Opinion
Case No. 95-15348-DOT Chapter 7, Adversary Proceeding No. 00-1078.
Date: May 1, 2000.
Bryan H. Guidash, Esquire, Bankert Associates, PC, Fairfax, VA, Counsel for the plaintiff.
Charles L. King, Esquire, Arlington, VA, Counsel for the defendant.
MEMORANDUM OPINION
Before the court is (a) the motion of debtor Tina M. Bacallao to reopen her case to obtain relief against Dittmar Company ("Dittmar") for an alleged violation of the discharge injunction and (b) the motion of Dittmar to remand a removed action to the General District Court of Loudoun County, Virginia. The issues arise in the context of a foreclosure and ensuing eviction action. The debtor claims that the refinance deed of trust under which Dittmar foreclosed was legally ineffective to create any liability on the debtor because it did not comply with the requirements for a valid reaffirmation agreement. Among other relief, the debtor seeks the return of nearly three and a half years of mortgage payments collected by Dittmar in the amount of $53,145.61. A hearing was held on April 18, 2000, at which the debtor and Dittmar were each present by counsel. At the conclusion of the hearing, the court took the matter under advisement to review the applicable law. For the reasons stated, the motion to remand will be granted, but the case will be reopened to consider the debtor's claims with respect to the payments she made on the deed of trust.
Background
Tina M. Bacallao ("Ms. Bacallao") and her husband, Manuel B. Bacallao ("Mr. Bacallao"), filed a joint voluntary chapter 7 petition in this court on December 1, 1995, and received a discharge on March 17, 1996. Among the assets listed on their schedules was a townhouse located at 21059 View Glass Terrace, Sterling, Virginia. The townhouse, which they valued on their schedules at $157,000, was subject to a first-lien deed of trust in favor of Dittmar. The deed of trust, dated January 31, 1992, secured a 7-year promissory note in the original principal amount of $168,900.00 made by Ms. Bacallao (then known as Tina Michelle Corry) and her mother, Frances Lee Corry. Ms. Bacallao subsequently married Mr. Bacallao. By deeds of gift dated November 22, 1994, and May 19, 1995, ownership of the property became vested in Ms. Bacallao and Mr. Bacallao as tenants by the entirety. In their bankruptcy papers, the debtors stated that they intended to reaffirm the debt to Dittmar. Dittmar brought a motion for relief from the automatic stay in order to foreclose under its deed of trust. That motion, which alleged that the debtors were two months behind on their mortgage payments, was granted by Judge Douglas O. Tice, Jr., of this court on March 27, 1996. In the interim, the chapter 7 trustee had filed a report of no distribution, and the bankruptcy case was closed on July 25, 1996.
The note provided for interest at 4.5% in the first year, 5.5% in the second year, 6.5% in the third year, 7.5% in the fourth year, and 8.5% thereafter. The initial monthly payment amount (principal and interest) was recited to be $855.79 "PLUS $500.00 TOWARDS DOWN PAYMENT." By its terms, the note would balloon and be due in full on February 1, 1999.
No reaffirmation agreement between Dittmar and the debtors was filed with the court. On April 1, 1996, however, Ms. Bacallao and Mr. Bacallao signed a note and refinance deed of trust in favor of Dittmar in the principal amount of $153,869.79. The deed of trust recited that the new note was a refinance of the January 31, 1992, note. A total of 40 monthly payments (plus some late charges) were made on the new note from May 1996 through August 1999 in the aggregate amount of $53,145.61. There is some dispute over what happened next. Apparently the September 1999 payment was tendered late and was refused by Dittmar, which then commenced a nonjudicial foreclosure under the deed of trust. Ms. Bacallao was successful in obtaining a temporary restraining order from the Circuit Court of Loudoun County staying the foreclosure sale, conditioned upon the posting of a $10,000.00 bond. Bacallao v. Dittmar Co. et al., Chy. No. 19684 (Dec. 21, 1999).
This note, like the original note, was due in full on February 1, 1999. It provided for interest at 8.5% and for monthly payments of principal and interest in the amount of $1,183.13 each.
The bond was posted, and the sale was accordingly stayed. After a hearing on January 21, 2000, however, the chancellor entered an order on February 9, 2000, sustaining Dittmar's demurrer to Ms. Bacallao's bill of complaint, denying Ms. Bacallao's motion for a preliminary injunction, dissolving the temporary restraining order, granting leave to amend the bill of complaint, and retaining jurisdiction to determine issues with respect to the $10,000.00 bond. A public auction sale under the deed of trust was then held on February 10, 2000, at which Dittmar was declared the successful bidder with a credit bid of $149,542.24. On February 16, 2000, the substitute trustee executed a deed conveying the property to Dittmar. That deed was recorded in the land records of Loudoun County on February 22, 2000.
This was the unpaid principal balance as shown on Dittmar's records.
Dittmar then commenced an unlawful detainer action against Ms. Bacallao on March 1, 2000, in the General District Court of Loudoun County to obtain possession of the property. The state court ordered the filing of a bill of particulars by Dittmar and grounds of defense by Ms. Bacallao and set the trial of the action for April 10, 2000. On March 7, 2000, Ms. Bacallao filed the motion that is before this court to reopen her chapter 7 case. On March 29, 2000, she filed a notice of removal of the unlawful detainer action to this court, and, on April 10, 2000, grounds of defense and a counterclaim. Dittmar opposes the motion to reopen and has filed a motion to remand the unlawful detainer action to the Loudoun County General District Court.
Discussion
The motion to reopen Ms. Bacallao's case represents that the debtor seeks four forms of relief from this court: (1) a declaration that the April 1, 1996, deed of trust is void; (2) return to her of all payments she made on the April 1, 1996, deed of trust; (3) damages sustained as a result of Dittmar's violation of the discharge injunction; and (4) attorney's fees and costs incurred both in this court and in the Circuit Court of Loudoun County. The grounds of defense and counterclaim filed by her in the removed action (1) denies that Dittmar has a valid claim for possession of the property because the April 1, 1996, note and deed of trust were void and (2) seeks release of the $10,000 bond she posted in the Loudoun County Circuit Court. At oral argument, the debtor essentially conceded that Dittmar's lien survived her discharge and that Dittmar was entitled to foreclose in the event of a payment default; however, she continued to vigorously assert that no personal liability could arise from the new note and that she was entitled to the return of any payments she made on the mistaken belief that she remained liable on the obligation. Dittmar opposes reopening of the bankruptcy case and seeks remand of the eviction action on the ground that the April 1, 1996, note and deed of trust were given for "new consideration" and that any payments by the debtor should be deemed "voluntary."
A.
Under § 350(b), Bankruptcy Code, a closed bankruptcy case may be reopened "to administer assets, to accord relief to the debtor, or for other cause" (emphasis added). The decision whether to reopen a closed case is discretionary with the court. Hawkins v. Landmark Finance Co. (In re Hawkins), 727 F.2d 324 (4th Cir. 1984) (bankruptcy court did not abuse discretion in denying motion to reopen case to file motion to avoid security interest in furniture 8 months after case was closed). A case should not be reopened, however, when doing so would be futile and a waste of judicial resources. In re Carberry, 186 B.R. 401, 402-03 (Bankr.E.D.Va. 1995) (Tice, J.) (denying motion to reopen no-asset case to schedule omitted creditor). There is substantial authority that reopening a case is a prerequisite to a valid removal of a state court action. In re Iannacone, 21 B.R. 153, 155 (Bankr.D.Mass. 1982) ("[S]ince the state court action was initiated after the bankruptcy case was closed and removal [under the bankruptcy removal statute] may be had only during the pendency of the bankruptcy case, removal is not possible absent a reopening"); In re Carter, 38 B.R. 636, 638 (Bankr. D. Conn. 1984); Alexandria Knolls West Condominium Homes Council of Co-Owners v. Strelsky (In re Strelsky), 46 B.R. 178 (Bankr.E.D.Va. 1985).
B.
Removal of civil actions from other courts to bankruptcy courts is governed by 28 U.S.C. § 1452 and Federal Rule of Bankruptcy Procedure 9027. Section 1452 provides in relevant part as follows:
(a) A party may remove any claim or cause of action in a civil action other than a proceeding before the United States Tax Court or a civil action by a governmental unit to enforce such governmental unit's police or regulatory power, to the district court for the district where such civil action is pending, if such district court has jurisdiction of such claim or cause of action under section 1334 of this title.
(emphasis added). When the civil action is commenced after the bankruptcy case is filed, the notice of removal must be filed within 30 days of the receipt, through service of otherwise, of the initial pleading setting forth the claim or cause of action sought to be removed. Fed.R.Bankr.P. 9027(a)(3).
The record on removal does not include the sheriff's return of service of the summons for unlawful detainer. The summons reflects, however, that it was delivered to the sheriff on March 2, 2000. Even assuming the summons was served on Ms. Bacallao the same day, the notice of removal that was filed on March 29, 2000, would clearly have been timely.
Although the statute literally speaks in terms of removal to the United States District Court, all bankruptcy cases and all proceedings arising in bankruptcy cases or arising under the Bankruptcy Code or related to a bankruptcy case have been referred to the bankruptcy judges of this District under 28 U.S.C. § 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. Accordingly, the removed action has been properly docketed in this court, and this court may proceed to determine the issues raised by the motion to remand.
Prior to the 1991 amendments to Fed.R.Bankr.P. 9027, the role of the bankruptcy court in connection with a motion to remand was limited to filing a report and recommendation with the United States District Court. That restriction was deleted by the 1991 amendments, since the Judicial Improvements Act of 1990 gave the United States District Courts jurisdiction to hear appeals of a bankruptcy court's order determining a motion for remand. See, Advisory Committee Notes to 1991 Amendments, Fed.R.Bankr.P. 9027.
C.
The critical issue, both with respect to the motion to reopen and the motion to remand, is whether Ms. Bacallao has stated a colorable claim that the new note and deed of trust were, as she now asserts, void as a violation of the discharge injunction. In this connection, it is necessary to address separately the note and deed of trust, since personal liability and liens are affected differently by a bankruptcy discharge.
With certain exceptions not relevant here, a chapter 7 discharge releases a debtor from all debts that arose before the filing of the case. § 727(b), Bankruptcy Code. Among other things, a discharge "operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor[.]" § 523(a)(2), Bankruptcy Code (emphasis added). However, a discharge does not affect the liability of any other entity on the debt, nor does it prevent a debtor from voluntarily paying the debt. § 523(e) and (f), Bankruptcy Code. More importantly, a discharge extinguishes only the debtor's personal liability, and does not eliminate a secured creditor's right to enforce its claim in rem against the collateral by foreclosing under a mortgage or security instrument after discharge. Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150, 2153, 115 L.Ed.2d 66 (1991).
Certain types of liens may be set aside, or "avoided," by a debtor in the course of a bankruptcy under § 522(f) and (h), Bankruptcy Code. It is not contended, however, that Dittmar's original deed of trust could have been avoided under either such provision.
In addition to voluntarily paying a discharged debt, a debtor may enter into a binding agreement to reaffirm his or her personal liability on a discharged debt, thereby waiving the protection of the discharge as to that debt. §§ 524(c) and (d), Bankruptcy Code. The Bankruptcy Code, however, imposes a number of procedural safeguards to protect debtors against improvident reaffirmations.
Most importantly, any reaffirmation agreement, in order to be effective, must be entered into prior to the granting of the debtor's discharge; must be filed with the bankruptcy court; and must notify the debtor that it can be rescinded at any time prior to discharge, or within 60 days after it is filed with the court, whichever occurs later. §§ 524(c)(1), (c)(2)(A), (c)(3), (c)(4), Bankruptcy Code. If the debtor was represented by counsel in the course of negotiating the agreement, the agreement must be accompanied by the attorney's declaration or affidavit that the attorney fully advised the debtor of the legal effect and consequences of the agreement and of any default under the agreement. § 524(c)(3)(C), Bankruptcy Code. If the debtor was not represented by counsel, that advice must be provided by the court. § 524(d)(1)(B), Bankruptcy Code. Additional requirements (not relevant here) apply where the debt in question is unsecured or is a consumer debt that is secured by collateral other than real estate. §§ 524(c)(3)(A)-(B), (c)(6)(A), and (d)(2).
Reaffirmation agreements — broadly defined as any "agreement between a holder of a claim and the debtor, the consideration for which, in whole or in part, is based on a debt that is dischargeable" (emphasis added — that do not comply with the requirements of § 523(c) are void. Cherry v. Arendall (In re Cherry), ___ B.R. ___ 2000 WL 361972 at *4 (Bankr.E.D.Va. 2000). In Cherry, Judge Stephen C. St. John of this court, after an extensive review of the existing case law, concluded that a post-petition "replacement note" executed by a debtor with respect to a dischargeable debt, and which did not comply with the requirements of § 523(c), was void. Id. at *2-4. In so doing, Judge St. John, consistent with most other courts that have considered the issue, rejected the argument that the execution of a new note, standing alone, can constitute a voluntary "payment" of the type permitted by § 524(f).
In this connection, Dittmar argues that there was "new consideration" for the April 1, 1999, note because the original deed of trust included a "due on sale" clause that was violated when Ms. Bacallao's mother quit-claimed her interest in the property to Mr. Bacallao. But even if forebearance in the face of an existing right to foreclose constituted fresh consideration, it is clear that it was not the only consideration. By its plain terms, § 523(c) applies to any agreement, the consideration for which consists "in whole or in part" of a dischargeable debt (emphasis added). See Liptz Roberts, Chtd, Pension Plan Trust v. Stevens (In re Stevens), 217 B.R. 757 (Bankr.D.Md. 1998). Here, the indebtedness represented by the April 1, 1996, note — including due date and interest rate — is the same debt that existed prior to discharge. Accordingly, the consideration for the new note included the existing indebtedness. There is no contention that the existing indebtedness was not dischargeable.
This particular default was not asserted in Dittmar's motion for relief from the automatic stay.
While the record is not fully developed, it appears that the debtors brought the delinquent payments under the old note current at the time the new note was executed.
Based on the analysis in Cherry, therefore, this court has little difficulty in concluding that the note, to the extent it attempted to fix personal liability on Ms. Bacallao for the pre-existing indebtedness, was legally ineffective to do so.
This does not, however, end the inquiry. As noted above, valid liens, unless avoided in the course of the bankruptcy, pass through bankruptcy unaffected and may be enforced against the collateral following discharge. No action was taken during the debtor's chapter 7 case to avoid Dittmar's lien, and no apparent basis exists upon which the lien could have been avoided. Here, the new deed of trust secured the same debt as the old deed of trust and involved no new or different collateral. In effect, the new deed of trust simply continued the lien that already existed against the property. The discharge injunction and the requirements of § 524(c) affect only the debtor's personal liability. Accordingly, even if all the facts are as Ms. Bacallao alleges, the new deed of trust did not violate the discharge injunction and is not void simply because her personal liability has been discharged. Accordingly, neither the foreclosure of that deed of trust nor the present action for possession implicates the debtor's discharge or any right protected by the Bankruptcy Code.
Of course, if Dittmar were to seek a deficiency judgment against Ms. Bacallao, her discharge would be clearly implicated. But at this point, no deficiency claim has been asserted.
D.
As noted above, the universe of claims that may be removed from a state court to this court under 28 U.S.C. § 1452 is restricted to those for which Federal jurisdiction exists under 28 U.S.C. § 1334. Such claims consist of those "arising under" the Bankruptcy Code, those "arising in" a bankruptcy case, and those "related to" a bankruptcy case. To determine whether a civil case "arises under" the Bankruptcy Code, a court must apply the same test for deciding whether a civil action presents a federal question under 28 U.S.C. § 1331. This means that "arising under" jurisdiction in bankruptcy extends to "only those cases in which a well-pleaded complaint establishes either that federal [bankruptcy] law creates the cause of action or that the plaintiff's right to relief necessarily depends on resolution of a substantial question of federal [bankruptcy] law."
Poplar Run Five L.P. v. Virginia Electric Power Co. (In re Poplar Run Five L.P., 192 B.R. 848, 854-55 (Bankr.E.D.Va. 1995) (internal citations omitted) (alterations in original). Proceedings "arising in" a bankruptcy case, as the Fourth Circuit has explained, are those proceedings that "are not based on any right expressly created by [the Bankruptcy Code], but nevertheless would have no existence outside of the bankruptcy." Bergstrom v. Dalkon Shield Claimants Trust (In re A. H. Robins Co., Inc.), 86 F.3d 364, 372 (4th Cir. 1996), cert. denied, 117 S.Ct. 483, 136 L.Ed.2d 377 (1996). Finally, the "related to" category of proceedings is "quite broad and includes proceedings in which the outcome could have an effect on the estate being administered." Id., citing Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984) ("An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedoms of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.").
The Pacor formulation was cited with approval by the Supreme Court in Celotex Corp v. Edwards, 514 U.S. 300, 308, 115 S.Ct. 1493, 1499, 131 L.Ed.2d 403 (1995).
Nevertheless, the "related to" category is not so broad as to encompass litigation of state law claims that will not have an effect on the bankruptcy estate, simply because one of the litigants had previously filed a petition in bankruptcy. Lux v. Spotswood Constr. Loans, 176 B.R. 416 (E.D.Va. 1993), aff'd, 43 F.3d 1467 (table), 1994 WL 621820 (4th Cir. 1994) (after chapter 7 case was closed, there was no "related to" jurisdiction over adversary proceeding brought by debtor challenging a foreclosure); Poplar Run Five, supra (bankruptcy court lacked jurisdiction over adversary proceeding by reorganized debtor to recover security deposit where outcome would not affect distribution to creditors or partners).
The unlawful detainer action that has been removed to this court seeks only possession of the property that was the subject of the deed of trust. It does not seek a deficiency judgment against the debtor on account of the secured note, nor does it seek damages for the debtor's occupancy of the property. Whatever monetary claims the debtor may have against Dittmar with respect to the April 1, 1996, promissory note, and the payments she made on account of it, are not in the nature of compulsory counterclaims to the unlawful detainer action. Dittmar's claim to possession raises solely issues of state law. Although Ms. Bacallao's defense to the claim for possession asserts a bankruptcy defense, the facts she alleges are insufficient, as a matter of law, to sustain such a defense. Thus, even if this court technically has jurisdiction based on the assertion of a right created by the Bankruptcy Code, the insufficiency of that defense as a matter of law is sufficient grounds for remand under 28 U.S.C. § 1452(b), which permits this court to remand a removed action "on any equitable ground."
Her counterclaim, as noted, does assert rights with respect to the $10,000.00 bond held by the Loudoun County Circuit Court in connection with the injunction action she brought to enjoin the foreclosure. It is doubtful that the General District Court would have jurisdiction to determine the rights to a bond posted in the Circuit Court, even though the same parties are involved. The only discharge-related issue that would arise in connection with the bond is if Dittmar sought to recover from the bond, not merely its provable delay damages, but also its deficiency claim. That issue may be appropriately addressed when and if it arises.
For that reason, a separate order will be entered remanding the unlawful detainer action to the General District Court of Loudoun County.
E.
The final question is whether there is relief, other than the adjudication of the unlawful detainer action, that may potentially be afforded the debtor related to her discharge. In this connection, the court notes that the motion to reopen seeks not only administrative relief in the form of an order reopening the case, but various forms of substantive relief as well. First, the debtor seeks a declaration that the April 1, 1996, deed of trust is void. As discussed above, the facts pleaded in the motion to reopen would not support such a ruling. Second, she seeks return to her of all payments she made on the April 1, 1996, deed of trust, together with compensatory damages and attorney's fees for violation of the discharge injunction. Whether Ms. Bacallao would be entitled to such relief is a question that cannot be determined without an evidentiary hearing. The debtor alleges in her motion that she made the payments only because she believed the refinance note to be enforceable. If so, a claim for recovery of the payments may have merit. In re Gilland, 62 B.R. 587 (Bankr.D.Neb. 1986). On the other hand, if her motive in making the payments was to retain the collateral, the creditor's acceptance of the payments would not violate the discharge injunction and would provide no basis for civil contempt sanctions in the form of an order requiring their disgorgement. Since the issue of the debtor's motive for making payments cannot be determined without receiving evidence, the court will set a separate hearing on that issue.
In this Circuit, a debtor who is current on a secured debt is not required to reaffirm the debt in order to retain the collateral, but may simply continue making payments. Home Owners Funding Corp. of America v. Belanger (In re Belanger), 962 F.2d 345 (4th Cir. 1992); see also Riggs Nat'l Bank of Washington, D.C. v. Perry, 729 F.2d 982 (4th Cir. 1984).
III.
For the reasons stated, separate orders will be entered granting the motion to reopen; remanding the unlawful detainer action to the Loudoun County General District Court; and setting an evidentiary hearing on the debtor's motion for civil contempt sanctions related to payments made on the refinance note.