decided: April 26, 1979.
IN THE MATTER OF JOHN C. ROLOFF, SR., DEBTOR IN NO. 78-2394 IN THE MATTER OF PATRICIA ROLOFF, DEBTOR IN NO. 78-2395 JOHN C. ROLOFF, SR., AND PATRICIA ROLOFF, HIS WIFE, APPELLANTS
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.
Opinion OF THE COURT
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 must be held to have erred in exercising such jurisdiction.
In the present case, not only had the state foreclosure proceedings been instituted prior to the filing of the debtors' petition, the foreclosure proceedings had resulted in a judgment. Under Decker it is apparent that the bankruptcy court is without jurisdiction to relitigate the merits or amount of such a judgment.
It is true that the Decker decision applies traditional straight bankruptcy jurisdictional law to Chapter XII, one of the rehabilitation chapters of the Act,*fn8 and thus arguably diverges from the more protective scheme of that Chapter.*fn9 As a preliminary matter, it should be noted that, whatever arguments might be made against the application of Decker here, under the rules of this Court we are bound by that decision, until such time as the full court En banc may wish to reconsider it.*fn10 But we are disinclined to reject Decker in any event.
Chapter XII, like the other rehabilitation chapters in the Bankruptcy Act, is designed to provide an opportunity for the preservation and restoration of a debtor, not a means by which the debtor may be speedily dismantled. In pursuit of this end, the bankruptcy court is given certain powers that may be exercised to preserve the status quo until a real property arrangement may be settled upon. Included are jurisdiction to lift or continue automatic stays,*fn11 to grant injunctive relief,*fn12 and when necessary to oust mortgagees in possession.*fn13 But these are specific powers of an equitable nature designed to allow the debtor time to reorder his affairs.*fn14 They contain no language indicative of an extension of the substantive summary jurisdiction of the bankruptcy court. It does not follow, then, that Congress intended to give the bankruptcy court the authority to adjudicate once more, in a full trial, the merits and amount of each lien already determined to be owed to the secured creditor. Any such new and broad adjudicatory power must be found in the language of § 411, Supra, which gives jurisdiction only over the debtor and his property wherever located, not over property already in the constructive possession of another court. The words "wherever located" would appear to expand Territorial jurisdiction allowing the court's process to run beyond the district in which it sits rather than to divest all other courts of jurisdiction over property already before them. This is in essence the stance we took in Decker. It is a position that has been ably defended by several commentators,*fn15 and we are not prepared to discard it now.
The Roloffs suggest that the rule in Decker may be circumvented, however, because here Audubon consented to the jurisdiction of the bankruptcy court by filing a complaint to vacate the stay. With the adoption of the new Bankruptcy Rules in 1973 it became necessary for a secured creditor to file a Complaint in order to lift a stay. And, the Roloffs claim, the new rules incorporate into adversary proceedings the law of affirmative defenses and counterclaims of the Federal Rules of Civil Procedure.*fn16 It might be argued, then, that Audubon's complaint must be treated as a "claim", thus entitling debtors, such as the Roloffs, to bring counterclaims against the party asserting the claim as a matter of federal procedural law and vesting the bankruptcy court with summary jurisdiction, in any case, on a theory of implied consent.*fn17
This argument was accepted by the bankruptcy court. It relied on Katchen v. Landy, 382 U.S. 323, 86 S. Ct. 467, 15 L. Ed. 2d 391 (1966), which holds that when a creditor files a "claim" with the bankruptcy court it subjects itself by implied consent to that court's summary jurisdiction on all counterclaims set forth by the debtor that arise out of the same transaction. We are in accord with the district court in rejecting the proffered analogy to Katchen and the effort to expand the bankruptcy court's substantive authority through the device of a counterclaim. Katchen involved actual claims for payment of rent due and the unpaid balance on a note seeking distribution from the bankrupt estate. Counterclaims challenging the propriety of the requested distribution necessarily required the bankruptcy court charged with the bankrupt estate to determine what payment, if any, the creditor was entitled to receive. Here, in contrast, the secured creditor does not seek affirmative relief from the bankruptcy judge but desires only to be free from restraint in executing its previously obtained judgment. We do not consider this request to be sufficient to justify a finding of jurisdiction by consent.*fn18
In declining to apply Katchen, the district court followed the reasoning of In re Essex Properties, Inc., 430 F. Supp. 1112 (N.D.Cal.1977). It concluded that the filing of a complaint in order to vacate the stay under Rule 12-43 did not constitute a "claim" against the debtor's property so as to trigger the right of the debtor to counterclaim or to bring the merits of the foreclosure within the summary jurisdiction of the Bankruptcy Court. In Essex Properties, the debtor responded to a Rule 12-43 complaint with affirmative defenses going to the merits of the prior foreclosure, including defenses predicated upon usury, negligence, breach of contract, and fraud. The district court agreed with the order of the bankruptcy judge that struck these defenses, and held:
(1) that appellee's complaint to vacate the stay did not constitute a claim within the meaning of Rules 12(b) or 13 of the Federal Rules of Civil Procedure; (2) that the appropriate forum for appellant's affirmative defenses and counterclaims was the trial court in the foreclosure action; and (3) that the defenses and counterclaims did not direct themselves to the validity of appellee's security interest and other matters not before the bankruptcy court.
The Essex court thus rejected the contention that the new Bankruptcy Rules had expanded the jurisdiction of the bankruptcy court to include such affirmative defenses or counterclaims.*fn20
We are persuaded, as was the district court, that Essex Properties sets forth a correct statement of the law. We do not believe that, by designating as a "complaint" the motion for relief from the stay, the drafters of the Bankruptcy Rules anticipated that bankruptcy judges would be authorized to conduct trials on the merits of particular liens whenever relief from a stay was sought. As one commentator has noted:
The debtor will frequently have, or be able to devise, . . . counterclaims against the secured creditor. Fraud, negligence, breach of contract, usury, interference with perspective business advantage, securities fraud, antitrust violations all are claims that a debtor might raise to challenge the debt. Allowing a debtor to raise these real or imagined claims, when a creditor files a complaint for relief from the automatic stay, could flood the bankruptcy courts with complex trials including jury trials on every conceivable tort and contract counterclaim. Such a result does not accord with either the essential nature of a complaint for relief from stay, that of a hearing on a preliminary injunction, or with the intention of the drafters of the Bankruptcy rules, who gave calendar priority to these hearings.
The complaint to vacate the stay was not designed to initiate full adjudication on the merits of prior liens filed by a secured creditor, and it was error for the bankruptcy judge to consider affirmative defenses and counterclaims going to the merits and amount of Audubon's judgment.*fn22
In conclusion, it is important to emphasize that the refusal to permit a bankruptcy court to adjudicate affirmative defenses and counterclaims going to the substance of a prior foreclosure proceeding in no way undermines the authority of that court to decide whether to continue the automatic stay. The bankruptcy judge must determine whether the Roloffs have any equity in the foreclosed property. He must also decide whether the continuation of the stay will cause undue harm to Audubon. Finally, it is necessary that he evaluate whether there is a reasonable possibility of successful rehabilitation of the bankrupt and how such prospect will be affected should the encumbered property be withdrawn from the estate. These are the considerations that traditionally support a determination to vacate or retain an automatic stay in these cases, and we do not understand Audubon to question their relevance here. As we recognized in Decker, the lack of summary jurisdiction to decide the ownership of the foreclosed property does not affect the authority of the court to exercise equitable powers specifically granted to it in Chapter XII.*fn23 As for the Roloffs' assertion that they should be allowed to attack the prior judgment on the merits, it is enough to say that whatever right they may have to litigate that question must be exercised elsewhere and not in response to a complaint to vacate an automatic stay.*fn24
The judgment of the district court will be affirmed.*fn25