306 F.3d 914 (9th Cir. 2002), 01-56576, In re Beaty

Docket Nº:01-56576.
Citation:306 F.3d 914
Party Name:In re Thomas R. BEATY and Nancy Z. Beaty, Debtors, Page 915 Thomas R. Beaty, Appellant, v. David Selinger, Appellee.
Case Date:September 26, 2002
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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306 F.3d 914 (9th Cir. 2002)

In re Thomas R. BEATY and Nancy Z. Beaty, Debtors,

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Thomas R. Beaty, Appellant,

v.

David Selinger, Appellee.

No. 01-56576.

United States Court of Appeals, Ninth Circuit

September 26, 2002

Argued and Submitted June 6, 2002.

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[Copyrighted Material Omitted]

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Thomas B. Gorrill, San Diego, CA, for debtors-appellants Thomas R. Beaty and Nancy Z. Beaty.

David Selinger, Oceanside, CA, in Pro Se, for the appellee.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel; Russell, Klein and Ryan, Bankruptcy Judges, Presiding. BAP No. SC-00-01566-RyKR.

Before FERNANDEZ, WARDLAW and W. FLETCHER, Circuit Judges.

Opinion by Judge WILLIAM A. FLETCHER; Concurrence by Judge FERNANDEZ.

OPINION

WILLIAM A. FLETCHER, Circuit Judge.

We are presented in this case with a question of first impression: does the doctrine of laches apply to nondischargeability complaints brought under 11 U.S.C. § 523(a)(3)(B) and Federal Rule of Bankruptcy Procedure 4007(b)? When unscheduled creditor David Selinger sought a determination of the dischargeability of his state court default judgment against Chapter 7 debtor Thomas Beaty, the bankruptcy court granted summary judgment in Beaty's favor based on his affirmative defense of laches. On appeal, the bankruptcy appellate panel ("BAP") reversed on the ground that laches is never available as an affirmative defense in a § 523(a)(3)(B) action. For the reasons discussed below, we disagree with the BAP's holding that laches is never available. However, because Beaty is unable to establish the elements of a laches defense in this case, we hold that the BAP was correct in reversing the grant of summary judgment in his favor.

I

The relevant facts are not in dispute. In September 1991, Thomas and Nancy

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Beaty filed a Chapter 7 bankruptcy petition. Nine months earlier, in January 1991, David Selinger had filed a complaint in a California state court against a real estate development company and Does 1-50, alleging, inter alia, fraudulent concealment with malice. At the time Selinger filed his action, he and the Beatys did not know each other. Unaware that they had any connection to Selinger or his lawsuit, the Beatys did not list Selinger as a creditor on their bankruptcy schedules. In January 1992, the bankruptcy court granted the Beatys a discharge.

In March 1992, Selinger substituted Thomas Beaty ("Beaty") for one of the unnamed Does in his state court action. On June 10, 1993, after Beaty had been served the summons, complaint and substitution order, and after Beaty had failed to appear and answer, the state court entered a default judgment against him. The judgment stated that Beaty's conduct in injuring Selinger had been "fraudulent, willful, malicious, and in conscious disregard" of Selinger's rights. The court awarded general damages and specified that punitive damages would be determined at a later date. On June 17, 1993, in response to a state court order that he appear at a judgment debtor's examination, Beaty filed a "Notice of Injunction Against Further Proceedings," to which he attached a copy of his bankruptcy discharge. The Notice stated that "[t]he effect of this Discharge of Debtor is equivalent to an automatic injunction against creditors from commencing or continuing any lawsuit [or] enforcement of any judgment." Nothing further occurred in the state court action.

One year later, on August 29, 1994, Selinger filed a pro se adversary proceeding seeking to revoke the Beatys' discharge under 11 U.S.C. § 727. In June 1995, the bankruptcy court granted summary judgment to the Beatys in that action. It later denied Selinger's motion for reconsideration. The district court affirmed the bankruptcy court's dismissal in April 1997.

In April 1998, just over six years after the Beatys' discharge was issued and just shy of five years after Beaty filed the state-court Notice that informed Selinger of Beaty's discharged status, Selinger, again acting pro se, filed a second bankruptcy complaint against Beaty. This complaint, the subject of the present appeal, alleged that the default judgment was nondischargeable under 11 U.S.C. § 523(a)(2), (4) and (6). The complaint noted that Selinger was not listed as a creditor in Beaty's petition, received no notice that the case would be closed, and had no knowledge of the case until after the discharge, and therefore could not have made a timely filing of proof of claim or request for determination of dischargeability. In his briefing to us, and to the courts below, Selinger suggested that he filed this second complaint when he did because a month earlier, the United States Supreme Court, in Cohen v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998), had held that punitive damages are not dischargeable in bankruptcy. His complaint sought a declaration that the default judgment debt was nondischargeable under § 523(a)(3)(B);1 a modification

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of the discharge order to allow continued prosecution of the state court action for a determination of punitive damages; and a ruling that any future award of punitive damages would be nondischargeable.

In September 1998, the bankruptcy court granted a motion by Beaty to dismiss Selinger's § 523(a)(3)(B) complaint on a ground not relevant here. In March 2000, the BAP reversed and remanded. On remand, Beaty answered the complaint. The answer (1) admitted that Selinger was an unscheduled creditor who had no knowledge of the bankruptcy proceeding in time to file a timely nondischargeability complaint, and (2) asserted laches as an affirmative defense. Beaty argued that Selinger had formal notice of the discharge no later than June 1993 and that his delay in bringing the nondischargeability action was unreasonable and prejudicial. He noted that Selinger had lost an earlier action objecting to the Beatys' discharge and that the present § 523(a)(3)(B) action was brought only after Selinger learned of a change in the law that might benefit him.

Beaty moved for summary judgment based on laches. Selinger moved for summary judgment based on issue preclusion and moved to strike portions of Beaty's answer, including the portion containing his laches defense. The bankruptcy court granted Beaty's motion, denied Selinger's motions, and dismissed Selinger's complaint with prejudice. The court noted that "laches has long been recognized as a means to protect a party from unreasonable, prejudicial delay" and is "an equitable defense available when properly pled." It held that Selinger was "guilty of laches by failing to bring a Section 523 nondischargeability complaint for over five years after first learning [Beaty] had filed bankruptcy." It stated:

Here, Mr. Selinger's delay is inexcusable and was done for tactical reasons. The Plaintiff expressed an intent to await a change in the law with regard to dischargeability of punitive damages and to see what would happen with this 727 action in which he objected to Mr. Beaty's discharge. Prejudice to the Defendant is obvious based upon these facts, and the Court rules that the Debtor is entitled to a fresh start at this late date, having received his discharge in 1992,

Selinger appealed to the BAP, which reversed in part and remanded in a published opinion. In re Beaty, 268 B.R. 839 (9th Cir. BAP2001). The majority of the panel held that the equitable doctrine of laches is never a valid defense in a § 523(a)(3)(B) adversary proceeding to except from discharge a debt that the debtor failed to schedule in time to permit the timely filing of a nondischargeability complaint. The panel majority emphasized that Federal Rule of Bankruptcy Procedure 4007(b) provides that a § 523(a)(3)(B) complaint may be filed "at any time." It wrote that, "[w]hile we may agree that Selinger's failure to act more promptly is questionable, we are not at liberty to rewrite the plain language of the Code or the Rules. . . . A laches defense to the filing of a § 523(a)(3)(B) complaint is in conflict with Rule 4007(b) and therefore is inappropriate." Id. at 846. The majority reasoned that, because a debtor is also allowed to bring an action to determine the dischargeability of a debt himself, see Fed. R. Bankr.P. 4007(a), debtors like Beaty need not wait for creditors to bring such actions, and are therefore able to avert any prejudicial

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delay. See In re Beaty, 268 B.R. at 846.

One BAP panel member concurred in the result, but wrote separately to object to the majority's conclusion that laches could never apply to a § 523(a)(3)(B) action. In his view, "there is a potential role for the laches defense" in such actions, and "[t]he majority's attempt to use the instant appeal, in which laches was incorrectly applied, as the occasion to banish laches from § 523(a)(3)(B) risks throwing out the baby with the bath water." Id. at 849 (Klein, J., concurring). This panel member would have held that laches is available in such actions as a general matter, but would have found that the Bankruptcy Court abused its discretion in finding laches in this case because (1) Selinger was diligent, (2) Beaty was not prejudiced by being unfairly deprived of the ability to defend this particular § 523(a)(3)(B) action, and (3) any arguable prejudice was the self-inflicted result of Beaty's attempt to "bamboozle" Selinger by erroneously stating in the Notice of Injunction that the discharge barred enforcement of any judgment. Id. at 850.

Beaty timely appealed the judgment of the BAP.

II

We review de novo cases appealed from the Bankruptcy Appellate Panel. In re Scovis, 249 F.3d 975, 980 (9th Cir. 2001). " 'Because we are in as good a position as the BAP to review bankruptcy court rulings, we independently examine the...

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