Virginia Lawyers Weekly VA Lawyers Weekly
Where the debtor sold her house, but the mortgage holder received no proceeds, and it then sued the debtor, purchasers and new mortgage holder in circuit court, the bankruptcy court will abstain from the suit. The circuit court can adjudicate the debtor’s affirmative defense of discharge.
Background
Dee Arnolds filed a Chapter 7 petition with this court on Nov. 30, 2015. She listed real property at 8006 Pohick Road, Springfield, Virginia, which she had purchased in 2005 and which she had financed with a loan from BankUnited FSB, in her schedules.
Ms. Arnolds received a Chapter 7 discharge. In December 2021, Ms. Arnolds sold the Pohick Road property to Amer Ali Farooq, Nicole Farooq Abu-Ghannan and Norina Farooq for approximately $1,059,000. The Farooqs borrowed $836,385 from United Wholesale Mortgage LLC, which recorded a deed of trust against the Pohick Road property. DLJ Mortgage Capital Inc. which, by the time of the sale had purchased the BankUnited loan, did not receive any proceeds from the sale.
On July 1, 2022, DLJ filed a complaint in the circuit court against Ms. Arnolds, the Farooqs, and UWM. On Sept. 7, 2022. Ms. Arnolds removed the case to this court. Now before the court is DLJ’s motion to remand. Alternatively, DLJ requests that the court abstain from hearing this adversary proceeding.
Jurisdiction
A controversy arises in Title 11 when “it would have no practical existence but for the bankruptcy.” In this case, DLJ’s claims arise under state law and would exist had Ms. Arnolds never filed for bankruptcy.
Ms. Arnolds argues that her affirmative defense of a bankruptcy discharge constitutes a core proceeding. The court will assume that Ms. Arnolds’ affirmative defense of a bankruptcy discharge constitutes a core proceeding, and that the court has core jurisdiction, arising in jurisdiction over this adversary proceeding.
Analysis
Ms. Arnolds first argues that DLJ’s mortgage lien on the Pohick Road property was “eliminated upon the filing of the petition for relief under § 544(a)(3).” The court rejects this argument because the trustee in Ms. Arnolds’ bankruptcy case never moved to avoid the lien under § 544(a)(3). Further, Ms. Arnolds never moved to avoid the lien as impairing her exemptions pursuant to § 522(h).
The court turns to an examination of the claims stated in DLJ’s complaint. Count One seeks declaratory relief as to DLJ’s lien status on the Pohick Road property. This is an in rem claim and does not violate the discharge injunction. Count Two asserts a breach of contract claim against the debtor for her “contractual obligations under the Note, Deed of Trust and Loan Modification Agreement.” The deed of trust represents a potential in rem lien claim against the Pohick Road property, but the note is clearly a pre-petition, personal obligation. Further, the lien modification agreement, to the extent it confirms the debtor’s personal liability on a pre-petition obligation (which was not reaffirmed in her bankruptcy case), presents a potential in personam claim, subject to a defense that DLJ might assert under § 524(j).
Count Three asserts fraud-based claims against the debtor which are in personam in nature. However, the fraud is alleged to have taken place in December 2021, when the debtor sold the Pohick Road property, and the debtors’ discharge would not cover post-discharge fraud claims. Count Four alleges a slander of title claim against Ms. Arnolds. Again, the alleged slander occurred post-discharge, so it would not be barred by the debtor’s discharge. Count Five asserts a constructive trust against the Mariah Jefferson Court property, allegedly as the proceeds of the Pohick Road property. The constructive trust claim appears to represent an in personam claim against the debtor.
DLJ’s pursuit of any discharged claims against the debtor in personam will be at its peril. At this time, however, the debtor is not seeking any relief from this court for DLJ’s alleged violations of the discharge injunction. She simply wants this court to adjudicate her affirmative defense of discharge, something that state courts routinely handle. The court finds that, in the absence of a reopening of this case, abstention is appropriate.
Attorneys’ fees
DLJ seeks an award of attorneys’ fees. As explained above, the court has assumed that there is core subject matter jurisdiction. The court has declined to apply mandatory abstention, but has decided to permissively abstain. The court concludes, therefore, that an award of attorneys’ fees is not warranted in this case.
DLJ’s motion to remand granted. DLJ’s motion for attorneys’ fees denied.
DLJ Mortgage Capital Inc. v. Arnolds, Case No. 22-01046, Jan. 9, 2023. EDVA Bankr. at Alexandria (Kenney). VLW No. 023-4-002. 15 pp.
