Ostroff et al v. Ocwen Loan Servicing, LLC et al

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
FRANK OSTROFF and MARIA T.
RAMIREZ OSTROFF,
Debtors.
____________________________
FRANK OSTROFF and MARIA T.
RAMIREZ OSTROFF,
Plaintiffs,
v.
AMERICAN HOME MORTGAGE, et
al.,
Defendants.
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Case No. 09-00594
(Chapter 7)
Adversary Proceeding No.
09-10020
For publication in West's
Bankruptcy Reporter
MEMORANDUM DECISION RE DISMISSING
ADVERSARY PROCEEDING FOR LACK OF SUBJECT MATTER JURISDICTION
The plaintiffs commenced this adversary proceeding seeking
to have this court determine that certain deeds of trust on 3210
Volta Place, NW, Washington, D.C., are invalid and unenforceable
and that the creditors holding those deeds of trust have no liens
against the property. 	I issued an order to show cause why this
adversary proceeding ought not be dismissed for lack of subject
The document below is hereby signed.
Signed: August 16, 2010.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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matter jurisdiction. 	Both the plaintiff and the defendant
American Home Mortgage filed in response to that order arguing
that jurisdiction is proper. 	For the reasons set forth below, I
conclude that this court lacks subject matter jurisdiction.
I
The facts underlying this adversary proceeding are not in
dispute. 	On July 8, 2009, the plaintiffs, Frank and Maria
Ostroff, commenced a case in this court under chapter 7 of the
Bankruptcy Code (11 U.S.C.). 	The Ostroffs claimed as exempt the
entire value of 3210 Volta Place, and it has become exempt
property. 	The Ostroffs seek in this adversary proceeding to have
this court determine that the defendants’ deeds of trust
encumbering 3210 Volta Place are invalid.
The Ostroffs allege that the deeds of trust on 3210 Volta
Place are invalid because they hold the property as tenants by
the entirety and only Frank Ostroff executed the deeds. 	American
Home has raised several defenses and asserts counterclaims
seeking to quiet title, to find an equitable lien, and to find
equitable subrogation, seeking to maintain its lien on the
property notwithstanding having failed to obtain Maria Ostroff’s
signature on the deeds of trust.
In light of these facts, I entered an order directing the
parties to show cause why the adversary proceeding ought not be
dismissed for lack of subject matter jurisdiction. 	Thereafter,
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the Ostroffs and American Home filed in response, arguing that
jurisdiction was proper. 	The Ostroffs later amended their
complaint to add the Internal Revenue Service as a party, seeking
to have the court determine the priority of a pre-petition tax
lien on 3210 Volta Place.
II
The district courts are granted limited subject matter
jurisdiction by virtue of 28 U.S.C. § 1334 and when the district
court refers a proceeding to the bankruptcy court pursuant to 28
U.S.C. § 	157, the bankruptcy court exercises the limited subject
matter jurisdiction of the district court. 	Section 1334(a)
grants original and exclusive jurisdiction to the district court
for all cases under title 11 and § 1334(b) grants the district
court original but not exclusive jurisdiction for all civil
proceedings arising under title 11, or arising in or related to
cases under title 11. 	Moreover, § 1334(e) grants the district
court exclusive jurisdiction over all property of the debtor and
property of the estate as of the commencement of the case,
regardless of where that property is located. 	Finally, § 157(a)
provides that the district court may refer this jurisdiction to
the bankruptcy judges for the district, which the District Court
for the District of the District of Columbia has done via
standing order.
To recapitulate, Congress has addressed two types of
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jurisdiction. 	With respect to proceedings, Congress has
authorized the district courts (and the bankruptcy courts by way
of referral from the district courts) to hear any proceeding (1)
arising under the Bankruptcy Code, (2) arising in a case under
the Bankruptcy Code, and (3) related to cases arising under the
bankruptcy. 	With respect to property, Congress has given the
courts jurisdiction over property of the debtor and property of
the estate. 	None of these jurisdictional provisions confer this
court with subject matter jurisdiction over this adversary
proceeding.
III
With respect to jurisdiction over proceedings, this
adversary proceeding does not fit within any of the categories of
proceedings for which the bankruptcy court has subject matter
jurisdiction.
A.
First, this adversary proceeding does not arise under the
Bankruptcy Code. 	Nothing in either the Ostroffs’ amended
complaint or the defendant’s amended answer, including the
counterclaims asserted therein, cite to any provision of the
Bankruptcy Code as a basis for relief.
The Ostroffs are seeking to avoid the deeds of trust on
their property on the basis that they hold the property as
tenants by the entirety and that Maria Ostroff did not sign the
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deeds of trust at issue in this adversary proceeding. 	As I
pointed out in my order to show cause, however, the Ostroffs are
not relying on any provision of the Bankruptcy Code to avoid the
deeds of trust. 	Nor could they.
While, to be sure, the Bankruptcy Code does provide
opportunities to avoid deeds of trust encumbering property held
in a tenancy by the entirety, see, e.g., 11 U.S.C. § 544
(granting the trustee the power to avoid unperfected liens), none
of these opportunities are available here. 	The Ostroffs
commenced their case under chapter 7 of the Bankruptcy Code.
Debtors in chapter 7 bankruptcy are only given limited powers to
avoid liens.
Section 522(f)(1) of the Bankruptcy Code allows debtors to
avoid judicial liens and liens on certain personal property to
the extent those liens impair an exemption. 	The liens here are
neither judicial liens nor do they encumber personal property.
Potentially more relevant, § 522(h) endows the debtor with many
of the trustee’s avoidance powers, but limits a debtor’s ability
to use these powers to instances when the transfer the debtor is
seeking to avoid was an involuntary transfer. 	Here, the Ostroffs
do not alleged that the transfer was involuntary, nor do they
cite § 522(h) as a basis for relief in either their amended
complaint or their response to the order to show cause.
American Home also fails to show that its counterclaims
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arise under the Bankruptcy Code. 	Like the Ostroffs, American
Home cites no provision of the Bankruptcy Code as a basis for
relief.
In its first counterclaim, Quiet Title—Declaratory
Judgment—Injunctive Relief, American Home asks the court to
exercise its “equitable powers” to declare its deeds of trust as
valid, first and second lien positions against 3210 Volta Place
and to require the Ostroffs to execute any and all documents
necessary to perfect its liens. 	This relief, however, exists
solely by virtue of District of Columbia property and equitable
law, not the Bankruptcy Code. 	Consequently, it provides an
insufficient basis to find jurisdiction based on the proceeding
arising under the Bankruptcy Code.
In its second counterclaim, Declaratory Judgement—Equitable
Lien, American Home again asks for relief that exists solely by
virtue of District of Columbia property and equitable law.
Particularly, American Home asks the court to declare its liens
valid and enforceable as an equitable lien. 	This basis for
relief is similarly unavailing as a basis for jurisdiction as
arising under the Bankruptcy Code.
Finally, American Home asks the court to equitably subrogate
its lien to First Union and Provident, the mortgages it paid off
in refinancing 3210 Volta Place. 	Once again, though, this is a
cause of action that arises under District of Columbia law and
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does not provide the defendant with a hook for arising under
title 11 jurisdiction under 28 U.S.C. 1334(b).
American Home’s right to enforce any lien that it could
enforce under state law against the exempt homestead despite the
property being exempt does arise under the Bankruptcy Code,
specifically, under 11 U.S.C. § 522(c)(2), but its state law
right to enforce a lien arises under state law, not under the
Bankruptcy Code. 	Adjudicating what rights American Home has
under state law is not a proceeding arising under the Bankruptcy
Code. 	If it has any such right to enforce a lien under state
law, there is no dispute regarding the applicability of
§ 522(c)(2) to permit the enforcement of that lien.
The parties have not attempted to found subject matter
jurisdiction on the existence of defenses to the claims that
arise under non-bankruptcy law. 	I conclude that even though the
Ostroffs raise a defense under the Bankruptcy Code to American
Home’s claims for finding a lien exists, subject matter
jurisdiction cannot be founded on that basis. 	As noted above,
American Home asks the court to exercise its “equitable powers”
to declare its deeds of trust as valid, first and second lien
positions against 3210 Volta Place and to require the Ostroffs to
execute any and all documents necessary to perfect its liens.
The Ostroffs defend on the basis that the discharge injunction of
11 U.S.C. § 524(a) bars a proceeding to impose a lien, which did
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not exist previously, on 3210 Volta Place. 	In Rivet v. Regions
Bank of Louisiana, 522 U.S. 470, 475 (1998), a party sought to
justify removal of a proceeding on the basis that a prior
bankruptcy court order barred the removed action. 	The Court
disagreed, concluding that although the defense arose under
federal law (the bankruptcy court order), the complaint could not
be viewed as asserting a claim based on federal jurisdiction.
The Court observed:
We 	have 	long 	held 	that 	“[t]he 	presence 	or 	absence 	of
federal-question 	jurisdiction 	is 	governed 	by 	the
‘well-pleaded 	complaint 	rule,’ 	which 	provides 	that
federal jurisdiction exists only when a federal question
is 	presented 	on 	the 	face 	of 	the 	plaintiff's 	properly
pleaded 	complaint.” 	Caterpillar 	Inc. 	v. 	Williams, 	482
U.S. 386, 392 (1987); see also Louisville & Nashville R.
Co. v. Mottley, 211 U.S. 149, 152 (1908). 	A defense is
not part of a plaintiff's properly pleaded statement of
his 	or 	her 	claim. 	See 	Metropolitan 	Life 	Ins. 	Co. 	v.
Taylor, 481 U.S. 58, 63 (1987); Gully v. First Nat. Bank
in Meridian, 299 U.S. 109, 112 (1936) (“To bring a case
within the [federal-question removal] statute, a right or
immunity 	created 	by 	the 	Constitution 	or 	laws 	of 	the
United States must be an element, and an essential one,
of the plaintiff's cause of action.”).
The complaint here addressed only whether the property was free
of any lien, a question under District of Columbia law, not under
the Bankruptcy Code. 	In response to the American Home’s
counterclaim and efforts to impose a lien through equitable
powers existing under District of Columbia law, the Ostroffs have
raised the defense of the discharge injunction, but a defense is
not a basis for finding subject matter jurisdiction. 	The
Ostroffs’ complaint did not invoke the discharge injunction, and
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thus that does not furnish a basis for finding subject matter
jurisdiction.
“The discharge injunction granted by section 524(a) is a
substantive right conferred by the Bankruptcy Code . . .
enforceable through a declaratory judgment action.” 	Insurance
Co. of N. Am. v. NGC Settlement Trust & Asbestos Claims Mgmt.
Corp. (In re Nat'l Gypsum), 118 F.3d 1056, 1063 (5th Cir. 1997).
The well-pleaded complaint rule nevertheless necessitates finding
that “arising under” subject matter jurisdiction was not pled.
Liberty Mut. Insur. Co. v. Lone Star Indus., Inc., 313 B.R. 9, 16
(D. Conn. 2004) (removed complaint could not be viewed as
“arising under” the Bankruptcy Code even if a defense existed
under the Bankruptcy Code); State of Arkansas Teacher Retirement
System v. Merrill Lynch & Co., Inc. (In re LJM2.Co-Investment,
L.P.), 319 B.R. 495, 500-02 (Bankr. N.D. Tex. 2005). 	The
complaint and the counterclaim, for reasons next discussed, are
not related to the Ostroffs’ case under chapter 7 of the
Bankruptcy Code, and accordingly the existence of the discharge
defense cannot be used as a basis to treat those pleadings as
fitting within the exception to the well-pleaded complaint rule
for “related to” jurisdiction. 	See Bank of America, N.A. v.
Brennan Title Co. (In re Donoho), 402 B.R. 687, 697 (Bankr. E.D.
Va. 2009) (well-pleaded complaint rule does not apply when a
bankruptcy removal is predicated on "related to" jurisdiction);
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In re Brooks Mays Music Co., 363 B.R. 801, 815 (Bankr. N.D. Tex.
2007) (same).
The Ostroffs sought a determination whether a lien existed
on their property, a question of District of Columbia law. 	To
the extent they could seek a declaration that American Home is
barred by the discharge injunction from securing a determination
under District of Columbia law that a lien exists on their
property via equitable remedies, a narrow question distinct from
whether District of Columbia law affords such equitable remedies,
the dismissal of this adversary proceeding will be without
prejudice to their filing a complaint seeking such relief. 	The
court can then address such issues as abstention and the
discretionary factors regarding entertaining a declaratory
judgment action. 	See In re LJM2.Co-Investment, L.P., 319 B.R. at
502; In re Antonious, 373 B.R. 400, 409 (Bankr. E.D. Pa. 2007).
B.
Having determined that neither the complaint nor the
counterclaim arises under the Bankruptcy Code, the next issue is
whether the parties’ claims either “arise in” or “relate to” the
Ostroffs’ chapter 7 case. 	As I explained in my November 25, 2009
order to show cause, Pacor, Inc. v. Higgins, 743 F.2d 984 (3d
Cir. 1984), sets forth the relevant test for whether a proceeding
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is “related to” to a bankruptcy case. 1 	Under Pacor, a proceeding
is related to a bankruptcy case if “the outcome of that
proceeding could conceivably have any effect on the estate being
administered in bankruptcy.” 	Id. at 994. 	In response to the
order to show cause, American Home and the Ostroffs put forth
several arguments that jurisdiction is proper.
1.
First, American Home argues that there is an effect on the
estate because if the Ostroffs avoid all the liens, 3210 Volta
Place will be available for distribution to the unsecured
creditors. 	In arriving at this conclusion, American Home states
that 3210 Volta Place will be available because the Ostroffs have
failed to properly exempt the property and therefore it is
available to be sold for the benefit of unsecured creditors. 	As
I explain in my memorandum opinion of March 8, 2010, in the main
1 	It is important to note that because the “arise in” and
“related to” standards operate conjunctively the court need only
determine whether the adversary proceeding is at least related to
the bankruptcy case. 	Wood v. Wood (In re Wood), 825 F.2d 90, 93
(5th Cir. 1987). 	If the proceeding does not at least meet the
lesser related-to standard, it cannot, by definition, meet the
arising-in standard.
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case, however, the Ostroffs have exempted 3210 Volta Place. 2
Because 3210 Volta Place is exempt, the only outcome of the
adversary proceeding would be to determine whether the defendants
have a valid, enforceable lien on 3210 Volta Place. 	In the event
the defendants do, that lien will survive bankruptcy and will
remain enforceable against the property. 	In the event the
defendants do not, then the Ostroffs take 3210 Volta Place free
of American Home’s liens, with no effect on the estate. 	None of
the equity freed up by virtue of any lien avoidance will go to
the benefit of the estate or unsecured creditors. 	Rather, that
value would fall to junior lienors or the Ostroffs, to the extent
they are able to avoid all the liens on the property or enough
liens to provide them with an equity cushion.
2.
Notwithstanding the practical reality that avoiding these
liens has no effect on the administration of the estate, both the
2 	As I noted in my memorandum opinion in the main case
regarding American Home’s renewed objection to the Ostroffs’
exemption of 3210 Volta Place, the Ostroffs’ amendment of an
unrelated schedule does not have the effect of reopening the
period for objecting to exemptions under Fed. R. Bankr. Proc.
4003. 	Moreover, even in the event that the Ostroffs’ amendment
of an unrelated schedule were to open up the objection period to
their claimed exemptions, if I were to grant American Home’s
objection I would likely do so without prejudice to the Ostroffs’
filing an amended list of exemptions. 	Unless American Home were
able to come up with a reason why the Ostroffs’ amended exemption
of 3210 Volta Place under the District’s unlimited homestead
exemption was improper (and they have put forth no reasons why it
would be), the detour of granting American Home’s objection would
merely lead us back to the place we are today.
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Ostroffs and American Home argue that jurisdiction lies because
this is a core proceeding under 28 U.S.C. § 157.
Section 157(b)(1) provides that, upon referral from the
district court, the bankruptcy court “may hear and determine all
cases under title 11 and all core proceedings arising under title
11 or arising in a case under title 11 . . . .” 	Section
157(b)(2) goes on to enumerate certain core proceedings,
including, under § 157(b)(2)(K), “determinations of the validity,
extent, and priority of liens,” and, under § 157(b)(2)(O), “other
proceedings affecting the liquidation of the assets of the estate
or the adjustment of the debtor-creditor or equity security
holder relationship, except personal injury tort or wrongful
death claims.” 	The parties, however, read too much into § 157.
The plain language of § 157(b) only allows a court to hear
and determine core proceedings that arise under title 11 or arise
in a case under title 11. 	This adversary proceeding does not fit
within either of those two categories. 	First, this adversary
proceeding does not arise under title 11. 	As I stated above,
nothing in either the Ostroffs’ complaint or American Home’s
counterclaims relies on a provision of the Bankruptcy Code as a
basis for relief. 	Second, this adversary proceeding does not
arise in a case under title 11. 	“The ‘arising in a case under’
category is generally thought to involve administrative-type
matters . . . or as the Wood court put it ‘matters that could
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arise only in bankruptcy.’” In re Toledo, 170 F.3d 1340, 1345
(11th Cir. 1999) (citing Collier on Bankruptcy and quoting In re
Wood, 825 F.2d at 97). 	This adversary proceeding has nothing to
do with the administration of the case or the estate and does not
concern a matter that could arise only in bankruptcy. 	To the
contrary, this matter arises solely by virtue of District of
Columbia law. 	Consequently, under the plain language of § 157(b)
this is not a core proceeding that arises under title 11 or in a
case under title 11.
Moreover, § 157(b) does not in itself provide the bankruptcy
courts with jurisdiction. 	Rather, this provision serves to
divide between the district courts and the bankruptcy courts who
bears the laboring oar. 	In proceedings that are core proceedings
under § 157, the bankruptcy court bears the laboring oar on
making findings of facts and conclusions of law. 	In proceedings
that are not core proceedings but are nevertheless related to the
bankruptcy case, the bankruptcy court is empowered by 28 U.S.C.
§ 157(c)(1) only to make proposed findings of facts and
conclusions of law (unless the parties consent otherwise under
§ 157(c)(2)). 	Importantly, however, in order for a proceeding to
be either core or non-core, jurisdiction must first lie by virtue
of § 1334. 	Only after jurisdiction is proper does § 157 come in
to play.
Section 1334(b) does not grant jurisdiction over proceedings
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that solely affect property that a debtor has exempted from the
estate. 	Turner v. Ermiger (In re Turner), 724 F.2d 338 (2d Cir.
1983); see also In re McClellan, 99 F.3d 1420, 1422-23 (7th Cir.
1996); In re Graziadei, 32 F.3d 1408, 1410 n.2 (9th Cir. 1994)
(bankruptcy court lacked subject matter jurisdiction to order
that fees owed to his former spouse’s attorney pursuant to a
postpetition divorce decree be paid out of proceeds of exempt
property); Menotte v. United States (In re Garcia), 2002 WL
31409580 (S.D. Fla. 2002). 	In In re Turner, the debtor Turner
exempted from the estate her cause of action against her landlord
Ermiger for conversion of restaurant equipment, and claimed other
exemptions that exhausted the estate. 	The Court of Appeals held
that the bankruptcy court did not have “related to” jurisdiction
over the proceeding: 3
Turner 	brought 	the 	present 	action, 	which 	she 	had
reclaimed 	from 	the 	estate 	pursuant 	to 	§ 	522(d), 	in 	her
own name. 	There is no suggestion that the proceeds would
be turned over to the trustee, or accounted for to him,
and the judgment below orders Ermiger to pay the damages
directly to her. 	Failure to recover on the claim against
Ermiger 	could 	not 	increase 	her 	exemption 	claim 	under
3 	In re Turner held that for a proceeding to be "related
to" the bankruptcy case, the proceeding must have a "significant
connection" to the debtor's bankruptcy case. 	In In re Cuyahoga
Equip. Corp., 980 F.2d 110, 114 (2d Cir. 1992), the Court of
Appeals clarified this test by indicating that, "The test for
determining whether litigation has a significant connection with
a pending bankruptcy proceeding is whether its outcome might have
any 'conceivable effect' on the bankruptcy estate." (Citations
omitted.) 	The Second Circuit has thus aligned itself with the
Pacor test. 	Under the Pacor test, the outcome in In re Turner
would have been the same.
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§ 	522(d) 	of 	the 	Code 	since 	her 	exemptions 	had 	already
exhausted the estate.
In re Turner, 724 F.2d at 341. 	Here, too, the Ostroffs have
exhausted the estate by way of their exemptions, leading the
trustee to file a Report of No Distribution, and regardless of
the outcome of the parties’ claims, they will have no impact on
the other exemptions the Ostroffs have claimed as to other
assets. 	As this court noted in a similar case, a “claim that the
lien is invalid is simply a characteristic of the property
exempted . . . , and the debtors can assert that invalidity
outside of this bankruptcy case.” 	In re Wilson, 2004 WL 420037,
*2 (Bankr. D.D.C. Feb. 27, 2004).
A proceeding is not “related to” a bankruptcy case merely
because the debtor happens to be a debtor in bankruptcy at the
time the proceeding is brought. 	As stated in Boone v. Community
Bank of Homestead (In re Boone), 52 F.3d 958, 961 (11th Cir.
1995):
The 	role 	of 	debtor 	is 	defined 	by 	the 	panoply 	of 	rights
and duties arising from the petition in bankruptcy; the
outcome of the tortious interference claim will not alter
those 	rights 	and 	duties 	in 	any 	way. 	Hence, 	“[t]o 	fall
within the court's jurisdiction, the plaintiffs' claims
must 	affect 	the 	estate, 	not 	just 	the 	debtor.” 	In 	re
Wood, 825 F.2d at 94.
Because § 1334 does not give the bankruptcy court jurisdiction
over proceedings that solely affect the debtor’s property, § 157
never becomes applicable to this adversary proceeding in the
first instance. 	For this reason, the parties’ argument that this
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is a core proceeding and therefore jurisdiction is proper is
unavailing.
Notwithstanding the foregoing analysis, the parties cite
several cases in support of their contention that this is a core
proceeding and therefore jurisdiction is proper. 	Two cases
American Home cites go against its position. 	Continental Nat’l
Bank v. Sanchez (In Re Toledo), 170 F.3d 1340 (11th Cir. 1999),
found that jurisdiction did lie but only after it concluded that
there would be an effect on the assets of the estate. 	In so
holding, the Toledo court distinguished a previous case where it
did not find jurisdiction because any recovery in that adversary
proceeding “would not inure to the benefit of the estate.” Id. at
1346 (distinguishing In re Boone, 52 F.3d at 958). 	Because the
Ostroffs have exempted the entire value of 3210 Volta Place,
whether these liens are valid has no effect on the estate and,
accordingly, Toledo does not support American Home’s position.
In the second case American Home cites, Hasset v. BancOhio Nat’l
Bank (In re CIS Corp.), 172 B.R. 748 (S.D.N.Y. 1994), the court
found the proceeding to be non-core on the basis that
§ 157(b)(2)(K) only applied to liens that affected property of
the estate. 	Id. at 759.
Another case on which American Home relies, Gibbs v. F & M
Marquette Nat’l Bank (In re Gibbs), 44 B.R. 475 (Bankr. D. Minn.
1984), is readily distiguishable from this case. 	In Gibbs, the
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court held that jurisdiction lied by virtue of § 506(d). 	It was
only after the court determined the action arose under the
Bankruptcy Code that § 157(b)(2)(K) came into play and the court
determined that the matter was core. 	This is consistent with the
analysis above and, consequently, does not provide a foundation
for subject matter jurisdiction in this case, where the parties
cite to no provision in the Bankruptcy Code as a basis for
relief.
Two decisions American Home cites, however, do support its
position. 	These decisions conclude that jurisdiction lies for a
bankruptcy court to determine the validity of liens even when the
debtor has exempted the property which the liens purport to
encumber and the objection period to exemptions has expired. 	In
Hallmark Capital Group, LLC v. Pickett (In re Pickett), 362 B.R.
794 (Bankr. S.D. Tex. 2007), the court found that § 157(b)(2)(K)
provided jurisdiction over not only property of the estate, but
also property of the debtor that had become exempt. 	Id. at 797. 4
The other case supporting American Home’s argument, First State
4 	In Veldelkens v. GE HFS Holdings, Inc. (In re Doctors
Hospital 1997, L.P.), 351 B.R. 813 (Bankr. S.D. Tex. 2006), an
opinion authored by the Hallmark judge, the court reached a
similar conclusion, finding a proceeding core by concluding that
§ 157(b)(2)(K) included determining the validity of liens on
property of a reorganized corporate debtor. 	Id. at 844-45. 	That
decision may be distinguishable because it involved a corporate
debtor’s property, and addressed the court’s continuing
jurisdiction over lien questions that had pertained to property
of the estate and that were still in play after confirmation of a
plan vested the property at issue in the reorganized debtor.
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Bank of Wykoff v. Grell (In re Grell), 83 B.R. 652 (Bankr. D.
Minn. 1988), similarly concluded that bankruptcy courts have
jurisdiction over disputes regarding the validity of liens on
property of the debtor by virtue of § 157(b)(2)(K). 	Id. at 657.
Respectfully, I disagree with these decisions.
As I explained above, before § 157 even comes into play,
jurisdiction must first lie under § 1334(b). 	After there is
jurisdiction, then § 157 serves to determine whether the
bankruptcy court is empowered to make findings of fact and
conclusions of law. 	If even the district court would lack
jurisdiction under § 1334(b) because the proceeding does not
arise under the Bankruptcy Code or arise in or relate to a case
under title 11, § 157 cannot otherwise save a case from
dismissal.
3.
Finally, the Ostroffs’ amendment to their complaint also
fails to create jurisdiction. 	Prior to the Ostroffs’ filing
their chapter 7 petition, the Internal Revenue Service recorded a
pre-petition tax lien on 3210 Volta Place. 	This IRS tax lien was
recorded after American Home, Ocwen, and BB&T, the original
defendants in this adversary proceeding, recorded their deeds of
trust. 	In their response to the order to show cause, the
Ostroffs argue that jurisdiction is now proper because the
outcome of this adversary proceeding would determine the extent
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to which the IRS’s tax lien was secured.
In support of their position that adding the IRS as a
necessary party cures the jurisdictional defects, the Ostroffs
rely on Holland Industries, Inc. v. United States, 103 B.R. 461,
466 (Bankr. S.D.N.Y. 1989). 	In Holland, the court opined, in
dicta, that “bankruptcy courts routinely determine the validity
of tax liens . . . when the lien concerns property of the
debtor.” 	This quote, however, is taken out of context. 	In
Holland, the court was asked to decide whether it had
jurisdiction to determine the validity of a non-debtor lien.
Although bankruptcy courts do have jurisdiction to determine the
validity of tax liens, the jurisdiction only exists when that
determination would have an effect on the administration of the
estate, that is, when the debtor has not exempted the property on
which the tax lien attached and the trustee has not issued a
report of no distribution. 	Where, as here, the property is
exempted and there will be no distribution to unsecured
creditors, the fate of the tax lien has no impact upon the estate
and, therefore, jurisdiction does not lie merely by adding the
IRS as a party.
Moreover, notwithstanding that any determination of the
validity of the initial defendants’ liens will necessarily
determine the extent to which the IRS’s tax lien is secured (that
is, the extent to which enforcement of the tax lien would yield
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the IRS anything), this result does not give the court
jurisdiction. 	Again, the test is whether this proceeding would
have any effect on the administration of the estate. 	The
Ostroffs have exempted the entire value of 3210 Volta Place. 	The
IRS’s lien on that property has passed through the Ostroffs’
chapter 7 case unaffected by the bankruptcy case. 	To the extent
the Ostroffs are able to avoid some of the initial defendants’
liens, then that may free up value that could be realized via
enforcement of the tax lien. 	To the extent that the Ostroffs are
unable to avoid any liens, the IRS will remain a lienholder
unaffected by the bankruptcy case but junior in priority to the
initial defendants’ liens and thereby possibly unsecured. 	Those
two possible outcomes have no impact on the administration of the
bankruptcy estate because the property has been exempted from the
estate and there are no other assets for the trustee to
administer. 	The trustee has issued a report of no distribution,
and how the IRS tax lien fares will have no impact on the
unsecured creditors in the case for whom there will be no
distributions to share, and against whom the IRS would not be
competing to the extent it is an unsecured creditor. 	For these
reasons, adding the IRS as a defendant does nothing to cure the
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jurisdictional defect in this adversary proceeding. 5
IV
The final basis of bankruptcy court jurisdiction is 28
U.S.C. § 1334(e)(1), which gives the court exclusive jurisdiction
over all property of the debtor at the commencement of the case
and all property of the estate, regardless of where that property
is located. 	In their response to the order to show cause, the
Ostroffs argue that because 3210 Volta Place was their property
at the time they commenced their chapter 7 case, § 1334(e) now
gives the court jurisdiction to hear their lien avoidance action.
Were the statute interpreted as urged by the parties, then
decisions such as In re Turner and In re Boone would have to be
viewed as decided in error, and I decline to adopt the parties’
interpretation of the statute.
The conferral by § 1334(e) of exclusive jurisdiction over
the property of the debtor as of the commencement of the case and
over property of the estate furthers the various rights a
bankruptcy trustee has to administer certain property for the
benefit of unsecured creditors. 	Section 1334(e) provides that
5 	The Ostroffs also state that at the very least the court
should consider the views of the IRS before dismissing the
adversary proceeding. 	The IRS’s response, however, would not
change the underlying facts of the adversary proceeding: namely,
that the Ostroffs have exempted the entire value of the property
and the trustee has issued a report of no distribution.
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the court has exclusive jurisdiction over the property of the
debtor as of the commencement of the case because 11 U.S.C. §
541(a)(1) defines property of the estate as including, with minor
exceptions, all of the property of the debtor as of the
commencement of the case. 	In turn, § 1334(b) permits the court
to determine under 11 U.S.C. § 522 the extent to which property
will be permitted to be exempted from the estate. 	The debtor’s
property must first come into the estate, subject to the property
being exempted and the bankruptcy court’s determining questions
relating to claims of exemption, and is thus subject in that
sense to administration by the bankruptcy court. 	See Sumy v.
Schlossberg, 777 F.2d 921, 925 (4th Cir. 1985) (noting that § 541
overruled Lockwood v. Exchange Bank, 190 U.S. 294 (1903), which
held that under the Bankruptcy Act the court lacked jurisdiction
over property that could be exempted); In re Charles, 123 B.R.
52, 54 n.1 (Bankr. E.D. Mo. 1991) (same).
In other words, § 1334(e)(1) divests any other court of the
authority to take jurisdiction over the res being administered by
the trustee for the benefit of unsecured creditors. 	This
includes the debtor’s property as of the commencement of the case
that becomes property of the estate on that date under 11 U.S.C.
§ 541(a)(1), subject to being exempted out of the estate to the
extent permitted by 11 U.S.C. § 522. 	Once such property is
exempted from the estate, it is property of the debtor anew, and
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is no longer property being administered by the bankruptcy
trustee as “property of the debtor as of the commencement of the
case.” 	An argument thus exists that such property that has
become exempt is not covered by § 1334(e)(1). 6
Even if property that has become exempt is still covered by
§ 1334(e)(1), that does not address whether the bankruptcy court
has subject matter jurisdiction over proceedings relating to such
property. 	Jurisdiction over the property of the debtor under
§ 1334(e) does not equate to jurisdiction under § 1334(b) over a
proceeding that relates to such property. 	See Valley Historic
Ltd. P’ship v. Bank of N.Y., 486 F.3d 831, 838 (4th Cir. 2007)
(“the Debtor would still have had to establish jurisdiction under
§ 1334(b), since § 1334(e) does not by itself create jurisdiction
6 	From a literal standpoint, property of the debtor that
fits within the exceptions to the general rule of § 541(a)(1)
never becomes property of the estate, and need not be exempted by
the debtor. 	Unlike property that later becomes exempt property,
and thus the debtor’s property anew, property of the debtor
excepted from § 541(a)(1) remains the debtor’s property from the
outset, not becoming property of the debtor only anew. 	Conferral
of exclusive jurisdiction over such debtor property is thus not
susceptible of an argument that exclusive jurisdiction over such
property under § 1334(e)(1) ceases upon the property becoming
property of the debtor anew. 	Nevertheless, all that means is
that § 1334(e)(1) is an overly broad instrument in protecting the
bankruptcy court’s authority to administer estate property by
conferring exclusive jurisdiction over such property in the
bankruptcy court. 	It does not demonstrate an intent that
§ 1334(e)(1) address subject matter jurisdiction over
proceedings. 	To the extent that applying § 1334(e)(1) to such
property of the debtor as of the commencement of the case that
never becomes property of the estate would produce absurd
results, principles of statutory interpretation are available to
address avoiding such results.
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to conduct civil proceedings”); Jacobs v. Jacobs (In re Jacobs),
401 B.R. 202, 205-07 (Bankr. D. Md. 2008).
Although I was initially inclined to follow Abramowitz v.
Palmer, 999 F.2d 1274 (8th Cir. 1993), and hold that subject
matter jurisdiction exists in this case based on § 1334(e)(1), I
am now convinced that Abramowitz was erroneously decided. 	See In
re Jacobs, 401 B.R. at 206-07 (bankruptcy court lacks subject
matter jurisdiction to determine the ownership of property that
is not property of the estate). 	In Abramowitz, the court held
that § 1334(e)(1) (then numbered § 1334(d)) conferred subject
matter jurisdiction over a proceeding to determine that the
debtor’s exempted homestead was subject to a constructive trust,
citing two bankruptcy court decisions as directly supporting its
holding.
In one of those decisions, In re Gibbs, 44 B.R. 475 (Bankr.
D. Minn. 1984), the court held that it had subject matter
jurisdiction over a proceeding brought under 11 U.S.C. § 506(d)
to determine that a lien on exempted property was void as being
trumped by superior liens in excess of the value of the property.
Plainly that was a proceeding arising under the Bankruptcy Code,
fitting within the “arising under” prong of jurisdiction under 28
U.S.C. § 1334(b). 	Accordingly, In re Gibbs does not support the
argument that § 1334(e)(1) confers subject matter jurisdiction to
determine whether a lien exists under nonbankruptcy law against
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property that has been exempted from the estate.
In the second decision upon which Abramowitz relied, In re
Jackson, 102 B.R. 82 (Bankr. N.D. Tex. 1988), the court held it
had jurisdiction to determine whether under state law a lien
existed against property the debtor had exempted, citing
§ 1334(e)(1) (then numbered § 1334(d)) and In re Gibbs as
supporting its holding. 	The court pointed to proposed
§ 2-201(a)(2) of statutory changes recommended by the Commission
on the Bankruptcy Laws of the United States, a provision never
enacted, that would have conferred upon the bankruptcy court
jurisdiction over “the determination of all controversies that
arise out of a case commenced under this Act,” including
“controversies involving property set apart to the debtor as
exempt, including the enforceability of claims, whether or not
secured, against such property.” 	That language dealt with
jurisdiction over controversies, not over property, and thus was
not a forerunner to § 1334(e)(1). 	Accordingly, that language
cannot be used as a justification for construing § 1334(e)(1) as
a basis for conferring subject matter jurisdiction over a
proceeding to determine whether a lien exists on property that
has been exempted from the estate.
With respect to jurisdiction over “controversies” (the same
thing as “proceedings” as that term is used in 28 U.S.C.
§ 1334(b)), the Commission’s proposed § 2-201(a)(2) can be
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construed as consistent with the current jurisdictional grant
under 28 U.S.C. § 1334(b) with respect to proceedings regarding
exemptions. 	Pursuant to § 1334(b), a bankruptcy court can
determine what property is exempt (an issue arising under the
Bankruptcy Code), and can declare whether a lien existing under
state law comes within 11 U.S.C. § 522(c) as remaining
enforceable against exempted property (similarly an issue arising
under the Bankruptcy Code). 7 	Even if § 2-201(a)(2) of the
Commission’s proposal cannot be construed as consistent with
§ 1334(b), the proposal was never enacted, and § 1334(b), not the
Commission’s proposal, governs. 	For all of these reasons, I
reject as erroneous the reasoning of In re Jackson in concluding
that 28 U.S.C. § 1334(e)(1) (then numbered § 1334(d)) or
§ 1334(b) confers subject matter jurisdiction to determine
whether a lien exists under nonbankruptcy law against exempt
property.
The consequence is that the Abramowitz holding that
§ 1334(e)(1) can provide subject matter jurisdiction over a
proceeding rests on one decision in which “arising under”
jurisdiction existed under § 1334(b) (and thus the existence of
§ 1334(e)(1) was an academic issue) and another decision which
7 	As discussed previously, however, interpreting § 522(c)
as to whether it covers a particular lien is not the same thing
as determining whether a lien exists on the exempted property in
the first place.
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relied on § 1334(e)(1) for subject matter jurisdiction but whose
reasoning was seriously flawed. 	Accordingly, I reject the
holding of Abramowitz that § 1334(e)(1) can supply subject matter
jurisdiction.
Aside from its reliance on § 1334(e)(1), Abramowitz also
found subject matter jurisdiction over the claim to impose a
constructive trust based on the proceeding being a proceeding to
declare nondischargeable a debt procured by fraud, a proceeding
arising under the Bankruptcy Code and thus falling within the
court’s “arising under” subject matter jurisdiction. 	The
constructive trust was sought as a remedy for the fraud that was
the ground asserted by the plaintiff as a basis for determining
nondischargeability of the debt. 	The constructive trust against
the exempted property, therefore, was relief ancillary to the
establishment of the nondischargeable debt for fraud. 	Here, no
argument can be made that the determination of whether American
Home has a lien on the Ostroffs’ homestead is sought as ancillary
relief in a proceeding over which this court does have subject
matter jurisdiction. 8
Abramowitz also cited Johnson v. Finnman (In re Johnson),
960 F.2d 396 (4th Cir. 1992), as a decision in which the
8 	The extent to which a bankruptcy court has subject matter
jurisdiction to grant ancillary relief is an area of unsettled
law which I need not reach.
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bankruptcy court was held to have jurisdiction to determine the
existence of constructive trusts in property the debtor had
accumulated. 	In Johnson, however, the property at issue had not
been exempted by the debtor, and that distinguishes Johnson from
this proceeding. 	Johnson merely upholds the bankruptcy court’s
power to require beneficiaries of constructive trusts to bring
claims in the bankruptcy court so that the trust property can be
distinguished from non-trust property that, as property of the
estate, the bankruptcy trustee could administer for the benefit
of unsecured creditors. 	The proceeding in Johnson was thus a
proceeding addressing the administration of the estate, and fell
plainly within the bankruptcy court’s subject matter jurisdiction
under 28 U.S.C. § 1334(b). 	Here, in contrast, the Ostroffs'
homestead has been exempted, and the existence vel non of a lien
on that property is an issue that does not “arise under” the
Bankruptcy Code, does not “arise in” the bankruptcy case, and has
no impact on the administration of the estate. 	Accordingly,
there is no subject matter jurisdiction.
V
The property at issue was property of the estate at the
commencement of the case. 	The Ostroffs claimed the property
exempt in its entirety, and when no one timely objected, the
property’s character for purposes of the case became exempt
property under 11 U.S.C. § 522(l) (“Unless a party in interest
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objects, the property claimed as exempt . . . is exempt.”) 	If
the property had remained property of the estate, the bankruptcy
trustee, not the Ostroffs, would have been the party with
standing to prosecute a proceeding to declare American Home’s
lien invalid in order to administer the equity in the property,
as property of the estate, for the benefit of unsecured
creditors. 	The Ostroffs’ right to pursue the adversary
proceeding at the outset of the case was based on the prospect
that the property would be treated as exempt property in the case
by reason of § 522(l). 	Although the court would have had
jurisdiction over a proceeding by the trustee to declare American
Home’s lien invalid on estate property, the court does not have
jurisdiction over such a proceeding by the Ostroffs premised on
the property being exempt. 	That subject matter is tested as of
the date of the filing of the complaint gains them nothing
because the proceeding was necessarily founded on its being
pursued as to exempt property.
VI
For the foregoing reasons, I will dismiss this adversary
proceeding for lack of subject matter jurisdiction. 	An order
follows.
[Signed and dated above.]
Copies to: All counsel of record.
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