City and County of Denver District Court No. 13CV218. Honorable Edward D. Bronfin, Judge.
Deborah Mackall and Herbert Hutchins, Pro se.
Bryan Cave LLP, Stephen D. Rynerson, Sean M. Ward, Denver, Colorado, for Defendant-Appellees.
Hawthorne and J. Jones, JJ., concur.
[¶1] Plaintiffs, Deborah Mackall and Herbert Hutchins, appeal the district court's judgment dismissing their complaint pursuant to C.R.C.P. 12(b)(5). As an issue of first impression in Colorado, we first address whether a debtor who fails to disclose a state court claim to the bankruptcy court lacks standing to assert that claim after the bankruptcy case is dismissed. Because we conclude that a debtor has standing in this situation, we proceed to address two additional
issues of first impression in Colorado: (1) whether a bankruptcy court's order allowing a creditor's proof of claim survives the dismissal of the bankruptcy proceedings prior to discharge from bankruptcy, and if so, (2) whether the order has preclusive effect in state court. We conclude that under the facts presented here, the answer to both of these additional questions is yes. Based on these conclusions, among others, we affirm.
[¶2] Plaintiffs purchased a home and subsequently refinanced it. In the course of refinancing, they executed a promissory note to a lender. The note was then transferred by a series of assignments to defendant, Mortgage Electronic Registration Systems, Inc. (MERS).
[¶3] In 2009, plaintiffs became unable to make scheduled payments on the loan and worked with defendant, Chase Home Finance LLC (CHF), the loan servicer, to set up a modified payment plan. Although plaintiffs made several payments in accordance with the modified payment plan, CHF nevertheless initiated foreclosure proceedings in 2010 and sought a C.R.C.P. 120 order authorizing sale of the house for default on the loan agreement. The C.R.C.P. 120 court dismissed the action without prejudice. CHF then filed a second C.R.C.P. 120 action that the court also dismissed without prejudice.
[¶4] In January 2012, MERS assigned the note to defendant, JPMorgan Chase Bank, N.A. (Chase), which then filed a third C.R.C.P. 120 action. After holding a hearing, the C.R.C.P. 120 court ruled that Chase was the holder of the original, authentic, and enforceable promissory note and that plaintiffs were probably in default. Accordingly, in June 2012, the court issued a written order authorizing Chase to sell the house.
[¶5] Shortly thereafter, plaintiffs filed a Chapter 13 petition for bankruptcy in federal bankruptcy court. Chase filed a proof of claim in the bankruptcy case based on the promissory note, and plaintiffs objected. After holding a hearing on plaintiffs' objection, the bankruptcy court allowed Chase's proof of claim because it determined that Chase was in possession of the original, authentic, and enforceable note, and was the proper party to enforce it. Later, the bankruptcy court dismissed the bankruptcy proceeding prior to confirmation of a plan or discharge because plaintiffs had failed to comply with the court's order requiring them to submit an amended bankruptcy plan.
[¶6] In February 2013, plaintiffs filed the civil complaint at issue here. They asserted numerous claims against Chase, alleging that Chase's note was fraudulent and that Chase was not the proper party to enforce it. They also requested that the district court vacate the order authorizing sale. Chase moved to dismiss pursuant to C.R.C.P. 12(b)(5). The district court granted the motion. It ruled that some claims were precluded by both the C.R.C.P. 120 order authorizing sale and the bankruptcy court order allowing Chase's proof of claim, some failed as a matter of law, and some were not properly before the court.
[¶7] Plaintiffs appeal the dismissal of some of their claims.
[¶8] Initially, Chase contends that plaintiffs lack standing to assert any claims against it because all of the claims were actionable when plaintiffs filed for bankruptcy, and plaintiffs failed to disclose the claims to the bankruptcy court. Chase did not raise this issue below, but standing is a jurisdictional issue that parties or the court may raise at any time, including for the first time on appeal. See Anson v. Trujillo, 56 P.3d 114, 117 (Colo.App. 2002). Therefore, we address this issue and conclude that plaintiffs have standing to assert their claims against Chase.
[¶9] When a debtor files a bankruptcy petition, all of the debtor's property, including all legal claims that the debtor could have pursued at the time of filing, becomes part of the bankruptcy estate. See 11 U.S.C. § 541 (2012); First Horizon Merch. Servs., Inc. v. Wellspring Capital Mgmt., LLC, 166 P.3d 166, 180 (Colo.App. 2007). Even though this happens automatically, the debtor must disclose such legal claims to the bankruptcy court. See 11 U.S.C. § 521(1) (2012); Eastman v. Union Pac. R.R. Co., 493 F.3d 1151, 1159 (10th Cir. 2007).
[¶10] Once constituted, only the bankruptcy estate has standing to assert claims that are part of the estate. See First Horizon Merch. Servs., 166 P.3d at 180. If the bankruptcy court dismisses the case before there is a confirmed plan or discharge, that dismissal " revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case." 11 U.S.C. § 349(b)(3) (2012). All of the property that was transferred from the debtor to the estate revests in the debtor regardless of whether the debtor disclosed it to the bankruptcy court. See, e.g., Crawford v. Franklin Credit Mgmt. Corp., 758 F.3d 473, (2d Cir. 2014) (section 349(b)(3) " makes no distinction between those [assets] that were listed in the debtor's schedule of assets and those [assets] that were not; what is revested in the immediately-pre-petition owner or owners is 'the property of the estate.'" (quoting § 349(b)(3))). Thus, where a bankruptcy case is dismissed, the Bankruptcy Code seems to unequivocally grant a debtor standing to assert any claim that it possessed before it filed for bankruptcy, regardless of whether it disclosed the claim to the bankruptcy court during the bankruptcy proceedings.
[¶11] Despite the plain language of section 349(b)(3), some courts have held that a debtor's failure to disclose property to the bankruptcy court may result in that property remaining with the bankruptcy estate even after the bankruptcy proceeding is dismissed. In Kunica v. St. Jean Financial, Inc., 233 B.R. 46 (S.D.N.Y. 1999), the court held that 11 U.S.C. § 554 (2012) overrides section 349(b)(3) based on the following reasoning. Section 554 provides that the bankruptcy trustee can administer the property of the estate or decide to abandon it to the debtor. See 11 U.S.C. § 554(a). Any disclosed property that is not administered automatically is abandoned to the debtor. See 11 U.S.C. 554(c). But undisclosed property (1) can neither be administered nor abandoned by the trustee and (2) is not automatically abandoned to the debtor if not administered. Therefore, undisclosed property remains property of the estate even after a dismissal. See U.S.C. § 554(d) (" [P]roperty of the estate that is not abandoned under this section and that is not administered in the case remains property of the estate." ); Kunica, 233 B.R. at 53. And because only the estate has standing to assert a claim that is the property of the estate, a debtor who fails to disclose a claim loses standing to assert that claim even after the bankruptcy case is dismissed. See Kunica, 233 B.R. at 53.
[¶12] The Kunica court's decision that section 554 overrides the plain language of section 349(b)(3) also turned on " [a] number of factors particular to [that] action [that] militate[d] in favor of [the court's] conclusion." Id. at 55. First, " given that [the debtor] obtained its dismissal after its case was fully administered and all of its assets scheduled, it arguably obtained the functional equivalent of a discharge." Id. Second, because it was unclear whether the debtor could have obtained a discharge as a matter of law, a dismissal after full administration of the debtor's assets may have been the closest thing to a discharge that the debtor could have received. Id. Third, had the bankruptcy court known about the undisclosed claims, its decision to dismiss the case might have been different. Id. Accordingly, the Kunica court was reluctant to allow the debtor to conceal the claims and their potential value from the bankruptcy court, obtain the functional equivalent of a discharge of its debts based on an accounting of fewer than all of its assets, and retain standing to assert the concealed claims after the effective discharge. See id. at 53-54 (" [D]ismissal of a bankruptcy case . . . as opposed to a discharge, should not provide a debtor with a safe harbor against lack of standing to pursue causes of action that were not properly disclosed." ).
[¶13] Relying on Kunica, a division of the Texas Court of Appeals came to the same conclusion, observing that " [f]ull disclosure is the most critical element of the bankruptcy system because without it the basic system of marshaling assets and the distribution of proceeds to creditors would be an impossible task." Kilpatrick v. Kilpatrick, 205 S.W.3d 690, 702 (Tex.App. 2006).
[¶14] Many courts, however, have disagreed with this view. In Crawford, the Second Circuit thoroughly addressed ...