ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY C.A. No. 78-0910 -- Bky. Nos. 77-00435/6
Before Adams, Hunter and Garth, Circuit Judges.
This appeal presents a question regarding the summary jurisdiction of a bankruptcy court under Chapter XII of the Bankruptcy Act.*fn1 Specifically, the debtors seek to attack a state court foreclosure judgment by filing an affirmative defense and counterclaim relating to the merits of that judgment, in response to a secured creditor's complaint to vacate a stay in proceedings before a bankruptcy judge. The district judge held that the bankruptcy court is without jurisdiction to hear affirmative defenses and counterclaims in such circumstances. We agree.
Appellants, John and Patricia Roloff, are debtors who, on February 15, 1977, filed a Chapter XII petition for a real property arrangement. Under Bankruptcy Rule 12-43(a) the filing of this type of petition operates as an automatic stay of any proceeding against the debtors or of the enforcement of any judgment against them. Appellee, Audubon Savings & Loan Association, the holder of a first mortgage on the Roloffs' house, had begun foreclosure proceedings on the mortgage in New Jersey state courts on October 21, 1976. It had succeeded in obtaining a default judgment against the Roloffs in the amount of $32,077.23 on January 6, 1977, almost six weeks before the debtors filed their Chapter XII petition.*fn2 A foreclosure sale was scheduled for March 4, 1977, and it was this sale that was automatically stayed by the filing on February 15, of the Chapter XII petition.
In order to execute upon its state court judgment, Audubon, pursuant to Bankruptcy Rule 12-43(d), filed a complaint requesting the Bankruptcy Court to vacate the automatic stay, alleging that the value of the mortgaged property was less than the amount of the liens against it, and that there was, therefore, no equity in the property. In their answer, the Roloffs denied that there was insufficient equity to protect the interest of Audubon, the secured creditor. However, the Roloffs went further in their opposition to the motion to lift the stay. They asserted an affirmative defense grounded on estoppel, filed a counterclaim attacking Audubon's right to foreclose on the property, and sought damages as well.*fn3 Later, debtors attempted to amend their counterclaim to include violations of the Truth in Lending Act. Audubon moved to strike the affirmative defense and counterclaim, arguing that these were not responsive pleadings to its motion to vacate the stay. The bankruptcy judge denied Audubon's motion to strike, permitted the amendment of the counterclaim,*fn4 and ordered discovery and trial. He concluded that the mortgaged property was within his summary jurisdiction and that, in any event, Audubon had consented to that jurisdiction by filing its complaint to vacate the automatic stay.*fn5
The district court, upon reviewing the order of the bankruptcy judge,*fn6 reversed, holding that affirmative defenses and counterclaims relating to the merits of the foreclosure action are not properly raised in a proceeding for relief from an automatic stay, and that the Bankruptcy Court has no summary jurisdiction to hear such claims.
Section 411 of the Bankruptcy Act, 11 U.S.C.A. § 811, vests the Bankruptcy Court with "exclusive jurisdiction of the debtor and his property." It provides:
"Where not inconsistent with the provisions of this chapter, the court in which the petition is filed, shall, for the purposes of this chapter, have exclusive jurisdiction of the debtor and his property, wherever located."
The initial question raised in this appeal is whether the property already foreclosed upon by Audubon is within the jurisdictional grant of § 411.
In In re Decker, 465 F.2d 294 (3d Cir. 1972), this Court answered that precise question, concluding that the previous litigation in a state court deprived the bankruptcy court of summary jurisdiction to determine the ownership of property on which a prior foreclosure proceeding had been instituted:
Since the foreclosure proceeding vested the state court with constructive possession of the mortgaged property prior to the filing of the bankruptcy proceedings, the Bankruptcy Court was deprived of summary jurisdiction and it ...