Wiles et al v. Wise et al

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE:
TEDDY T. WILES, SR., and
IDA MARIE WILES,
Debtors.
___________________________________
TEDDY T. WILES, SR., and IDA MARIE
WILES,
Plaintiffs,
v.
CHARLES WISE, III, and MORTGAGE
ELECTRONIC REGISTRATION
SYSTEMS, INC., (MERS), as nominee for
HOMECOMINGS FINANCIAL
NETWORK, INC.,
Defendants.
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Case No. 02-21206
Chapter 7
Adv. Proc. No. 10-123
MEMORANDUM OPINION
Teddy and Ida Wiles (the “Debtors”) filed this adversary proceeding against Charles Wise,
III, and Mortgage Electronic Registration Systems, Inc. (“MERS”), alleging three causes of action:
(1) violation of the Bankruptcy Code’s discharge injunction of 11 U.S.C. § 524 against Mr. Wise
and MERS; (2) violation of the West Virginia Consumer Credit and Protection Act, W. Va. Code
§ 46A-2-128(e), against MERS; and (3) a request for a declaration that a purported deed of trust in
favor of MERS is invalid as a lien against the Debtors’ real property.
Dated: Wednesday, January 19, 2011 3:02:00 PM
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Mr. Wise and/or MERS request that the court dismiss all counts of the Debtors’ adversary
complaint against them (except for MERS’s alleged violations of the discharge injunction) on the
basis that the Debtors have either failed to state a claim upon which relief can be granted, or that this
court lacks subject matter jurisdiction to adjudicate the stated cause of action.
For the reasons stated herein, the court will grant the motions to dismiss.
I. STANDARD OF REVIEW
Mr. Wise seeks to dismiss Count I against him – alleging a violation of the Bankruptcy
Code’s discharge injunction – on the grounds that the Debtors’ have failed to state a claim upon
which relief may be granted under Fed. R. Bankr. P. 7012(b), which incorporates Fed. R. Civ. P.
12(b)(6) into bankruptcy adversary proceedings.
In adjudicating a motion to dismiss for failure to state a claim under Fed. R. Civ. P. 12(b)(6),
a court must accept as true all of the factual allegations in the complaint as well as the reasonable
inferences that can be drawn from them, and a court may dismiss the complaint “only if it is clear
that no relief could be granted under any set of facts that could be proved consistent with the
allegations.” Hishon v. King & Spalding, 467 U.S. 69, 73 (1984). 	This tenant, however, is
inapplicable to threadbare recitals of a cause of action’s elements, supported by mere conclusory
statements. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1950 (2009). Defeating a motion for relief under
Rule 12(b)(6) requires the plaintiff to provide more in the complaint than “mere labels and
conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atl.
Corp. v. Twombly, 127 S. Ct. 1955, 1965 (2007). The factual allegations in the complaint “must be
enough to raise a right of relief above the speculative level,” id. at 1959, and be enough to “state a
claim to relief that is plausible on its face.” Ashcroft, 129 S. Ct. at 1949. Determining whether a
complaint is “facially plausible” is context-specific, requiring the reviewing court to draw on its
experience and common sense. Id. at 1950.
Mr. Wise and/or MERS seek to dismiss Counts II and III for lack of subject matter
jurisdiction under Fed. R. Bank. P. 7012(b), which incorporates Fed. R. Civ. P. 12(b)(1) into
bankruptcy adversary proceedings.
In adjudicating a motion to dismiss for lack of subject matter jurisdiction under Fed. R. Civ.
P. 12(b)(1), the court is to “regard the pleadings as mere evidence on the issue, and may consider
evidence outside the pleadings without converting the proceeding to one for summary judgment.”
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Richmond, F. & P. R. Co. v. United States, 945 F.2d 765, 768 (4th Cir. 1991). The “court should
grant the Rule 12(b)(1) motion to dismiss ‘only if the material jurisdictional facts are not in dispute
and the moving party is entitled to prevail as a matter of law.’” Evans v. B. F. Perkins Co., 166 F.3d
642, 647 (4th Cir. 1999) (citation omitted). If factual allegations regarding the existence of subject
matter jurisdiction are in dispute, then the court may resolve the factual issues in adjudicating the
motion to dismiss. Thigpen v. United States, 800 F.2d 393, 396 (4th Cir. 1986).
II. BACKGROUND
As stated in the Debtors’ complaint, they filed a Chapter 7 bankruptcy petition on April 8,
2002, listing a debt owed to MERS for $39,717.58. On their schedule of real property, the Debtors
stated that they jointly owned real property in Albright, West Virginia worth $26,400. The Debtors
claimed the full value their real property as exempt.
On May 24, 2002, MERS filed a motion for relief from the automatic stay to proceed against
the Debtors’ real property, believing the debt owed to it to be secured by that property. On July 1,
2002, however, its counsel filed a motion to withdraw its stay relief motion on the grounds that
MERS’s security interest in the real property was invalid. 	The court granted the motion to
withdraw, the Debtors received their Chapter 7 discharge on July 17, 2002, and their case was closed
the same day.
After the closing of the Debtors’ bankruptcy case, MERS sent the Debtors monthly invoices,
and the Debtors endured weekly telephone calls from MERS seeking to collect on the note allegedly
secured by a deed of trust on the Debtors’ real property. In July 2003, the substitute trustee under
the deed of trust attempted to sell the Debtors’ property until being informed that the obligation
secured by the deed of trust was discharged in bankruptcy. 	The Debtors contend that MERS
violated their discharge injunction at least four time each month from August 2003 to May 2009.
On April 24, 2009, MERS, through its counsel, Charles C. Wise, III, filed an civil action
against the Debtors in the Circuit Court of Preston County West Virginia to reform the invalid deed
of trust. The Preston County Complaint states:
This is an action for reformation of a Deed of Trust that Teddy T. Wiles and
Ida M. Wiles agreed to execute in favor of Plaintiff MERS and Homecomings
Financial, where a correct property address but incorrect property description was
included in the Deed of Trust. MERS also seeks a declaratory judgment that it is a
lien holder with a first priority lien against a full interest in the real estate defined
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herein.
. . . .
17. 	The Wiles[es] remain obligated to assist MERS and Homecomings Financial
with obtaining a marketable security interest in the Property, pursuant to the
Document 	Agreement 	covering 	“Lost 	Misplaced, 	Misstated, 	or 	Inaccurate
Documents,” executed by the Wiles on or about September 22, 2000 . . . .
. . . .
26. 	Because the Deed of Trust and MERS’s lien on the Property was not avoided
by the Trustee or debtors, it passed through Bankruptcy and remains effective as
against the Wiles[es].
. . . .
28. 	MERS does not seek to recover monetary relief under the Note, nor does it
seek any deficiency judgment against the Wiles[es] under the Note or Deed of Trust.
. . . .
32. 	Even if the Deed of Trust contained an incorrect description and could be
challenged by third parties, the Deed of Trust was, and remains, effective as against
the grantors, the Wiles[es].
. . . .
WHEREFORE, Plaintiff requests that this Court enter an order declaring that
[MERS] is entitled to the benefits and protections afforded to a lender whose loan
is secured by a first priority lien against a full interest in the real estate . . . and that
the Deed of Trust should be reformed to correct the incorrect description . . . .
(Ex. Compl.).
On August 16, 2010, on the motion of the Debtors, the court reopened their Chapter 7
bankruptcy case. This adversary proceeding was filed against the Defendants on September 7, 2010.
III. DISCUSSION
Mr. Wise requests that the court dismiss Count I against him on the grounds that he is not
violating the Bankruptcy Code’s discharge injunction in seeking to reform a deed of trust that would
be a lien against the Debtor’s real property – not a personal obligation of the Debtors. 	MERS
requests that the court dismiss Count II, alleging violations of the West Virginia Consumer Credit
and Protection Act, on the basis that the court lacks subject matter jurisdiction over alleged, post-
discharge violations of State law. Mr. Wise and MERS seek dismissal of Count III on the grounds
that the Debtors lack standing to declare MERS’s deed of trust invalid.
A. 	Mr. Wise’s Motion to Dismiss Count I
Mr. Wise argues that Count I, alleging a cause of action for violation of the Debtors’
discharge injunction, fails to state a claim against him on the basis that, as the attorney for MERS’s
Preston County action to reform its deed of trust, he is only seeking in rem relief against the
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Debtors’ property; he is not seeking to enforce the deed of trust as a personal obligation of the
Debtors.
When a debtor receives a bankruptcy discharge under 11 U.S.C. § 524, the entry of that
discharge voids any personal liability that the debtor may have with respect to a lien against the
debtor’s real property, and it prohibits any action or act to collect, recover, or offset any such debt
as a personal liability of the debtor. 11 U.S.C. § 524(a)(1-2). Only a debtor’s personal liability on
a pre-petition debt or lien is extinguished; a creditor’s right to proceed against property of a
discharged debtor survives, giving rise to the adage that “liens pass through bankruptcy unaffected.”
E.g., Johnson v. Home State Bank, 501 U.S. 78, 84 (1991) (“[A] bankruptcy discharge extinguishes
only one mode of enforcing a claim – namely, an action against the debtor in personam – while
leaving intact another – namely, an action against the debtor in rem”); Garran v. SMS Fin. V, LLC
(In re Garran), 338 F.3d 1, 5 (1st Cir. 2003) (“Since a judicial lien attached to property is a liability
in rem, it is not routinely discharged at the conclusion of the bankruptcy case.”); Cen-Pen Corp. v.
Hanson, 58 F.3d 89, 93 (4th Cir. 1995) (“[L]iens pass through bankruptcy unaffected. A bankruptcy
discharge extinguishes only in personam claims against the debtor(s), but generally has no effect on
an in rem claim against the debtor’s property.”); Wrenn v. American Cast Iron Pipe Co. (In re
Wrenn), 40 F.3d 1162, 1164 (11 th Cir. 1994) (“We therefore conclude that [the judgment] lien
remains enforceable [after discharge], unless some provision of the Bankruptcy Code aside from the
discharge provision makes the lien avoidable.”); Robinson v. Robinson (In re Robinson), No. 05-
137, 2007 Bankr. LEXIS 2076 at *9-10 (Bankr. N.D.W. Va. June 25, 2007) (same).
Importantly, a discharge in bankruptcy does not extinguish debt – the debt is still in existence
– only the debtor’s personal liability for the payment of that debt is discharged by the Bankruptcy
Code. 	E.g., United States v. Alfano, 34 F. Supp. 2d 827, 841 (E.D.N.Y. 1999) (“Part of the
conceptual difficulty may arise from the interplay between a discharge of the debtor’s debt and an
extinguishment of the creditor’s claim. The key point is that although a debtor’s debt may be
personally discharged in bankruptcy, the underlying debt is not extinguished.”); Pague v. Harshman
(In re Pague), No. 09-71, 2010 Bankr. LEXIS 912 at *12 (Bankr. N.D.W. Va. April 5, 2010)
(holding that the creditor was allowed to enforce her lien interest in rem after discharge, but could
not pursue the debtor personally on the discharged debt); Robinson, 2007 Bankr. LEXIS at *11 (“[A]
discharge in bankruptcy has no effect on the validity of the underlying debt; rather, a discharge in
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bankruptcy merely releases the debtor from any obligation that the debtor has to repay that debt.”).
Accordingly, after the Debtors’ discharge in this case, MERS was still owed money pursuant
to its pre-petition extension of credit to the Debtors; however, it could not seek to collect that
indebtedness from the Debtors because their bankruptcy discharge relieved them of all personal
responsibility on that debt. MERS was limited to enforcing it alleged lien rights only against the
Debtors’ real property.
Although the nature of the relief sought in the Preston County Complaint filed by Mr. Wise
on behalf of MERS states that the action is only against the Debtors’ property – and no monetary
relief is being sought from the Debtors under the pre-petition note – the complaint does make certain
allegations against the Debtors regarding their personal responsibility. Namely, in ¶ 17, MERS
seeks to hold the Debtors accountable to assist them with obtaining a marketable security interest
in the Debtors’ real property. In ¶ 26, MERS states that its lien remains effective as against the
Debtors. In ¶ 32, MERS states that the deed of trust remains effective against the Debtors.
In isolation, ¶¶ 17, 26, and 32 appear to make allegations concerning the personal
responsibility of the Debtors on a debt that was discharged by them in bankruptcy. The court does
not believe, however, that the Debtors have stated a plausible claim against Mr. Wise for a violation
of the discharge injunction based on his filing of the Complaint. More specifically, the stated nature
of the Complaint is to reform a deed of trust against real property – not to collect a debt from the
Debtors. The request for relief only seeks reformation of the deed of trust to correct an erroneous
property description – no request exists for judgment against the Debtors. Additionally, ¶ 28 of the
Complaint specifically states that no monetary relief or deficiency judgment is sought against the
Debtors. 	In sum, the court finds that the Preston County Complaint merely seeks to enforce a
purported lien interest in real property, if one exists.
Consequently, the court will grant Mr. Wise’s request to dismiss Count I of the Debtors’
adversary complaint only to the extent that it alleges a cause of action against him. No disposition
as to the allegations against MERS or its agents pursuant to Count I is made at this time.
B. 	Subject Matter Jurisdiction Over Count II - Post-Petition Violations of the WVCCPA
In Count II, the Debtors allege that MERS violated W. Va. Code § 46A-2-122(e) of the West
Virginia Consumer Credit and Protection Act when it attempted to collect a debt by communicating
directly with the Debtors at a time when they were represented by an attorney. MERS asserts that
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this court has no subject matter jurisdiction over this cause of action on the basis that all the contacts
alleged to have occurred were after the Debtors’ bankruptcy case had closed.
The district courts have original and exclusive jurisdiction of all cases under title 11 and
original, but non-exclusive jurisdiction of all civil proceedings arising under, arising in, or related
to a case under title 11. 28 U.S.C. § 1334. 	The district court for this District has referred this
jurisdictional grant to the bankruptcy court, as authorized by 28 U.S.C. § 157(a). 	A close
examination of bankruptcy court jurisdiction under § 1334 is important because the “jurisdiction of
the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute.”
Celotex Corp. v. Edwards, 514 U.S. 300, 307 (1995).
Controversies arise in title 11 when they “‘are not based on any right expressly created by
Title 11, but nevertheless, would have no existence outside of the bankruptcy[; i]n other words, a
‘controversy arises in Title 11' when ‘it would have no practical existence but for the bankruptcy.’”
Grausz v. Englander, 321 F.3d 467, 471 (4th Cir. 2003) (citations omitted). Claims arise under title
11 if the claims “clearly invoke substantive rights created by bankruptcy law.” Glinka v. Federal
Plastics Mfg., Ltd. (In re Housecraft Indus. USA, Inc.), 310 F.3d 64, 70 (2d Cir. 2002). 	A
proceeding is related to a bankruptcy case when “the outcome of that proceeding could conceivably
have any effect on the estate. . . . [and] could alter the debtor's rights, liabilities, options, or freedom
of action (either positively or negatively). . . .” Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.
1984). See also Celotex Corp., 514 U.S. at 308 n.6 (1995) (“[W]hatever [‘related to’] test is used,
these cases make clear that bankruptcy courts have no jurisdiction over proceedings that have no
effect on the estate of the debtor.”); New Horizon of N.Y. LLC v. Jacobs, 231 F.3d 143, 151 (4th Cir.
2000) (“This court has adopted the Pacor related to test . . . .”).
This court previously addressed its subject matter jurisdiction over alleged post-petition
violations of § 46A-2-128(e) and concluded that no such jurisdiction existed under § 1334:
The Debtor’s cause of action arising under W. Va. Code § 46A-2-128(e) is not one
that “arises in” or “arises under” title 11 because a debtor's right to be free from a
debt collector’s contacts when the debtor is represented by an attorney exists
independently of the Bankruptcy Code, and the Bankruptcy Code does not attempt
to regulate how that contact is to be made, when and if such contact is appropriate.
Likewise, Debtor’s cause of action under § 46A-2-128(e) is not “related to” the
Debtor's bankruptcy case because whether the Debtor wins or loses, there will be no
affect on the bankruptcy estate.
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Therefore, the court concludes that the jurisdictional grant in 28 U.S.C. § 1334, as
referred to the bankruptcy courts pursuant to § 157(a), as interpreted by the Third
Circuit in its “conceivable effects” test first articulated in Pacor, which has been
adopted by the Court of Appeals for the Fourth Circuit, does not provide a basis for
the court’s exercise of jurisdiction over the Debtor’s State law cause of action under
W. Va. Code § 46A-2-124(e) because win, lose, or draw, the bankruptcy estate will
be wholly unaffected by the outcome of the litigation.
Johnston v. Valley Credit Servs. (In re Johnston), No. 06-180, 2007 Bankr. LEXIS 1174 at *16-19
(Bankr. N.D.W. Va. April 12, 2007).
The Debtors assert that this court has “pendent jurisdiction” under 28 U.S.C. § 1334(b) as
“an extension of supplemental jurisdiction [that] permits a federal court . . . to entertain a state claim
where the federal court would otherwise lack subject matter jurisdiction in an action where the state
law claim arises out of the same event, or connected series of events, as the federal claim.”
(Document No. 12, p.2). As the Court of Appeals for the Ninth Circuit recently stated in Battle
Ground Plaza, LLC v. Ray (In re Ray), 624 F.3d 1124, 1135 (9th Cir. 2010) – even when no “related
to” jurisdiction exists – a bankruptcy court has ancillary jurisdiction “to permit disposition by a
single court of factually interdependent claims.” 	The terms “ancillary” jurisdiction, as well as
“pendant claim” and “pendant party” jurisdiction are now generally viewed by the courts and
commentators as being encompassed within the statutory term “supplemental jurisdiction” as set
forth in 28 U.S.C § 1367. 16 Moore’s Federal Practice – Civil § 106.03[1] (2010).
In Johnston, 2007 Bankr. LEXIS 1174, this court considered whether it had supplemental
jurisdiction to hear and determine a claim over which it did not have an independent basis to assert
jurisdiction under § 1334, but which arose out of the same core of operative fact as the claim over
which the court had subject matter jurisdiction under § 1334. The court concluded that it could not
exercise supplemental jurisdiction for five reasons:
First, by its express terms, § 1367(a) provides that “the district court shall have
supplemental jurisdiction.” No similar grant of authority exists in the statute
conferring supplemental jurisdiction on bankruptcy courts. The jurisdictional basis
for the bankruptcy court is set forth in § 1334. Moreover, pursuant to § 157(a), the
district court may refer to the bankruptcy court all cases “under title 11 and any or
all proceedings arising under title 11 or arising in or related to a case under title 11.”
This language plainly refers to the grant of federal jurisdiction over bankruptcy cases
in § 1334, and does not include any reference to Congress’s grant of supplemental
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jurisdiction to the district courts. 	Indeed, the Order of Reference entered in this
District on August 24, 1984, states that all such cases falling under the umbrella of
§ 157(a) are referred to the bankruptcy court and that Order of Reference does not
mention any grant of supplemental jurisdiction. 	Accordingly, any finding that the
bankruptcy court enjoys the same grant of supplemental jurisdiction as the district
court must have some other basis than the plain language of the statute.
Second, should a bankruptcy court exercise supplemental jurisdiction under § 1367,
which would include all claims having some logical relationship to the bankruptcy
proceeding, then the “related to” grant of jurisdiction in § 1334(b) would be
rendered superfluous. In essence, an exercise of a court's supplemental jurisdiction
under § 1367 would include all, or almost all, instances to which § 1334(b)’s “related
to” jurisdiction would already apply. Such a result is contrary to the well-established
rules of statutory construction that statutes should be read in harmony, and that all
words of a statute should be given effect. 	Moreover, assuming that § 1334(b)’s
“related to” jurisdictional grant is itself a grant of supplemental jurisdiction to the
bankruptcy court, instead of a specific jurisdictional grant under the Pacor standard,
then by its terms, § 1367 would not be an available source for exercising jurisdiction.
Section 1367(a) expressly states that “[e]xcept . . . as expressly provided otherwise
by federal statute . . . the district court shall have supplemental jurisdiction. . . .” If
§ 1334(b)’s “related to” jurisdiction is a grant of supplemental jurisdiction, then the
exception to § 1367's grant of supplemental jurisdiction is applicable.
Third, the United States Supreme Court has admonished that federal courts, and their
jurisdiction, are created by written law. Before a federal court can exercise
jurisdiction over a matter, two things are necessary: (1) “‘[t]he constitution must
have given the court the capacity to take it’”; and (2) “‘an act of Congress must have
supplied it . . . . To the extent that such action is not taken, the power lies dormant.’”
A federal court should not read a jurisdictional statute broadly and should not assume
that the full Constitutional reach of federal court jurisdiction has been exercised by
Congress. 	Reading 28 U.S.C. §§ 157, 1334, and the District Court’s Order of
Reference to include a grant of jurisdiction under § 1367 when no such express
statutory grant is present is contrary to the Supreme Court’s admonishment on how
a court is to interpret a jurisdictional statute.
Fourth, while the court realizes that efficiency and convenience to the parties results
should the court be able to exercise supplemental jurisdiction, and that it may be
onerous to litigate claims with a similar factual background indifferent courts, the
United States Supreme Court has already addressed such concerns. 	In short,
convenience does not confer subject matter jurisdiction.
Fifth, firm policy reasons also justify the court's conclusion that bankruptcy courts
do not enjoy the same § 1367 supplemental jurisdiction power as the district courts.
Foremost is that the aim of the Bankruptcy Code is “in the main, to secure equal
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1 The Debtors also cite to the automatic stay of 11 U.S.C. § 362(a); however, the
automatic stay terminated as to the Debtors and their estate when the Debtors’ Chapter 7 case
closed on July 17, 2002. § 362(c)(2). Thus, the automatic stay is not a basis for asserting
substantive bankruptcy rights in this adversary proceeding when all the alleged acts of Mr. Wise
and MERS occurred after their bankruptcy case had closed.
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distribution among creditors.” The aim of the Bankruptcy Code is not to adjudicate
disputes not created by the Bankruptcy Code that have no effect on the bankruptcy
estate. The very basis for the Supreme Court's decision in N. Pipeline Constr. Co. v.
Marathon Pipe Line Co., which gave rise to the jurisdictional fix in the 1984
Bankruptcy Amendments and Federal Judgeship Act, was that a bankruptcy court,
as an Article I Congressional creation, could not exercise the essential attributes of
an 	Article 	III 	court. 	Thus, 	where 	appropriate, 	a 	bankruptcy 	court 	should
conservatively exercise jurisdiction in recognition of its limited Article I status, and
should not venture into the unwarranted exercise of the essential attributes of Article
III judicial power. Moreover, because neither the Fourth Circuit nor the United States
Supreme Court has made a determination of whether or not the bankruptcy courts
enjoy supplemental jurisdiction under 28 U.S.C. § 1367, the fairest course of action
for the litigants is to take a conservative approach to defining bankruptcy court
jurisdiction. Should the bankruptcy court exercise supplemental jurisdiction and be
wrong, then any judgment rendered on the cause of action may be subject to
avoidance under Fed. R. Civ. P. 60(b)(4); Fed. R. Bankr. P. 9024.
Id. at *21-28.
The Debtors in this case have not advanced any argument that would make the court
reconsider its earlier statement of the law and its refusal exercise jurisdiction over post-petition state
law claims under the West Virginia Consumer Credit and Protection Act. Accordingly, the court
will dismiss Count II of the Debtors’ adversary complaint against MERS without prejudice.
C. 	Subject Matter Jurisdiction Over Count III - Lien Invalidity
Among other allegations in Count III of the Debtors’ adversary complaint, they assert that
under 11 U.S.C. § 522 they may avoid MERS’s lien against their real property.1
Both Mr. Wise and MERS identify §§ 522(g) and (h) as the subsections upon which the
Debtors are relying to declare MERS’s lien invalid. 	They argue that §§ 522(g) and (h) are not
applicable, and considering that the only remaining allegations in Count III concern the application
of state law, which were abandoned by the Debtors’ bankruptcy estate at closing, they state that
Count III is not related to the Debtors’ bankruptcy petition; thus, this court does not have subject
matter jurisdiction over Count III.
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2 The court has reviewed the cases cited by the Debtors, Putnam County Bank v. Tolley
(In re Tolley), No. 09-1550, 2010 U.S. Dist. LEXIS 84123 (S.D.W. Va. Aug., 16, 2010); In re
Law Developers, LLC, 404 B.R. 136 (E.D.N.C. 2008); and In re Atlas Fire Apparatus, Inc., 56
B.R. 927 (E.D.N.C. 1986). In none of these cases were the moving parties asserting rights under
11 U.S.C. § 522(g) and (h) based on a trustee’s failure to bring an avoidance action.
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The Debtors did cite to § 522 as one basis upon which they seek to declare MERS’s lien
invalid. If the Debtors have a cause of action under § 522, then they have asserted a right that arises
under the Bankruptcy Code because they are invoking a substantive right created by bankruptcy law
over which this court has subject matter jurisdiction.
Importantly, it is the Debtors in this case that are seeking to declare the lien of MERS to be
invalid – not their Chapter 7 trustee. When the Chapter 7 trustee refuses to act to avoid a lien of a
creditor, the Bankruptcy Code provides a debtor with certain, more limited, lien avoidance rights:2
(h) The debtor may avoid a transfer of property of the debtor or recover a setoff to
the extent that the debtor could have exempted such property under subsection (g)(1)
of this section if the trustee had avoided such transfer, if--
(1) such transfer is avoidable by the trustee under section 544, 545, 547, 548,
549, or 724(a) of this title or recoverable by the trustee under section 553 of
this title; and
(2) the trustee does not attempt to avoid such transfer.
§ 522(h).
Assuming that the Debtors in this case can meet the requirements of § 522(h)(1-2), then they
still must meet the requirement of § 522(g)(1), which provides:
(g) . . . the debtor may exempt . . . property that the trustee recovers under section
510(c)(2), 542, 543, 550, 551, or 553 of this title, to the extent that the debtor could
have exempted such property . . . if such property had not been transferred, if--
(1)
(A) such transfer was not a voluntary transfer of such property by the
debtor; and
(B) the debtor did not conceal such property;
§ 522(g)(1).
Accordingly, “[r]eading these statues together reveals that, as a prerequisite to invoking the
avoidance powers of § 522(h), the following conditions must be met: (1) the transfer sought to be
avoided must not be a voluntary transfer by the debtor; (2) the debtor must not have concealed the
transferred property; (3) the transfer of the property must be subject to avoidance under, inter alia,
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3 The Debtors also assert jurisdiction based on a previous order entered by this court.
The Debtors state that MERS’s bankruptcy counsel filed a motion for relief from the automatic
stay when their bankruptcy case was active in 2002. The stay relief motion was followed by a
motion to withdraw it on the grounds that MERS believed its deed of trust was invalid. Based
on MERS’s motion to withdraw, the court entered an order grating the motion on the basis that
MERS (not the court) had determined its security interest was invalid. Thus, the court never
addressed the merits of the stay relief motion, only the merits of MERS’s motion to withdraw its
request for stay relief. In short, nothing in the court’s record is a binding declaration by the court
that MERS’s lien is invalid, and nothing exists that would preclude MERS from bringing its
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section 544; and (4) the trustee must not have attempted to avoid the transfer of the property.
Assuming that these prerequisites are satisfied, then the Debtor may avoid the transfer ‘to the extent
that the debtor could have exempted such property.’” In re Bardell, 361 B.R. 468 , 474-75 (Bankr.
N.D.W. Va. 2007).
Under § 522(g)(1)(A), a “voluntary transfer” is one that results “‘from the debtor’s free
will’” where the debtor acts “‘with knowledge of all essential facts and free from the persuasive
influence of another.’” In re Sumner, No. 05-14243, 2007 Bankr. LEXIS 4406 at *8-9 (Bankr. N.D.
Ga. Nov. 26, 2007) (quoting In re Davis, 169 B.R. 285, 296 (E.D.N.Y. 1994)).
Here, the Debtors obtained a loan from Homecomings Financial on September 22, 2000, for
$39,900, and agreed to secure the loan with a first priority deed of trust against their real property.
The grant of a security interest in real property is a voluntary transfer within the meaning of §
522(g)(1)(A); consequently, the Debtors are unable to exercise a Chapter 7 trustee’s avoidance
powers and the Debtors have no cause of action against either Mr. Wiles or MERS under § 522 of
the Bankruptcy Code. See, e.g., Rodriguez v. Dorine’s Bail Bonds, Inc. (In re Rodriguez), 361 B.R.
887 (Bankr. D. Ariz 2007) (“Having failed to establish that the granting of the Deeds of Trust were
involuntary transfers as required by § 522(g)(1), the Debtor lacks standing under § 522(h) to set
aside the Deeds of Trust.”); In re Bethea, 275 B.R. 127, 133 (Bankr. D.C. 2002) (“The debtor has
not disputed that he voluntarily transferred the mortgage lien interest in the property . . . . Thus, §
522(g)(1)(A) precludes that debtor from exempting the lien once avoided.”); In re Strom, 46 B.R.
144 , 148 (Bankr. E.D.N.C. 1985) (same); In re Echoles, 21 B.R. 280, 282 (Bankr. D. Ariz. 1982)
(same).
Only two other allegations are contained in the Debtors’ adversary complaint concerning the
alleged invalidity of MERS’s lien. 3 The Debtors assert that MERS’s lien is invalid on the grounds
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action to reform its deed of trust following the closing of the Debtors’ bankruptcy case. The
court is not being asked to enforce or interpret its own orders in Count III of the Debtors’
adversary proceeding such that it might have jurisdiction over the action. The effect, if any, of
the statement or MERS’s counsel regarding its lien status is not at issue before this court.
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that the legal description in the deed of trust is not the Debtors’ real estate, and that the deed of trust
is invalid on the basis that the signing of the deed of trust took place without the supervision of an
attorney. Both of these allegations arise under State law and therefore do not “arise under” or “arise
in” title 11. Moreover, the Debtors’ bankruptcy case was fully administered on July 17, 2002, with
the Chapter 7 trustee abandoning any interest the bankruptcy estate had in the Debtors’ real property
as of that date – except for that property that had already been exempted by the Debtors. 11 U.S.C.
§ 554(c). The outcome of the Debtors’ state law claims against MERS and/or Mr. Wise would have
no impact on the bankruptcy estate and any benefit received in the litigation would be only for the
Debtors.
Consequently, the outcome of Count III, lien invalidity, is not “related to” a case under the
Bankruptcy Code and this court lacks subject matter jurisdiction under 28 U.S.C. § 1334 to
adjudicate the Debtors’ state law causes of action. See, e.g., Ostroff v. Am. Home Mortg. (In re
Ostroff), 433 B.R. 442 (Bankr. E.D. Va. 2010) (no jurisdiction to adjudicate debtor’s state law claim
of lien invalidity on exempt property); Johnston, 2007 Bankr. LEXIS 1174 at *17 (“Debtor's cause
of action . . . is not ‘related to’ the Debtor's bankruptcy case because whether the Debtor wins of
loses, there will be no affect on the bankruptcy estate.”).
Therefore, the court will dismiss Count III of the Debtors’ complaint because the Debtors
have failed to state a claim against Mr. Wise or MERS under 11 U.S.C. § 522(h) and (g), and the
remaining allegations against Mr. Wise and MERS under Count III are allegations over which this
court has no jurisdiction (and are therefore dismissed without prejudice) because those allegations
do not arises in, arises under, or relate to the Debtors’ bankruptcy case.
IV. CONCLUSION
For the above-stated reasons, the court will enter a separate order that grants Mr. Wise’s and
MERS’s motions to dismiss.
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