc., 291 S.W.3d 739, 744 (Mo. Ct. App. 2009) ("pecuniary loss"); Higgins v. Ferrari, 474 S.W.3d 630, 631 (Mo. Ct. App. 2015) ("consequent injury"). The record in this case does not demonstrate that Excellent Home incurred an injury attributable to Kinard because any debt was extinguished by Excellent Home's full credit bid. Vestin, 279 S.W.3d at 537. Accordingly, it is hereby
ORDERED the judgment of the Bankruptcy Court is AFFIRMED.
IT IS SO ORDERED.