United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

________________

No. 09-6024

________________

In re: *

*

Brad Allen Stabler and Brenda Lee *

Stabler, *

*

Debtors. *

*

Brad Allen Stabler and Brenda Lee *

Stabler, *

* Appeal from the United States

Plaintiffs - Appellants, * Bankruptcy Court for the District of

* South Dakota

v. *

*

John R. Beyers, *

*

Defendant - Appellee. *

_____

Submitted: October 28, 2009

Filed: November 30, 2009

_____

Before SCHERMER, MAHONEY, and VENTERS, Bankruptcy Judges.

_____

VENTERS, Bankruptcy Judge.
1

 The Honorable Charles L. Nail, Jr., United States Bankruptcy Judge for the

District of South Dakota.

2

 The Panel may affirm on any basis supported by the record. See Hall v.

Lhaco, Inc., 140 F.3d 1190, 1193-94 (8th Cir. 1998). Because we affirm the

bankruptcy court’s decision to abstain, we do not need to review its application of

collateral estoppel.

3 In re Pennino, 299 B.R. 536, 538 (B.A.P. 8th Cir. 2003).

4

 First Nat'l Bank of Olathe, Kansas v. Pontow (In re Pontow), 111 F.3d

604, 609 (8th Cir. 1997).

5 Gourley v. Usery (In re Usery), 242 B.R. 450, 457 (B.A.P. 8th Cir. 1999)

(citing Forbes v. Forbes (In re Forbes), 215 B.R. 183, 187 n. 6 (B.A.P. 8th Cir.

1997)).

2

This is an appeal of the bankruptcy court's order granting the Defendant’s

motion to dismiss the underlying adversary proceeding.1

 The bankruptcy court

dismissed the adversary proceeding based on the application of collateral estoppel to

a prior state-court judgment and on a determination that permissive abstention was

warranted under 28 U.S.C. § 1334(c)(1). For the reasons stated below, we affirm the

bankruptcy court’s decision to abstain.2

I. STANDARD OF REVIEW

 A bankruptcy court’s decision to abstain from exercising jurisdiction is

reviewed for an abuse of discretion.3

 A court abuses its discretion “when its ruling is

founded on an error of law or a misapplication of law to the facts.”4

 In its application,

the abuse of discretion standard is nearly indistinguishable from the clearly erroneous

standard.5

II. BACKGROUND

The Debtors filed a Chapter 7 bankruptcy petition on May 13, 2003. In their

bankruptcy schedules, the Debtors listed a debt to First State Bank of Roscoe (“FSB”)
3

in the amount of $225,816.36 secured by personal property valued at $216,000. On

August 12, 2003, the Debtors received a discharge.

After receiving their discharge, the Debtors entered into two transactions that

eventually led to the present litigation. First, in March 2004, the Debtors and Brad

Stabler’s parents, Stan and Rose Marie Stabler, jointly and severally executed a note

and mortgage in the amount of $650,000 in favor of FSB. The note refinanced certain

pre-petition secured debt from Brad Stabler’s corporation, Edmunds County Ag

Services, which the Debtors had personally guaranteed, as well as some of Stan and

Rose Marie Stabler’s personal debt. Defendant John R. Beyers, an officer at FSB,

guaranteed the note and a third party, Arnold Schurr, purchased the note. When the

Debtors defaulted on the note, Arnold Schurr assigned it to Beyers.

The second transaction took place in May 2004. On this occasion, again with

Beyers’s assistance, the Debtors obtained a $150,000 loan from Ipswich State Bank

(“ISB”) which was secured by a lien on the Debtors’ personal property. The Debtors

used the proceeds of this loan to pay off some of their pre-petition secured debt to

FSB, in order to retain the collateral securing the debt, and to pay off loans that FSB

had made to the Debtors post-petition. Beyers also guaranteed this note.

In February 2005, the Debtors renewed the note to ISB and signed another

security agreement. Ultimately, however, the Debtors defaulted, and ISB assigned the

indebtedness and security to Beyers.

When Beyers attempted to collect these debts, the Debtors in May 2007 filed

a lawsuit in the Circuit Court of McPherson County, South Dakota, against Beyers,

FSB, ISB, and others. In their Complaint, the Debtors alleged, inter alia, that the

debts they owed to FSB, ISB, and Beyers had been discharged in their bankruptcy.

The Debtors amended their state-court Complaint about a year later alleging that FSB,
4

Beyers, and other individuals were guilty of fraud, breach of fiduciary duty, and

conspiracy because they had led the Debtors to believe they owed discharged debt. 

Beyers answered the amended complaint and filed counterclaims on the notes

assigned to him. Count 1 of Beyers’s counterclaim related to the note assigned to him

by ISB. Count 2 sought to foreclose on the security interest securing that note.

Counts 3 and 4 related to the $650,000 note originated by FSB. As to Counts 3 and

4, Beyers specifically stated that he was “requesting judgment against Brad and

Brenda Stabler only for those amounts determined not to be discharged in their prior

Chapter 7 bankruptcy.”

The parties engaged in considerable discovery and motion practice in the statecourt litigation. On October 13, 2008, the Debtors filed their reply to FSB’s and

Beyers’s counterclaims. They again alleged that various debts were discharged and

that Beyers was violating the discharge injunction by attempting to collect them.

On January 13, 2009, Beyers filed a motion for summary judgment on Counts

1 and 2 of his counterclaims. The Debtors resisted by claiming the debt related to

those counts was discharged and that the ISB note and security agreement was an

invalid effort to reaffirm discharged debt.

On the eve of the hearing on Beyers’s motion for summary judgment in the

state court, the Debtors filed an adversary complaint in the bankruptcy court alleging

that Beyers’s state-court counterclaims violated the discharge injunction. They asked

the bankruptcy court to declare that certain debts were discharged and requested that

Beyers be held in contempt.

On May 12, 2009, the state court sent a letter to the parties announcing its

ruling on Beyers’s motion for summary judgment. The court ruled that a bankruptcy

discharge only affects a debtor’s personal liability, not security interests or liens on
5

a debtor’s property. It found that following their bankruptcy discharge, the Debtors

obtained a loan from ISB and used the proceeds in part to pay off some of FSB’s prepetition liens. With the loan assigned to Beyers and in default, the court held that

Beyers was entitled to summary judgment on Counts 1 and 2 of his counterclaim.

The Debtors immediately filed an Application for a Temporary Restraining

Order or Preliminary Injunction in the adversary proceeding asking the bankruptcy

court to enjoin Beyers from submitting an order or judgment to the state court

regarding its summary judgment decision. The Debtors again alleged that the debt in

Count 1 of Beyers’s counterclaim had been discharged.

On April 29, 2009, the Debtors filed a motion for summary judgment on their

adversary complaint, and submitted numerous exhibits in support of their motion.

Beyers did not answer the Debtors’ motion for summary judgment; instead, he moved

to dismiss the Debtors’ adversary complaint on several grounds, including the

application of collateral estoppel to the state-court order granting him partial summary

judgment on his counterclaims. Alternatively, Beyers requested that the bankruptcy

court abstain from hearing the adversary proceeding pursuant to 28 U.S.C.

§1334(c)(1). 

The bankruptcy court held a hearing on Beyers’s motion to dismiss on July 1,

2009. At the hearing, the bankruptcy court invited the parties, several times, to submit

additional evidence and argument in support of their positions. After both parties

affirmatively stated that they had nothing more to offer, the bankruptcy court

announced its ruling from the bench. The Debtors timely appealed that ruling.

III. DISCUSSION

As a preliminary matter, the Panel dispenses with the Debtors’ contention that

the bankruptcy court’s dismissal of the adversary proceeding should be reversed

because the bankruptcy court considered matters outside the pleadings in its decision.
6

 Applicable to bankruptcy proceedings pursuant to Fed. R. Bankr. P.

7012(b).

7 See Blair v. Wills, 420 F.3d 823, 826 (8th Cir. 2005) (holding that the

district court’s consideration of matters outside of pleadings on a motion to dismiss

was harmless where the non-movant had an adequate opportunity to respond). See

also Angel v. Williams, 12 F.3d 786, 788 (8th Cir. 1993) (noting that Rule 12(b)

does not require the court to give affirmative notice to the parties of its intent to

consider matters outside the complaint; constructive notice is sufficient when

plaintiff has adequate time to respond).

6

According to the Debtors, the bankruptcy court should have treated the Defendant’s

motion to dismiss as a motion for summary judgment, as required by Fed. R. Civ. P.

12(d),6

 and should have given the Debtors an opportunity to respond to the

Defendant’s motion. This argument is without merit for two reasons.

First, the record belies the Debtors’ contention that they were surprised by the

bankruptcy court’s consideration of matters outside the pleadings or that they were not

given an adequate opportunity to respond to the Defendant’s motion. Most of the

matters outside the pleadings considered by the court were actually “joint” exhibits

submitted by agreement between the Defendant and the Debtors. And the bankruptcy

court gave the Debtors no less than three opportunities, including two short recesses,

to offer additional evidence or argument in opposition to the Defendant’s motion.

Upon reconvening after the first recess, the Debtors accepted the bankruptcy court’s

invitation and offered three additional exhibits. After that, however, the Debtors

affirmatively stated that they had nothing further to offer. At no point did the Debtors

object to the Court’s consideration of the exhibits or any other matters outside the

pleadings.

The fact that the bankruptcy court never formally announced that it was treating

the Defendant’s motion to dismiss as a motion for summary judgment is immaterial;

all that matters is that the non-moving party has an adequate opportunityto respond.7
8 See Bellotti v. Baird, 428 U.S. 132, 143, 96 S.Ct. 2857, 2864, 49 L.Ed.2d

844 (1976) (federal court may consider abstention sua sponte). See also Carver v.

Carver, 954 F.2d 1573, 1579 (11th Cir. 1992) (bankruptcy court may consider

permissive abstention under § 1334(c)(1) sua sponte); In re Wayne Engineering

Corp., 2008 WL 2356673 (Bankr. N.D. Iowa, June 5, 2008) (same).

7

And the record indicates that the Debtors had an adequate, if not ample, opportunity

to respond to the Defendant’s motion to dismiss. 

Second, any error the bankruptcy court might have committed in failing to

formally announce its intention to treat the Defendant’s motion to dismiss as a motion

for summary judgment is also harmless because the court could have reached the issue

of abstention sua sponte.8

 Hence, the procedure by which the issue came before the

bankruptcy court is largely irrelevant, as long as the Debtors had notice that the court

was considering abstention. And they did. They had from the time the Defendant

filed his motion to dismiss raising the abstention issue – May 21, 2009 – to the date

of the hearing – July 1, 2009. 

Therefore, the Panel finds that the Debtors’ objection to the procedure by which

the bankruptcy court took up and ruled on the Defendant’s motion to dismiss was

proper and does not warrant a reversal of the bankruptcy court’s order dismissing the

adversary proceeding. 

A. Permissive Abstention under 28 U.S.C. § 1334(c)(1).

A bankruptcy court’s authority to abstain from exercising its jurisdiction over

a proceeding arises under 28 U.S.C. § 1334(c)(1), which provides:

Nothing in this section prevents a district court in the interest of

justice, or in the interest of comity with State courts or respect for State
9

 28 U.S.C. § 1334(c)(1).

8

law, from abstaining from hearing a particular proceeding arising under

title 11 or arising in or related to a case under title 11.9

Because the statute speaks in general concepts, i.e., the “interest of justice” and

“interest of comity,” courts have developed specific criteria to determine whether

abstention is warranted. These criteria include:

(1) the effect or lack thereof on the efficient administration of the estate

if a Court recommends abstention,

(2) the extent to which state law issues predominate over bankruptcy

issues,

(3) the difficult or unsettled nature of the applicable law,

(4) the presence of a related proceeding commenced in state court or

other nonbankruptcy court,

(5) the jurisdictional basis, if any, other than 28 U.S.C. § 1334,

(6) the degree of relatedness or remoteness of the proceeding to the main

bankruptcy case,

(7) the substance rather than the form of an asserted “core” proceeding,

(8) the feasibility of severing state law claims from core bankruptcy

matters to allow judgments to be entered in state court with enforcement

left to the bankruptcy court,

(9) the burden on the bankruptcy court's docket,

(10) the likelihood that the commencement of the proceeding involves

forum shopping by one of the parties,
10 In re Williams, 256 B.R. 885, 893-94 (B.A.P. 8th Cir. 2001). See also

Matter of Chicago, Milwaukee, St. Paul & Pacific Railroad Co., 6 F.3d 1184, 1189

(7th Cir. 1993) (“Courts should apply these factors flexibly, for their relevance and

importance will vary with the particular circumstances of each case, and no one

factor is necessarily determinative.”).

11 Transcript, p. 21.

12 Id.

9

(11) the existence of a right to a jury trial, and

(12) the presence in the proceeding of nondebtor parties.10

The bankruptcy court determined that the majority of these factors weighed in

favor of abstention. The Panel finds no fault with the bankruptcy court’s analysis or

its conclusion that factors 1, 4, 8, 10, 11, and 12 weigh in favor of abstention and that

the remaining factors either are neutral or weigh slightly against abstention. 

Of the factors weighing in favor of abstention, the tenth factor – the likelihood

one of the parties is forum shopping – deserves particular note because of how

apparent and egregious it is that the Debtors were forum shopping. As the bankruptcy

court aptly emphasized: “They (the Debtors) filed their action in state court. They

raised the issue of their discharge in their state court [sic] complaint. They allowed

their action to proceed in state court for some 19 months. And they waited to

commence this adversary proceeding until the state court ruled against them on one

matter and appeared poised to rule against them on another.”11 To permit the Debtors

to proceed with their adversary complaint in the bankruptcy court would “condone

their blatant attempt to circumvent the decision of the state court in which they chose

to proceed more than two years ago and secure a different or better result in this (the

bankruptcy) court.”12
13 11 U.S.C. § 727(b). See In re Everly, 346 B.R. 791, 796 (B.A.P. 8th Cir.

2006).

14 Id.

10

The Debtors dispute that they are forum shopping, arguing that the state court

did not have jurisdiction to render a decision on the dischargeability of the debts owed

to Beyers and that “the discharge order and discharge injunction were not clearly

implicated until January 2009, when Defendant refused to answer an interrogatory

requesting he describe the debt that was non discharged in [the Debtors’] bankruptcy.”

Neither argument has merit.

The Debtors’ first contention, that the state court cannot determine whether a

debt has been discharged in bankruptcy, is legally flawed and contrary to the Debtors’

own conduct. Aside from determinations of dischargeability under 11 U.S.C. §

523(a)(2), (4), or (6), state courts have concurrent jurisdiction to determine the

dischargeability of a debt.13 Here, the issue before the state court (and bankruptcy

court) was not whether the Debtors’ debts to Beyers were excepted from discharge

under § 523(a)(2), (4), or (6), but whether they constituted post-petition debts outside

the penumbra of the discharge and discharge injunction. Under § 727(b) and Everly,

the state court had jurisdiction to make that determination.14 Moreover, the Debtors

apparently believed that the state court had jurisdiction to determine the

dischargeability of debts when they chose that forum to bring their first suit. 

The Debtors’ second argument that the discharge order and injunction were

only recently put at issue is also belied by the facts. The Debtors placed their

discharge, and by implication, the discharge injunction, squarely at issue in the

amended complaint they filed in state court on June 17, 2008. In their recitation of

(presumably) relevant facts, the Debtors recounted that they were granted a discharge

of their debts on August 12, 2003, that FSB was named as a creditor in their

bankruptcy proceeding, that their guarantee of the Edmunds County Ag Services debt
11

was discharged, that Beyers and FSB attempted to obtain the reaffirmation of a

discharged debt, and that Arnold Schurr, ISB, and Beyers tried to “[l]aunder the debt

through a series of transactions so as to give it the appearance of a debt actually owed

(i.e., a debt that had not been discharged).” Then, in Count III, which seeks damages

against Beyers and FSB for fraud, the Debtors alleged that “Beyers and FSB knew that

the . . . debt[s] . . . were not in fact owing,” and that “[a]s part of this fraudulent

scheme, Beyers and FSB misled [the Debtors] into believing that they had reaffirmed

and continued to owe the pre-bankruptcy debt.” The presence of these allegations in

the Debtors’ amended complaint leaves no doubt that the Debtors’ discharge and the

discharge injunction were at issue in the state court litigation. Moreover, it was the

Debtors who put them at issue. And there is little doubt that they would have accepted

a favorable ruling from the state court on these issues had one been issued.

IV. CONCLUSION

For the reasons stated above, the bankruptcy court’s order abstaining from

exercising jurisdiction over the adversary proceeding is affirmed.