Opinion
Case No. 97-17400-SSM
March 20, 1998
Glenn Alan Marston, Esquire, Ms. Joanne Margaret Marston, Chantilly, VA, for Debtors-Movants, Pro se
Mr. Wesley O. Niccolls, Sr., Arlington, VA, for Respondent and cross-movant, Pro se
MEMORANDUM OPINION
This matter is before the court on (a) debtor Glenn Alan Marston's motion to avoid a lien held by Wesley O. Niccolls, Sr., in the debtors' mobile home; (b) Mr. Niccolls's cross-motion to continue the lien and to compel the debtors to make payments; and (c) Mr. Niccolls's oral motion that this court abstain. A hearing was held on February 24, 1998, at which the parties presented argument. The court took the motion for abstention under advisement, set an evidentiary hearing in the event the court did not grant the motion to abstain, and gave the parties an opportunity to submit additional points and authorities. The debtors subsequently filed a pleading which is in the nature both of a response to Mr. Niccolls's motion to continue the lien and a memorandum in opposition thereto.
Background
The debtors, Glenn Alan Marston and Joanne Margaret Marston, filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court on October 6, 1997. The chapter 7 trustee filed a report of no distribution on November 7, 1997, and the debtors received a discharge of their dischargeable debts on January 16, 1998.
On their schedules, the debtors listed as an asset a 1970 Manchester single-wide mobile home, which they valued at $7,000. The mobile home was claimed exempt on their schedules under the Virginia homestead exemption, Va. Code Ann. §§ 34-4 and 34-13, and is shown as being subject to a purchase money lien in favor of Wesley O. Niccolls, Sr., in the amount of $4,955.00. The claim of Mr. Niccolls is scheduled as "disputed," with the additional notation, "Debtor contends home overvalued grosslyand that he has claim(s) against lienholder which would invalidate security interest."
On December 19, 1997, debtor Glenn A. Marston filed a motion to avoid Mr. Niccolls's lien under 11 U.S.C. § 522(f), asserting that the lien was acquired through fraud. Mr. Niccolls then filed on January 5, 1998, a pleading entitled "Motion to Continue Lien on Property Owned by Defendant and to Order Plaintiff to Become Current with the Payments of the Promissory Note," which constituted both a response to the debtor's motion and a cross-motion for affirmative relief.
Discussion
As a threshold matter, this court is required to determine whether it has subject matter jurisdiction over the controversy between the debtors and Mr. Niccolls. If such jurisdiction does not exist, that is the end of the inquiry. Otherwise, the court must determine whether abstention is appropriate under the particular circumstances of this case.
I.
Under 28 U.S.C. § 1334 and 157(a) and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984, this court has jurisdiction of all bankruptcy "cases" and all "civil proceedings" that "arise under" the Bankruptcy Code or that "arise in" or are "related to" a bankruptcy case. There can be little question that Congress intended to confer broad jurisdiction over bankruptcy matters. That jurisdiction, however, is not unlimited. As Chief Judge Bostetter of this court has explained,
Like other federal courts, bankruptcy courts are courts of limited jurisdiction, and as such, they "must be alert to overstepping their limited grants of jurisdiction." At any stage of a litigation . . . subject-matter jurisdiction may be questioned. By failing to do so, the parties cannot confer jurisdiction by consent. If the court perceives the defect, it is obligated to raise the issue sua sponte. "It is to be presumed that a cause lies outside this limited jurisdiction, and the burden of establishing the contrary rests upon the party asserting jurisdiction."
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). 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.
Id. (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, U.S., 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.") 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 filed a petition in bankruptcy. Lux v. Spotswood Construction Loans, 176 B.R. 416 (E.D. Va. 1994), 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 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).
A.
On its face, it may seem odd that the court even raises the question of jurisdiction, since there can be no question that a debtor's lien avoidance motion under § 522(f), Bankruptcy Code, lies well within the scope of a bankruptcy court's core jurisdiction, involving as it does a right expressly created by the Bankruptcy Code. Valid liens ordinarily pass through bankruptcy and are unaffected by a debtor's discharge. Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 2153, 115 L.Ed.2d 66 (1991). This is true even as to exempt property, since § 522(c)(2), Bankruptcy Code, expressly allows enforcement of a pre-petition debt against exempt property where the debt is secured by that property and the lien has not been avoided. Certain liens, however, may be set aside, or "avoided," under specific provisions of the Bankruptcy Code. Relevant to the present motion, § 522(f), Bankruptcy Code, permits a debtor "[to] avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled" if such lien is either "a judicial lien" or is
(B) a nonpossessory, nonpurchase-money security interest in any —
(i) household furnishings, household goods, wearing apparel, appliances, books, animals, crops, musical instruments, or jewelry that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor;
(ii) implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor; or
(iii) professionally prescribed health aids for the debtor or a dependent of the debtor.
Thus, by the plain language of the statute, a nonpossessory, nonpurchase-money security interest may be avoided only (a) if it "impairs" an exemption claimed by the debtor and (b) if it attaches to property of the type described in § 522(f)(1)(B)(i) through (iii), that is, household furnishings, tools of the trade, or professionally prescribed health aids. See In re Wetzel, 46 B.R. 254, 255 (Bankr. W.D. Va. 1984) (consensual security interest in firearms could not be avoided because firearms are not household goods or furnishings); In re Psick, 61 B.R. 308, 313 (Bankr. D. Minn. 1985) (avoidance of consensual liens available only with respect to "a protected class of specific types of property"; dirt bike, tractor-loader and automobile did not fall within that class).
In response to conflicting judicial interpretations of when a lien "impairs" an exemption, Congress in the Bankruptcy Reform Act of 1994 amended § 522(f) to create a mathematical test for impairment. Specifically, a lien impairs an exemption to the extent that the sum of the lien, all other liens on the property, and the amount of the exemption that the debtor could claim if there were no liens on the property, exceeds the value the debtor's interest in the property would have in the absence of any liens. § 522(f)(2)(A).
Before the court even reaches the issue of lien avoidance under § 522(f), the court must find that the lien in question is either a "judicial lien" or a "nonpur'chase-money, nonpossessory security interest" (emphasis added). Mr. Niccolls's lien is plainly not a "judicial lien" because it does not arise as a result of judicial process, and the motion itself makes it clear that the lien was given to secure the purchase price for the mobile home. The debtor argues that, because he was induced to purchase the mobile home as a result of Mr. Niccolls's fraudulent concealment of defects, the court should not consider the resulting lien to be a true purchase-money security interest. The purchase-money character of a lien, however, would appear to be dependent solely on the purpose for which it was given. Here, there is no dispute that the lien was given to secure the balance of the purchase price. In any event, the court need not resolve that issue, because, even if fraud in connection with a sale of goods could somehow transform a purchase-money security interest into a nonpurchase-money security interest, a mobile home simply does not fall within the limited category of goods with respect to which a debtor may avoid a consensual security interest under § 522(f), Bankruptcy Code.
The debtor's position, at bottom, is that he should be able to keep the mobile home without paying the purchase price because he was sold a pig in a poke. More precisely, he asserts that the mobile home, because of the concealed damage, was worth no more than what he already paid Mr. Niccolls, and he should not be required to pay any more.
The Fourth Circuit has explained that "household goods" under § 522(f)(2)(A) "are those items of personal property that are typically found in or around the home and used by the debtor or his dependents to support and facilitate day-to-day living within the home, including maintenance and upkeep of the home itself." (emphasis added). McGreevy v. ITT Financial Services (In re McGreevy), 955 F.2d 957, 961-62 (4th Cir. 1992). The majority of courts that have considered the issue have held that mobile homes and trailers are not "household furnishings." See Thorp Credit, Inc. v. Nason (In re Nason), 13 B.R. 984 (Bankr. D. R.I. 1981) (camping trailer); In re Snyder, 67 B.R. 872 (Bankr. W.D. Pa. 1986) (mobile home). The court is aware that a sister court has permitted a debtor to avoid a nonpurchase-money security interest in a mobile home. Goad v. Patrick Henry Nat'l Bank (In re Goad), 161 B.R. 161 (Bankr. W.D. Va. 1993). That opinion, however, does not discuss the issue of whether a mobile home constitutes a household furnishing, household good, or appliance, and instead simply assumes that it is sufficient that the property may be claimed as exempt under applicable state law. To the extent that Goad simply ignores the plain limiting language of § 522(f)(1)(B), I do not find the opinion persuasive, and I decline to follow it. Accordingly, I am constrained to conclude that the debtor's motion fails to state a claim for relief under § 522(f), Bankruptcy Code.
As to a "judicial lien," this would be true, since the limiting language in § 522(f)(1)(B) only applies to security interests.
B.
Section 522(f) is not the only lien avoidance provision available to a debtor, however, and it is therefore necessary to consider briefly whether, despite not having been expressly pleaded, the motion states a claim for avoidance under § 522(h), Bankruptcy Code. Essentially, § 522(h) permits a debtor, in those situations where the trustee has not attempted to set aside a particular transfer, to step into the trustee's shoes and to avoid certain types of transfers which the trustee could have avoided, as long as the debtor "could have exempted" the property had the trustee recovered it, and as long as the transfer was "not a voluntary transfer" and the debtor did not conceal the property. In re Wilkinson, 196 B.R. 311, 318 (Bankr. E.D. Va. 1996). The transfers so avoidable include those that can be set aside under the trustee's "strong arm" powers (§ 544, Bankruptcy Code), certain types of statutory liens, including liens for rent or distress for rent (§ 545, Bankruptcy Code), preferences (§ 547, Bankruptcy Code), fraudulent transfers (§ 548, Bankruptcy Code), unauthorized post-petition transfers (§ 549, Bankruptcy Code), liens securing fines, penalties, or punitive damages (§ 724(a), Bankruptcy Code), and certain setoffs occurring within 90 days of the bankruptcy filing (§ 553(b), Bankruptcy Code).
Although F.R.Bankr.P. 4003(d) permits a debtor's lien avoidance action under § 522(f) to be brought by motion as a contested matter, a debtor's lien avoidance action under § 522(h) must be brought as an adversary proceeding. F.R.Bankr.P. 7001(2); In re Wilkinson, 196 B.R. 311, 315 (Bankr. E.D. Va. 1996); In re Shorts, 63 B.R. 2, 3 (Bankr. D. D.C. 1985); In re Calelos, 216 B.R. 159, 165 (Bankr. D. Md. 1997). Nevertheless, the court concludes that it is appropriate to consider, in the context of the present motion, whether the facts alleged by the debtor would state a cause of action under § 522(h) in order to spare the parties additional court appearances on purely procedural issues.
In this case, the pleadings reflect that debtor purchased the mobile home in question from Mr. Niccolls on December 9, 1995, apparently making a down payment of $1,500 and signing a promissory note for $5,500.00, with interest at 10% per annum, repayable in installments of $100.00 per month, for the balance of the purchase price. The pleadings do not disclose whether a certificate of title was delivered, with Mr. Niccolls's lien being noted thereon, or whether Mr. Niccolls retained the title pending completion of payments under the note. The sales contract expressly stated that the mobile home was being sold "as is" and without warranty. The debtor alleges, however, that the advertisement to which he responded described the mobile home as being "in good condition," with two baths; that the utilities (except for electricity) were deliberately turned off when the debtor inspected the property, thereby preventing a complete inspection which would have disclosed damage to the plumbing system, an unusable toilet in the second (half) bathroom, and a non-functioning heater; and that the "as is" contract was sprung on him at the last minute at a time when Mr. Niccolls knew the debtor was "over a barrel" because the family had been evicted from their previous apartment, and it was in the middle of a cold winter.
Giving the most generous reading to the allegations in the motion, they simply do not state the elements of any of the specific types of transfers which § 522(h) permits the debtor to set aside if the trustee does not. Accordingly, the court concludes that the claims set forth in the motion do not "arise under" the Bankruptcy Code.
Because the motion does not otherwise fairly set forth the elements of an avoidance action under § 522(h), Bankruptcy Code, the court need not reach the issue — which does not appear to have been addressed by any court — of whether the additional requirement that the transfer in question not be a "voluntary transfer" is satisfied where the debtor's otherwise-voluntary transfer was the result of fraud in the inducement.
C.
The debtor's claims against Mr. Niccolls also do not "arise in" a bankruptcy case, as that term has been defined in Bergstrom and other cases — that is, they are not claims which, while "not based on any right expressly created by [the Bankruptcy Code], . . . nevertheless would have no existence outside of the bankruptcy." Bergstrom, 86 F.3d at 372. The dispute between the debtor and Mr. Niccolls began prior to and independently of the bankruptcy and is the ordinary stuff of state court contract actions and rescission suits.
The issue, therefore, resolves to whether the claims asserted in the motion are "related to" the debtors' bankruptcy case, since, as the District Court for this district has noted, "[A] bankruptcy court may not even hear, let alone issue orders in, non-core unrelated matters." In re McLean Square Associates, G.P., 200 B.R. 128, 133 (E.D. Va. 1996) (Ellis, J.). After careful consideration, the court can only conclude that the debtor's claims against Mr. Niccolls do not fall within even the expansive perimeter of "related to" jurisdiction under 28 U.S.C. § 1334(b). This is not a reorganization proceeding in which successful assertion of the debtor's claim against Mr. Niccolls could provide a recovery for the benefit of creditors or free up other funds to pay creditors. The trustee has abandoned the mobile home as an asset of the bankruptcy estate and has filed a report of no distribution. The resolution of the dispute between the debtor and Mr. Niccolls can have no conceivable effect on creditors. Accordingly, not only can the fraud claims asserted in the motion not be brought by motion, but only as an adversary proceeding, this court would not have jurisdiction even if an adversary proceeding were filed.
II.
Since the court concludes that it does not have jurisdiction in any event, the court need not reach the issue of abstention. Nevertheless, some brief discussion is appropriate. Under 28 U.S.C. § 1334(c)(1), a bankruptcy court may abstain from hearing a particular proceeding over which it otherwise has jurisdiction "in the interest of justice, or in the interest of comity with State courts or respect for State law." Additionally, 28 U.S.C. § 1334(c)(2) requires abstention
[u]pon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section . . . if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.
(emphasis added).
Mr. Niccolls's motion for abstention does not set forth a compelling basis for permissive abstention under 28 U.S.C. § 1334(c)(1). Although the issues involved are purely matters of state law, the present motion does not involve a subject matter, such as domestic relations or zoning, with respect to which state courts have traditionally been accorded deference or are recognized as having special expertise. There are no competing or parallel state court proceedings that might be affected by this motion, which is a purely private dispute between the two parties and involves no issue of public concern. A proceeding in this court would not involve any different rule of decision than would be applied in a state court. Nor, finally, is there any special inconvenience to the parties in terms, for example, of distance from the courthouse or physical difficulty in getting to court or of compelling the presence of witnesses and the production of evidence. All that Mr. Niccolls has pointed to is that the debtor is able to commence an action in this court without having to pay a filing fee, but would have to pay a filing fee to commence an action against him in state court. Since the debtor represents that he lacks the funds to do so, Mr. Niccolls reasons that the debtor would have to drop his claim if he is unable to assert it in this court. That would, of course, be a benefit to Mr. Niccolls, but is not necessarily calculated to promote justice. Accordingly, were the court to determine that it had jurisdiction, it would also conclude that Mr. Niccolls has not shown a sufficient basis for permissive abstention under 28 U.S.C. § 1334(c)(1).
An issue has been raised, for example, as to whether the debtor's claim would be barred by the applicable statute of limitations. Under Va. Code Ann. § 8.01-243(A), "every action for damages resulting from fraud, shall be brought within two years after the cause of action accrues." A cause of action for fraud accrues "when such fraud . . . is discovered or by the exercise of due diligence reasonably should have been discovered." Va. Code Ann § 8.01-249(1). While it is difficult to discern a precise chronology from the debtor's pleadings, it would appear that the debtor became aware of the alleged fraud more than two years prior to filing his motion. The debtor suggests that even if the two year statute of limitations for fraud has run, he could take advantage of the five year statute of limitations for injury to property. Va. Code Ann. § 8.01-243(B). However, the Virginia courts have consistently rebuffed attempts to characterize a buyer's action for misrepresentations in connection with the sale of property as an "injury to property" and have held that such actions are governed by the statute of limitations for fraud. J. F. Toner Son, Inc. v. Staunton Prod. Credit Ass'n., 237 Va. 155, 158, 375 S.E.2d 530, 531 (1989); Pigott v. Moron, 231 Va. 76, 80-81, 341 S.E.2d 179, 181-82 (1986). While the debtor complains of various actions by Mr. Niccolls that he asserts caused damage to the property, all those actions occurred prior to the sale and before the debtor had an interest in the property.
See Judicial Conference Schedule of Fees, 28 U.S.C. § 1930 App. ("[F]or filing a complaint, a fee shall be collected in the same amount as the filing fee prescribed in 28 U.S.C. § 1914(a) for instituting any civil action other than a writ of habeas corpus. If . . . a debtor is the plaintiff', no fee is required.'") (emphasis added).
See Motion To Avoid Lien, ¶ 6 ("Plaintiff has, in time past, advised Defendant of his grievances, without obtaining satisfaction, and has been unable to file in the Virginia courts due to inability to pay the filing fees and other hardships.")
Mr. Niccolls argues that putting obstacles in the debtor's way promotes justice because the debtor's representations are false and the entire motion frivolous. However, that argument puts the cart before the horse. At the pleading stage, the court is required to accept the well-pleaded allegations as true. The court can determine the truth or falsity of the debtor's representations only after hearing evidence.
With respect to mandatory abstention under 28 U.S.C. § 1334(c)(2), all of the elements are met except for one: the requirement that an action already be commenced in the state court. Since there was no action pending in state court at the time the debtors filed their petition, mandatory abstention does not apply.
Although most courts have held that a state court action must be pending at the time the bankruptcy petition is filed in order to trigger mandatory abstention, a few decisions have held that a state court action need not actually have been filed. See 1 Collier on Bankruptcy ¶ 3.05[2] at 3-67 (Lawrence P. King, ed., 15th ed. rev. 1997); see also World Solar Corp. v. Steinbaum (In re World Solar Corp.), 81 B.R. 603, 612 (Bankr. S.D. Cal. 1988). The majority view, however, would seem to be better reasoned and more consistent with the plain language of the statute.
III.
In summary, the court concludes that the present motion does not state a claim for lien avoidance under § 522(f), Bankruptcy Code, and that the other claims asserted in the motion, if they could be heard at all in this court, would have to be brought as an adversary proceeding, and not by motion. The court also concludes that if this court had jurisdiction over the fraud claims set forth in the motion, abstention would not be appropriate. However, because the court concludes that it does not have even "related to" jurisdiction over the fraud claims set forth in the motion, the motion must be dismissed without prejudice to the debtor's right to assert those claims in a state court of appropriate jurisdiction.
So that there will be no confusion by the parties, the court stresses that dismissal of the motion does not in any manner affect the discharge of the debtor's personal liability to Mr. Niccolls on the promissory note. The fact that the lien survives the discharge means only that Mr. Niccolls may enforce his claim in rem against the collateral to the extent permitted by state law, but he may not seek a money judgment against the debtor. This includes a judgment for the "alternate value" of the collateral under the Virginia detinue statute. In re Martin, 157 B.R. 268, 275 (Bankr. W.D. Va. 1993). If the debtor brings an action against Mr. Niccolls, Mr. Niccolls may, however, without violating the discharge injunction plead as a setoff — and only as a set off — any amounts owed by the debtor on the promissory note. See Davidovich v. Welton (In re Davidovich), 901 F.2d 1533, 1539 (10th Cir. 1990) (a right of setoff recognized by § 553, Bankruptcy Code, survives a discharge just as much as a claim secured by a mortgage or any other lien); In re Conti, 50 B.R. 142, 149 (Bankr. E.D. Va. 1985) (Shelley, J.) (creditor who otherwise meets requirement for setoff under § 553 not prohibited from doing so because debtor's obligation to the creditor has been discharged). Setoff may only be used to reduce the debtor's claim against Mr. Niccolls, however, and no affirmative judgment may be entered against the debtor.
A separate order will be entered consistent with this opinion denying the motion to the extent it seeks relief under § 522(f), Bankruptcy Code, and dismissing the motion without prejudice with respect to the debtor's damage and rescission claims against Mr. Niccolls.'
Mr. Niccolls's cross-motion will also be dismissed. Since the debtor's personal liability on the promissory note has been discharged, there is no legal basis upon which the court may "order [the debtor] to pay all payments which are due and payable," as requested in the cross-motion. Motion to Continue Lien on Property, ¶ 28.