First State Bank of Roscoe et al v. Stabler et al
OPINION AND ORDER AFFIRMING BANKRUPTCY COURT DECISION Signed by U.S. District Judge Roberto A. Lange on 3/30/17. (DJP)
UNITED STATES DISTRICT COURT
^AR 3 0 201?
DISTRICT OF SOUTH DAKOTA
FIRST STATE BANK OF ROSCOE,and JOHN
OPINION AND ORDER AFFIRMING
BANKRUPTCY COURT DECISION
BRAD ALLEN STABLER,and BRENDA LEE
First State Bank of Roscoe (FSBR)and John Beyers (colledtiveiy Appellants) appeal the
bankruptcy judge's decision to sanction them for violating the discharge injunction in Brad and
Brenda Stablers' bankruptcy case. Appellants contend that the bankruptcy judge's decision was
barred by preclusion principles and incorrect on the merits. For the reasons explained below,
this Court affirms.
This case has a long procedural history, including a jury trial, a court trial, several
opinions by a South Dakota circuit judge, two orders from a bankruptcy judge, and opinions
from both the Supreme Court of South Dakota and the Bankruptcy Appellate Panel(BAP)ofthe
Eighth Circuit. This Court draws the facts from these prior opinions and orders as well as from
the Appendix filed by Appellants.' In 1999, Brad and his wife Brenda started an agriculture
business called Edmunds County Ag Services, Inc. (EGAS). Stabler v. First State Bank of
Roscoe, 865 N.W.2d 466, 469 (S.D. 2015). The Stablers funded EGAS by borrowing money
from FSBR, whose president at that time was Beyers. Id at 469; App. 457. FSBR's loans to the
Stablers were secured by liens on the Stablers' property and a personal guarantee from Brad.
Stabler, 865 N.W.2d at 469; App. 457—58. FSBR also held mortgages on certain property of
Brad's parents, Stan and Rose Stabler, as security for some of EGAS's debt. Stabler. 865
N.W.2d at 469-70; App. 457.
Brad liquidated EGAS in 2002 after it proved unsuccessful. Stabler. 865 N.W.2d at 470.
Beyers then discussed the idea of filing for bankruptcy with the Stablers and suggested counsel
for them to do so. App. 457. Brad and Brenda filed a Chapter 7 bankruptcy petition in May
2003. Stabler. 865 N.W.2d at 470; App. 154—79. Brad and Brenda's bankruptcy schedules
listed FSBR as a secured creditor with a claim for $225,816.36, although the debt Brad and
Brenda actually owed FSBR at that time approximated $600,000. App. 06, 166. FSBR received
prompt notice of the bankruptcy petition. App. 06. Brad and Brenda received a bankruptcy
discharge in August 2003, and FSBR received notice of the discharge. App. 07. The discharge
eliminated Brad's personal guaranty of EGAS's debt but did not eliminate FSBR's liens on Brad
and Brenda's property. Stabler. 865 N.W.2d at 470; see also Venture Bank v. Lanides 800 F.3d
442,445(8th Gir. 2015).
In March 2004, Beyers convinced all four Stablers to sign a $650,000 promissory note
along with a collateral real estate mortgage (GREM) covering nearly all of the Stablers' real
property. Stabler. 865 N.W.2d at 470, 472; App. 458. The March 2004 note and GREM at least
'Citations to pleadings from the Stablers' bankruptcy case will be"BR Doc."followed by the
document number in the GM/EGF system.
in part refinanced and secured pre-bankruptcy loans that FSBR had previously made to EGAS
and all four Stablers. Stabler, 865 N.W.2d at 470, 472; App; 08-09, 14. Aceording to the
Supreme Court of South Dakota, the 2004 note and CREM included "the exact same amount"
and "the same form of debt as existed prior to Brad and Brenda's bankruptcy." Id. at 470. The
$650,000 note was divided three ways^ to others with whom" Beyers or FSBR had relationships: a
$416,000 note assigned to a partnership called Schurss, a $213,000 note assigned to Roger Ernst,
and a $21,000 note assigned to a company called H&K Acres. Id. at 472 n.6; App. 08-14. Brad
and Brenda paid the $21,000 note off, and the other two notes were eventually assigned to
Beyers. Stabler. 865 N.W.2d at 472 n.6; App. 08-14.
In May 2004, Beyers assisted Brad and Brenda in getting a $150,000 loan from Ipswich
State Bank. Stabler. 865 N.W.2d at 470; Stabler v. Bevers(In re Stablerl. 418 B.R. 764, 766-67
(B.A.P. 8th Cir. 2009). Beyers guaranteed this loan, which was secured by a lien on Brad and
Brenda's property. In re Stabler. 418 B.R. at 767; Stabler. 865 N.W.2d at 470. Brad and Brenda
used the Ipswich loan to pay FSBR, although it is not entirely clear whether they were paying off
valid liens and post-discharge debt or debts that had been discharged in their bankruptcy.^ In re
^The division of the $650,000 note is difficult to track as it involved multiple transactions and
assignments. In March 2004, the Stablers executed a $416,000 promissory note in favor of
Sehurrs and an agreement that FSBR could assign a $416,000 interest in the CREM to Schurrs.
App. 09. In April 2004, the Stablers executed similar documents with respect to Ernst in the
amount of $213,000. App. 10. Later in 2004, FSBR assigned a $416,000 interest in the 2004
CREM to Schurrs and a $213,000 interest in the 2004 CREM to Ernst. App. 10-11. On March
21, 2005,the Stablers executed a $213,000 promissory note in favor of Schurrs stating that it was
being made "for the express purpose 6f renewal of real estate mortgage and shall be secured by a
Mortgage with even date herewith." App. 11. The Stablers executed a $629,000 mortgage in
Sehurrs' favor that same day. App. II. In 2007, Ernst executed a release of the mortgage that
FSBR had assigned to him in 2004. App. 11. In 2008, Schurrs assigned to Beyers its promissory
notes from the Stablers, its interest in the 2004 CREM, and its interest in the 2005 mortgage.
^The BAP said that Brad and Brenda used the proceeds of the Ipswich State Bank loan "to pay
off some of their pre-petition secured debt to FSB, in order to retain the collateral securing the
Stabler. 428 B.R. at 767; Stabler. 865 N.W.2d at 470. Brad and Brenda eventually defaulted on
the loan, and the Ipswich State Bank assigned the debt and security to Beyers. In re Stabler. 418
B.R. at 767; Stabler. 865 N.W.2d at 470.
In May 2007, after FSBR attempted to collect on some of the Stablers' debt, all four
Stablers filed an action in state court asking the judge to determine how much money they
actually owed FSBR, Ipswich State Bank, Ernst, and Schurrs. App. 256, 262-65. The Stablers
amended their complaint in 2008 to add Beyers as a defendant and assert claims for fraud, breach
of fiduciary duty, and conspiracy. App. 269-77. The amended complaint alleged that Beyers
and FSBR knew that the debt refinanced in the $650,000 note had been discharged in bankruptcy
yet misrepresented that Brad and Brenda still owed this money. App. 273.
FSBR and Beyers answered the amended complaint and asserted counterclaims against
the Stablers. App. 491-530. Counts 1 and 2 of Beyers's counterclaim sought to recover on the
loan from Ipswich State Bank and to foreclose on the property securing that loan. App. 503-06,
521. Counts 3 and 4 of Beyers's counterclaim concerned the $650,000 promissory note. App.
506—08. Count 3 of the counterclaim sought recovery on the $416,000 portion Beyers obtained
from Schurrs while count 4 of the counterclaim sought recovery of the $213,000 portion Beyers
obtained from Schurrs. App. 506-08, 521. Counts 3 and 4 of the counterclaim both stated that
Beyers was "requesting judgment against Brad and Brenda Stabler only for those amounts
determined not to be discharged in their prior Chapter 7 bankruptcy." App. 507—08, 521. As an
affirmative defense. Brad and Brenda asserted that the debt Beyers sought to recover in counts 1,
3, and 4 ofthe counterclaim was discharged in bankruptcy. App. 290, 292, 294.
debt, and to pay off loans that FSB had made to the Debtors post-petition." In re Stabler. 418
B.R. at 767. The Supreme Court of South Dakota said "[t]he proceeds from this loan went to
FSB, but it is still disputed whether the proceeds paid off valid liens or reaffirmed discharged
debt." Stabler. 865 N.W.2d at 470.
Beyers moved for summary judgment on counts 1 and 2 of his counterclaim in mid-
January 2009. App. 306—07. Before the state court could rule on Beyers's motion, Brad and
Brenda filed an adversary complaint against Beyers in bankruptcy court. App. 584—89. Brad
and Brenda styled their filing as an adversary complaint, although in oral argument to this Court
all parties recognized that the filing could have been by way of a motion. In the adversary
complaint. Brad and Brenda asked the bankruptcy judge to declare that the debt Beyers sought to
recover in his counterclaim was discharged and to hold him in contempt for violating the
discharge injunction. App. 588.
In May 2009, the state court granted Beyers summary judgment on counts 1 and 2 of his
counterclaim. App. 321-23. The state court reasoned that a bankruptcy discharge does not
eliminate liens on the debtor's property, that Brad and Brenda had obtained a loan from Ipswich
State Bank after receiving their discharge, and that they had used some of this loan to pay
secured debts to FSBR. App. 321-22. Because Brad and Brenda were in default, the state court
concluded that Beyers could foreclose on the collateral securing the loan. App. 321-22.
Appellants then moved to dismiss the adversary complaint filed in bankruptcy court.
They argued that the adversary complaint's allegations concerning the Ipswich State Bank loan
should be dismissed because the state court's decision on that issue had preclusive effect in the
bankruptcy proceeding. App. 609-10. As to the adversary complaint's allegations concerning
the $650,000 promissory note. Appellants argued that counts 3 and 4 of Beyers's counterclaim
made clear that he was only seeking to recover debt that the state court determined was not
discharged in Brad and Brenda's bankruptcy. App. 614-15. Alternatively, Appellants asked the
bankruptcy court to abstain under 28 U.S.C. § 1334(c)(1) from deciding whether the debt Beyers
sought to recover was discharged in bankruptcy. App. 615-18. Brad and Brenda responded with
several arguments, including that the Ipswich State Bank loan and the $650,000 promissory note
were invalid reaffirmation agreements.
App. 636, 644. In bankruptcy parlance, "[a]
reaffirmation agreement is one in which the debtor agrees to repay all or part of a dischargeable
debt after a bankruptcy petition has been filed." Venture Bank. 800 F.3d at 445 (quotation
omitted). Section 524(c) of the Bankruptcy Code provides that reaffirmation agreements are
unenforceable unless, among other requirements, they are made before the; discharge and are
filed with the bankruptcy court. II U.S.C. § 524(c)(1), (3). Brad and Brenda argued that the
Ipswich State Bank loan and the $650,000 note were unenforceable because these agreements
were never filed with the bankruptcy court.
In a July 2009 oral order, the bankruptcy judge dismissed Brad and Brenda's adversary
complaint based on the failure to state a claim and a decision to abstain under § 1334(c)(1). App.
333-355, 699. The bankruptcy judge found that the state court's May 2009 summary judgment
order was entitled to preclusive effect and thus barred Brad and Brenda's claims concerning the
Ipswich State Bank loan. App. 347-48. As for the $650,000 note, the bankruptcy judge
reasoned that the language of counts 3 and 4 of the counterclaim undercut Brad and Brenda's
assertion that Beyers was violating the discharge injunction:
With respect to the debts described in counts three and four
of Beyers' state court counterclaim, the analysis is much simpler.
In both counts, Beyers states unambiguously,"Beyers is requesting
judgment against Brad and Brenda Stabler only for those amounts
determined not to be discharged in their prior Chapter 7
Debtors have offered no reasonable interpretation of this
statement that would permit me to conclude Beyers is in any way
attempting to collect, recover, or offset a debt discharged in
If Beyers recovers everything he has requested in counts
three and four of the state court complaint, he will necessarily
recover only those amounts determined not to be discharged in
debtors' bankruptcy and Beyers' efforts to collect only those
amounts cannot and do not violate the discharge injunction.
And as was the case with respect to the post-discharge note
described in count one of Beyers' state court counterclaim, the
post-discharge notes in counts three and four of Beyers' state court
counterclaim, which it bears mentioning were executed in favor of
the assurers, not Beyers, cannot and do not constitute an
unenforceable re-affirmation agreement, because as I indicated
earlier, a re-affirmation agreerrient necessarily involves a prepetition debt that would otherwise be discharged.
Consequently, to the extent it relates to counts three and
four of Beyers' state court counterclaim, debtors' adversary
complaint fails to state a claim upon which relief can be granted.
The bankruptcy judge went on to explain, however, that while he had "effectively
dispose[d]" of the adversary complaint. Appellants had also asked him to abstain from hearing
the matter under § 1334(c)(1). App. 349. Analyzing the abstention factors listed in Williams v.
Citifinancial Mortgage Co.(In re Williams"). 256 B.R. 885 (B.A.P. 8th Cir. 2001), the bankruptcy
judge reasoned that although the question of whether Beyers violated the discharge injunction
was "clearly a matter of federal bankruptcy law," the issue of whether the debt in the
counterclaim was discharged involved state law because Brad and Brenda were claiming Beyers
defrauded them into agreeing to pay that debt. App. 351-52. Because the state court had
concurrent jurisdiction to decide whether the debt in counts 3 and 4 ofthe counterclaim had been
discharged, the bankruptcy judge concluded that the best approach was to defer to the state court
to decide the question and to allow Brad and Brenda to return to bankruptcy court if necessary:
I believe it would be possible, even preferable, to sever debtors'
state court claims, allow the state court to determine, as it already
has with respect to count one of Beyers' state court counterclaim,
whether any of the debts Beyers is seeking to collect have been
discharged. And if the state court determines, albeit contrary to the
express language of counts three and four of Beyers' state court
counterclaim, any of those debts have been discharged, allow
debtors to renew their complaint. That is not an ideal solution, but
it's better than having the parties battling. And I use that word
advisedly, simultaneously on two fronts.
And it's better than
having two courts racing to decide whether Beyers acted
App. 352—53. Thus, the bankruptcy judge decided to abstain from hearing the proceeding "[a]s
an alternative grounds for dismissing debtors' complaint." App. 354. The bankruptcy judge
entered a text order stating: "DISPOSITION: Based on the findings and conclusions entered on
the record, Debtors-Plaintiffs' Complaint (doc. I) is dismissed, and this adversary proceeding
shall be closed. The other pending motions are rendered moot." App. 699.
Brad and Brenda appealed the bankruptcy judge's dismissal of their adversary complaint.
The BAP affirmed the decision to abstain without ruling on the dismissal for failure to state a
claim. In re Stabler. 418 B.R. at 766 n.2. 769-71.
Appellants and the Stablers continued to litigate in state court. In 2011, the state judge
granted Brad and Brenda summary judgment on counts 3 and 4 of Beyers's counterclaim. App.
13, 473. The state judge found that Brad and Brenda actually owed FSBR $608,124.55 when
they filed for bankruptcy,'' that the $650,000 promissory note was a "reaffirmation of personal
liability for debt that was discharged in their bankruptcy," and that this reaffirmation was
unenforceable against Brad and Brenda because it had never been filed with the bankruptcy
court. App. 6, 13-15. The fact that Beyers had received his interest in the $650,000 note from
third parties did not change the state judge's conclusions. App. 13-15. According to the state
judge, Beyers had "concocted a transaction" where third parties (Schurrs and Ernst) would take
promissory notes from Brad and Brenda for the purpose of recreating personal liability for Brad
and Brenda on discharged debt.
The state judge described conduct that
''in Brad and Brenda's bankruptcy petition, their attorney Rob Ronayne mistakenly listed FSBR
as having a claim for only $225,816.36.
demonstrated a lack of good faith and an intent to evade the discharge injunction. App. 13-15.
Thereafter, the state court reversed its earlier decision to grant Beyers summary judgment on
count 1 of his counterclaim because it found that there was an issue of fact concerning whether
Beyers could enforce the Ipswich State Bank loan against Brad and Brenda. App. 474.
A trial was scheduled on several of the parties' remaining state-court claims. At the
pretrial hearing, Brad and Brenda dropped their fraud claim and elected to pursue rescission of
the $650,000 promissory note.^ App. 431-33, 475. This left for a jury trial Stan and Rose's
claim that Appellants had fraudulently induced them to sign the $650,000 promissory note. App.
475. Part of Stan and Rose's theory offraud was that Beyers had misrepresented that Brad owed
a large portion of the debt underlying the $650,000 note, when that debt had actually been
discharged in bankruptcy and not properly reaffirmed. App. 475-76, 488; Stabler. 865 N.W.2d
at 473. At trial, the state judge gave a jury instruction explaining the requirements for a valid
reaffirmation agreement and stating that there was a split in authority concerning when a
reaffirmation agreement was necessary:
At the time the note and mortgage were signed, there were courts
that had ruled both ways on whether a reaffirmation agreement to
pay discharged debt was needed when the lender agreed not to
foreclose on the borrower, in exchange for the borrower's promise
to pay. At the time the note and mortgage were signed, there were
no binding court decisions in South Dakota on the issue.
App. 488. The jury returned a special verdict finding that $439,100.00 of the $650,000
promissory note was obtained by fraud. App. 485.
^Brad and Brenda's attorney acknowledged at the pretrial hearing that because they were not
presenting a fraud claim to the jury. Brad and Brenda would not have a claim in state court for
punitive damages. App. 432. At the same hearing. Brad and Brenda's attorney said they were
withdrawing their claim for attorney's fees because he thought that was an issue for the
bankruptcy court to decide. App. 433. Appellants claim that Brad and Brenda "waived" their
claims for attorney's fees, but in reality Brad and Brenda were affirmatively indicating an
intention to pursue this issue before the bankruptcy court as they ultimately did.
Thereafter, the state judge held a court trial concerning Brad and Brenda's rescission
claim and whether Beyers could recover on the Ipswich State Bank loan. App. 456-66; 477. In
a July 2013 opinion, the state judge summarized the facts ofthe case as follows:
The opposing parties could not have viewed the case more
differently. According to the Stablers, John Beyers and FSBR
intentionally engaged in a course of conduct intended to collect
money that was no longer owed by Brad and Brenda Stabler and to
defraud Stan and Rose Marie Stabler into securing that nonexistent
debt with their own assets. Beyers and FSBR attempted to paint an
entirely different picture. Their version of the case portrayed John
Beyers as a beneficent owner of a well-intentioned, small town
bank who was simply trying to help to prevent Brad and Brenda
Stabler from losing their farm. His actions, both personally and as
a representative ofFSBR, were portrayed as altruistic.
The jury rejected the theory ofthe case presented by Beyers
and FSBR. After viewing the same evidence as the jury, I also
reject their depiction of the events and motivations. Based on all
of the evidence presented at the jury trial and the court trial, these
are the facts as I find them to have becurred in this case. Each time
a fact is stated in this opinion, it has been found by this Court to
have been established by a preponderance ofthe evidence.
Brad and Brenda Stabler had a small family farm which
they funded through loans from FSBR. Brad Stabler decided to
start a crop spraying business, known as [EGAS]. EGAS was also
funded through loans from FSBR.
Brad Stabler personally
guaranteed the EGAS loans. The EGAS building was built on land
owned by Stan and Rose Marie Stabler. Naturally, FSBR asked
that the EGAS building loan would be secured by the property
upon which it was located. Stan and Rose Marie agreed to this
request. Accordingly, FSBR had a security interest up to the value
of that loan (approximately $110,000) against a quarter section
parcel of Stan and Rose Marie's farm.
Things did not go well with EGAS. EGAS was being sued
by various parties. John Beyers assessed the situation and realized
that EGAS was doomed. More importantly, John Beyers realized
that if the litigation was allowed to proceed, those other parties
were going to obtain judgments against EGAS. Beyers realized
that EGAS did not have sufficient assets to cover all of its
liabilities and was essentially bankrupt. Being an astute and
experienced businessman, Beyers saw the natural progression.
Unless he took action, EGAS eventually would be forced into
bankruptcy. He realized that FSBR was under-secured on the
loans to Brad and Brenda Stabler and EGAS. In order to protect
FSBR's interests, Beyer[s] arranged for Brad and Brenda Stabler to
meet with Attorney Rob Ronayne about filing for bankruptcy.
The evidence establishes that this bankruptcy was not Brad
or Brenda's idea. This idea was solely that of John Beyers. John
Beyers decided that Brad and Brenda Stabler should file
bankruptcy. John Beyers personally decided who Brad and Brenda
Stabler should use as their bankruptcy attorney—^Rob Ronayne.
Rob Ronayne is an experienced bankruptcy attorney. Rob
Ronayne also regularly served as an attorney for FSBR. John
Beyers also knew this. John Beyers convinced Brad and Brenda
Stabler that he was acting in their best interests. He was not and
knew it. I find and conclude that John Beyers' intention was to
protect the financial interests ofFSBR.
John Beyers owns FSBR. John Beyers knew that if the
lawsuits were allowed to proceed, EGAS and Brad and Brenda
Stabler would eventually end up filing for bankruptcy. By
maintaining their trust, encouraging them to file bankruptcy; and
selecting their bankruptcy attorney, Beyers believed that he could
control the situation so that the debts to the other creditors could be
discharged while the obligations to FSBR could be maintained or
reassumed. Over the course of the next year, this is exactly what
John Beyers and FSBR accomplished.
Brad and Brenda Stabler filed for and received discharge
from bankruptcy court. The discharge eliminated Brad's personal
guarantee of the EGAS debt. FSBR still held security interests in
Brad and Brenda Stabler's farm and machinery because such
secured interests are not discharged by bankruptcy. FSBR still
held a security interest worth approximately $110,000 over a
quarter section parcel of land owned by Stan and Rose Marie
Stabler. FSBR could have foreclosed on that quarter of land to
recover on that debt. FSBR Could have foreclosed on Brad and
Brenda's land and other secured property. This course of action
would have resulted in a significant shortfall for FSBR. FSBR
would have recovered some money but would have taken a
significant loss on the various loans of Brad and Brenda and
EGAS. More importantly, FSBR would have had no further
recourse against any ofthe Stablers. John Beyers understood this.
Instead of accepting such a loss, John Beyers devised a
scheme through yvhich he would convince Brad and Brenda Stabler
to continue paying on their discharged debt. Alone, this would be
practically useless because Brad and Brenda clearly did not have
the resources to service the reaffirmed debt. It was only a matter
of time before they would default. John Beyers' scheme included
a plan to improve FSBR's security interests by convincing Stan
and Rose Marie to sign increasingly larger mortgages to their
entire farm in order to secure the debt of Brad and Brenda. This is
exactly what transpired. As found by the jury and by this Court,
$431,900^ of the value of those mortgages was obtained by fraud
on the part of John Beyers and FSBR.
App. 456—58 (footnotes omitted). In a footnote, the state court Judge explained that evidence at
trial supported his earlier determination that the $650,000 promissory note was an invalid
The evidence establishes that the purported reaffirmations with
FSBR were not knowingly and consensually accepted by Brad and
Brenda. Instead, the evidence establishes that they were the result
of coercive behavior by John Beyers on behalf of FSBR. It was
clear to Brad and Brenda that if they did not reaffirm the debt that
FSBR would foreclose on their property and, more importantly, the
property of Stan and Rose Marie. All of this was done without the
consent or supervision of the bankruptcy court. This type of
behavior is exactly what the "reaffirmation process" is intended to
protect against. The evidence establishes that based on the
financial circumstances ofBrad and Brenda, it was not in their best
interests to reaffirm that debt or forestall the foreclosure of FSBR's
secured interests. After hearing all of the evidence, I am firmly
convinced that no bankruptcy judge would have ever concluded
that it was in Brad and Brenda's best interest to allow them to
reaffirm the discharged debt.
App. 458. The state judge concluded that Brad and Brenda were entitled to $142,908.27 based
on their rescission of the $650,000 promissory note. App. 465. Although noting that Beyers's
behavior surrounding the Ipswich State Bank loan was improper,^ the state judge concluded that
Beyers could still enforce that loan against Brad and Brenda. App. 459-61.
Both sides appealed the state court's judgment to the Supreme Court of South Dakota.
Stabler. 865 N.W.2d at 469. Appellants argued that the state court should have granted them
summary judgment on Stan and Rose's fraud claim because any misrepresentation Beyers made
^The state judge appears to have transposed the "1" and the "9" in this amount. The jury actually
found that $439,100 ofthe $650,000 promissory note was obtained by fraud. App. 476,485.
^The state judge found that Beyers had lied to Ipswich State Bank about Brad and Brenda's
financial condition and then manipulated their repayment of the loan to minimize the amount he
would ultimately need to repay Ipswich State Bank as guarantor ofthe loan. App. 459.
that Brad owed some of the debt underlying the $650,000 promissory note was a legal, rather
than a factual, misrepresentation. Id, at 477(explaining that a fraud claim cannot be based on "a
misrepresentation as to what the law would allow or require" (citation omitted)). According to
Beyers, a split in authority on reaffirmation agreements established that his representations were
ones oflaw. Id,at 478. The Supreme Court of South Dakota rejected this argument, finding that
the law was not "so unclear as to render [Beyers and FSBR] unaware" that 11 U.S.C. § 524(c)
would apply under the facts of the case. Stabler. 865 N.W.2d at 478. The Supreme Court of
South Dakota also distinguished DuBois v. Ford Motor Credit Co., 276 F.3d 1019 (8th Cir.
2002), the main case Beyers cited to support his argument that § 524(c) did not apply to the
$650,000 promissory note. Stabler, 865 N.W.2d at 478. The Supreme Court of South Dakota
explained that unlike Dubois, where the debtors approached the creditor themselves and
voluntarily agreed to pay a discharged debt. Appellants had "pressured Plaintiffs into signing the
loan documents, repeatedly seeking them out to sign numerous notes and mortgage additional
property in an attempt to reaffirm the discharged debt." Stabler. 865 N.W.2d at 478. Given
these facts, the Supreme Court of South Dakota concluded that the Stablers' agreement to pay
discharged debt was not voluntary. Id, at 478-79.
In December 2015, Brad and Brenda filed a motion in bankruptcy court asking the judge
to find Appellants in contempt for violating the discharge injunction. App. 01-04. Brad and
Brenda explained that the state judge had now found that the $650,000 promissory note
represented discharged debt and argued that Appellants violated the discharge injunction by
suing them for this debt in state court. App. 02-03. The brief in support ofthe motion provided
additional reasons and references to state court evidence about Beyer's scheme to collect the
discharged debt. BR Docs. 31, 31-2, 37, 37-1, 37-2. Beyers and FSB objected, claiming that the
bankruptcy court's earlier decision precluded the motion for contempt and arguing that they had
a good faith belief that the $650,000 note was enforceable. BR Doc. 35, 35-1.
The bankruptey judge issued an oral order in June 2016 granting Brad and Brenda's
motion for contempt. App. 533-62. The bankruptcy judge began by stating that Appellants'
issue preclusion argument misconstrued his 2009 order dismissing the adversary complaint. In
the 2009 order, the bankruptcy judge explained, he had abstained from deciding whether Beyers
was attempting to collect discharged debt but had invited Brad and Brenda to renew their request
for sanctions should the state judge decide in their favor. App. 541. Although the bankruptcy
judge acknowledged that he had also dismissed the complaint for failure to state a claim, he
reasoned that he could not "both abstain from hearing a matter and grant relief with respect to
that matter." App. 541. The bankruptcy judge further explained that even if he could have
granted FSBR and Beyers relief, "the landscape has changed significantly since I dismissed
Debtor's earlier complaint." App. 542. Specifically, the "prophylactic" language^ in counts 3
and 4 ofthe counterclaim "could no longer be given any weight" after "the state court's finding
that the entire debt was discharged and there were no amounts determined not to be discharged in
[Brad and Brenda's] prior Chapter 7 bankruptcy." App. 542-43.
Next, the bankruptcy judge found that FSBR and Beyers willflilly violated the discharge
injunction by coercing the Stablers into signing the new promissory notes and pursuing
collection of the discharged debt. App. 543-62. Relying on factual findings in the state court's
July 2013 order, the bankruptcyjudge rejected Beyers's claim of good faith, stating:
Nothing in the state court's findings suggest either Bank or Beyers
was ever acting in good faith in their post-discharge dealings with
^The prophylactic language referenced is the confining of the request for judgment on counts 3
and 4 of the counterclaim to "only . .. those amounts determined not to be discharged in [the
Stablers'] prior Chapter 7 bankruptcy." App. 507-08,521.
Debtors. If Bank and Beyers truly believed in good faith the debt
was enforceable, there would have been no need for a scheme or
coercive behavior. Instead of the shell game the state court
described, a single new promissory note and a single new
mortgage would have sufficed.
A timely filed reaffirmation
agreement would have been even better.
The bankruptcy judge concluded by holding Appellants in contempt for violating the
discharge injunction. He awarded Brad and Brenda $159,605.77 in attorney's fees and ordered
that Beyers and FSBR each pay $25,000 in punitive damages.^ App. 563. Beyers and FSBR do
not challenge the amount of either attorney's fees or the punitive damages award, but contend
that issue preclusion principles and the circumstances render such awards invalid and improper.
Appellants argue that issue preclusion and the law of the case doctrine barred the
bankruptcy judge from considering Brad and Brenda's motion for contempt. They also contend
that the bankruptcy judge should have denied the motion on its merits. This Court addresses
each of Appellants' arguments in turn.
The bankruptcy judge's refusal to apply issue preclusion presents a legal question that
this Court reviews de novo. Sells v. Porter tin re PorterT 375 B.R. 822, 826 (B.A.P. 8th Cir.
2007). Because this Court is considering the preclusive effect of the bankruptcy court's
dismissal of the adversary complaint, it applies the federal common law of issue preclusion.
Covert V. LVNV Funding. LLC. 779 F.3d 242, 245 (4th Cir. 2015)("Federal law governs the res
judicata effect of earlier bankruptcy proceedings.").
^In explaining the punitive damages award, the bankruptcy judge said that he was "appalled" by
the actions of Beyers and FSBR and that their motive "was pure and unadulterated greed." App.
Issue preclusion, sometimes called collateral estoppel, "refers to the effect of a judgment
in foreclosing relitigation of a matter that has been litigated and decided." Migra v. Warren City
Sch. Dist. Bd. ofEduc.. 465 U.S. 75, 77 n.l (1984). There are five elements to issue preclusion:
(1) the party sought to be precluded in the second suit must have
been a party, or in privity with a party, to the original lawsuit;(2)
the issue sought to be precluded must be the same as the issue
involved in the prior action; (3) the issue sought to be precluded
must have been actually litigated in the prior action; (4) the issue
sought to be precluded must have been determined by a valid and
final judgment; and (5) the determination in the prior action must
have been essential to the prior judgment.
^ Sandy Lake Band of Miss. Chippewa v. United States. 714 F.3d 1098, 1102-03 (8th Cir. 2013)
(quoting Robinette v. Jones. 476 F.3d 585, 589(8th Cir. 2007)).
Appellants argue first that issue preclusion applies to the bankruptcy judge's 2009
decision that Brad and Brenda had failed to state a claim. As the Eighth Circuit recognized
nearly twenty-five years ago, "[t]he general rule is that, 'if a judgment is appealed, [issue
preclusion] only works as to those issues specifically passed upon by the appellate court.'"
Mandich v. Walters. 970 F.2d 462, 465 (8th Cir. 1992)(quoting Hicks v. Quaker Oats Co.. 662
F.2d 1158, 1168 (5th Cir. 1981)). The rationale for this rule is that a "full and fair opportunity to
litigate" an issue includes having an appellate court determine whether the issue was accurately
decided. Id.(quoting Gray v. Lacke. 885 F.2d 399, 406 (7th Cir. 1989)); see also Dow Chem. v.
U.S. E.P.A.. 832 F.2d 319, 323 n.25 (5th Cir. 1987)(explaining that "[tjhe rule responds to the
fear that an appellate court's choice of grounds may arbitrarily and unfairly preclude any review
of alternative grounds reached by the district court"); Janicki Logging Co. v. United States. 36
Fed. Cl. 338, 340-41 (Fed. Cl- 1996)("This approach to issue preclusion makes eminent sense.
Our legal system generally allows litigants the opportunity to secure appellate review of adverse
trial courtjudgments. Defendant's approach would undermine this right by binding a litigant to a
trial court's determination of an issue on which the litigant did not have an opportunity to secure
appellate resolution."). The First and Second Restatements of Judgments, a leading treatise on
civil procedure, and the majority of the federal courts of appeals agree that if an appellate court
affirms on one ground but passes over another, issue preclusion does not attach to the ground the
appellate court refused to consider. Yingbin-Nature fGuangdongl Wood Indus. Co. v. Inf 1
Trade Comm'n. 535 F.3d 1322, 1334 n.4 (Fed. Cir. 2008); Niagara Mohawk Power Corp. v.
Tonawanda Band of Seneca Indians. 94 F.3d 747, 754 (2d Cir. 1996); Borst v. Chevron Corp..
36 F.3d 1308, 1314 n.ll (5th Cir. 1994); Ash Creek Mining Co. v. Luian. 969 F.2d 868, 872-73
(10th Cir. 1992); Grav. 885 F.2d at 406—07; Svnanon Church v. United States. 820 F.2d 421,
424-25 (D.C. Cir. 1987); Hill v. Watts. 803 F.2d 713 (4th Cir. 1986)(per curiam); Restatement
(Second)of Judgments § 27 cmt. o(Am. Law Inst. 1982); Restatement (First) of Judgments § 69
cmt. b (Am. Law Inst. 1942); 18 Charles Alan Wright et al.. Federal Practice and Procedure
§§ 4421, 4432(3d ed.). Here, of course, the BAP on appeal affirmed on abstention grounds and
did not address whether the bankruptcy court should have dismissed the adversary complaint
filed in 2009. In re Stabler. 418 B.R. at 766 n.2, 769—71. Under the general rule, issue
preclusion does not attach.
Beyers, however, argues that the rule in the Eighth Circuit is that a holding not addressed
on appeal is still entitled to preclusive effect. Beyers bases this argument on Tudor Oaks
Limited Partnership v. Cochrane fin re CochraneJ. 124 F.3d 978 (8th Cir. 1997), a complicated
case that ultimately is distinguishable.
The issue in Cochrane was whether a particular
Minnesota state court Judgment against a lawyer was dischargeable in bankruptcy. A limited
partnership had sued the lawyer in 1987 for breach of fiduciary duty. Id. at 980. In 1992, a
Minnesota jury found in the limited partnership's favor and awarded it millions of dollars in
The Minnesota Court of Appeals affirmed the breach offiduciary duty finding, but
remanded the case to the trial court with instructions to reduce the damages. Id After the trial
court entered final judgment, the lawyer filed a new action in state court seeking to have the
judgment set aside. Id He argued for the first time that the limited partnership's dissolution
during the first state court action deprived the trial court ofjurisdiction and that the judgment
was obtained by fraud because the dissolution had not been disclosed. Id The trial court
disagreed, finding that the lawyer had waived his capacity-to-sue defense by failing to raise it
during the first action and that his fraud argument failed as a matter of law. Id The Minnesota
Court of Appeals affirmed the dismissal ofthe lawyer's suit, holding that the lawyer had waived
his capacity-to-sue and fraud arguments by failing to raise them until afl:er the entry of final
judgment in the first action. Id at 980-81; Cochrane v. Tudor Oaks Condo. Proiect. 529 N.W.2d
429, 432, 435—36(Minn. Ct. App. 1995). It reasoned that the limited partnership's dissolution
had long been public knowledge and that the "protracted nature" ofthe litigation gave the lawyer
ample time to raise his arguments. Cochrane. 124 F.3d at 980-81; Tudor Oaks. 529 N.W.2d at
435-36. In the meantime, the limited partnership filed an adversary proceeding in the lawyer's
bankruptcy case seeking a declaration that the state court judgment was not dischargeable.
Cochrane. 124 F.3d at 981. The bankruptcy court gave preclusive effect to the jury's finding that
the lawyer breached a fiduciary duty and therefore held that the state judgment was not
dischargeable. Id at 981. In 1996, almost ten years after the partnership had sued the lawyer in
state court, the lawyer appealed the bankruptcy court's decision to the Eighth Circuit. Among
other things, the lawyer argued that there had never been any finding concerning whether the
state court judgment had been obtained by fraud. Id at 983. The Eighth Circuit disagreed,
holding that the lawyer was bound by the state court's decision that no fraud occurred. Id
Although the Eighth Circuit recognized that the Minnesota Court of Appeals had affirmed
"solely" on a waiver theory, it held that the state court's fraud findings in the lawyer's action
"were final for purposes of applying the doctrine of collateral estoppel because that litigation had
reached such a stage that, in our view, there is 'no really good reason for permitting [those
issues] to be litigated again.'" Id at 983 (alteration in original)(quoting John Morrell & Co. v.
Local Union 304A of United Food & Commercial Workers. 913 F.2d 544, 563-64 (8th Cir.
Cochrane is not the only case in the Eighth Circuit considering whether issue preclusion
should apply to a holding unaddressed on appeal. Eleven years after Cochrane. in Fairbrook
Leasing. Inc. v. Mesaba Aviation. Inc.. 519 F.3d 421 (8th Cir. 2008), the Eighth Circuit refused
to give preclusive effect to a district court's alternative holding that the Eighth Circuit had passed
over in an earlier appeal. Id at 428. In the first action in Fairbrook. the district court had ruled
alternatively that a document executed by the parties was a "Type I" and a "Type II" agreement
under New York law. Id at 427. The Eighth Circuit affirmed the district court's decision that
the document was a Type II agreement without addressing the alternative holding that the
document was a Type I agreement. Id at 428. Thereafter, one ofthe parties started a new action
in federal court seeking damages that were only available under a Type I agreement. In its
reasoning, the Eighth Circuit relied on Comment o of the Restatement (Second) of Judgments,
which states in relevant part:
If the appellate court upholds one of [a lower court's
alternative] determinations as sufficient but not the other, and
accordingly affirms the judgment, the judgment is conclusive as to
the first determination.
If the appellate court upholds one of these determinations
as sufficient and refuses to consider whether or. not the other is
sufficient and accordingly affirms the judgment, the judgment is
conclusive as to the first determination.
Restatement(Second) of Judgments § 27 cmt. o(Am. Law Inst. 1982). The Eighth Circuit then
held that "basic principles of issue preclusion bar [the party] from relying on the district court's
alternative ruling that the [document] was a Type I agreement because that ruling was not upheld
on appeal."'" Fairbrook. 579 F.3d at 428.
Contrary to Appellants' suggestion, Cochrane does not establish a rule in the Eighth
Circuit that issue preclusion always applies to alternative decisions unaddressed on appeal. The
facts in Cochrane were unique: by the time the lawyer's bankruptcy decision reached the Eighth
Circuit, there had been a jury verdict awarding damages for the lawyer's breach of fiduciary
duty; an appellate decision affirming the jury's breach of fiduciary duty finding; entry of final
judgment by the trial court; a trial court summary judgment decision holding that the lawyer had
waived his capacity to sue defense and that his fraud claims failed as a matter of law; and an
appellate decision holding that the lawyer had waived his fraud and capacity-to-sue arguments
by failing to raise them before entry of final judgment. Cochrane. 124 F.3d at 980-81; Tudor
Qaks. 529 N.W.2d at 432,435-36. Thus, when the lawyer argued to the Eighth Circuit that there
had never been a finding on whether the state court judgment was obtained by fraud, he was
asking the Eighth Circuit to preclude the limited partnership from collecting on a judgment that
had been years in the making and that had previously withstood an untimely fraud argument
rejected as a matter of law by a trial court and rejected on waiver grounds by an appellate court.
Under these circumstances, the Eighth Circuit had ample justification to hold that the trial court's
'"Wright and Miller's treatise on civil procedure states: "Ifthe appellate court terminates the case
by final rulings as to some matters only, preclusion is limited to the matters actually resolved by
the appellate court, whether it terminated the case on terms that left it unnecessary to resolve
other matters or affirmed on some grounds and vacated or reversed on others." Wright et al.,
supra § 4432 (footnote omitted). Wright and Miller cite Fairbrook as an illustration of when a
court terminates a case on terms that leave it unnecessary to resolve other matters. Id. § 4432
fraud-related findings were final "because that litigation had reached such a stage that... there
[was]'no really good reason for permitting [those issues] to be litigated again.'" Cochrane. 124
F.3d at 983 (second alteration in orginal) (quoting John MorrelK 913 F.2d at 563-64). The
Eighth Circuit's decision in Cochrane contained no discussion of the general rule that issue
preclusion only attaches to issues specifically addressed on appeal. And the Eighth Circuit did
not mention Cochrane in the subsequent Fairbrook decision, which it presumably would have
done if Cochrane in fact established that issue preclusion always applies to alternative decisions
unaddressed on appeal.
The strong justifications for applying issue preclusion in Cochrane are absent here. First,
when the bankruptcy judge initially ruled that Brad and Brenda had failed to state a claim
concerning counts 3 and 4 of the counterclaim, he focused on the language of the counterclaims
rather than the facts surrounding the $650,000 note. App. 348^9. Later in the ruling, however,
when discussing the decision to abstain, the bankruptcy judge acknowledged that because Brad
and Brenda were arguing that some of their post-petition transactions with Beyers were
fraudulent, determining whether Beyers violated the discharge injunction might involve more
than simply looking at the language of the counterclaim. App. 352-53. The bankruptcy judge in
his abstention ruling stated that "if the state court determines, albeit contrary to the express
language of counts three and four of Beyers's state court counterclaim, any of those debts have
been discharged, [the bankruptcy judge would] allow the debtors to renew their complaint."
App. 352-53. Brad and Brenda then returned to state court, where the state judge found that as
to Brad and Brenda, the $650,000 note refinanced discharged debt; that Beyers had "devised a
scheme through which he would convince Brad and Brenda ... to continue paying on their
discharged debt;" and that Brad and Brenda's "purported reaffirmations with" FSBR "were the
result of coercive behavior by" Beyers. App. 13, 458. These findings—some of which the state
judge made after wading through the numerous financial transactions between FSBR, Beyers,
and the Stablers," and some of which he made after conducting separate jury and court trials—
provided the bankruptcy judge with a more complete picture of Beyers's conduct and changed
the nature of the case. Thus, unlike Cochrane. where the lawyer's fraud argument and the facts
and legal findings surrounding it remained unchanged, there was "good reason" to allow Brad
and Brenda to present anew to the bankruptcy judge whether Beyers violated the discharge
injunction and should therefore be held in contempt. Second, the appellate court in Cochrane
considered the trial court's fraud findings at least indirectly when it held that the lawyer waived
his right to argue fraud based on the limited partnership's dissolution. Tudor Oaks. 529 N.W.2d
at 432, 435-36. Here, the BAP affirmed on abstention grounds without addressing the
bankruptcy judge's alternative holding at all. Finally, Brad and Brenda asserted their claim in a
timely manner, unlike the lawyer in Cochrane.
Because Cochrane is distinguishable and does not require courts to always afford
preclusive effect to issues unaddressed on appeal, this Court will apply the general rule like the
Eighth Circuit did in Fairbrook. Under the general rule, the bankruptcy judge's alternative
holding that Brad and Brenda failed to state a claim is not entitled to preclusive effect because
the BAP declined to consider it on appeal and affirmed on abstention grounds only.
Even if the general rule did not apply, this Court would still affirm the bankruptcy
judge's refusal to apply issue preclusion. When, as here, "a first decision is supported both by
findings that deny the power ofthe court to decide the case on the merits and by findings that go
''in his opinion concluding that the $650,000 note was an invalid reaffirmation of discharged
debt, the state judge stated: "Attempting to deduce the true state of affairs [between Beyers,
FSBR, and the Stablers] is nearly maddening. I have literally spent weeks poring over these
documents trying to reach a full understanding ofthe circumstances." App. 14.
to the merits, preclusion is inappropriate as to the findings on the merits." Wright et al., supra.
§ 4421. The Sixth Circuit discussed this principle in Remus Joint Venture v. McAnallv. 116
F.3d 180 (6th Cir. 1997). In Remus, a federal district court dismissed a complaint based on
Burford and Pullman abstention,'^ but also found that the plaintiff had failed to establish a
protected property interest in the subject ofthe litigation. Id. at 182-83. In a later state case, the
state court applied issue preclusion to the district court's decision on the merits. Id. at 183. The
Sixth Circuit explained that the state court was mistaken because when a "ruling rests on
alternative grounds, at least one of which is based on the inability ofthe court to reach the merits,
the judgment should not act as a bar in a future action." Id at 184 n.5. Because abstention was
one of the alternative grounds for the bankruptcy judge's dismissal of the adversary complaint,
the other ground—failure to state a claim—is not entitled to preclusive effect.'^
There are reasons peculiar to this case not to apply issue preclusion.. The bankruptcy
judge's dismissal and abstention in 2009 is akin to denying a motion for sanctions without
prejudice to refiling, rather than dismissal with prejudice of a complaint. Brad and Brenda made
their request in 2009 through an adversary complaint, but at oral argument recognized that they
should have styled it a motion in the bankruptcy case. See Green Point Credit. LLC v. McLean
'^See Burford v. Sun Oil Co.. 319 U.S. 315 ("1943): R.R. Comm'n of Texas v. Pullman Co.. 312
'^Relatedly, there is a line of federal case law holding that courts cannot decline to exercise
supplemental jurisdiction over a claim and, at the same time, rule on the merits of the claim.
Disher v. Info. Res.. Inc.. 873 F.2d 136, 140 (7th Cir. 1989)("A dismissal based on the district
court's relinquishing its pendent jurisdiction deprives any ruling that he may have made oil the
merits of a relinquished claim of preclusive effect."); Axess Int'l. Ltd. v. Intercargo Ins. Co.. 183
F.3d 935, 943 (9th Cir. 1999)("[Ojnce the district court chose not to exercise supplemental
jurisdiction over Axess's supplemental state law claims, it lacked the power to adjudicate the
merits of these claims . .. ."). Declining to exercise supplemental jurisdiction is a bit different
from deciding to abstain, but at least one bankruptcy court has explained that abstention under
§ 1334(c)(1) "is the relinquishment of federal jurisdiction to state courts when the conditions of
the statute are satisfied." In re Alternate Fuels. Inc.. No. 09-20173, 2010 WL 194660, at *2
(Bankr. D. Kan. Jan. 14, 2010).
(In re McLean), 794 F.3d 1313, 1326 (11th Cir. 2015)(explaining that civil contempt sanctions
for violating the discharge injunction should be brought as a contested matter via a motion rather
than as an adversary proceeding via a complaint); Chionis v. Starkus (In re Chionisl. No. CC-12-
1501-KuBaPa, 2013 WL 6840485, at *4 (B.A.P. 9th Cir. Dec. 27, 2013)("[A] bankruptcy court
may dismiss a complaint seeking contempt sanctions for violation of the discharge injunction
and thereby require the party seeking sanctions to proceed by motion instead."). Appellants at
oral argument acknowledged that whether the request was styled an adversary complaint or
motion made no practical difference. The bankruptcy Judge characterized his ruling as a
dismissal ofthe adversary complaint coupled with abstention, but his ruling—^where he expressly
left open the possibility to "allow debtors [Brad and Brenda] to renew their complaint" if the
state court determined that Beyers was seeking to collect on discharged debt—clearly signals
that he did not intend the ruling to have preclusive effect. See App. 352—53. When Brad and
Brenda brought their motion for contempt in 2015, they presented a broader theory of Beyers's
violation of the discharge injunction. Although Brad and Brenda in their 2015 motion restated
the previous grounds ofcounts 3 and 4 ofthe counterclaim as a basis for sanctions, App. 03, they
presented additional reasons and bases not before or considered by the bankruptcy Judge in 2009,
see App. 01—03; BR Docs. 31, 31-2, 37, 37-1, 37-2. Moreover, the bankruptcy Judge's decision
in 2016 to award sanctions is an enforcement of his own order against a party who violated the
order. Judges retain substantial discretion to enforce their orders. See Jones v. CitiMorteage.
Inc., 666 F. App'x 766, 775 n.8 (11th Cir. 2016)(per curiam)(explaining that the bankruptcy
court that issues the discharge injunction "is the court that alone possess[es] the power to enforce
compliance with [the injunction]"); Waffenschmidt v. MacKav. 763 F.2d 711, 716 (5th Cir.
1985)("Courts possess the inherent authority to enforce their own injunctive decrees.").
There are five required elements for issue preclusion, as set forth above. See Sandv Lake
Band, 714 F.3d at 1102—03. The parties of course are the same between the 2009 adversary
complaint and 2015 motion, and the issue sought to be precluded is the same. However, the
issue sought to be precluded was not truly "actually litigated" in 2009; and the "valid and final
judgment" element is missing because the affirmance was on abstention grounds only.
Appellants also argue that the bankruptcy judge's decision to abstain is entitled to
preclusive effect. Although a decision to abstain does not bar further litigation ofthe underlying
claims in a case, Partington v. Gedan. 961 F.2d 852, 860 (9th Cir. 1992), it can preclude further
litigation pf the abstention issue itself. Grieve v. Tamerin. 269 F.3d 149, 153 (2d Cir. 2001)
(applying issue preclusion to a decision to abstain under Younger v. Harris. 401 U.S. 37(1971));
CH Props.. Inc. v. Comite de Vecinos de Isla Verde (In re CH Props. Inc.T 381 B.R. 20, 27-28
(D.P.R 2007)(likening abstention under § 1334(c)(1) to Younger abstention and applying issue
preclusion to bankruptcy judge's decision to abstain). Here, however, the bankruptcy judge
never said that he was going to permanently abstain from deciding whether Beyers violated the
discharge injunction and should therefore be held in contempt. Rather, the bankruptcy judge
stated in his 2009 oral order that it would be "preferable" to have the state court decide the
discharge question and then allow Brad and Brenda to renew their request if necessary. App.
352-53. In his 2016 oral order, the bankruptcy judge confirmed that his 2009 oral order "invited
[Brad and Brenda] to renew their request for Sanctions," depending on what the state court
decided. App. 541.
Although Appellants acknowledge that a bankruptcy court's interpretation of its own
order is entitled to deference. Doc. 13 at 34; Gen. Elec. Capital Corp. v. Dial Bus. Forms. Inc.(In
re Dial Bus. Forms. Inc."). 341 F.3d 738, 744 (8th Cir. 2003) (reviewing bankruptcy court's
interpretation of its order for abuse of discretion); Kellev v. Centennial Bank tin re KellevI 488
B.R. 97, 99 (B.A.P. 8th Cir. 2013) (same), they argue that the bankruptcy judge abused his
discretion when the judge interpreted his 2009 oral order as inviting Brad and Brenda to renew
their request for sanctions. According to Appellants, this interpretation is inconsistent with the
bankruptcy judge's 2009 text order dismissing the adversary complaint. Appellants contend that
the text order did not contain an invitation to return; that the dismissal was presumed to be "with
prejudice" or "on the merits" under Rule 41(b) of the Federal Rules of Civil Procedure and Rule
7041 of the Federal Rules of Bankruptcy Procedure; and that the language of the text order
should control rather than the 2009 oral order. Appellants' argument is unconvincing. To be
sure, when there is a direct conflict between an opinion and an unambiguous judgment, the
judgment typically controls.
Eakin v. Cont'l 111. Nat'l Bank & Tr. Co. of Chi.. 875 F.2d 114,
118 (7th Cir. 1989) (holding that the language of the judgment eontrolled where the district
court's opinion concluded that specific performance was appropriate but the judgment stated the
defendant had to pay the full amount under letter of credit). That is not the situation here,
however. The text order says nothing about Brad and Brenda being barred from returning to
bankruptcy court or the bankruptcy judge permanently abstaining from deciding the contempt
issue. App. 699. Nor is the text order an unqualified dismissal with prejudice, as Appellants
argue. Instead, the text order says that the adversary complaint is dismissed "[bjased on the
findings and conclusions entered on the record." App. 699. The text order is ambiguous for
purposes of applying issue preclusion because the order itself sheds no light on what the
"findings and conclusions entered on the record" actually were. See Colonial Auto Ctr. v.
Tomlin (In re Tomlin). 105 F.3d 933, 940 (4th Cir. 1997) (finding that bankruptcy dismissal
order was ambiguous where the order stated that debtor's petition was dismissed with prejudice
"for the reasons set forth" in the trustee's motion); Heartland Hosp. v. Thompson. 328 F. Siipp.
2d 8, 12 (D.D.C. 2004)(concluding that judgment was ambiguous where judgment remanded
case to administrative agency "for action consistent with the foregoing opinion"). And when a
judgment is ambiguous, courts look beyond the judgment itself to determine its preclusive effect.
See Tomlin. 105 F.3d at 941 (considering bankruptcy judge's interpretation of ambiguous
dismissal order); Sec. Mut. Cas. Co. v. Century Cas. Co.. 621 F.2d 1062, 1066 (10th Cif. 1980)
("If there is any ambiguity or obscurity or if the judgment fails to express the rulings in the case
with clarity or accuracy, reference may be had to the findings and the entire record for the
purpose of determining what was decided."); see also United States v. Maull. 855 F.2d 514, 516
(8th Cir. 1988) (holding that the district court's opinion entered after it had dismissed a
complaint under FRCP 41(b)"effectively clarified the ambiguity in its earlier order and 'rebutted
the presumption of finality created by Rule 41(b)'"(quoting Knox v. Lichtenstein. 654 F.2d 19,
22(8th Cir. 1981))). In sum, the rule that the judgment controls over the opinion does not apply
here because the text order is ambiguous and does not directly conflict with the 2009 oral order.
Appellants offer several other reasons why the bankruptcy judge abused his discretion in
interpreting his 2009 oral order, including that the main reason the bankruptcy judge declined to
exercise jurisdiction over the adversary complaint was that Brad and Brenda were forum
shopping and that the decision to abstain was a second, alternative ruling, made only after the
bankruptcy judge decided that Beyers's counterclaim did not violate the discharge injunction.
Neither these arguments nor any of Appellants' other arguments establish that the bankruptcy
judge abused his discretion when he interpreted his 2009 oral order as inviting Brad and Brenda
to renew their request for sanctions. As set forth above, the bankruptcy judge made the
following statement in the 2009 oral order:
I believe it would be possible, even preferable, to sever debtors'
state court claims, allow,the state court to determine, as it already
has with respect to count one of Beyers' state court counterclaim,
whether any of the debts Beyers is seeking to collect have been
discharged. And if the state court determines, albeit contrary to the
express language of counts three and four of Beyers' state court
counterclaim, any of those debts have been discharged, allow
debtors to renew their complaint.
App. 352-53. Given this language, the bankruptcy judge's interpretation of his 2009 order was
reasonable and was not an abuse of discretion. Because the 2009 order allowed Brad and Brehda
to return to bankruptcy court if the state judge decided the discharge question in their favor, the
bankruptcy judge's decision to abstain in 2009 did not bar Brad and Brenda's 2015 motion for
Law of the Case
Appellants argue that the law of the case doctrine barred the bankruptcy judge from
considering Brad and Brenda's 2015 motion for contempt. Although Appellants argued to the
bankruptcy court that issue preclusion applied to the motion for contempt, they never made any
argument concerning the law ofthe case doctrine. Appellants' failure to raise the law ofthe case
doctrine before the bankruptcy judge constitutes a waiver of that argument and precludes them
from raising it on appeal to this Court.
Dapec. Inc. v. Small Bus. Admin, tin re MBA
Poultry. LLC. 291 F.3d 528, 534 n.3 (8th Cir. 2002)(holding that party waived argument by
failing to raise it in bankruptcy court); First Bank Inv'rs' Tr. v. Tarkio Coll.. 129 F.3d 471, 477
(8th Cir. 1997)("As a general rule, we will not consider issues not presented to the bankruptcy
court in the first instance.").
Even if Appellants had not waived their law of the case argument, it is meritless. The
law of the case doctrine "provides that when a court decides a rule of law, that decision should
govern the same issues in subsequent stages in the same case." UniOroup v. Winokur. 45 F.3d
1208, 1211 (8th Cir. 1995). The purpose of the doctriiie is to protect the parties' settled
expectations, ensure the uniformity of decisions, and promote judicial efficiency. First Union
Nat'l Bank v. Pictet Overseas Tr. Corp.. 477 F.3d 616, 620 (8th Cir. 2007). The doctrine "is a
matter of practice and discretion, not a limit on power." Wright et al., supra. § 4478; see also
Musacchio v. United States. 136 S. Ct. 709, 716(2016)("The doctrine 'expresses the practice of
courts generally to refuse to reopen what has been decided,' but it does not 'limit [courts']
power.'" (alteration in original) (quoting Messenger v. Anderson. 225 U.S. 436, 444 (1912)));
Little Earth ofthe United Tribes. Inc. v. U.S. Dep't of Hons. & Urban Dev.. 807 F.2d 1433, 1440
(8th Cir. 1986)("Law ofthe case is a doctrine of discretion, not a command to the courts.").
Appellants argue that the law of the case doctrine applies to the bankruptcy Judge's
decision that counts 3 and 4 of the counterclaim did not violate the discharge injunction. They
contend that this decision created a reasonable expectation that they would not be held in
contempt for violating the discharge injunction. Whatever expectation the bankruptcy judge's
decision created, it does not justify applying the law of the case doctrine.
bankruptcy judge stated in his 2009 oral order that counts 3 and 4 of the counterclaim did not
violate the discharge injunction, he also ruled both that the state court should decide whether the
debt Beyers sought to collect had been discharged in bankruptcy and that Brad and Brenda could
renew their complaint if they obtained a favorable ruling on the discharge question. App. 35253. The bankruptcy judge's statement that Brad and Brenda could renew their complaint
provided sufficient notice to Appellants that the contempt issue was not permanently settled.
Moreover, while the bankruptcy judge's 2009 decision focused only on the language of Beyers's
counterclaim, the judge's 2016 order finding Beyers in contempt went beyond this language and
was based on other facts and circumstances. The bankruptcy judge recited the state judge's
findings concerning Beyers's conduct—^that Beyers had devised a scheme to convince Brad and
Brenda to eontinue paying on discharged debt and had coerced them into, signing new
promissory notes—before stating "I find Bank's aetions in coercing debtors to sign the new
promissory notes and Beyers's aetions in pursuing collection ofthe discharged debt to be willful
violations of the court's discharge order." App. 549. The 2009 decision concerning counts 3
and 4 of the counterclaim did not give Beyers license to use those state claims to seek to collect
discharged debt or insulate Beyers from being held in contempt for prior conduct in scheming
and coercing the Stablers to sign notes for discharged debts. At bottom, the bankruptcy judge's
2009 order did not give rise to the sort of settled expectation that the law of the case doctrine is
designed to protect.
Applying the law of the ease doctrine also would not advance the doctrine's other
purposes. First, because the bankruptcy judge decided to abstain and invited Brad and Brenda to
renew their complaint if necessary, it would be inconsistent to hold that the 2009 oral order
permanently settled the question of whether Appellants violated the discharge injunction.
Second, applying the law ofthe case doctrine would not have conserved many judicial resources.
When Brad and Brenda filed their adversary complaint, the discharge question was already being
litigated in state court. Waiting until the state litigation concluded to decide whether Appellants
violated the discharge injunction was the most efficient course because it allowed the bankruptcy
judge to rely on the state judge's findings.
Merits of the Motion for Contempt
Appellants argue that the bankruptcy judge erred when he concluded that they violated
the discharge injunction in 11 U.S.C. § 524(a)(2). This Court reviews the bankruptcy judge's
decision to award sanctions for a violation of the discharge injunction for an abuse of discretion.
considering the bankruptcy judge s legal conclusions de novo and his factual findings for clear
error. Venture Bank, 800 F.3d at 443; Mo. Dep't of Soe. Servs. v. Soeneer tin re SnencerV 550
B.R. 766, 769 (B.A.P. 8th Cir. 2016). Under § 524(a)(2), a discharge like the one Brad and
Brenda received operates as an injunction against the commencement or continuation of an
action, the employment of process, or an act to collect, recover or offset any such debt as a
personal liability of the debtor, whether or not discharge of such debt is waived." 11 U.S.C.
§ 524(a)(2). By its terms then, the discharge injunction prohibits not only lawsuits, but also any
other aet to collect a discharged debt from the debtor. In re MeLean. 794 F.3d at 1320;
Poindexter v. Sw. Mo. Bank tin re Poindexterl 376 B.R. 732, 736 (Bankr. W.D. Mo. 2007).
Indeed, the discharge injunction is designed "to ensure that once a debt is discharged, the debtor
will not be pressured in any way to repay it." Everlv v. 4745 Second Ave.. Ltd.. 346 B.R. 791,
795 (B.A.P. 8th Cir. 2006)(citation and internal quotation marks omitted). A bankruptcy court
may hold a creditor in contempt and impose sanctions if the creditor willfully violates the
discharge injunction. In re McLean. 794 F.3d at 1319; In re Lang. 398 B.R. 1, 3 (Bankr. N.D.
Iowa 2008). As the moving parties. Brad and Brenda have "the burden to show by clear and
convincing evidence that [Appellants] had knowledge of the discharge and willfully violated it
by pursuing collection activities." In re Lang. 398 B.R. at 3; see also Poindexter. 376 B.R. at
738( The standard of willfulness . . . requires evidence the offending Creditor knew of the
existence ofthe discharge order and intentionally took actions which violated its provisions.").
Appellants do not dispute that they knew of the discharge order in Brad and Brenda's
bankruptey case. Instead, Appellants argue that under the decision in Everlv. 346 B.R. 791, they
did not willfully violate the discharge injunction because they had a good faith basis for
believing that Brad and Brenda owed the debt underlying the $650,000 note. The issue in Everlv
was whether a company violated the discharge injunction by suing the debtor in state court for
damages the debtor caused the company when he burglarized a club and started it on fire. Id. at
793. The debtor in Everly had received a discharge in bankruptcy but had failed to properly list
the company as a creditor. Id at 793-94, 797. Section 523(a)(3) of the Bankruptcy Code
excepts certain debts from discharge if the debtor fails to list or schedule the creditor in time for
the creditor to file a complaint in bankruptcy court. Everlv. 346 B.R. at 795-96. The company,
who at that time was unaware of the debtor's discharge, sued the debtor in state court for
damages the debtor caused when he burned the club. Id at 794. The debtor moved for sanctions
in the bankruptcy court, arguing that the company had violated the discharge injunction. Id The
bankruptcy court denied the motion and the Eighth Circuit BAP affirmed. The BAP explained
"that as long as a creditor has a good faith basis for believing that its debt was excepted from
discharge or, as in this case, had no knowledge of any such discharge, the creditor is not subject
to sanctions for violating the discharge injunction when it proceeds in state court." Id at 79798.
Appellants argue that they had a good faith belief that Brad and Brenda owed the debt
underlying the $650,000 promissory note because at the time Beyers filed his counterclaim, there
was a split in authority concerning whether the requirements in § 524(c) apply when a debtor
agrees to pay discharged debt in exchange for a creditor's promise not to foreclose on liens that
had passed through the debtor's bankruptcy. The requirements for reaffirmations in § 524(c)
apply to any agreements "between a holder of a claim and the debtor, the consideration for
which, in whole or in part, is based on" dischargeable debt. II U.S.C. § 524(c); DuBois. 276
F.3d at 1022. When Beyers filed his counterclaim, there were a few cases suggesting that a
creditor's promise to forego foreclosure on a pre-bankruptcy security interest constituted new
and sufficient consideration to support a debtor's promise to repay discharged debt. Minster
State Bank v. Heirhblzer ("In re HeirholzerV 170 B.R. 938, 940^1 (Bankr. N.D. Ohio 1994).
According to these cases, such agreements were not reaffirmation agreements subject to
§ 524(c), but were instead new contracts supported by independent consideration. Id. at 941
(holding that although a post-discharge promissory note was not a valid reaffirmation agreement,
the note was still enforceable because the bank's promise to forego foreclosure of a mortgage
constituted "new and sufficient consideration to support a binding post-discharge obligation" to
repay discharged debt); see also Watson v. Shandell ("In re Watsonl. 192 B.R. 739, 747 (B.A.P.
9th Cir. 1996) ("The general rule concerning postpetition contracts versus reaffirmation of
discharged debts is that the pivotal factor which serves to establish a valid post discharge
contract is the existence of some separate consideration for the subsequent agreement." (citation
and internal quotation marks omitted)). Appellants contend that these cases gave them a good
faith belief that the consideration for the $650,000 promissory note w^s the independent value of
the surviving liens or interests rather than Brad and Brenda's discharged debt.
The facts here do not support a good-faith belief that the surviving liens constituted the
new and independent consideration necessary to make § 524(c) inapplicable under the cases
Appellants rely on. The debt that Brad and Brenda owed under the $650,000 note mirrored the
amount they owed FSBR before filing for bankruptcy. Stabler. 865 N.W.2d at 470. Appellants
never appraised the surviving liens, but there is no evidence that the value of these liens was
anything near the amount of the $650,000 note. Indeed, the state judge found that had
Appellants foreclosed on their liens on the Stablers' property. Appellants "would have taken a
significant loss on the various loans of Brad and Brenda and EGAS." App. 458. Relying on
these facts, the Supreme Court of South Dakota concluded that Appellants should have known
that § 524(c) applied to the $650,000 note, notwithstanding the alleged split in authority on
We do not think the law is so unclear as to render Defendants
unaware of its application to Defendants' conduct. 11 U.S.C.
§ 524(c) states that a reaffirmation agreement is any "agreement
between a holder of a claim and the debtor, the consideration for
which, in whole or in part, is based on a debt that is dischargeable
in a case under this title[.]" Any claim by Beyers that the
consideration to forego foreclosure on liens that passed through
bankruptcy is new consideration to which this statute does not
apply is unconvincing in the context of this case. There is no
indication that any sort of valuation was done on the liens that
survived bankruptcy. Instead, Defendants sought out Stablers to
renew all obligations that they owed prior to the bankruptcy, in the
same form and amount that Brad and Brenda personally owed prebankruptcy. We see no attempt by Defendants to enter into an
entirely new arrangement based on the value ofthe surviving liens.
Stabler. 865 N.W.2d at 478; see also id. at 478—79 ("[I]t is clear to this Court that Defendants
entered into an agreement, 'the consideration for which, in whole or in part, [was] based' on
discharged debt, and that any agreement to pay was not voluntarily entered into by [the
Stablers]." (first alteration in original)). The Supreme Court of South Dakota's conclusion is
consistent with some of the cases cited by Appellants for their good faith argument. S^ BR
Doc. 35-1 at 31. In Shields v. Stangler ("In re Stangleri. 186 B.R. 460 (Bankr. D. Minn. 1995),
for instance, the bankruptcy court recognized that when the amount the debtor owes under the
post-bankruptcy contract exceeds the value of the surviving lien, "the consideration might well
be, in part, based on the discharged debt." Id at 463 n.2. And in In re Watson, the Ninth Circuit
BAP explained that "if a debtor assumes the same obligations under a new agreement as existed
under a former, such a discharged debt obligation would preclude a postpetition agreement from
being considered a new and separate agreement." 192 B.R. at 747.
Beyers's conduct surrounding the $650,000 note further undermines Appellants' good
faith argument. When EGAS faced severe financial difficulties, Beyers encouraged Brad and
Brenda to file for bankruptcy and directed them to FSBR's own attorney to use as their
bankruptcy attomey. Based on the state court findings, Beyers convinced Brad and Brenda that
he was acting in their best interest, but his true goal was to control Brad and Brenda's fmancial
situation so that he could claim their discharged debts to FSBR remained owing. App. 457—58.
To this end, according to state court findings, Beyers "devised a scheme" to get Brad and Brenda
to continue paying FSBR for debt that had been discharged. App. 458. This scheme involved
Beyers "pressuring" Brad and Brenda, Stabler. 865 N.W.2d at 478, and using "coercive
behavior" to get them to sign the $650,000 note, the accompanying CREM, and the notes in
favor of Schurrs and Emst, App. 458. Beyers used Schurrs and Ernst as straw men, as the state
court put it, to reestablish the discharged debt through another party before its transfer back to
Beyers. App. 13-14. The state judge found that the $650,000 promissory note was "not
knowingly and consensually accepted by Brad and Brenda," and that no bankruptcy court would
have concluded that reaffirming the discharged debt was in Brad and Brenda's best interest.
App. 458. As the bankruptcyjudge recognized, Beyers's use of a scheme and his pursuit of Brad
and Brenda to sign multiple agreements beyond the $650,000 note is inconsistent with an honest
belief that the $650,000 note was enforceable. App. 548^9. Appellants contend that under the
cases they rely on, Beyers's conduct is irrelevant to whether they had a good faith belief that the
$650,000 note was enforceable. This Court disagrees. Although the cases Appellants rely on
held that a promise to forego foreclosure can constitute "new and sufficient consideration," these
cases do not hold that a creditor can use a lien to coerce a debtor into paying discharged debt.
Nor do these cases suggest that a creditor can engage in the sort of overreach Beyers engaged in
here without violating the discharge injunction. The purpose of the discharge injunction has
always been "to ensure that . . . the debtor will not be pressured in any way to repay" a
discharged debt. Everly. 346 B.R. at 795 (citation and internal quotation marks omitted). The
few cases Appellants cite do not give rise to a good faith belief that a creditor can engage in the
very behavior the injunction was designed to prevent simply because the creditor's interaction
with the debtor involves a promise not to foreclose on a secured position.
In sum, Appellants' good faith argument is unconvincing given the similarity between the
debt Brad and Brenda owed before bankruptcy and the debt they owed under the $650,000 note,
the lack of any evidence that the liens were worth anywhere near $650,000, the continued effort
to securitize and collect on that discharged debt, and Beyers's conduct as set forth at length in
state court findings and decisions. Clear and convincing evidence supports the bankruptcy
judge's conclusion that Appellants knew of the discharge injunction and willfully violated it.
For the reasons stated above, it is hereby
ORDERED that the bankruptcy judge's 2016 decision holding Appellants in contempt
and imposing sanctions is affirmed.
day of March, 2017.
BY THE COURT:
ROBERTO A. LANGE
UNITED STATES DISTRICT JUDGE
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