416 B.R. 147

In re Kay F. EDLER, Debtor.

No. 08-16960(ELF).

United States Bankruptcy Court, E.D. Pennsylvania.

April 9, 2009.

*148Michael W. Gallagher, Lafayette Hill, PA, for Debtor.

MEMORANDUM

ERIC L. FRANK, Bankruptcy Judge.

I.

Presently before the court in the chapter 7 bankruptcy case of Kay F. Edler (“the Debtor”) is the Motion for Relief from the Automatic Stay (“the Motion”) filed by Larry Yogel (“Mr.Yogel”).1

On September 23, 2008, prior to the commencement of this bankruptcy case, Mr. Yogel obtained a $655,904.19 money judgment (“the Judgment”) against the Debtor and her husband, James Edler (“Mr.Edler”), in the Court of Common Pleas, Montgomery County (“the C.P. Court”). On September 25, 2008, Mr. Edler, on his own behalf, and purportedly on behalf of the Debtor, appealed the Judgment to the Pennsylvania Superior Court (“the State Court Appeal”).2 On October 23, 2008, the Debtor filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court.

The Debtor’s bankruptcy filing stayed the State Court Appeal. See 11 U.S.C. § 362(a); Assoc. of St. Croix Condo. Owners v. St. Croix Hotel Corp., 682 F.2d 446, 449 (3d Cir.1982). Mr. Yogel seeks relief from the automatic stay to permit the State Court Appeal to proceed. He argues that this will be an “asset” case and that case administration (in particular, the claims allowance process) will be facilitated if relief from the automatic stay is granted to permit the validity of the Judgment to be finally determined through the state court appellate process. He maintains this contention notwithstanding the recent filing of a Report of No Distribution (“the NDR”) by the chapter 7 trustee (“the Trustee”).

For the reasons set forth below, I will deny the Motion without prejudice to Mr. Yogel’s right to re-list the Motion if certain *149events occur in the administration of this bankruptcy case.

II.

There are two (2) “moving parts” related to the Motion. The first is the State Court Appeal. The other is the adversary proceeding (“the AP”) that Mr. Yogel initiated in this court on February 2, 2009 (Adv. No. 09-036). In the AP, Mr. Yogel requests a determination that the Debtor’s debt3 to him (ie., the debt that has been reduced to Judgment) is nondischargeable under 11 U.S.C. § 523(a)(2), (4) and/or (6).

It is common practice for creditors whose state court litigation has been stayed by a bankruptcy filing and who assert that the subject debt is nondis-chargeable under § 523(a)(2), (4) or (6), to seek: (1) relief from the automatic stay for “cause” under 11 U.S.C. § 362(d) to complete the state court litigation and (2) deferral of the bankruptcy court nondis-chargeability proceeding until the state court proceedings have concluded.4 Here, however, Mr. Yogel does not seek relief from the stay based on the interrelationship of the state court action and the bankruptcy court nondischargeability proceeding. Instead, he contends that “cause” for relief from the automatic stay exists based on considerations relating to the potential administration of the bankruptcy estate assets.5

Mr. Yogel’s initial argument, made before the Trustee filed the NDR, may be summarized as follows:

(1) the Debtor’s bankruptcy schedules disclose that there is non-exempt equity in the Debtor’s real estate that should be administered;
(2) once there are assets available for distribution, Mr. Yogel will file a proof of claim based upon the Judgment;
(3) the Debtor can be expected to object to the proof of claim and seek relief from the automatic stay to prosecute the State Court Appeal to prevent allowance of the claim based on the application of res judicata, collateral estoppel and/or the Rooker-Feldman doctrine;6 and
(4) because it is likely that the Debtor will be granted relief from the automatic stay in the future to resume prosecution of the State Court Appeal, it would expedite and facilitate the Trustee’s eventual distribution of assets to grant Mr. Yogel relief now, rather than later, (ie., after the Debtor objects to Mr. Yogel’s proof of claim).

Essentially, Mr. Yogel argued initially that the benefits to the estate of granting relief from the stay outweigh the burdens to the Debtor of resuming litigation of the State Court Appeal, even though there has been *150no determination that the underlying debt is nondischargeable. See generally Chan, 355 B.R. at 498-500 (decision to grant stay relief to an unsecured creditor involves a balancing of competing interests).7

The Debtor responded by arguing that the court should not consider granting relief from the stay to facilitate bankruptcy case administration unless and until it is clear that the Trustee will be raising an estate. At the hearing, the Debtor suggested that, in light of the present state of the real estate market, it is extremely unlikely that the Trustee will be able to do so. The Debtor argued further that stay relief should not be granted to permit further litigation in the state court until the bankruptcy court has determined that the underlying debt is nondischargeable.

Following the hearing and after the submission of the parties’ post-hearing memo-randa, the Trustee filed a “Report of No Distribution” (“the NDR”) on March 26, 2009. See Docket Entry No. 35. In the NDR, the Trustee states “I have made a diligent inquiry into the financial affairs of the debtor(s) and the location of the property belonging to the estate; and that there is no property available for distribution from the estate over and above that exempted by law.” Id. Thus, the Trustee has reported that this is a “no-asset” case.8

III.

A.

The initial burden of proof in this matter lies with Mr. Yogel. As one court has explained,

Initially, on a motion to lift or modify the automatic stay, the burden of proof is a shifting one. That is, section 362(d)(1) requires an initial showing of ‘cause’ by the movant, while section 362(g) places the burden of proof on the debtor for all issues other than ‘the debtor’s equity in property .... ’ If the movant however fails to make an initial showing of cause, courts have denied relief without requiring any showing from the debtor that it is entitled to continued protection.

In re Telegroup, Inc., 237 B.R. 87, 91 & n. 3 (Bankr.D.N.J.1999) (italics in original) (citations omitted) (quoted in In re Schellhamer, 2009 WL 222427, at *4 (Bankr.M.D.Pa. Jan.29, 2009)).

Mr. Yogel’s initial legal theory in this matter was based on the factual premise that the Trustee will (or at least is likely to) administer an estate. That premise appears to be unfounded in light of the Trustee’s NDR. Therefore, based on his initial theory, Mr. Yogel has not met his initial burden. However, after the filing of the NDR, Mr. Yogel filed a second supplemental memorandum of law, in which he argues that the Motion should be granted notwithstanding the NDR.

Mr. Yogel now asserts that he might file an objection to the NDR within the next thirty (30) days, see Fed. R. Bankr.P. 5009 (providing thirty (30) days for a party in interest to object to a trustee’s final re*151port), as well as take other action to try to compel the sale of the Debtor’s assets for distribution in the bankruptcy case. He contends that whether or not he files an objection and notwithstanding the NDR, the Motion should be granted. Respectfully, I disagree with both alternatives of Mr. Yogel’s supplemental argument.

B.

1.

Mr. Yogel first asserts, on the one hand, that if he does not object to the NDR, then the bankruptcy case will be closed “as of course,” the automatic stay will terminate and that no materially greater burden will be imposed on the Debtor by lifting the stay now as opposed to waiting approximately thirty (30) days, when the stay will terminate anyway. See Yogel Second Supplemental Memorandum of Law at 2. Presumably, Mr. Yogel bases his argument on 11 U.S.C. § 362(c)(2), which provides that the stay of most acts under § 362(a) terminates upon the earlier of: (1) the closing of the case, (2) dismissal of the case, or (3) the entry of the chapter 7 discharge.

This argument is flawed because Mr. Yogel’s assumption that this bankruptcy case will be “closed” after the NDR objection period expires is incorrect. Mr. Yogel overlooks the pendency of the nondis-chargeability adversary proceeding, which will keep the case open. Thus, it is not clear that the automatic stay will terminate simply because no objection is filed to the NDR.

The issue, however, is more complex.

Although the pending adversary proceeding will cause this case to remain open after the expiration of the NDR objection period, Mr. Yogel may be correct that the automatic stay will expire in the near future. The automatic stay will expire because the Debtor’s discharge should be entered soon. The rules of court state that if no objection to discharge is filed and the deadline for filing such objection expires, subject to certain other conditions, “the court shall forthwith grant the discharge.” Fed. R. Bankr.P. 4004(c)(1).9 The filing of a complaint to determine the dischargeability of a particular debt is not one of the grounds for deferring the entry of the discharge order. Id.10 Thus, in this case, it is likely that the discharge will be entered shortly and the automatic stay will terminate. See 11 U.S.C. § 362(c)(2).11

*152Even so, the discharge injunction may replace the restraint of the automatic stay. See 11 U.S.C. § 727(b) (discharge applies to all debts that arose before the order for relief); id. § 524(a)(2) (discharge operates as an injunction against, inter alia, continuation of action to collect a discharged debt). Thus, unless Mr. Yogel prevails in the pending § 523(a) dischargeability proceeding, resumption of his litigation against the Debtor in state court would run afoul of the discharge injunction. In these circumstances, creditors typically forbear from resuming collection activity until- resolution of a pending dischargeability proceeding in the bankruptcy court, especially proceedings based on § 523(a)(2)(4) or (6), over which the bankruptcy court has exclusive jurisdiction. See id. § 523(c). To the extent that a creditor might contend that it has the right to proceed in state court after termination of the automatic stay because the discharge injunction is inapplicable to the debt whose dischargeability is as yet undetermined, it would be within the bankruptcy court’s power to restrain the creditor from proceeding in state court pending the conclusion of the dischargeability proceeding 12 and, generally speaking, it is difficult to envision the circumstances in which a bankruptcy court would not exercise that power.

The bottom line here is that the impending entry of the discharge order and the possible termination of the automatic stay in the near future, by themselves, are not compelling reasons for terminating the automatic stay at this time. The Debtor’s interest in obtaining a resolution of the dischargeability of the subject debt outweighs the interest of Mr. Yogel in resuming litigation against the Debtor in the state court.13

2.

Alternatively, Mr. Yogel asserts that if he does object to the NDR, “considerations underlying this Motion for Relief will be the same as they were before the Trustee’s Report was filed.” Yogel Second Supplemental Memorandum of Law at 2. That statement is not accurate.

Prior to the NDR, there was a reasonable basis to believe that the Trustee might administer assets in this ease because the Debtor’s bankruptcy schedules disclosed the existence of non-exempt equity in her real estate. It is now much more likely that no assets will be distributed in this case.14 As long as the prospects of an estate being administered are dim, I find that the Debtor’s burden of participating in the State Court Appeal, prior to a determination that the subject debt is nondis-chargeable, outweighs any conditional, countervailing benefit to the bankruptcy estate.

Thus, based on the rationale for relief from the automatic stay put forward by Mr. Yogel, the filing of the NDR resolves the Motion. Mr. Yogel is not entitled to *153relief from the automatic stay.15

In re Edler
416 B.R. 147

Case Details

Name
In re Edler
Decision Date
Apr 9, 2009
Citations

416 B.R. 147

Jurisdiction
United States

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