Rule 41’s “Two-Dismissal” Rule Does Not Apply to Prior Contested Matter Where Objection is Filed

Airport Business Center v. Alfahel (In re Alfahel), No. 22-1219 (9th Cir. BAP June 1, 2023)

On June 1, 2023, the U.S. Bankruptcy Appellate Panel of the Ninth Circuit upheld the decision of the U.S. Bankruptcy Court for the Northern District of California, which avoided a judicial lien held by Airport Business Center (ABC) pursuant to Bankruptcy Code § 522(f), which permits the avoidance of a lien that impairs an exemption.  In this case, chapter 7 debtors Emad Aziz Masoud Alfahel and Lina Nadim Fahel claim an exemption on their residence. ABC’s argument that the court should have excluded allegedly usurious interest from its computation of the total amount of senior liens was rejected. The court also elected to hear and resolve the dispute despite the fact that the debtors previously brought and dismissed the same motion twice.

In May 2016, the debtors filed their chapter 7 petition, listing their home with a value of $630,000 and claiming an exemption of $3,354 under California’s wildcard exemption. They also disclosed three deeds of trust and four judicial liens, including ABC’s judgment lien. A discharge was entered and the case was closed in August 2016.

In the fall of 2016, the debtors filed a motion to reopen the case, which was granted.  In February 2017, the debtors filed motions to avoid each of the four judicial liens, but after ABC objected, they withdrew their motion and the case was closed once again. The same process repeated in May 2018 with the help of new counsel.

In April 2021, the debtors moved a third time to reopen their case. The court granted the request but imposed a 30-day deadline to file the avoidance motion. The debtors met the deadline, and ABC objected on three grounds. First, ABC asserted that certain written requests for admission that the debtors failed to respond to should be deemed admitted. Second, ABC argued that the “two-dismissal rule” under Rule 41(a)(1)(B) of the Federal Rules of Civil Procedure should bar the debtors from filing a third avoidance motion. Finally, ABC objected on the grounds of laches. However, the court rejected all of ABC’s arguments and avoided its judicial lien, except for about $12,000.

The court ruled that Rule 41(a)(1)(B), commonly known as the “two-dismissal rule,” did not apply.  Specifically, the rule applies only to dismissals either by stipulation or prior to the filing of an answer or motion for summary judgment.  In this case, ABC objected to the first motion, which was equivalent to filing an answer. With respect to ABC’s objection that claims secured by senior liens included usurious interest, the court determined that ABC lacked standing to object, because standing to raise usury claims belongs solely to the borrower. Finally, ABC argued that the five-year delay was per se prejudicial but failed to articulate any particular facts, as is necessary to support laches.

Finding no fault with the bankruptcy court’s reasoning, the bankruptcy appellate panel affirmed.

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