In re Bennett

528 B.R. 273

In re: Franklin Bennett III, Debtor.

Bky. No. 14–13143–ELF

United States Bankruptcy Court, E.D. Pennsylvania.

Signed April 7, 2015

Franklin A. Bennett III, Philadelphia, PA, pro se

MEMORANDUM

ERIC L. FRANK, CHIEF U.S. BANKRUPTCY JUDGE

I. INTRODUCTION

In this chapter 13 bankruptcy case, Debtor Franklin Bennett III, (“the Debtor”) filed an objection (“the Objection”) to the City of Philadelphia's (“the City”) proof of claim. The City's claim is a secured claim for $7,528.20 in unpaid water and sewer bills incurred on several properties owned by the Debtor. The Debtor alleges that a portion of the water bill for one of the properties, 1661 Womrath Street (“the Womrath Property”) is excessive. (He does not dispute the City's claim with respect to the water bills on his other properties). In response, the City asserts that this court is precluded from considering the Objection on the merits by a determination made in a prior administrative proceeding. Alternatively, the City disputes the merits of the Objection.

For the reasons stated below, I conclude that the bankruptcy court is not precluded from reaching the merits of the Objection. I further conclude that the Objection is meritorious and should be sustained. Consequently, I will enter an order reducing the City's allowed secured claim from $7,528.20 to $4,896.73.

II. PROCEDURAL HISTORY

On April 21, 2014, the Debtor filed a petition under chapter 7 of the Bankruptcy Code. bankruptcy. (Doc. # 1). At the Debtor's request, the case was converted to chapter 13 by order dated May 2, 2014. (Doc. # 23). The City filed its proof of claim on September 17, 2014, and subsequently amended it on October 20, 2014 to $7,528.20. (Claim # 's 8–1, 8–2). The amount of the City's claim related to the Womrath Property is $2,981.27. Id.

The Debtor filed the Objection on November 26, 2014, disputing the amount of the City's claim. (Doc. # 73). After a number of agreed continuances, a hearing on the Objection was held and concluded on January 13, 2015. The City filed a post-hearing memorandum in support of its position on January 27, 2015. (Doc. # 144). The Debtor declined the opportunity to make a post-hearing submission.

III. THRESHOLD ISSUE: PRECLUSION

A.

The Debtor's dispute with the City over the bill for water usage at the Womrath Property was the subject of an administrative proceeding before the Philadelphia Tax Review Board (“the TRB”).¹ The administrative proceeding commenced pre-petition and resulted in a postpetition determination adverse to the Debtor. The administrative determination creates a threshold issue raised by the City: whether the bankruptcy court is precluded from considering the Objection on the merits due to the TRB proceedings.²

The Debtor filed his petition with the TRB seeking review of the disputed water bill for the Womrath Property prior to filing his bankruptcy petition on June 17, 2013.³ The TRB appointed a Master to hear the dispute.⁴ The Debtor did not appear at the Master's hearing scheduled on January 24, 2014. The petition for review was denied, but also, for some undisclosed reason, the hearing was rescheduled to April 22, 2014. (This, of course suggests, that the denial of the petition for review on January 24, 2014 was not final and was superseded by the grant of a new hearing date. The record is not definitive on this point, however).⁵

The Debtor filed his bankruptcy petition on April 21, 2014, the day before the rescheduled hearing before the Master. While the record again is silent, I infer that the Debtor again did not appear at the TRB Master's Hearing on April 22, 2014 and that, as a result, the Master recommended that the TRB deny the petition for review. The TRB then denied the Debtor's petition “on the merits” on April 30, 2014.⁶

The parties dispute whether the Debtor sought further review of the decision by the full TRB.

Based on these events, the City invokes the doctrine of res judicata and contends that the denial of the Debtor's petition for review precludes the bankruptcy court's consideration of the merits of the Objection.

B.

The doctrine of res judicata gives dispositive effect to a prior judgment, including all issues which could have been raised in the earlier proceeding. E.g., Blunt v. Lower Merion School Dist., 767 F.3d 247, 276–77 (3d Cir.2014). The requisite elements for the doctrine to apply are:

(1) a final judgment on the merits in a prior suit;

(2) the same parties or their privies; and

(3) a subsequent suit based on the same cause of action.

E.g., Id. ; M.R. v. Ridley School Dist., 744 F.3d 112, 120 (3d Cir.2014).

The doctrine is not limited strictly to prior court judgments. It may be invoked when an administrative agency has acted in a judicial capacity and resolved disputed issues properly before it in which the parties had an adequate opportunity to litigate. See, e.g., United States v. Utah Constr. & Mining Co., 384 U.S. 394, 422, 86 S.Ct. 1545, 16 L.Ed.2d 642 (1966) ; Duhaney v. Attorney General of U.S., 621 F.3d 340, 347 (3d Cir.2010) ; Jorden v. National Guard Bureau, 877 F.2d 245, 249 (3d Cir.1989) ; see generally B & B Hardware, Inc. v. Hargis Indus., Inc., –––U.S. ––––, 135 S.Ct. 1293, 191 L.Ed.2d 222, 2015 WL 1291915, at *7 (U.S. Mar. 24, 2015) (application of doctrine of issue preclusion may be based on administrative agency determinations).

In this case, the City invokes the doctrine of res judicata based on the TRB's denial of the Debtor's petition for review of his liability on the water bill. The City argues that all of the res judicata elements are met in that: (1) the TRB denied the petition for review, (2) the parties to the petition for review and the Objection in this court are the same, and (3) the Objection is based on either the same claim actually raised unsuccessfully, or claims that could have been raised, in the Debtor's petition for review before the TRB.

Up to this point, the City's argument is pretty straightforward. However, one singular fact casts doubt on the applicability of res judicata: the TRB made its decision on the day after the Debtor filed his bankruptcy case.⁷ It is therefore, necessary to consider the effect, if any, of the bankruptcy automatic stay, 11 U.S.C. § 362(a), on the TRB decision.

C.

Section 362(a)(1) of the Bankruptcy Code provides that the filing of a bankruptcy petition acts as a “stay ... of the commencement or continuation ... of a judicial, administrative, or other action or proceeding against the debtor....” 11 U.S.C. § 362(a)(1).

It is well established that judicial, administrative or other proceedings, including adjudicative decisions, that occur after the commencement of a bankruptcy case and in violation of the automatic stay are void. E.g., In re Myers, 491 F.3d 120, 128 (3d Cir.2007) ; In re Siciliano, 13 F.3d 748, 751 (3d Cir.1994) ; In re Iezzi, 504 B.R. 777, 784 (Bankr.E.D.Pa.2014). Thus, if the automatic stay applies to the petition for review, the April 30, 2014 TRB decision is void and provides no basis for the application of res judicata because there is no valid, pre-petition adjudication.

The City argues, however, that § 362(a)(1) applies only to proceedings “against the debtor” and that the petition for review before the TRB is not such a proceeding. The City contends that the TRB proceeding was an offensive proceeding initiated by the Debtor that is not subject to the automatic stay. With the automatic stay inapplicable, the City depicts the TRB determination as a valid decision that provides an adequate foundation for the application of res judicata.⁸

I agree with the City's general statement of the law: § 362(a)(1) extends the automatic stay only to actions against the debtor and not to affirmative claims brought by the debtor against other parties. See, e.g., Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1204 (3d Cir.1991) ; 4Kids Entm't, Inc. v. Upper Deck Co., 797 F.Supp.2d 236, 241 (S.D.N.Y.2011). However, I respectfully, but firmly, disagree with the City's characterization of the Debtor's petition for review as an offensive proceeding initiated by the Debtor.

D.

For more than thirty (30) years, the controlling precedent in this Circuit on the meaning of the term “against the debtor” in § 362(a)(1) has been Assoc. of St. Croix Condominium Owners v. St. Croix Hotel Corp., 682 F.2d 446 (3d Cir.1982). In St. Croix Condominium, the Court of Appeals held that the applicability of the automatic stay to a pre-petition lawsuit is determined by evaluating the nature of the action at its “inception” and that, for purposes of § 362(a)(1), the nature of the proceeding does “not change depending on the particular stage of the litigation at which the filing of the petition in bankruptcy occurs.” 682 F.2d at 449. Further, the automatic stay “stay[s] all appeals in proceedings that were originally brought against the debtor, regardless of whether the debtor is the appellant or appellee.” Id. (emphasis in original). Stated slightly differently, the question is: which party was in an “offensive posture” when the proceedings between the parties began?

I conclude that the dispute between the Debtor and the City commenced with the City in the offensive posture. The proceedings began when a City agency (the Water Revenue Bureau) issued a bill—a formal demand for payment for water and sewer service provided to the Debtor's property. The issuance of that bill was an administrative act to collect a debt, with the City in an offensive posture. The Debtor's petition for review was nothing more than a defensive response to the City's demand for payment. In the petition for review, the Debtor sought only a modification of the City's liability determination in the form of a reduction of his bill. By comparison, “offensive” debtor proceedings against third parties that fall outside § 362(a)(1) typically involve claims that would result in the collection of money from the third party, i.e., claims that would inure to the benefit of and augment the...