Ruth S. Stephens, et al v. Sweet Water State Bank

Ruth S. Stephens, et al., Appellant,

v

Sweet Water State Bank, Appellee.

Supreme Court of Alabama

601 So.2d 937

 

Factual Background

Ruth S. Stephens, Lucy Mae Shoemaker, and Milton Ray Shoemaker appeal from a declaratory judgment and order permanently enjoining them from foreclosing on a mortgage.  Stephens and the Shoemakers and the Sweet Water State Bank (“Bank”) hold a mortgage on 39 acres of land belonging to Guy K. and Elizabeth A. Garza. Stephens and the Shoemakers transferred the land to the Garzas, and the Garzas in return executed a mortgage. Stephens and the Shoemakers recorded this mortgage and in the meantime, the Garzas had entered into a purchase money mortgage with the Bank that covered the same 39 acres and a mobile home.  The Garzas executed the mortgage with the Bank and the Bank recorded it.  The Bank recorded its mortgage before Stephens and the Shoemakers recorded their mortgage.  The Garzas executed several modifications of the original purchase money mortgage with the Bank.  After this, the Garzas executed a correction mortgage, which granted a mortgage to the Bank on two acres separate from the original property, in exchange for a release of the mortgage on two acres subject to the original mortgage.  The rest of the acreage remained subject to the original mortgage.  The Bank recorded the correction mortgage and the Garzas submitted a bankruptcy plan pursuant to Chapter 13 of the United States Bankruptcy Code, under which they were to surrender the 39 acres to Stephens, without mention of either of the Shoemakers.  The plan also provided for the surrender of a second mortgage to the Bank on the 39 acres.  The United States Bankruptcy Court for the Southern District of Alabama confirmed the plan.

Issue

The court decided whether the bankruptcy court’s order confirming the plan was res judicata as to the mortgagee’s claim in circuit court.

Discussion

This case concerns a mortgagee’s challenge to a debtor’s plan filed under Chapter 13 of the United States Bankruptcy Code.  The mortgagee filed its claim in the state circuit court after the federal bankruptcy court had confirmed the debtor’s plan, and the circuit court made an adjudication of the mortgage priorities different from that set out in the plan.

The court disagrees with the circuit court’s conclusion that the bankruptcy court made no determination of priority.  The court observed that plain language of the bankruptcy court’s confirmation order lists the priorities in this case.  The court further observed that in Chapter 13 cases, the debtor submits the plan and bankruptcy courts are required to give creditors notice of the proposed plan.  The court found that both secured creditors in the case had notice of the proposed plan, and the Bank was fully aware that the bankruptcy court order gave mortgage priority in the 39 acres to Stephens.

The court held that the bankruptcy court must provide creditors an opportunity to object to confirmation of the proposed plan and notice of the time allowed for objections.  Where the bankruptcy court receives no timely objections to the plan, the court will approve and confirm the plan, subject to its conformity with other requirements.

Once a bankruptcy court has confirmed a plan, creditors are generally bound by that plan, whether or not the creditor has consented to the plan.  Because the bankruptcy court’s order confirming the debtor’s plan was a determination of priority among the creditors, it is also res judicata with respect to the Bank’s later claim in circuit court.

The court discussed the elements of res judicata, or claim preclusion, as (1) a prior judgment on the merits, (2) rendered by a court of competent jurisdiction, (3) with substantial identity of the parties, and (4) with the same cause of action presented in both suits.  If those four elements are present, any claim that was or could have been adjudicated in the prior action is barred from further litigation.

Conclusion

Here the bankruptcy court made a determination as to priorities; that determination directly affected the interests of the creditors, and the creditors had ample opportunity to litigate at length.  The court held that the bankruptcy court’s order confirming the plan was res judicata as to the mortgagee’s claim in circuit court and reversed the judgment of the circuit court and remands the cause.


Inside Ruth S. Stephens, et al v. Sweet Water State Bank