Vaga Land Holdings 19, LLC v. Bird (In re Bird)

IN RE: JAMES KURT BIRD, Debtor.

VAGA LAND HOLDINGS 19, LLC, Appellant, v. JAMES KURT BIRD, Appellee.

8:20CV438

BANKRUPTCY NO. BK20-80890

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEBRASKA

March 17, 2021

(Chapter 13)

MEMORANDUM OPINION

On September 9, 2020, VAGA Land Holdings 29, LLC ("VAGA"), a secured creditor in debtor James Kurt Bird's ("Bird") Chapter 13 bankruptcy case, moved for relief from the automatic stay, see 11 U.S.C. § 362(a), (d), arguing VAGA was not adequately protected under Bird's Chapter 13 Plan. At the end of a motion hearing on October 5, 2020, the bankruptcy court¹ granted VAGA limited relief "for the purpose of reinstatement of" VAGA's state-court judicial-foreclosure lawsuit but denied further relief. VAGA appeals, and this Court affirms.²

I. BACKGROUND

Bird has an ownership interest in real property located at 12517 Arbor Street in Douglas County, Nebraska (the "property"). Bird failed to pay real estate taxes on theproperty, which is his residence, for the 2015 tax year. On March 6, 2017, the Douglas County Treasurer ("Treasurer") conducted a tax sale for the property. VAGA paid the taxes and acquired a lien on the property represented by a certificate of tax sale ("certificate"). Bird did not redeem the certificate, and VAGA issued a Notice of Application for Tax Deed on April 21, 2020. The next day, VAGA filed a complaint in state court seeking to judicially foreclose the certificate ("foreclosure case").

On July 15, 2020, Bird filed a Chapter 13 bankruptcy petition. He filed a suggestion of bankruptcy in the foreclosure case five days later. On July 28, 2020, Bird filed a Chapter 13 Plan (the "plan"), treating VAGA's certificate as a mortgage claim and proposing to pay the full certificate amount under the plan.

On September 9, 2020, VAGA moved for relief from the automatic stay, arguing it was not adequately protected by Bird's plan and should be allowed to continue prosecuting the foreclosure case.³ VAGA also contended the plan was "unconfirmable because it improperly extends" Bird's window to redeem the certificate contrary to Justice v. Valley National Bank, 849 F.2d 1078, 1085 (8th Cir. 1988), and In re Froehle, 286 B.R. 94, 101 (B.A.P. 8th Cir. 2002). VAGA noted in its motion that it had separately objected to the plan on that basis. In resisting the motion for relief, Bird contended VAGA made a binding election to pursue the title to the property under the judicial-foreclosure method under Neb. Rev. Stat. § 77-1902 et seq., rather than apply for a treasurer's tax deed under Neb. Rev. Stat. § 77-1824.

On September 10, 2020, VAGA filed a proof of claim in the bankruptcy case in the amount of $9,316.06, which included attorney fees of $846.69. The amount was fully secured by the lien on the property with annual interest of 14%. According to Bird's declaration, the property is valued at $135,300 and subject only to VAGA's secured claim,leaving "an equity cushion in the amount of $125,983.94." Bird later amended the plan to increase the monthly payments and change the category of VAGA's claim from a mortgage claim to a claim secured by real property to be paid in full. VAGA did not resist or object to confirmation of the amended plan.

The bankruptcy court held a hearing on VAGA's motion for relief on October 5, 2020. At the motion hearing, VAGA argued the Nebraska Supreme Court's decision in HBI, L.L.C. v. Barnette, 941 N.W.2d 158, 165 (2020), "explicitly authorizes a certificate holder to file a judicial foreclosure action and pursue application of the treasurer's tax deed." VAGA further argued that under VAGA's interpretation of In re Froehle, 286 B.R. at 103, "the automatic stay does not preclude a certificate holder from making application through a county treasurer for a tax deed."

Ruling from the bench, the bankruptcy court acknowledged HBI "indicates that a creditor is not bound 100 percent by their election" but found the case distinguishable. The bankruptcy court found VAGA made an election "in this particular case by the filing of the [foreclosure case] which was pending at the time of the bankruptcy, the fact of a proof of claim indicates that attorney's fees are requested, and the fact that" VAGA indicated in its motion for relief that it wanted foreclosure to proceed. The bankruptcy court further found "no lack of adequate protection" because VAGA had "a first position lien" with little chance of anyone taking priority. Given those unique circumstances, the bankruptcy court denied VAGA's request for relief from the stay, except for the limited purpose of allowing VAGA to reinstate the foreclosure case. The bankruptcy court did not prepare a written order.

On October 14, 2020, the bankruptcy court confirmed the amended plan; it is still in effect. Bird states "[t]he payments on VAGA's secured claim should be completed on or about October 2022."

On October 19, 2020, VAGA filed a Notice of Appeal (Filing No. 1) appealing only from the bankruptcy court's oral "Order Granting in part, Denying in part Motion for Relief from Stay" and electing to have its appeal heard by this Court. See 28 U.S.C. § 158(b)(1), (c)(1)(A). VAGA did not appeal from the order confirming Bird's amended plan.

VAGA raises two issues on appeal—whether the bankruptcy court erred in (1) "denying VAGA's motion for relief from the automatic bankruptcy stay in determining that VAGA was adequately protected" under Chapter 13 and (2) "determining VAGA had made a binding election to pursue a Treasurer's tax deed via the judicial foreclosure method pursuant to Neb. Rev. Stat. § 77-1917 (judicial foreclosure method), and was barred from later proceeding under Neb. Rev. Stat. § 77-1824 (treasurer's tax deed method) to obtain a treasurer's tax deed."⁴

II. DISCUSSION

A. Standard of Review

This Court has "jurisdiction to hear appeals from final judgments, orders, and decrees" of the bankruptcy court. 28 U.S.C. § 158(a)(1). "When a bankruptcy court's judgment is appealed to the district court, the district court acts as an appellate court and reviews the bankruptcy court's legal determinations de novo and findings of fact for clear error." In re WEB2B Payment Sols., Inc., 815 F.3d 400, 404 (8th Cir. 2016) (quoting In re Falcon Prods., Inc., 497 F.3d 838, 840-41 (8th Cir. 2007)). "A finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948).

B. No Reversible Error

As the parties point out, Nebraska law provides two separate and distinct methods by "which the holder of a tax certificate can obtain a deed to the property purchased at a tax sale." Adair Asset Mgmt., L.L.C. v. Terry's Legacy, LLC, 875 N.W.2d 421, 425-26 (Neb. 2016). Under the "tax deed" method, "the holder of a tax certificate can obtain a tax deed from the county treasurer, after having given proper notice." Id. at 425. Under the "judicial foreclosure" method, the certificate holder "can foreclose upon the tax lien in a court proceeding and compel sale of the property, yielding a sheriff's deed." Id.

"The choice between these two procedures rests with the holder." Neun v. Ewing, 863 N.W.2d 187, 193 (Neb. 2015). Once made, that choice (or election) determines which statutory provisions "govern the rights of the parties in relation to the tax sale certificate." Id. at 194 ("By filing a judicial foreclosure action, the holder has elected to proceed under chapter 77, article 19."). That includes the specific procedures by which the debtor can redeem the property. Id. at 193-94, 196 ("Sections 77-1824 and 77-1917 provide separate procedures, requirements, and time limits for redeeming property."). In other words, if the holder elects "to proceed by judicial foreclosure[,] . . . both the holder and the property owner are bound by that election." Id. at 194.

That is not to say that the holder is forever bound by its initial choice and can never change course. See HBI, 941 N.W.2d at 165. In appropriate circumstances, the holder can dismiss the judicial-foreclosure action and pursue the tax-deed method. Id. (deciding a holder's "election to initially file and dismiss the judicial foreclosure action did not preclude his application for a tax deed" because he retained his "right to voluntary dismissal under §§ 25-601 and 25-602").

Here, VAGA issued a Notice of Application for Tax Deed on April 21, 2020. The next day, it filed the foreclosure case. While that case was pending, Bird filed for bankruptcy, which automatically stayed the foreclosure case. See 11 U.S.C. § 362(a). A few weeks later, VAGA moved for relief from the automatic stay so it could "continueprosecuting" its judicial foreclosure. At the motion hearing, VAGA argued that under VAGA's interpretation of HBI, VAGA was "not bound by either a judicial foreclosure or other election to avail itself of its rights under the tax certificate that it holds."

The bankruptcy court rejected VAGA's proposed interpretation of HBI, concluding § 362(a) stayed what VAGA was "trying to do . . . because it stays the continuation of a judicial proceeding, an act to obtain possession of property of the estate, or an act to create, perfect or enforce a lien"—which is what a tax certificate is under Nebraska law. Based on VAGA's actions in this case, the bankruptcy court found "VAGA elected to judicially foreclose" its tax certificate. In particular, the bankruptcy court noted that "although VAGA sent both," it followed the tax-deed notice with a judicial-foreclosure lawsuit that was pending when Bird filed his bankruptcy petition. The bankruptcy court further emphasized (1) VAGA filed a proof of claim in the bankruptcy case that included a request for attorney fees—fees that are only available under the judicial-foreclosure method, and (2) VAGA's motion for relief, which was then before the bankruptcy court,...