John Finstad v. James Gord

Case Type:
Case Status:
19-6035 (8th Circuit, Mar 27,2020) Published
State courts have concurrent jurisdiction to interpret confirmed reorganization plans. Confirmed plans are new contracts between debtors and creditors whose claims are addressed in the plan. Accordingly, bankruptcy courts should not review a state court's interpretation of a confirmed plan under jurisprudential doctrines such as res judicata, issue preclusion, and the Rooker-Feldman doctrine. Further, the state court correctly applied the state's parol evidence law in its interpretation of the plan because property interests are created and interpreted under state law.
Procedural context:
After losing on the issue in state and federal trial court, the debtors reopened a chapter 12 bankruptcy case, twelve years after the plan had been confirmed. The debtors reopened the chapter 12 case to request the bankruptcy court to enter a declaratory judgment that the (former) debtors had legal and equitable title to a farm notwithstanding the debtors' delivery of a quitclaim deed to the secured lender in connection with the confirmed chapter 12 plan and the lender's subsequent deed of the farm to a third party two years later. The bankruptcy court ruled that: (1) federal bankruptcy law did not preempt the state court's decision that the deed delivered by the debtors to the lender under the chapter 12 plan was a conveyance of the debtors' interest in the farm; (2) the Rooker-Feldman doctrine barred the debtors' new claim of ownership of the farm; and (3) the debtors' claims were barred by res judicata. The debtors appealed.
John and Lorie Finstad owned a farm that was subject to a security interest held by Beresford Bancorporation, Inc. (“Beresford”). The Finstads filed a Chapter 12 petition in July 2005 after Beresford began foreclosure proceedings. In October 2005, with the bankruptcy court’s approval, the Finstads and Beresford entered into a settlement agreement. The Finstads conveyed the farm to Beresford by executing and delivering a quitclaim deed (the “Beresford Deed”), which Beresford recorded in January 2006. The Finstads were allowed to remain on the farm as tenants and gave them an option to purchase the property back from Beresford. The Finstads’ chapter 12 plan, which incorporated the settlement, was confirmed on April 17, 2006. In early 2006, James Gord lent the Finstads $525,000, in exchange for a second mortgage on the farm, executed in favor of James and Wendy Gord (the “Gords”). Beresford sent the Finstads notices of default under the approved settlement agreement beginning shortly before the Finstads received their discharge in 2008. Beresford notified the Finstads of its intent to sell the farm in July 2008. In December 2008, Beresford sold its interest in the farm and delivered a quitclaim deed to the Gords, the holders of the second mortgage. In January 2012, the Gords brought a quiet title action in North Dakota state court against the Linstads, Beresford, and all others claiming an interest in the farm. The Linstads challenged the deed between Beresford and the Linstads and argued that the Beresford Deed was intended to create an ongoing mortgage relationship, rather than to convey title to Beresford. The state district court found the Beresford Deed to be clear and unambiguous on its face, it had therefore conveyed the Linstads’ right, title, and interest in the farm to Beresford. Applying North Dakota’s parol evidence statute, the state district court barred the Linstads from introducing extrinsic evidence to show a different intent. The state district court held that the Linstads lacked standing to challenge the subsequent deed between Beresford and the Gords, because the Linstads had no interest in the farm. The state district court dismissed the claims against Beresford with prejudice and, one year later, granted summary judgment in favor of the Gords. The Linstads appealed, and the North Dakota Supreme Court affirmed. After losing in state court, the Linstads filed an action in the United States District Court for the District of North Dakota against Beresford and the Gords. Beresford and the Gords both moved for summary judgment, arguing that the preclusive effect of the state court decisions deciding ownership of the farm barred the federal action. The federal court agreed. On appeal, the Eight Circuit affirmed.

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