No. 09-6024 (8th Cir. BAP 11/30/09)

The Eighth Circuit Bankruptcy Appellate Panel comprised of Judge Venters, Judge Schermer, and Judge Mahoney affirmed the South Dakota bankruptcy court’s decision to abstain. Debtors received a discharge in their Chapter 7 which included a certain secured debt. Subsequently, debtors entered into two transactions involving the same secured creditor in an effort to refinance their pre-petition corporate debt. Upon commencement of collection efforts, debtors sued the note holder in state court alleging that the debt had been discharged in the Chapter 7. On the eve of summary judgment in the state action, debtors commenced an adversary proceeding in the chapter 7 against the same note holder seeking a declaratory judgment that the debts had been discharged. Ultimately, the BAP affirmed the bankruptcy court’s decision to abstain. The BAP evaluated the findings on each of the grounds for permissive abstention under §1334 and found no fault with the bankruptcy court’s analysis. Specifically, the BAP highlighted the importance of the tenth factor in this case as a result of the lengthy history of the state action. Finally, the BAP denied the debtors’ arguments relating to the limitations of the state court’s jurisdiction. The BAP explained that the state court had jurisdiction to hear the controversy because the issue was not whether the debt was excepted from discharge, a task intrinsically left to the bankruptcy court, but whether a particular debt was subject to the prior discharge.