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First State Bank of Roscoe v. Stabler

United States District Court, D. South Dakota, Northern Division

March 30, 2017

FIRST STATE BANK OF ROSCOE, and JOHN R. BEYERS, Appellants,
v.
BRAD ALLEN STABLER, and BRENDA LEE STABLER, Appellees.

          OPINION AND ORDER AFFIRMING BANKRUPTCY COURT DECISION

          ROBERTO A. LANGE UNITED STATES DISTRICT JUDGE

         First State Bank of Roscoe (FSBR) and John Beyers (collectively Appellants) appeal the bankruptcy judge's decision to sanction them for violating the discharge injunction in Brad and Brenda Stablers' bankruptcy case. Appellants contend that the bankruptcy judge's decision was barred by preclusion principles and incorrect on the merits. For the reasons explained below, this Court affirms.

         I. Facts

         This case has a long procedural history, including a jury trial, a court trial, several opinions by a South Dakota circuit judge, two orders from a bankruptcy judge, and opinions from both the Supreme Court of South Dakota and the Bankruptcy Appellate Panel (BAP) of the Eighth Circuit. This Court draws the facts from these prior opinions and orders as well as from the Appendix filed by Appellants.[1] In 1999, Brad and his wife Brenda started an agriculture business called Edmunds County Ag Services, Inc. (ECAS). Stabler v. First State Bank of Roscoe, 865 N.W.2d 466, 469 (S.D. 2015). The Stablers funded ECAS by borrowing money from FSBR, whose president at that time was Beyers. Id. at 469; App. 457. FSBR's loans to the Stablers were secured by liens on the Stablers' property and a personal guarantee from Brad. Stabler. 865 N.W.2d at 469; App. 457-58. FSBR also held mortgages on certain property of Brad's parents, Stan and Rose Stabler, as security for some of ECAS's debt. Stabler. 865 N.W.2d at 469-70; App. 457.

         Brad liquidated ECAS in 2002 after it proved unsuccessful. Stabler. 865 N.W.2d at 470. Beyers then discussed the idea of filing for bankruptcy with the Stablers and suggested counsel for them to do so. App. 457. Brad and Brenda filed a Chapter 7 bankruptcy petition in May 2003. Stabler. 865 N.W.2d at 470; App. 154-79. Brad and Brenda's bankruptcy schedules listed FSBR as a secured creditor with a claim for $225, 816.36, although the debt Brad and Brenda actually owed FSBR at that time approximated $600, 000. App. 06, 166. FSBR received prompt notice of the bankruptcy petition. App. 06. Brad and Brenda received a bankruptcy discharge in August 2003, and FSBR received notice of the discharge. App. 07. The discharge eliminated Brad's personal guaranty of ECAS's debt but did not eliminate FSBR's liens on Brad and Brenda's property. Stabler. 865 N.W.2d at 470; see also Venture Bank v. Lapides 800 F.3d 442, 445 (8th Cir. 2015).

         In March 2004, Beyers convinced all four Stablers to sign a $650, 000 promissory note along with a collateral real estate mortgage (CREM) covering nearly all of the Stablers' real property. Stabler. 865 N.W.2d at 470, 472; App. 458. The March 2004 note and CREM at least in part refinanced and secured pre-bankruptcy loans that FSBR had previously made to ECAS and all four Stablers. Stabler, 865 N.W.2d at 470, 472; App; 08-09, 14. According to the Supreme Court of South Dakota, the 2004 note and CREM included "the exact same amount" and "the same form of debt as existed prior to Brad and Brenda's bankruptcy." Id. at 470. The $650, 000 note was divided three ways[2] to others with whom' Beyers or FSBR had relationships: a $416, 000 note assigned to a partnership called Schurss, a $213, 000 note assigned to Roger Ernst, and a $21, 000 note assigned to a company called H&K Acres. Id. at 472 n.6; App. 08-14. Brad and Brenda paid the $21, 000 note off, and the other two notes were eventually assigned to Beyers. Stabler. 865 N.W.2d at 472 n.6; App. 08-14.

         In May 2004, Beyers assisted Brad and Brenda in getting a $150, 000 loan from Ipswich State Bank. Stabler. 865 N.W.2d at 470; Stabler v. Beyers (In re Stabler). 418 B.R. 764, 766-67 (B.A.P. 8th Cir. 2009). Beyers guaranteed this loan, which was secured by a lien on Brad and Brenda's property. In re Stabler. 418 B.R. at 767; Stabler, 865 N.W.2d at 470. Brad and Brenda used the Ipswich loan to pay FSBR, although it is not entirely clear whether they were paying off valid liens and post-discharge debt or debts that had been discharged in their bankruptcy.[3] In re Stabler. 428 B.R. at 767; Stabler. 865 N.W.2d at 470. Brad and Brenda eventually defaulted on the loan, and the Ipswich State Bank assigned the debt and security to Beyers. In re Stabler. 418 B.R. at 767; Stabler. 865 N.W.2d at 470.

         In May 2007, after FSBR attempted to collect on some of the Stablers' debt, all four Stablers filed an action in state court asking the judge to determine how much money they actually owed FSBR, Ipswich State Bank, Ernst, and Schurrs. App. 256, 262-65. The Stablers amended their complaint in 2008 to add Beyers as a defendant and assert claims for fraud, breach of fiduciary duty, and conspiracy. App. 269-77. The amended complaint alleged that Beyers and FSBR knew that the debt refinanced in the $650, 000 note had been discharged in bankruptcy yet misrepresented that Brad and Brenda still owed this money. App. 273.

         FSBR and Beyers answered the amended complaint and asserted counterclaims against the Stablers. App. 491-530. Counts 1 and 2 of Beyers's counterclaim sought to recover on the loan from Ipswich State Bank and to foreclose on the property securing that loan. App. 503-06, 521. Counts 3 and 4 of Beyers's counterclaim concerned the $650, 000 promissory note. App. 506-08. Count 3 of the counterclaim sought recovery on the $416, 000 portion Beyers obtained from Schurrs while count 4 of the counterclaim sought recovery of the $213, 000 portion Beyers obtained from Schurrs. App. 506-08, 521. Counts 3 and 4 of the counterclaim both stated that Beyers was "requesting judgment against Brad and Brenda Stabler only for those amounts determined not to be discharged in their prior Chapter 7 bankruptcy." App. 507-08, 521. As an affirmative defense, Brad and Brenda asserted that the debt Beyers sought to recover in counts 1, 3, and 4 of the counterclaim was discharged in bankruptcy. App. 290, 292, 294.

         Beyers moved for summary judgment on counts 1 and 2 of his counterclaim in mid-January 2009. App. 306-07. Before the state court could rule on Beyers's motion, Brad and Brenda filed an adversary complaint against Beyers in bankruptcy court. App. 584-89. Brad and Brenda styled their filing as an adversary complaint, although in oral argument to this Court all parties recognized that the filing could have been by way of a motion. In the adversary complaint, Brad and Brenda asked the bankruptcy judge to declare that the debt Beyers sought to recover in his counterclaim was discharged and to hold him in contempt for violating the discharge injunction. App. 588.

         In May 2009, the state court granted Beyers summary judgment on counts 1 and 2 of his counterclaim. App. 321-23. The state court reasoned that a bankruptcy discharge does not eliminate liens on the debtor's property, that Brad and Brenda had obtained a loan from Ipswich State Bank after receiving their discharge, and that they had used some of this loan to pay secured debts to FSBR. App. 321-22. Because Brad and Brenda were in default, the state court concluded that Beyers could foreclose on the collateral securing the loan. App. 321-22.

         Appellants then moved to dismiss the adversary complaint filed in bankruptcy court. They argued that the adversary complaint's allegations concerning the Ipswich State Bank loan should be dismissed because the state court's decision on that issue had preclusive effect in the bankruptcy proceeding. App. 609-10. As to the adversary complaint's allegations concerning the $650, 000 promissory note, Appellants argued that counts 3 and 4 of Beyers's counterclaim made clear that he was only seeking to recover debt that the state court determined was not discharged in Brad and Brenda's bankruptcy. App. 614-15. Alternatively, Appellants asked the bankruptcy court to abstain under 28 U.S.C. § 1334(c)(1) from deciding whether the debt Beyers sought to recover was discharged in bankruptcy. App. 615-18. Brad and Brenda responded with several arguments, including that the Ipswich State Bank loan and the $650, 000 promissory note were invalid reaffirmation agreements. App. 636, 644. In bankruptcy parlance, "[a] reaffirmation agreement is one in which the debtor agrees to repay all or part of a dischargeable debt after a bankruptcy petition has been filed." Venture Bank. 800 F.3d at 445 (quotation omitted). Section 524(c) of the Bankruptcy Code provides that reaffirmation agreements are unenforceable unless, among other requirements, they are made before the; discharge and are filed with the bankruptcy court. 11 U.S.C. § 524(c)(1), (3). Brad and Brenda argued that the Ipswich State Bank loan and the $650, 000 note were unenforceable because these agreements were never filed with the bankruptcy court.

         In a July 2009 oral order, the bankruptcy judge dismissed Brad and Brenda's adversary complaint based on the failure to state a claim and a decision to abstain under § 1334(c)(1). App. 333-355, 699. The bankruptcy judge found that the state court's May 2009 summary judgment order was entitled to preclusive effect and thus barred Brad and Brenda's claims concerning the Ipswich State Bank loan. App. 347-48. As for the $650, 000 note, the bankruptcy judge reasoned that the language of counts 3 and 4 of the counterclaim undercut Brad and Brenda's assertion that Beyers was violating the discharge injunction:

With respect to the debts described in counts three and four of Beyers' state court counterclaim, the analysis is much simpler. In both counts, Beyers states unambiguously, "Beyers is requesting judgment against Brad and Brenda Stabler only for those amounts determined not to be discharged in their prior Chapter 7 bankruptcy."
Debtors have offered no reasonable interpretation of this statement that would permit me to conclude Beyers is in any way attempting to collect, recover, or offset a debt discharged in debtors' bankruptcy.
If Beyers recovers everything he has requested in counts three and four of the state court complaint, he will necessarily recover only those amounts determined not to be discharged in debtors' bankruptcy and Beyers' efforts to collect only those amounts cannot and do not violate the discharge injunction.
And as was the case with respect to the post-discharge note described in count one of Beyers' state court counterclaim, the post-discharge notes in counts three and four of Beyers' state court counterclaim, which it bears mentioning were executed in favor of the assurers, not Beyers, cannot and do not constitute an unenforceable re-affirmation agreement, because as I indicated earlier, a re-affirmation agreement necessarily involves a pre-petition debt that would otherwise be discharged.
Consequently, to the extent it relates to counts three and four of Beyers' state court counterclaim, debtors' adversary complaint fails to state a claim upon which relief can be granted.

App. 348-49.

         The bankruptcy judge went on to explain, however, that while he had "effectively dispose[d]" of the adversary complaint, Appellants had also asked him to abstain from hearing the matter under § 1334(c)(1). App. 349. Analyzing the abstention factors listed in Williams v. Citifinancial Mortgage Co. (In re Williams), 256 B.R. 885 (B.A.P. 8th Cir. 2001), the bankruptcy judge reasoned that although the question of whether Beyers violated the discharge injunction was "clearly a matter of federal bankruptcy law, " the issue of whether the debt in the counterclaim was discharged involved state law because Brad and Brenda were claiming Beyers defrauded them into agreeing to pay that debt. App. 351-52. Because the state court had concurrent jurisdiction to decide whether the debt in counts 3 and 4 of the counterclaim had been discharged, the bankruptcy judge concluded that the best approach was to defer to the state court to decide the question and to allow Brad and Brenda to return to bankruptcy court if necessary:

I believe it would be possible, even preferable, to sever debtors' state court claims, allow the state court to determine, as it already has with respect to count one of Beyers' state court counterclaim, whether any of the debts Beyers is seeking to collect have been discharged. And if the state court determines, albeit contrary to the express language of counts three and four of Beyers' state court counterclaim, any of those debts have been discharged, allow debtors to renew their complaint. That is not an ideal solution, but it's better than having the parties battling. And I use that word advisedly, simultaneously on two fronts. And it's better than having two courts racing to decide whether Beyers acted fraudulently.

App. 352-53. Thus, the bankruptcy judge decided to abstain from hearing the proceeding "[a]s an alternative grounds for dismissing debtors' complaint." App. 354. The bankruptcy judge entered a text order stating: "DISPOSITION: Based on the findings and conclusions entered on the record, Debtors-Plaintiffs' Complaint (doc. 1) is dismissed, and this adversary proceeding shall be closed. The other pending motions are rendered moot." App. 699.

         Brad and Brenda appealed the bankruptcy judge's dismissal of their adversary complaint. The BAP affirmed the decision to abstain without ruling on the dismissal for failure to state a claim. In re Stabler. 418 B.R. at 766 n.2. 769-71.

         Appellants and the Stablers continued to litigate in state court. In 2011, the state judge granted Brad and Brenda summary judgment on counts 3 and 4 of Beyers's counterclaim. App. 13, 473. The state judge found that Brad and Brenda actually owed FSBR $608, 124.55 when they filed for bankruptcy, [4] that the $650, 000 promissory note was a "reaffirmation of personal liability for debt that was discharged in their bankruptcy, " and that this reaffirmation was unenforceable against Brad and Brenda because it had never been filed with the bankruptcy court. App. 6, 13-15. The fact that Beyers had received his interest in the $650, 000 note from third parties did not change the state judge's conclusions. App. 13-15. According to the state judge, Beyers had "concocted a transaction" where third parties (Schurrs and Ernst) would take promissory notes from Brad and Brenda for the purpose of recreating personal liability for Brad and Brenda on discharged debt. App. 13-15. The state judge described conduct that demonstrated a lack of good faith and an intent to evade the discharge injunction. App. 13-15. Thereafter, the state court reversed its earlier decision to grant Beyers summary judgment on count 1 of his counterclaim because it found that there was an issue of fact concerning whether Beyers could enforce the Ipswich State Bank loan against Brad and Brenda. App. 474.

         A trial was scheduled on several of the parties' remaining state-court claims. At the pretrial hearing, Brad and Brenda dropped their fraud claim and elected to pursue rescission of the $650, 000 promissory note.[5] App. 431-33, 475. This left for a jury trial Stan and Rose's claim that Appellants had fraudulently induced them to sign the $650, 000 promissory note. App. 475. Part of Stan and Rose's theory of fraud was that Beyers had misrepresented that Brad owed a large portion of the debt underlying the $650, 000 note, when that debt had actually been discharged in bankruptcy and not properly reaffirmed. App. 475-76, 488; Stabler. 865 N.W.2d at 473. At trial, the state judge gave a jury instruction explaining the requirements for a valid reaffirmation agreement and stating that there was a split in authority concerning when a reaffirmation agreement was necessary:

At the time the note and mortgage were signed, there were courts that had ruled both ways on whether a reaffirmation agreement to pay discharged debt was needed when the lender agreed not to foreclose on the borrower, in exchange for the borrower's promise to pay. At the time the note and mortgage were signed, there were no binding court decisions in South Dakota on the issue.

App. 488. The jury returned a special verdict finding that $439, 100.00 of the $650, 000 promissory note was obtained by fraud. App. 485.

         Thereafter, the state judge held a court trial concerning Brad and Brenda's rescission claim and whether Beyers could recover on the Ipswich State Bank loan. App. 456-66; 477. In a July 2013 opinion, the state judge summarized the facts of the case as follows:

The opposing parties could not have viewed the case more differently. According to the Stablers, John Beyers and FSBR intentionally engaged in a course of conduct intended to collect money that was no longer owed by Brad and Brenda Stabler and to defraud Stan and Rose Marie Stabler into securing that nonexistent debt with their own assets. Beyers and FSBR attempted to paint an entirely different picture. Their version of the case portrayed John Beyers as a beneficent owner of a well-intentioned, small town bank who was simply trying to help to prevent Brad and Brenda Stabler from losing their farm. His actions, both personally and as a representative of FSBR, were portrayed as altruistic.
The jury rejected the theory of the case presented by Beyers and FSBR. After viewing the same evidence as the jury, I also reject their depiction of the events and motivations. Based on all of the evidence presented at the jury trial and the court trial, these are the facts as I find them to have Occurred in this case. Each time a fact is stated in this opinion, ...

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