Ladd v. Ries (In Re Ladd)

MAHONEY, Bankruptcy Judge,

dissenting.

I respectfully dissent. The majority finds, as did the trial court, that once a decision is made denying a claim of exemption under the federal exemption statute, the debtors are forever after precluded from amending their claim of exemption to obtain the benefits of the Minnesota exemption statutes. Such a determination is based upon a misapplication of the “res judicata” doctrine or the “claims preclusion” doctrine. To reach such a result, the majority, as did the trial court, treat the denial of a claim of exemptions as if it is analogous to ordinary civil litigation in the federal courts. By treating the contested claim of exemption as ordinary civil litigation, the majority finds that the doctrine of res judicata bars a later suit where (1) an earlier suit resulted in a final judgment on the merits; (2) the earlier suit was based on proper jurisdiction; (3) both suits involve the same cause of action; and (4) both suits involve the same parties or their privies. Lovell v. Mixon, 719 F.2d 1373, 1376 (8th Cir.1983).

In Lovell , it was made clear that the doctrine prohibits relitigation of issues which were actually litigated as well as those “which could have been litigated in the first suit.” Id. (emphasis in original).

However, as the Eighth Circuit Court of Appeals noted in Huebner v. Farmers State Bank (In re Huebner), 986 F.2d 1222 (8th Cir.1993), cert denied, 510 U.S. 900 , 114 S.Ct. 272 , 126 L.Ed.2d 223 (1993)(No. 93-5597), “[fjinality for bankruptcy purposes is a complex subject.” Id. at 1223. In Huebner, the court gave a practical example of “why at least most exemption decisions should be final orders” under the finality standards set out in prior case law. Id. at 1224. Although discussing the matter generally, the court did not hold that all exemption decisions are final orders. In addition, the court did not suggest that exemption litigation decisions were final orders which were analogous to orders entered in ordinary civil litigation which would preclude further activity with regard to a debtor’s claim of exemption.

I suggest that a contested matter dealing with a claim of exemption under the federal statute and an objection by the trustee is much more analogous to the filing of a proof of claim by a creditor and an objection by an interested party. In such a contested matter, even after a determination favorable to or adverse to the claimant, Federal Rule of Bankruptcy Procedure 3008 permits reconsideration of such an order when a request is made by a party in interest. Rule 1009(a), which gives the debtor the right to amend a petition, list, schedule or statement as a matter of course at any time before the case is closed, is of the same ilk as Rule 3008 which gives the creditors, the trustee, or the debtor a second bite at the apple with regard to claims allowance or denial.

Similarly, the Bankruptcy Code itself permits amendment to Chapter 11, Chapter 12, and Chapter 13 plans after the initial plans have been contested and rejected by the court. See 11 U.S.C. § 1112 (b)(5); § 1208(c)(5); § 1307(c)(5); Lewis v. United States, 992 F.2d 767, 772 (8th Cir.1993) (a bankruptcy court order that neither confirms,a plan nor dismisses the underlying petition is not final); Vincent v. Fairbanks Capital Corp. (In re Vincent), 301 B.R. 734 (8th Cir. BAP 2003) *608 (motion denying debtor’s motion to modify a confirmed Chapter 13 plan is no more a final order for appeal purposes than an order denying confirmation of a plan); Michels v. Maynard Sav. Bank (In re Michels), 305 B.R. 868, 871 (8th Cir. BAP 2004) (because the appeal was from an order which both denied confirmation of a Chapter 12 plan and dismissed the case, the appeal was from a final appealable order.). Each of the statutory sections referred to above permit the court to convert or dismiss the case, whichever is in the best interest of creditors and the estate, for cause, if the court has determined that it should not permit the debtor additional time to file another plan or modify the current plan. This statutory language assumes the initial order denying confirmation of a plan under any of these chapters is not a final order to which res judicata applies. The cited case law confirms the assumption.

Next, even if one assumes that the res judicata doctrine applies, it only applies if the issue being raised in the second “lawsuit” could have been litigated in the first suit. Lovell v. Mixon, 719 F.2d at 1376 . Because the available relief in the federal exemption statute is significantly different from the relief available in the Minnesota statutes, it is my position that they are different “causes of action” and could not have been litigated in the initial contested matter concerning the claim of exemption under the federal statute.

If, on the other hand, the federal and state statutes do not constitute separate causes of action, but simply alternative relief that should have been pleaded in the first contested matter, the debtors face another problem. In the District of Minnesota, by virtue of the Marshall and Walls decisions relied upon by the majority and the Cochrane decision to which the majority gives very little consideration, a debtor must choose whether to proceed with a claim of exemption under the federal statute or the Minnesota statutes, and the debtor is precluded from presenting a claim under an alternative statutory scheme. Although the majority suggests that the trial court acknowledges the right of debtors to plead in the alternative, and the majority suggests any contrary language in Cochrane is “dicta,” the language in Cochrane is clear and to the point. Any lawyer who would attempt to list claims of exemption under the federal statute and, alternatively, under the Minnesota statute, would, by virtue of Cochrane, risk sanctions under Rule 9011. The Cochrane language I refer to is as follows:

Second, there is no basis under the Federal Rules of Bankruptcy Procedure for proposing an “alternative” claim of exemptions at the same time as one asserts a “main” claim in a Schedule C. The underlying though[t] could be tagged as, “well, if you don’t like that theory, how do you like this one?” This little dodge, however, runs entirely contrary to the clear purpose of Fed. R. Bankr.P.2007, 4003(a), and 1009: to provide a procedural framework for the raising of exemption issues one at a time, and not two-or-more at a time. The vehicle for this assertion of exemption rights is just not countenanced under the applicable rules or the prescribed forms, and the Debtor is out of bounds for using it.

178 B.R. at 1017-18.

The majority, although dismissing such language as “dicta,” in this case has fashioned a procedure by which it suggests counsel for debtors may evade the clear import of Cochrane. The majority tells counsel for debtors to ignore Cochrane and plead in the alternative, thereby preserving all appeal rights in case a bankruptcy *609 judge in Minnesota decides the Cochrane language is good precedent and follows it.

Rather than promulgating a procedure which suggests that debtors may somehow get around the Cochrane language, the majority should simply overrule Cochrane to the extent it can be construed to mean debtors cannot plead a claim of exemption under both federal and state laws in the alternative. Of course, such a procedure as suggested by the majority, and an order overruling Cochrane as I suggest, would both be totally unnecessary if the majority would simply acknowledge that litigation of contested matters is, under the Bankruptcy Code and the Bankruptcy Rules, much more complex and much more liberal with regard to amendments than is ordinarily the case with general civil litigation. With such an acknowledgment, the majority would, as I would, reverse the decision of the trial court and remand for a determination of the rights of the debtors with regard to a claim of exemption under the Minnesota statutes.