-
USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
____________________
No. 94-1674
PAUL J. GRELLA, TRUSTEE,
Appellant,
v.
SALEM FIVE CENT SAVINGS BANK,
Appellee.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Edward F. Harrington, U.S. District Judge] ___________________
____________________
Before
Torruella, Chief Judge, ___________
Coffin and Campbell, Senior Circuit Judges. _____________________
_____________________
Kevin P. Sweeney, with whom Alexander L. Cataldo, Timothy E. ________________ ____________________ __________
McAllister and Cuddy Bixby were on brief for appellant. __________ ___________
Kevin J. Simard, with whom Isaac H. Peres and Riemer & _________________ ________________ ________
Braunstein were on brief for appellee. __________
____________________
December 6, 1994
____________________
TORRUELLA, Chief Judge. This appeal raises an issue TORRUELLA, Chief Judge. ____________
frequently debated in bankruptcy courts around the country, but
never yet addressed by this court -- namely, the permissible
scope of a hearing on a motion for relief from the automatic stay
under 362 of the Bankruptcy Code.1 Paul J. Grella, trustee in
bankruptcy ("Trustee") for debtor The Beverly Corporation (the
"Debtor"), appeals the district court's affirmance of the
bankruptcy court's grant of summary judgment against Trustee in
favor of creditor Salem Five Cents Savings Bank (the "Bank").
Because we find that the bankruptcy court erred in entering
summary judgment against the Trustee and barring him on
principles of res judicata and collateral estoppel from pursuing ___ ________
a counterclaim against the Bank, we reverse, and remand to the
bankruptcy court for further proceedings consistent with this
opinion.
I. BACKGROUND I. BACKGROUND
On January 26, 1988, the Debtor signed a $1,000,000
promissory note in favor of the Bank. The Debtor later
collaterally assigned various promissory notes and mortgages (the
"Seventeen Notes") to the Bank to secure that debt. Among the
Seventeen Notes was a $290,000 note from the Wellesley Mortgage
Corporation (the "Wellesley Note").
On September 4, 1992, the Debtor filed a voluntary
petition under Chapter 7 of the Bankruptcy Code, activating the
____________________
1 Unless otherwise noted, all citations of statutory sections
are to the Bankruptcy Reform Act of 1978, 11 U.S.C. 101 et __
seq., as amended. ___
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automatic stay provisions of 362. On December 18, 1992, the
Bank filed a Motion for Relief from the Automatic Stay pursuant
to 362(d)(1), seeking an order allowing the Bank to exercise
its contractual and state law rights and remedies against the
Debtor with respect to the Seventeen Notes.2 In its Motion for
Relief, the Bank claimed to have a "perfected security interest"
in the Seventeen Notes because it was "in sole and exclusive
possession" of the originals. The Bank did not state or allege
any other details regarding its security interest. The Bank
asserted, as a basis for relief, that the Debtor was unable to
provide the Bank with adequate protection for its collateral
position.
In his Response to the Bank's Motion for Relief from
Stay, the Trustee did not contest the Bank's Motion, but merely
stated that he had not had sufficient time to review the
pertinent files and determine the existence of any possible
defenses to the Bank's claims. The Trustee then requested that a
preliminary hearing on the Motion be scheduled, after sufficient
time to review the files.
After a hearing on the Bank's Motion for Relief from
____________________
2 Section 362(d)(1) provides in pertinent part:
On request of a party in interest and
after notice and a hearing, the court
shall grant relief from the stay . . .
for cause, including the lack of adequate
protection of an interest in property of
such party in interest. . . .
-3-
Stay on January 14, 1993,3 the Bankruptcy Court granted the
Motion and issued an order lifting the automatic stay as to the
Bank, and allowing the Bank to exercise "any and all of its
contractual and state law rights and remedies" with respect to
the Seventeen Notes. In neither the hearing nor the order did
the bankruptcy court make any findings about the status of the
Bank's security interest in the Seventeen Notes.
Having obtained relief from stay, the Bank filed a
Complaint on February 19, 1993, requesting a determination of its
secured status under 506(a),4 and a turnover and accounting of
funds by the Trustee as to the Seventeen Notes. In support of
its Complaint, the Bank alleged only that it had a "perfected
security interest" in the Notes because it was "in sole and
exclusive possession" of them. Again, the Bank offered no other
details or arguments regarding its interest in the Notes.
On March 29, 1993, the Trustee answered the Bank's
Complaint (the "Answer"), denying the Bank's allegation that it
had a perfected security interest in the Seventeen Notes because
of its exclusive possession. The Trustee asserted as an
affirmative defense that the Bank did not perfect its security
____________________
3 The Trustee did not attend this hearing, for reasons that are
unexplained in the record. Both the Bank and the district court
make much of his absence. While we agree with the district court
that a trustee's failure to attend a scheduled hearing is
troubling and not to be encouraged, we do not find his absence
relevant to our analysis here.
4 Section 506 allows a creditor to seek determination of the
status of a lien on property in which the debtor's estate has an
interest.
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interest in the Wellesley Note prior to 90 days before the Debtor
filed its bankruptcy petition. The Answer also included a
Counterclaim, alleging that the Bank's interest in the Wellesley
Note is avoidable as a preferential transfer.5
On April 8, 1993, the Bank answered the Trustee's
counterclaim (the "Reply"). The Bank asserted, inter alia, on _____ ____
the grounds of estoppel, waiver and collateral estoppel, that the
Trustee was barred from pursuing his preference counterclaim
because he failed to file or pursue any objection to the Bank's
Motion for Relief from Stay.
On July 7, 1993, the Trustee moved for summary judgment
on his preference counterclaim. On August 3, 1993, the Bank
opposed that motion and cross-moved for summary judgment on the
ground that either res judicata or collateral estoppel barred the ___ ________
counterclaim, as the issue of the "validity" of the Bank's
interest in the Notes was decided when the Bankruptcy Court
granted the relief from stay. The Bankruptcy Court denied both
summary judgment motions, finding genuine issues of material fact
to exist regarding "the status of the holder of the note." With
respect to the Bank's res judicata and collateral estoppel ___ ________
____________________
5 A "preference" is a transfer of a debtor's assets during a
specified pre-bankruptcy period that unjustifiably favors the
transferee over other creditors. In re Melon Produce, Inc., 976 _________________________
F.2d 71, 73 (1st Cir. 1992). Section 547 allows a bankruptcy
trustee, in certain circumstances, to avoid preferential
transfers of an interest of the debtor if the transfer was made
within 90 days before the date of the filing of the bankruptcy
petition. The creation of a perfected security interest in
property during this 90-day preference period is itself a
preferential transfer if it meets the other requirements of
547. In re Melon Produce, Inc., 976 F.2d at 74. _________________________
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arguments, the Bankruptcy Court did not make a ruling, but merely
said that it was a "legal issue which we can get into later."
On November 16, 1993, the Trustee filed a motion for
summary judgment on the res judicata and collateral estoppel ___ ________
issues, arguing that the doctrines were inapplicable to the
Trustee's preference counterclaim, as there had been no
adjudication on the merits of the Bank's security interest during
the relief from stay proceeding. On the first page of his
Memorandum of Law in support of the Motion for summary judgment,
the Trustee stated:
Only the note entitled "Wellesley Mort.
Corp. of April 25, 1990" (the Wellesley
Note) . . . is presently in dispute. The
other notes and mortgages . . . have been
determined [by the Trustee] to be
perfected security interests in favor of
[the Bank].
Three days later, the Trustee filed a Motion for Leave
to Amend his Memorandum of Law, seeking to amend this statement
of facts. The Trustee explained that the original memorandum was
written some months before, and at that time the Trustee thought
that there was no dispute as to sixteen of the Seventeen Notes.
Sometime after the original memorandum was written, but before it
was filed, the Trustee apparently determined that he did indeed
dispute the Bank's interest in the other notes as well, but had
neglected to edit his memorandum before filing it with the court.
The Bank objected to the Trustee's Motion for summary judgment on
the res judicata and collateral estoppel issues, and cross-moved ___ ________
for summary judgment.
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After a hearing on the motions, the bankruptcy court
granted summary judgment in favor of the Bank.6 In its
decision, the court stated without explanation that it was
treating the Trustee's preference counterclaim as an "affirmative
defense." Although the court recognized that the hearing on
relief from stay was a preliminary one, the court went on to
state:
The question of the validity and
perfection of a security interest which
is the subject of a request for relief
from stay goes to the heart of the issues
before the court [during a relief from
stay hearing]. If the security interest
were invalid or unperfected, there would
be no cause for relief from stay and the
request would be denied . . . . The
Trustee could have raised the perfection
issue [underlying his preference
counterclaim] at the hearing on the
motion for relief. If he felt that I was
wrong in denying him additional time to
respond, an appeal from my order was
appropriate. Having had the potential
for one bite at the apple, he cannot
relitigate the issue at this time.
The court reasoned that the perfection issue was necessarily,
implicitly decided in the relief from stay proceedings, and thus
granted summary judgment in the Bank's favor "as to the entire
adversary proceeding" on collateral estoppel or res judicata ___ ________
grounds.
On May 23, 1994, the district court issued a Memorandum
and Order affirming the bankruptcy court's decision. The
____________________
6 Although the court did not explicitly rule on the Trustee's
Motion for Leave to Amend his original memorandum of law, the
court stated in its Decision that the parties agreed that the
only note in dispute was the Wellesley Note.
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district court ruled that collateral estoppel bars the Trustee's
preference counterclaim, and entered judgment in the Bank's favor
on May 25, 1994.
II. DISCUSSION II. DISCUSSION
A. Standard of Review A. Standard of Review __________________
In an appeal from district court review of a bankruptcy
court order, we independently review the bankruptcy court's
decision, applying the "clearly erroneous" standard to findings
of fact and de novo review to conclusions of law. In re SPM Mfg. __ ____ ______________
Corp., 984 F.2d 1305, 1310-11 (1st Cir. 1993) (citations _____
omitted). No special deference is owed to the district court's
determinations. Id. at 1311. __
B. Claim and Issue Preclusion B. Claim and Issue Preclusion __________________________
To evaluate the bankruptcy court's decision, we must
consider the doctrine of res judicata generally. We have ___ ________
explained that there are two different aspects of res judicata -- ___ ________
claim preclusion and collateral estoppel (also called issue
preclusion). Dennis v. Rhode Island Hosp. Trust, 744 F.2d 893, ______ ________________________
898 (1st Cir. 1984). The essential elements of claim preclusion
are: (1) a final judgment on the merits in an earlier action; (2)
an identity of parties or privies in the two suits; and (3) an
identity of the cause of action in both suits. Aunyx Corp. v. ___________
Canon U.S.A., Inc., 978 F.2d 3, 6 (1st Cir. 1992), cert. denied, __________________ _____ ______
__ U.S. __, 113 S. Ct. 1416 (1993). Once these elements are
established, claim preclusion also bars the relitigation of any
issue that was, or might have been, raised in respect to the ________________
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subject matter of the prior litigation. Dennis, 744 F.2d at 898 ______
(citations omitted) (emphasis in original).
The principle of collateral estoppel, or issue
preclusion, bars relitigation of any factual or legal issue that
was actually decided in previous litigation "between the parties, ________
whether on the same or a different claim." Dennis, 744 F.2d at ______
899 (quoting Restatement (Second) of Judgments, 27 (1982))
(emphasis in original). When there is an identity of the parties
in subsequent actions, a party must establish four essential
elements for a successful application of issue preclusion to the
later action: (1) the issue sought to be precluded must be the
same as that involved in the prior action; (2) the issue must
have been actually litigated; (3) the issue must have been
determined by a valid and binding final judgment; and (4) the
determination of the issue must have been essential to the
judgment. See NLRB v. Donna-Lee Sportswear Co., Inc., 836 F.2d ___ ____ ______________________________
31, 34 (1st Cir. 1987); In re Sestito, 136 B.R. 602, 604 (Bankr. _____________
D. Mass. 1992); In re Dubian, 77 B.R. 332, 337 (Bankr. D. Mass. ____________
1987). An issue may be "actually" decided even if it is not
explicitly decided, for it may have constituted, logically or __________
practically, a necessary component of the decision reached in the
prior litigation. Dennis, 744 F.2d at 899 (emphasis in ______
original).
As the Trustee points out, it is unclear whether the
bankruptcy court relied on claim or issue preclusion in entering
summary judgment and barring the Trustee's preference
-9-
counterclaim. Although the court's decision refers to claim
preclusion, it is based on an issue preclusion analysis. The
district court likewise expressly based its reasoning on issue
preclusion principles. Both the Bank and the Trustee contend
that the doctrine of issue preclusion is the appropriate basis
for our analysis here, and we agree. Thus, the broad issue
before us is whether all of the elements of issue preclusion, set
forth above, are met. In order to make this determination,
however, we must first consider exactly what issues were
adjudicated during the initial action, a hearing on a motion for
relief from stay.
C. Issues Determined During a 362(d) Hearing C. Issues Determined During a 362(d) Hearing ___________________________________________
The Trustee argues that the allowance of a motion for
relief from stay does not preclude the later prosecution of a
preference action, as a determination of the non-avoidability of
a lien under 547 is not, logically or practically, part of a
court's decision to grant relief from stay. In support of this
position, the Trustee cites the Seventh Circuit's decision of
Matter of Vitreous Steel Prods. Co., 911 F.2d 1223 (7th Cir. ______________________________________
1990), and urges us to adopt that court's reasoning.
In Vitreous Steel, the appeals court held that a _______________
decision to lift the automatic stay pursuant to 362(d) does not
preclude the prosecution under 547 of an adversary complaint.
Vitreous Steel, 911 F.2d at 1234. The court reasoned that the ______________
possible avoidability of a transfer to a creditor under 547 is
not an issue proper for adjudication by a court during a hearing
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on a motion to lift the automatic stay, and accordingly found
that the bankruptcy court erred in barring a trustee's
preferential transfer claim on collateral estoppel grounds. Id. __
The Vitreous Steel holding rests on persuasive grounds. ______________
First, as the Seventh Circuit noted, it is consistent with the
statutory scheme established by 362, and particularly with the
purpose of the relief from stay provision of 362(d). Id. at __
1232. As soon as a petition in bankruptcy is filed, the
automatic stay provisions of 362 take effect, preventing all
pre-petition creditors from taking action to collect their debts.
In certain situations, such as when a creditor has a security
interest in the debtor's property and the value of the collateral
is less than the amount of the debt, bankruptcy proceedings may
only delay the inevitable result. There may be no reason to make
the creditor wait for the distribution of the estate, and indeed,
early release of the property may aid administration of the
estate by allowing a quicker determination of the amount of an
undersecured creditor's claim. Id. at 1231-32. Thus, Congress __
included the provision for relief from stay under 362(d),
allowing bankruptcy courts to lift the stay as to certain
creditors if grounds for relief are presented. Id. at 1232; see __ ___
11 U.S.C. 362(d). These grounds are the adequacy of protection
for the creditor, the debtor's equity in the property, and the
necessity of the property to an effective reorganization. 11
U.S.C. 362(d). That the statute sets forth certain grounds for
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relief and no others indicates Congress' intent that the issues
decided by a bankruptcy court on a creditor's motion to lift the
stay be limited to these matters. See 11 U.S.C. 362(d). ___
Moreover, the hearing on a motion for relief from stay
is meant to be a summary proceeding, and the statute requires the
bankruptcy court's action to be quick. Vitreous Steel, 911 F.2d ______________
at 1232; see 11 U.S.C. 362(e). Section 362(e) provides that ___
a bankruptcy court must hold a preliminary hearing on a motion to
lift the stay within thirty days from the date the motion is
filed, or the stay will be considered lifted. A final hearing
must be commenced within thirty days after the preliminary
hearing. Vitreous Steel, 911 F.2d at 1232 (citing Fed. R. Bankr. ______________
P. 4001(a)(2)); see 11 U.S.C. 362(e). ___
The limited grounds set forth in the statutory
language, read in the context of the overall scheme of 362, and
combined with the preliminary, summary nature of the relief from
stay proceedings, have led most courts to find that such hearings
do not involve a full adjudication on the merits of claims,
defenses, or counterclaims, but simply a determination as to
whether a creditor has a colorable claim to property of the
estate. See, e.g., Estate Contruction Co. v. Miller & Smith ___ ____ _______________________ _______________
Holding Co., Inc., 14 F.3d 213, 219 (4th Cir. 1994) (hearings to _________________
lift the stay are summary in character, and counterclaims are not
precluded later if not raised at this stage); Vitreous Steel, 911 ______________
F.2d at 1232 (questions of the validity of liens are not at issue
in a 362 hearing, but only whether there is a colorable claim
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on property); In re Johnson, 756 F.2d 738, 740 (9th Cir.), cert. _____________ ____
denied, 474 U.S. 828 (1985) (relief from stay hearings are ______
limited in scope to adequacy of protection, equity, and necessity
to an effective reorganization, and validity of underlying claims
is not litigated); Nat'l Westminster Bank, U.S.A. v. Ross, 130 _______________________________ ____
B.R. 656, 658 (Bankr. S.D.N.Y.), aff'd, 962 F.2d 1 (2d Cir. 1991) _____
(decision to lift stay does not involve determination of
counterclaims, and thus those claims are not precluded later); In __
re Quality Elect. Ctrs., Inc., 57 B.R. 288, 290 (Bankr. D.N.M. ______________________________
1986) (relief from stay proceedings limited to whether the moving
creditor has a colorable claim to a perfected security interest);
In re Pappas, 55 B.R. 658, 660-61 (Bankr. D. Mass. 1985) _____________
(trustee's counterclaims may be considered, though not
adjudicated, at relief from stay proceedings);7 In re Geller, 55 _____________
B.R. 970, 974-75 (Bankr. D.N.H. 1985) (although a bankruptcy
court may consider counterclaims during a relief from stay
hearing, it is not authorized to a res judicata determination of ___ ________
____________________
7 The Bank cites In re Pappas in support of its argument that _____________
preference counterclaims are among claims that challenge the
"validity" of a creditor's lien, and thus are part of the relief
from stay determination. The Bank's reliance on that case,
however, is misplaced. As the Trustee points out, that case
involved the unusual factual situation of a creditor trying to
prevent a trustee from pursuing a defense to a motion for relief.
The Pappas court recognized that while a 362 motion for relief ______
hearing is not the proper forum for deciding counterclaims, a
court need not blind itself to such counterclaims, and may
consider them where raised. In re Pappas, 55 B.R. at 660-61. ____________
The court went on to discuss the distinction between
"considering" and "adjudicating" such claims, and specifically
stated that claims that challenge the validity of a lien "will be
considered, though not adjudicated, at the hearing on relief from
stay." Id. at 661. The Bank somehow overlooked this statement. __
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such claims on their merits); In re Tally Well Serv., Inc., 45 _____________________________
B.R. 149, 151-52 (Bankr. E.D. Mich. 1984) (a court may merely
consider counterclaims and defenses at a relief from stay
hearing, but such hearing is not the proper proceeding for those
claims' adjudication); cf. In re Shehu, 128 B.R. 26, 28-29 __ ____________
(Bankr. D. Conn. 1991) (acknowledging the narrow scope of
hearings on relief from stay, but allowing the debtor to present
evidence on "indirect defenses" going to offset the amount of the
secured debt, for the limited purpose of determining whether the
debtor has equity in the property).
These courts' interpretation of 362 also comports
with the statute's legislative history:
At the expedited hearing under subsection
(e), and at all hearings on relief from
the stay, the only issue will be the
claim of the creditor and the lack of
adequate protection or existence of other
cause for relief from the stay. This ____
hearing will not be the appropriate time _________________________________________
at which to bring in other issues, such _________________________________________
as counterclaims against the creditor on _________________________________________
largely unrelated matters. Those _____________________________
counterclaims are not to be handled in
the summary fashion that the preliminary
hearing under this provision will be.
Rather, they will be the subject of more
complete proceedings by the trustees to
recover property of the estate or to
object to the allowance of a claim.
H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 344 (1977), reprinted _________
in 1978 U.S. Code Cong. & Admin. News 5787, at 6300 (emphasis __
added). The Senate report reiterates this explanation, but also
adds:
However, this would not preclude the
party seeking continuance of the stay
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from presenting evidence on the existence
of claims which the court may consider in
exercising its discretion. What is ________
precluded is a determination of such _________________________________________
collateral claims on the merits at the _________________________________________
hearing. _______
S. Rep. No. 95-989, 95th Cong., 2d Sess. 55, reprinted in 1978 _____________
U.S. Code Cong. & Admin. News 5787, at 5841 (emphasis added).
The relief from stay procedures established by the
Bankruptcy Rules also point to the limited scope of the hearing.
Relief from the stay is obtained by a simple motion, Fed. R.
Bankr. P. 4001, and it is a "contested matter," rather than an
adversary proceeding. Fed. R. Bankr. P. 9014. See Advisory ___
Committee Note to Fed. R. Bankr. P. 7001 ("[R]equests for relief
from the automatic stay do not commence an adversary
proceeding."). In contrast, all actions to determine the
validity of a lien, such as a preference action under 547,
require full adjudication on verified pleadings, and must be
litigated in adversary proceedings. Fed. R. Bankr. P. 7001. To
allow a relief from stay hearing to become any more extensive
than a quick determination of whether a creditor has a colorable
claim would turn the hearing into a full-scale adversary lawsuit,
In re Gellert, 55 B.R. at 974, and would be inconsistent with ______________
this procedural scheme.
We agree with the Trustee's argument that allowing
these hearings to become adversary proceedings would also force
the untimely, expedited adjudication of complex and critical
issues during the early stages of the case, on the basis of the
movant creditor's unverified motion for relief. Trustees would
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be forced to assert (and win) not only objections to motions for
relief from stay, but any and all possible defenses and
counterclaims to the underlying claims of the movant creditor, or
risk being precluded from raising them later. Bankruptcy courts
would likewise be forced to determine the validity, priority and
extent of a lien during the relief from stay hearing, and the
creditor's motion would thus become a "substitute" for the normal
adversary proceedings on the merits. See In re Quality ___ _______________
Electronics, 57 B.R. at 290. ___________
Moreover, the Bankruptcy Code specifically provides
that a trustee has two years after appointment or until the close
of the case to commence a 547 preference action. Section
546(a)(1). A relief from stay proceeding, conversely, is usually
commenced very shortly after the bankruptcy petition is filed,
and, as explained above, must be completed no more than sixty
days from the filing of the motion for relief. Forcing trustees
to raise their counterclaims within that short period, usually
during the nascent stages of a bankruptcy case, would in effect
allow movant creditors to drastically reduce the two-year
limitations period set forth in the Code. Not only is this
result patently unfair and inefficient, it renders the Bankruptcy
Code's statutes of limitations provision irrelevant -- a result
we cannot endorse.
For all these reasons, we find that a hearing on a
motion for relief from stay is merely a summary proceeding of
limited effect, and adopt the Vitreous Steel court's holding that ______________
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a court hearing a motion for relief from stay should seek only to
determine whether the party seeking relief has a colorable claim
to property of the estate. The statutory and procedural schemes,
the legislative history, and the case law all direct that the
hearing on a motion to lift the stay is not a proceeding for
determining the merits of the underlying substantive claims,
defenses, or counterclaims. Rather, it is analogous to a
preliminary injunction hearing, requiring a speedy and
necessarily cursory determination of the reasonable likelihood
that a creditor has a legitimate claim or lien as to a debtor's
property.8 If a court finds that likelihood to exist, this is
not a determination of the validity of those claims, but merely a
grant of permission from the court allowing that creditor to
litigate its substantive claims elsewhere without violating the
automatic stay.
This is not to say that bankruptcy courts can never
____________________
8 Indeed, the legislative history of 362 suggests this very
analogy:
[T]he automatic stay is similar to a
temporary restraining order. The
preliminary hearing [on a motion for
relief from stay] is similar to the
hearing on a preliminary injunction,
. . . . The main difference lies in which
party must bring the issue before the
court. While in the injunction setting,
the party seeking the injunction must
prosecute the action, in proceedings for
relief from the automatic stay, the
enjoined party must move.
H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 344 (1977), reprinted _________
in 1978 U.S. Code Cong. & Admin. News 5787, at 6300. __
-17-
consider counterclaims and defenses, including preference ________
counterclaims, during a relief from stay hearing. As several
bankruptcy courts have discussed, there is a significant
difference between mere consideration of claims and final
adjudication on the merits. See In re Pappas, 55 B.R. at 660; In ___ ____________ __
re Gellert, 55 B.R. at 974-75; In re Tally Well, 45 B.R. at 152. __________ ________________
Certainly, a court may take into account any matter that bears
directly on the debtor's equity, or that clearly refutes a
creditor's claim to the property. For example, if a trustee
raises a defense to a creditor's claim at the relief from stay
hearing, the court need not ignore this defense, but may consider
it when deciding whether to lift the stay. If, however, the stay
is not lifted, that creditor is not barred forever from seeking
payment. It must simply comply with the automatic stay, and wait
with the other creditors for the estate's administration.
Conversely, if the stay is lifted, the creditor may
then prosecute its claim in subsequent litigation. The trustee
is not precluded from raising defenses or counterclaims in those
subsequent proceedings, because the defense was not fully
adjudicated, but only considered, during the preliminary hearing.
As a matter of law, the only issue properly and necessarily
before a bankruptcy court during relief from stay proceedings is
whether the movant creditor has a colorable claim; thus, a
decision to lift the stay is not an adjudication of the validity
or avoidability of the claim, but only a determination that the
creditor's claim is sufficiently plausible to allow its
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prosecution elsewhere.
The Bank nevertheless submits that the Vitreous Steel ______________
analysis is "flawed," and argues:
[A] determination (though not necessarily
a final one) as to a creditor's security
interest is an integral part of any __
decision regarding the lifting of the
stay . . . if the creditor's security
interest can be avoided for any reason,
there is no cause to grant the creditor
relief from stay because the creditor
lacks an interest in the debtor's
property.
(Emphasis in original). Essentially, the Bank contends that
because establishing the validity of a creditor's security
interest is an essential element of a relief from stay, the fact
that the stay was indeed lifted necessarily implies that the
security interest is valid.
This argument is meritless for two reasons. First, it
ignores the important distinction between the consideration and
adjudication of an issue. In a relief from stay hearing, the
only issue properly before the court, and thus the only one
actually adjudicated, is whether the stay should be lifted
because a creditor has shown a colorable claim. Put another way,
and employing the preliminary injunction analogy discussed above,
a creditor must show a reasonable likelihood that it has a
meritorious claim, and the court may consider any defenses or
counterclaims that bear on whether this reasonable likelihood
exists. If the stay is lifted, however, what has been actually
adjudicated is only that the creditor has shown this reasonable
likelihood. It is not a ruling on the merits of the underlying
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claim.9
Second, the Bank's argument also ignores the difference
between a void claim or lien, and a valid yet voidable lien. A ____ ________
creditor's valid, perfected security interest in the debtor's
property may nevertheless be voidable as a preferential transfer
under 547. In re Melon Produce, 976 F.2d at 74 (the creation ____________________
of a perfected security interest in property is itself a ______
preference, when the perfection takes place during the statutory
preference period and other criteria are satisfied). A creditor
may therefore have a lien that is sufficient to justify lifting
the stay, yet ultimately avoidable by the trustee as a
preferential transfer under 547. Thus, the Bank's contention
that "if the creditor's security interest can be avoided for any
reason, there is no cause to grant the creditor relief from stay"
is simply wrong.
The only case that the Bank cites purportedly
supporting its argument that a relief from stay proceeding can
have preclusive effect on a subsequent counterclaim is In re ______
Monument Record Corp., 71 B.R. 853 (Bankr. M.D. Tenn. 1987). _____________________
This case, however, is entirely distinguishable. In Monument ________
Record, the creditor and the trustee entered into a specific ______
____________________
9 The Bank also urges us to reject the Vitreous Steel court's ______________
"rigid rule" and adopt a "flexible approach" which takes unique
circumstances into account. We will not, however, overlook
Congressional intent, statutory language, and well-settled
procedural machinery that all limit the issues properly
adjudicated in such hearings. It is perhaps not surprising that
the Bank fails to cite any authority for its "flexible approach"
argument, as it lacks any legal or practical basis.
-20-
agreement, in order to resolve the motion for relief from stay,
stipulating that the creditor's security interest was a valid
first lien. Id. at 855. The bankruptcy court held that this __
specific agreement precluded the trustee from challenging in a
later adversary proceeding the perfection of the security
interest. Id. at 864. We agree with the Trustee that the __
parties' express agreement was the crux of the Monument Record ________________
court's ruling, and find that decision is logically limited to
those unique circumstances.
Applying our holding to the facts presented here, it is
evident that the bankruptcy court's order lifting the automatic
stay upon the Bank's motion did not have preclusive effect on the
Trustee's counterclaims. The only issue properly before the
court during that hearing was whether the Bank's claim was
colorable, or sufficiently plausible, to lift the stay. The
court did not, and indeed, could not adjudicate the substantive
merits of either the Bank's claim, or any possible defenses or
counterclaims.10 Thus, the issue raised by the Trustee's
____________________
10 This is so even if the Trustee had attended the hearing and
actually raised any defenses. Thus, the Trustee's absence at the
hearing is irrelevant. The Bank contends that the Trustee's
failure to deny the allegations in the Bank's motion for relief,
and to attend the hearing, constitutes a "judicial admission" of
the validity of the Bank's security interest. The Bank is
misguided. Because a court cannot properly adjudicate the
validity of a lien during relief from stay proceedings, a party
also cannot "admit," with preclusive, binding effect, to a
claim's validity. See In re Torco Equip. Co., 65 B.R. 353, 355 ___ ______________________
(Bankr. W.D. Ky. 1986) (preference claim is not a compulsory
counterclaim to a motion for relief because of the limited scope
of 362 proceedings). To hold otherwise would require a trustee
to plead any and all affirmative defenses and counterclaims
during the relief from stay proceedings, or be forever barred.
-21-
preference counterclaim was not before the court at the relief
from stay hearing, was not actually (or even implicitly)
litigated, and was not essential to the court's decision to lift
the stay. Therefore, the elements of issue preclusion are not
met here.11 Accordingly, both the bankruptcy court and the
district court erred in precluding the Trustee's later
counterclaim on those grounds.
____________________
As we have explained, this is untenable.
11 Moreover, because a relief from stay proceeding merely
removes a bar to a creditor from prosecuting its substantive
claims, and does not determine the merits of the underlying
claim, there is no identity of cause of action between a relief
from stay proceeding and an adversary proceeding on the claim's
validity. Thus, the elements of claim preclusion are likewise
not met here.
-22-
D. The Trustee's 547 Preference Counterclaim D. The Trustee's 547 Preference Counterclaim ___________________________________________
1. The Wellesley Note 1. The Wellesley Note
With respect to the Trustee's counterclaim under 547,
the bankruptcy court ruled that a genuine issue of material fact
exists as to the status of the Bank's security interest in the
Wellesley Note, and we find that the record supports the court's
finding.12 We therefore remand the case to the bankruptcy
court for further proceedings on the validity of the Bank's claim
and the Trustee's counterclaim as to the Wellesley Note.
2. The other sixteen of the Seventeen Notes 2. The other sixteen of the Seventeen Notes
Regarding the parties' dispute over the other sixteen
of the Seventeen Notes, the Trustee requests, in the "Conclusion"
section of his brief, that we "strike any finding that the
Trustee has agreed that the Seventeen Notes other than the
Wellesley Note are 'valid' security interests." In a final
footnote to his reply brief, the Trustee maintains that he is not
contending that his motion to amend should have been allowed, but
only that genuine factual issues exist regarding the validity, as ________
opposed to the perfection, of the other sixteen of the Seventeen
Notes, and thus summary judgment as to those notes is improper.
He offers no further support for this statement.
Regardless of the meaning or merit of the Trustee's
____________________
12 While the Bank contends that its security interest in the
Wellesley Note was perfected by possession prior to the 90-day
statutory preference period, the Trustee contends that the Bank
did not actually have possession of the Note until about two
months before the Debtor filed its bankruptcy petition. Both
parties' contentions have support in the record, thus creating a
genuine factual issue.
-23-
argument as to the other sixteen of the Seventeen Notes, we agree
with the Bank that the Trustee has not properly presented or
argued this issue on appeal. We have warned litigants that
issues averted to in a perfunctory manner, unaccompanied by some
effort at developed argumentation, are deemed waived for purposes
of appeal. Willhauck v. Halpin, 953 F.2d 689, 700 (1st Cir. _________ ______
1991). Parties must spell out their arguments squarely and
distinctly, or "forever hold their peace." Id. In his 50-page __
brief, the Trustee did not raise or address the issue of the
other sixteen notes at any point except for the one-sentence
statement, unsupported by any argument or case law, in his
conclusion. Even when the Bank pointed out this flaw, the
Trustee did not more fully develop the argument in his reply
brief, but deemed it worthy of only a cursory footnote. This is
simply insufficient presentation and argumentation of the issue
for any meaningful analysis, and we therefore deem it waived.13
III. CONCLUSION III. CONCLUSION
For the foregoing reasons, we conclude that both the
bankruptcy court and the district court erred in barring the
Trustee's preference counterclaim as to the Wellesley Note on the
grounds of either claim or issue preclusion. Accordingly, we
remand to the bankruptcy court for adjudication on the merits of
____________________
13 Because the argument is waived, we do not address it, and we
likewise do not address the Bank's counter-arguments that the
Trustee's statements in his Memorandum of Law are "admissions,"
and that the Trustee is estopped from denying his statements.
-24-
the Bank's security interest and the Trustee's counterclaim
regarding the Wellesley Note.
-25-
Document Info
Docket Number： 94-1674
Filed Date： 12/6/1994
Precedential Status： Precedential
Modified Date： 9/21/2015