Kartman v. North Suburban Tree Service Inc. (In Re Kartman)
2006 Bankr. LEXIS 2402, 2006 WL 3057227, 354 B.R. 70 (2006)
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Rule of Law:
A debtor lacks standing under 11 U.S.C. § 522(h) to avoid a judgment lien on property held as tenants by the entireties when the judgment is against both spouses, because under Pennsylvania law, such property is not exempt from process by a joint creditor.
Facts:
- John A. Kartman was the sole shareholder of West Chester Highlands, Inc., a development company.
- West Chester hired North Suburban Tree Service, Inc. (NSTS) in August 2001 to clear land for a construction project.
- Financing for the project failed, leaving West Chester unable to pay NSTS for the work performed.
- Kartman orally told Stephen Blum, the principal of NSTS, that he would personally ensure the debt was paid.
- NSTS prepared and sent a promissory note to Kartman and his wife for their signatures to formalize their personal liability for the corporate debt.
- The Kartmans never signed or returned the promissory note to NSTS.
- NSTS, through its non-attorney officer Kathleen Blum, initiated a lawsuit to collect the debt against Kartman, his wife Patricia, and West Chester.
Procedural Posture:
- North Suburban Tree Service, Inc. (NSTS) obtained a default judgment for $28,860 against John A. Kartman, his wife, and his company in the Court of Common Pleas of Allegheny County, a state trial court.
- Kartman filed a petition to open the default judgment in the state trial court.
- A hearing was scheduled for July 15, 2003, on the petition to open, but neither Kartman nor his counsel appeared.
- The state trial court denied the petition to open, leaving the default judgment in effect.
- Kartman filed an initial bankruptcy petition which was later dismissed.
- Kartman filed a second, new bankruptcy case in the U.S. Bankruptcy Court.
- In the current bankruptcy case, Kartman filed an amended complaint seeking to avoid the NSTS judgment lien.
- After a trial, the Bankruptcy Court orally denied Kartman's complaint, and Kartman subsequently filed a Motion to Alter or Amend Judgment.
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Issue:
Does a debtor have standing under 11 U.S.C. § 522(h) to avoid a state court judgment lien against property owned as tenants by the entireties when the underlying judgment is against both the debtor and his non-debtor spouse?
Opinions:
Majority - Agresti
No. The debtor, John A. Kartman, does not have standing to avoid the lien under 11 U.S.C. § 522(h) because the lien does not impair an exemption to which he is entitled. To use § 522(h), a debtor must be able to claim an exemption in the property under § 522(b). Kartman seeks to exempt his residence, which he owns with his wife as tenants by the entireties. Under Pennsylvania law, property held by tenants by the entireties is only exempt from creditors of a single spouse, not from joint creditors of both spouses. Since the NSTS judgment is against both Kartman and his wife, the property is not exempt from process by NSTS. Therefore, the lien does not impair a valid exemption, and Kartman lacks standing to bring the avoidance action. Furthermore, Kartman's action is barred by the doctrine of claim preclusion, as he had a full and fair opportunity to litigate the issue of personal liability in the prior state court proceeding but failed to do so. Finally, Kartman failed to meet the high burden of proving that the state court judgment was procured by extrinsic fraud.
Analysis:
This case illustrates the powerful preclusive effect of a final state court judgment, even a default judgment, in subsequent bankruptcy proceedings. It reinforces the principle that bankruptcy cannot be used as a vehicle to relitigate issues that were, or could have been, decided in a prior forum. The decision also provides a clear application of the requirements for debtor standing under 11 U.S.C. § 522(h), tying the debtor's avoidance power directly to the existence of a valid underlying exemption under state law. For future cases, this opinion stands for the proposition that debtors must challenge liability defenses in the original court action and cannot later use bankruptcy to collaterally attack the resulting judgment absent a showing of extrinsic fraud.
