State Court Application of Automatic Stay Is Res Judicata

Posted by NCBRC - July 21, 2016

A state court’s final ruling as to application of the automatic stay to a case before it was res judicata and could not be overruled by the bankruptcy court. Bank of North Georgia v. Vanbrocklin, 2016 Bankr. LEXIS 2176, No. 15-11761 (Bankr. N.D. Ga. May 15, 2016).

Bank of North Georgia (BNG) filed a state court lawsuit against a number of parties including several entities as principles on four notes and against James P. Vanbrocklin as guarantor on the notes. When Mr. Vanbrocklin filed chapter 7 bankruptcy he listed BNG as holding a contingent, unliquidated claim for approximately $1.2 million. BNG responded with an adversary complaint asserting that its claim was nondischargeable because Mr. Vanbrocklin, as a member and manager of Axiom Labs, a principle on the loans, had sold Axiom property, misappropriated proceeds, and wrongfully transferred property to a company called USA Labs. In the state case, BNG issued subpoenas and sought discovery as to transfers of property from either Mr. Vanbrocklin or USA Labs.

Mr. Vanbrocklin filed an emergency motion in the state court arguing that the discovery sought by BNG was in furtherance of its adversary proceeding in the bankruptcy court and requesting that the state court enforce the automatic stay by precluding such discovery. The state court granted the motion and stayed all proceedings in the state court as to Mr. Vanbrocklin.

In the bankruptcy court, BNG filed a “Motion Confirming the Automatic Stay Is Not in Effect As to Pending State Court Litigation.” BNG also filed a motion for reconsideration in the state court. The bankruptcy court characterized BNG’s motion as seeking a “comfort order” that the automatic stay does not apply and permitting the state court to continue the state litigation.

The bankruptcy court began its analysis with the Rooker-Feldman doctrine which precludes a district court from reviewing final orders of a state court. “In determining whether the doctrine applies, a federal court must answer two questions in addition to whether it is being asked to overrule a state court: (1) did the state court have authority to enter its judgment; and (2) is the state court action ‘ended.’”

The court began with the “well settled” principle that state courts have concurrent jurisdiction with bankruptcy courts to determine the application of the automatic stay thereby answering the first question in the Rooker-Feldman analysis in the affirmative. As to the second question, the fact that BNG had filed a motion for reconsideration meant that the state court action had not ended. The court concluded that the Rooker-Feldman doctrine did not preclude it from rendering a decision on the motions before it.

Turning to the next hurdle, the court addressed whether the doctrine of res judicata barred its review of the state judgment as to the applicability of the automatic stay. State law provides the parameters of a res judicata inquiry. In Georgia, “[a] judgment of a court of competent jurisdiction shall be conclusive between the same parties and their privies as to all matters put in issue or which under the rules of law might have been put in issue in the cause wherein the judgment was rendered until the judgment is reversed or set aside.” Additionally, courts have added that the prior judgment must be final: i.e. ripe for appeal. The bankruptcy court found all the elements of res judicata were present despite the pending motion for reconsideration as, in Georgia, that motion does not toll the appeal deadline. The court therefore, found that it could not interfere with the state court’s decision with respect to application of the automatic stay to the state case.

The court noted that its decision did not prevent BNG from pursuing its state court remedies with respect to the state judgment, nor did it prevent BNG moving for relief from stay in the bankruptcy court “which maintains exclusive jurisdiction over enforcement of the automatic stay,” notwithstanding the state court’s concurrent jurisdiction over application of the stay.

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