Summary:
In a property dispute between a sister, Ms. Lee, and her brother, Mr. Anasti, over real estate in South Carolina, Ms. Lee sought to assert superior title to Mr. Anasti though adverse possession. This matter was first commenced in South Carolina state court, but when Ms. Lee filed Chapter 7, later converting to Chapter 13, and brought an adversary proceeding asserting both adverse possession and seeking to avoid any interest Mr. Anasti had pursuant to 11 U.S.C. § 544.
The bankruptcy court issued two separate orders, consolidated in this appeal, first, lifting the automatic stay and second, dismissing the adversary proceeding on the basis that Ms. Lee did not have standing to pursue a § 544 avoidance action. Both orders were affirmed by the district court and appealed to the 4th Circuit.
While the appeals were pending, the South Carolina Court of Appeals dismissed Ms. Lee’s original action as untimely and the South Carolina Supreme Court denied her writ of certiorari.
In ruling on the relief from stay, the Court of Appeals reiterated that a "decision to lift the automatic stay under section 362 of the Code is within the discretion of the bankruptcy judge and this decision may be overturned on appeal only for abuse of discretion." In re Robbins, 964 F.2d 342, 345 (4th Cir. 1992). The factors that courts should consider in deciding whether to lift the automatic stay include
(1) whether the issues in the pending litigation involve only state law, so the expertise of the bankruptcy court is unnecessary;
(2) whether modifying the stay will promote judicial economy and whether there would be greater interference with the bankruptcy case if the stay were not lifted because matters would have to be litigated in bankruptcy court; and
(3) whether the estate can be protected properly by a requirement that creditors seek enforcement of any judgment through the bankruptcy court. Id.
As the bankruptcy court had found that Mr. Anasti had met all three of these factors, termination of the stay was within the bankruptcy court’s discretion. Ms. Lee’s argument that the bankruptcy estate was not a party to the state court proceeding was not persuasive, as "[a]ny interest of the bankruptcy estate in the Property is derived from Lee’s right in the Property. The bankruptcy estate’s claim is not greater than Lee’s claim." Additionally, as property interests are created by state law, unless there is some further federal interest implicated in the case, the analysis of such interest should be the same whether in bankruptcy or not. Lastly, the Chapter 7 Trustee, by filing a Report of No Distribution, and the Chapter 13 Trustee, by agreeing to the termination of the automatic stay, had both affirmatively declined to pursue this action.
Turning to the dismissal of the adversary proceeding, the 4th Circuit held that 28 U.S.C. § 1738 requires the federal courts to give state court decisions "the same full faith and credit ... as they have by law or usage in the courts of such State ... from which they are taken." Accordingly, applying South Carolina’s interpretation of collateral estoppel, the Court of Appeals held that this matter had "been actually litigated and determined valid by a judgment, the determination is conclusive in a subsequent action whether on the same or a different claim. The doctrine may not be invoked unless the precluded party has had a full and fair opportunity to litigate the issue in the first action." Zurcher v. Bilton, 379 S.C. 132, 135, 666 S.E.2d 224, 226 (S.C. 2008) (citations omitted).
As to Ms. Lee’s standing to seek avoidance of Mr. Anasti’s interest pursuant to 11 U.S.C. § 544(a), the Court of Appeals dodged the question of whether a Debtor has such standing. Instead it held that since the state court judgment held that Mr. Anasti was the owner of the property, there was no transfer to avoid and dismissal of the adversary proceeding was appropriate on that basis.
Commentary:
This leaves open the question of whether a Chapter 13 Debtor can be granted derivative powers from the Trustee under 11 U.S.C. § 544 to avoid transfers.
Lee v. Anasti- Standard for Relief From Stay; Collateral Estoppel; and Debtor’s Standing to Pursue § 544 Avoidance Action.PDF
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