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First State Bank of Roscoe v. Stabler

United States Court of Appeals, Eighth Circuit

January 30, 2019

First State Bank of Roscoe; John R. Beyers Appellants
Brad Allen Stabler; Brenda Lee Stabler Appellees

          Submitted: May 16, 2018

          Appeal from United States District Court for the District of South Dakota - Aberdeen

          Before SHEPHERD, MELLOY, and GRASZ, Circuit Judges.

          MELLOY, Circuit Judge.

         First State Bank of Roscoe (the "Bank") and John R. Beyers appeal the judgment of the district court[1] affirming a bankruptcy court order holding them in contempt and sanctioning them for violating a final bankruptcy discharge injunction. The Bank and Beyers argue on appeal that an earlier bankruptcy court order and related state-court judgments have preclusive effect and bar the current contempt order. They also argue that even if preclusion doctrines do not otherwise bar relief, they held a good faith belief that prevailing law permitted their conduct such that sanctions are inappropriate. We affirm.


         Brad and Brenda Stabler (the "Stablers") borrowed from the Bank to fund an agricultural services business. Beyers was a principal at the Bank. When the Stablers' business failed, the Stablers liquidated their business, and Beyers counseled them to seek bankruptcy protection. In the bankruptcy, the Stablers' attorney (whom Beyers recommended to the Stablers and who previously served as attorney for the Bank) failed to list all debt owed by the Stablers to the Bank. The Stablers owed the Bank over $600, 000, but the bankruptcy schedules listed the Bank as a secured creditor claiming much less than that amount. In addition to personal loan guarantees from the Stablers, the Bank held priority liens against the Stablers' land and farm machinery as well as a lien on land owned by Brad Stabler's parents. It is undisputed that the liens, in total, were insufficient to secure fully the Stablers' pre-bankruptcy indebtedness to the Bank.

         After the Stablers received their bankruptcy discharge, the Bank continued to hold security interests on the Stablers' land and equipment and on Brad's parents' land. Rather than foreclosing on this collateral (and realizing a substantial loss), the Bank and Beyers obtained from the Stablers and Brad's parents a commitment to pay a new $650, 000 note, an amount substantially in excess of the security interests that had survived bankruptcy. The Bank and Beyers obtained this commitment without court approval and through a series of transactions and debt transfers involving third parties. Specifically, the four Stablers became obligated on a $416, 000 note to a partnership named Schurrs, a $213, 000 note to Roger Ernst, and a $21, 000 note to a company named H&K Acres. These three other parties had relationships with Beyers or the Bank and received from the Bank assignments of security interests. Eventually, the Stablers paid off the $21, 000 note, and Beyers received the other notes and related security interests by assignment. Later, acting as a guarantor, Beyers helped the Stablers obtain a $150, 000 loan from Ipswich State Bank ("Ipswich" and "Ipswich Note") secured by the Stablers' property. The Stablers used this additional $150, 000 to pay the Bank, but the parties dispute whether this payment to the Bank was for discharged debt or post-discharge debt. Eventually, Beyers obtained assignment of the Ipswich Note and related security interests from Ipswich.

         Next, the Stablers fell behind on their payments, and the Bank and Beyers commenced collection efforts. In response, the Stablers and Brad Stabler's parents initiated a state-court action seeking a determination of what they owed the various lenders. In the state-court action, they alleged the post-bankruptcy commitments were unenforceable improper reaffirmations of discharged debt. They also alleged claims of fraud, breach of fiduciary duty, and conspiracy, asserting the Bank and Beyers knew the debt refinanced with the $650, 000 note had been discharged but misrepresented that the discharged amounts were still owed.

         The Bank and Beyers asserted four counterclaims. They argued that forbearance from foreclosing on the security interests that had survived discharge served as permissible consideration for new security interests and repayment commitments. Based on these arguments, Beyers and the Bank asserted that the reaffirmed debt was enforceable. Beyers and the Bank invited the state court to determine what debt had and had not been discharged in bankruptcy, and they characterized their enforcement efforts as relating only to debt that the state court might determine not to have been discharged. In fact, in their state court counterclaims, Beyers and the Bank indicated they were seeking to collect only on non-discharged debt.

         Looking specifically at the Bank and Beyers's counterclaims, Counterclaims 1 and 2 sought to collect on the Ipswich Note and foreclose on the collateral for that loan. Counterclaims 3 and 4 involved the $650, 000 note that was approximately equal in amount to what the Stablers owed Beyers and the Bank prior to bankruptcy.

         Beyers and the Bank moved for summary judgment on Counterclaims 1 and 2. After Beyers and the Bank filed their motion for summary judgment in the state court, but before the state court had ruled on the motion, the Stablers filed an adversary complaint in the bankruptcy court (a complaint the parties later conceded could be deemed a motion for sanctions) seeking contempt sanctions against Beyers and the Bank and alleging violation of the discharge injunction. The state court then granted summary judgment to the Bank and Beyers on Counterclaims 1 and 2, holding the Stablers had entered into the Ipswich Note after bankruptcy and had used the proceeds to pay off security interests that survived bankruptcy. The state court held the Stablers were in default on the Ipswich Note such that Beyers could foreclose on that loan's collateral.

         After the state court granted summary judgment on Counterclaims 1 and 2, the Bank and Beyers moved to dismiss the adversary complaint. In ruling on the motion to dismiss, the bankruptcy court entered an order with two seemingly inconsistent holdings. Looking at the Bank and Beyers's state-court pleadings in which those parties limited their request for relief to debt that had not been discharged, the bankruptcy court indicated that it appeared the Bank and Beyers were seeking relief related solely to permissible loans and not related to impermissible reaffirmations of discharged debts. The bankruptcy court also indicated that the state-court grant of summary judgment regarding Counterclaims 1 and 2 (the counts concerning the Ipswich Note) appeared to have preclusive effect. Based on these observations, the bankruptcy court appeared to grant the motion to dismiss for failure to state a claim.

         The bankruptcy court also held, however, that the state court possessed jurisdiction and authority to make discharge determinations. As such, the bankruptcy court expressly abstained from ruling on the motion to dismiss and noted that the Stablers could return to the bankruptcy court if the state court were to determine the Bank or Beyers had impermissibly attempted to collect discharged debt. In reaching this determination, the bankruptcy court expressed skepticism that the Stablers might achieve any such result in state court. Nevertheless, the bankruptcy court abstained and expressly left open the possibility of the Stablers later returning to the bankruptcy court.

         The Stablers appealed to the Bankruptcy Appellate Panel ("BAP") as to both issues, and the BAP affirmed. Stabler v. Beyers (In re Stabler), 418 B.R. 764, 766 n.2, 769-71 (B.A.P. 8th Cir. 2009). The BAP, however, addressed only the issue of abstention. No party sought from the BAP further analysis or explanation as to the bankruptcy court's apparent granting of the motion to dismiss on the merits.

         Meanwhile, the state-court action proceeded. The state court granted summary judgment for the Stablers on Counterclaims 3 and 4 and reversed its own earlier grant of summary judgment to Beyers and the Bank on Counterclaims 1 and 2. As to Counterclaims 3 and 4, the state court determined the $650, 000 note was an unenforceable reaffirmation of discharged debt. The court found Beyers had "concocted a transaction" involving third parties for the purposes of recreating discharged debt. The court also found Beyers did so without good faith and in an effort to overcome the bankruptcy discharge. These determinations also led the court to conclude that a question of material fact existed as to whether Beyers could enforce the Ipswich Note at issue in Counterclaims 1 and 2.

         Prior to trial, the Stablers dropped their fraud claim and elected to seek rescission of the $650, 000 note. The Stablers' attorney indicated at the state-court pretrial hearing that they would seek attorney fees in bankruptcy court rather than in state court. Issues remaining for trial, therefore, included the Stablers' claim for rescission of the $650, 000 note, the enforceability of the Ipswich Note, and a fraud claim asserted by Brad's parents. In their fraud claim, Brad's parents alleged Beyers obtained their signature on the $650, 000 note by falsely misrepresenting to them that Brad owed much of the debt underlying that note even ...

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