In re: Rafia Nafees Khan

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 13a0941n.06
No. 12-6567
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
In re: RAFIA NAFEES KHAN,
Debtor,
RAFIA NAFEES KHAN,
On Appeal from the United
Appellant, States District Court for the
Eastern District of Tennessee
v.
REGIONS BANK,
Appellee.
Before: ROGERS and COOK, Circuit Judges; and VAN TATENHOVE, District Judge. *
VAN TATENHOVE, District Judge. Pursuant to provisions of the United States
Bankruptcy Code, Rafia N. Khan, a Chapter 7 debtor, attempted through an adversary proceeding
to invalidate a proof of claim submitted by Regions Bank. The Bankruptcy Court of the Eastern
District of Tennessee ruled that she did not have standing to institute the adversary proceeding
because she was not a “party in interest” as defined in 11 U.S.C. § 502(a). Ms. Khan appealed that
decision to the United States District Court for the Eastern District of Tennessee. The district court
concluded that it could not hear the merits of Ms. Khan’s appeal because she was not a “person
* The Honorable Gregory F. Van Tatenhove, United States District Judge for the Eastern District
of Kentucky, sitting by designation.
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aggrieved” by the Bankruptcy Court’s decision. For the reasons set forth below, the district court’s
decision will be AFFIRMED.
I
In August of 2006, Ms. Khan and her ex-husband, Muhammad A. Khan, executed several
agreements with Regions. Among those documents was a Credit Agreement and Disclosure form
that established a revolving line of credit for Ms. Khan and her ex-husband.
The security for debts incurred on the line of credit was a Deed of Trust to Regions on
property located at 3901 S. Lake Boulevard, in Knoxville, Tennessee. This property was owned by
the Rafia N. Khan Irrevocable Trust. It is the subject of pending litigation in the Tennessee Court
of Appeals after Regions placed a $40,000.00 lien on it.
That action has been stayed because on December 31, 2010, Ms. Khan filed a voluntary
petition for relief under Chapter 7 of the United States Bankruptcy Code. Pursuant to the Code, she
filed various statements and schedules listing her assets and liabilities. She lists liabilities of
$541,605.84 and assets of $271,650.00. A Chapter 7 trustee was appointed to facilitate the
bankruptcy proceedings.
On March 1, 2011, Regions filed a proof of claim in Ms. Khan’s bankruptcy case. Regions
alleges that its Deed of Trust is valid, and permits the imposition of liens on Ms. Khan’s property.
Significantly, the Deed of Trust executed by Regions and Ms. Khan includes language waiving “any
statutory . . . right of . . . homestead.”
After Regions submitted its proof of claim, Ms. Khan initiated an adversary proceeding
against Regions. Ms. Khan alleged that the Deed of Trust was invalid, and that the lien claims based
on that instrument should be disallowed under 11 U.S.C. § 502(b)(1) of the Code. She also sought
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to have the Deed of Trust declared void under 11 U.S.C. § 506(d). She specifically alleged in her
amended complaint that she had “equity” in her home, and that her “interest” in the disallowance
of Regions’ lien claims was her “homestead exemption” in the property subjected to those claims.
Regions moved to dismiss Ms. Khan’s amended complaint for lack of subject matter jurisdiction.
It argued that absent a surplus of assets in the Chapter 7 bankruptcy estate, Ms. Khan simply had no
standing to sue for the disallowance of Regions’ claim.
The bankruptcy court accepted the matter as a facial challenge to Ms. Khan’s jurisdictional
claims. In re Khan, No. 10-36155, 2011 WL 4543962, at *2 (Bankr. E.D. Tenn. 2011). It ruled that
Ms. Khan, “a Chapter 7 debtor in a no-asset case,” possessed no standing to pursue the relief she
sought. Id. Ms. Khan appealed the bankruptcy court’s decision to the district court of the Eastern
District of Tennessee. The district court determined that since Ms. Khan was not a “person
aggrieved,” she was also without standing to appeal. Order and Memorandum Decision at 6, Khan
v. Regions Bank, No. 3:12-cv-00025 (E.D. Tenn. Oct. 31, 2012). Ms. Khan has timely appealed the
district court’s decision.
II
A
This Court has jurisdiction to review “all final decisions, judgments, orders, and decrees
entered” by a district court hearing an appeal from a bankruptcy court decision. 28 U.S.C. § 158(d);
see also Brown v. Hildebrand (In re Brown), 248 F.3d 484, 486 (6th Cir. 2001). This authority is
also codified in 28 U.S.C. § 1291 (“[t]he court of appeals . . . shall have jurisdiction of appeals from
all final decisions of the district courts of the United States.”).
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“Standing is a jurisdictional requirement and we are under a continuing obligation to verify
our jurisdiction over a particular case.” Harker v. Troutman (In re Troutman Enterprises., Inc.), 286
F.3d 359, 364 (6th Cir. 2002). “We review de novo jurisdictional questions.” In re Brown, 248 F.3d
at 486. This Court has said “it reviews the bankruptcy court judgment rather than the intermediate
district court judgment in such appeals.” Hancock v. McDermott, 646 F.3d 356, 359 n.1 (6th Cir.
2011). It explained, “this means only that any deference owed by us (such as clearly erroneous
review of factual determinations) extends to the bankruptcy court rather than to the intermediate
district court.” Id. Even if in some sense we are reviewing the bankruptcy court’s order directly,
as set out below, Khan must still have appellate standing to have subject matter jurisdiction. See
Moran v. LTV Steel Co. (In re LTV Steel Co.), 560 F.3d 449, 453 (6th Cir. 2009).
B
Past decisions by this Court recognize that “[o]nly a ‘person aggrieved’ has standing to
appeal a bankruptcy order.” In re Lunan, No. 12-6009, 2013 WL 1693983, at *1 (citing In re LTV
Steel Co., 560 F.3d at 452). To be considered a “person aggrieved,” the petitioner must prove “a
financial stake in the bankruptcy court’s order.” In re Lunan, 2013 WL 1693983, at *1 (quoting
Hacker v. Troutman (In re Troutman Enters., Inc.), 286 F.3d 359, 364 (6th Cir. 2002) (citation
omitted)). More specifically, the petitioner must be “ ‘directly and adversely affected pecuniarily
by the order.’ ” In re Lunan, 2013 WL 1693983, at *1 (quoting Fid. Bank, Nat’l Ass’n v. M.M. Grp.,
Inc., 77 F.3d 880, 882 (6th Cir. 1996) (emphasis added)).
It is unusual for a Chapter 7 debtor to have a pecuniary interest “ ‘because no matter how the
estate’s assets are disbursed by the trustee, no assets will revert to the debtor.’ ” In re Lunan, 2013
WL 1693983, at *1 (quoting Cult Awareness Network, Inc. v. Martino (In re Cult Awareness
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Network, Inc.), 151 F.3d 605, 607 (7th Cir. 1998)). If, however, the debtor can demonstrate “that
a successful appeal will generate assets in excess of liabilities, thus entitling her to a distribution of
surplus under 11 U.S.C. § 726(a)(6), then the debtor is a ‘person aggrieved’ with standing to
appeal.” In re Lunan, 2013 WL 1693983, at *1 (citing Kowal v. Malkemus (In re Thompson), 965
F.2d 1136, 1144 n.12 (1st Cir. 1992); Simon v. Amir (In re Amir), 436 B.R. 1, 10 (B.A.P. 6th Cir.
2010)). The debtor must show more than a metaphysical possibility of surplus; instead it “ ‘must
show that such surplus is a reasonable possibility.’ ” In re Lunan, 2013 WL 1693983, at *1 (quoting
In re Amir, 436 B.R. at 10 (internal quotation marks and citations omitted)).
Ms. Khan has failed to show that she has a financial interest in the bankruptcy court’s order.
Her reliance on In re Troutman Enterprises, 286 F.3d at 364, and In re Moran, 566 F.3d 676, 681
(6th Cir. 2009), is misplaced. Her argument is that the permanent release or discharge of a lien
against an individual debtor’s exempt property is a valuable, pecuniary right given to individual
bankrupt debtors by Section 522(c) of the Code. But neither case stands for this proposition.
Rather, they stand for the general proposition that a party may appeal an action of a bankruptcy court
when that decision “ ‘diminishes a person’s property, increases his burdens, or impairs his rights.’
” In re Moran, 566 F.3d at 681 (quoting Fid. Bank, Nat’l Ass’n, 77 F.3d at 882); In re Troutman
Enterprises, 286 F.3d at 364. Ms. Khan cannot satisfy this standard.
Her assets are substantially less than her liabilities. In her schedules, Ms. Khan lists the
value of the subject property at $180,000.00 and personal property at $91,650.00; however, those
assets are subject to creditors holding secured and unsecured liens totaling $541,605.84. Even if she
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were allowed a $25,000 homestead exemption,1 her liabilities would still exceed her total assets by
$244,955.84. By not establishing a surplus of assets, Ms. Khan has failed to demonstrate the
impairment of her rights by the bankruptcy court’s action.
Furthermore, Ms. Khan’s argument that the “homestead exemption” belongs to her, and not
to the bankruptcy estate, is unfounded. Under § 522(l), the debtor is required to file a list of property
claimed as exempt. “Unless a party in interest objects, the property claimed as exempt on such list
is exempt.” 11 U.S.C. § 522(l). The Supreme Court, in Owen v. Owen, 500 U.S. 305 (1991),
recognized this process for claiming exemptions, and remarked that no property can be exempted
“unless it first falls within the bankruptcy estate.” Owen, 500 U.S. at 308 (emphasis added). Ms.
Khan cannot claim an interest in the “homestead exemption” separate from the bankruptcy estate
and expect that property to retain exemption status. Without its inclusion in the bankruptcy estate
there is no plausible way it qualifies for exemption status.
III
Based on the foregoing analysis, Ms. Khan does not qualify as a “person aggrieved,” and
therefore did not have standing to appeal the bankruptcy court’s ruling. Accordingly, the district
court’s decision is AFFIRMED.
1 This is a large assumption as the Deed of Trust executed by Regions and Ms. Khan includes
language waiving “any statutory...right of ...homestead.”
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