582 B.R. 178
Bankr. E.D. Mich.2017Background
- Debtors Sean and Nicole Blume filed a Chapter 13 bankruptcy on June 29, 2017.
- Creditor Alisa A. Peskin-Shepherd, PLLC seeks relief from the automatic stay to continue state-court litigation (a Collection Case and related Divorce Case) concerning alleged debt and an alleged constructive trust/equitable lien on Debtors’ real property at 330 E. Avon Road, Rochester, MI (the Rochester Property).
- In the Divorce Case, the state court issued a March 9, 2017 opinion indicating the creditor may be entitled to an equitable lien/constructive trust on the Rochester Property, contingent on the outcome of the Collection Case.
- Sixth Circuit precedent generally bars a bankruptcy court from imposing constructive trusts/equitable liens on debtor property, but leaves room for a state court to impose such remedies if stay relief is granted and the state court sets an effective prepetition date.
- The bankruptcy court concluded that without stay relief the creditor would be deprived of the opportunity to litigate and potentially obtain secured status; it therefore found ‘‘cause’’ under 11 U.S.C. § 362(d)(1) to permit the state-court actions to proceed.
- The court granted stay relief to permit completion of the Collection and Divorce Cases (including appeals) and stayed further proceedings on the creditor’s objection to Sean Blume’s claimed exemption until the state litigation concludes.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether cause exists under 11 U.S.C. § 362(d)(1) to lift the automatic stay to allow state-court litigation of creditor’s claims | Creditor: stay relief is needed so the state court can determine existence/amount of debt, fraudulent-transfer avoidance, and imposition of a constructive trust/equitable lien (which could secure creditor’s claim) | Debtors: bankruptcy should protect estate and prevent state-court actions from altering property rights post-petition; stay should remain | Court: Granted stay relief—found cause because state court is the appropriate forum to decide constructive trust issue and creditor would otherwise lose its chance to obtain secured status |
| Whether bankruptcy court can impose a constructive trust/equitable lien on the Rochester Property | Creditor: constructive trust may be proper and should be litigated in state court | Debtors: bankruptcy court cannot allow state-court remedy to alter estate without careful protection; bankruptcy law limits imposition by bankruptcy court | Court: Bankruptcy court cannot itself impose constructive trust (citing Sixth Circuit), but will allow state court to determine and possibly impose such a lien with an effective prepetition date, which would be enforceable in the bankruptcy case |
| Whether further proceedings on creditor’s objection to Debtor’s claimed exemption should proceed now | Creditor: objection should await resolution of state-court determination of lien/constructive trust | Debtor: object to delay and seek prompt adjudication in bankruptcy | Court: Stayed further proceedings on exemption objection until state litigation concludes |
| Whether the Federal Rule 4001(a)(3) 14-day stay should apply | Debtor: likely sought the protective delay | Creditor: requested immediate effectiveness to avoid further delay | Court: Order effective immediately; Fed. R. Bankr. P. 4001(a)(3) does not apply |
Key Cases Cited
- XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443 (6th Cir. 1994) (bankruptcy court may not impose constructive trusts on debtor property)
- Kitchen v. Boyd (In re Newpower), 233 F.3d 922 (6th Cir. 2000) (clarifies limits on bankruptcy courts imposing constructive trusts and the interplay with state-court remedies)
- Poss v. Morris (In re Morris), 260 F.3d 654 (6th Cir. 2001) (further refines Sixth Circuit precedent restricting bankruptcy courts from creating constructive trusts and explains when state-court determinations may be recognized)