In re Boni, BAP No. CC-99-1085-TKB. Bankruptcy No. LA 95-17750 SB.

• Decision Date: 30 September 1999
• Docket Number: BAP No. CC-99-1085-TKB. Bankruptcy No. LA 95-17750 SB.
• Parties: In re Maquimary BONI, Debtor. Ang Ung and Rith Oun, Appellants, v. Maquimary Boni, Appellee.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit

240 B.R. 381 (1999)

In re Maquimary BONI, Debtor.

Ang Ung and Rith Oun, Appellants, v. Maquimary Boni, Appellee.

BAP No. CC-99-1085-TKB. Bankruptcy No. LA 95-17750 SB.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted June 24, 1999.

Decided September 30, 1999.

Scott Lee Shabel, Law Offices of Scott Lee Shabel, Los Angeles, CA, for Ang Ung and Rith Oun.

Paul Snyder, Newport Beach, CA, for Maquimary Boni.

Before TCHAIKOVSKY¹, KLEIN, and BRANDT, Bankruptcy Judges.

OPINION

TCHAIKOVSKY, Bankruptcy Judge.

The appellants filed a motion to annul the automatic stay retroactively and for a determination that the appellants' claim against the debtor is excepted from her bankruptcy discharge on equitable estoppel grounds. The bankruptcy court denied the motion to annul the automatic stay and determined the debt to be discharged. We dismiss the appeal from the denial of the motion to annul as moot and reverse the determination that the claim has been discharged on procedural grounds.

FACTS

In July 1994, appellants Rith Oun and Ang Ung (the "Creditors") filed a complaint against appellee Maquimary Boni (the "Debtor") and others in state court. The Debtor filed a cross-complaint against the Creditors. On March 27, 1995, the Debtor filed a chapter 7 bankruptcy petition. She did not list the Creditors' claims in her debt schedules, did not list her cross-complaint against the Creditors in her asset schedules, and did not list the state court action as pending litigation in her statement of financial affairs. The chapter 7 trustee filed a "no asset" report, and on July 13, 1995, the Debtor received a discharge.

The Debtor failed to inform either the Creditors or the state court of her bankruptcy when it occurred, and they failed to learn of it from any other source. Instead, the Debtor continued to defend the state court action and to prosecute her cross-complaint as if the bankruptcy had not occurred. A jury trial was conducted in the state court action in 1997. On April 29, 1997, the jury rendered a verdict against the Debtor for negligent misrepresentation in the principal amount of $148,251.30. The state court issued a directed verdict against the Debtor on all of the other claims.² The record does not reflect whether the issues raised by the Debtor's cross-complaint were included in the jury trial. Neither the jury verdict nor the judgment makes reference to any such claims.

After the jury issued its verdict, at a hearing in state court on May 29, 1997, the Debtor disclosed for the first time that she had filed a chapter 7 bankruptcy case and received a discharge in 1995. She contended that the automatic stay prevented the entry of judgment against her. The Creditors' attorney noted that the automatic stay was no longer in effect and contended that the issue was whether entry of the judgment would violate the discharge injunction of 11 U.S.C. § 524.

The state court judge decided to enter the judgment notwithstanding the Debtor's prior bankruptcy. He expressed the view that the Debtor had committed a fraud on the court by permitting the action to proceed and only informing the court of her bankruptcy discharge after she failed to prevail in the action. Moreover, he concluded that entry of the judgment was a mere ministerial act.³ He did not presume to opine on whether the judgment would be effective given the Debtor's prior bankruptcy. The judgment in the state court action was entered on June 14, 1997.

On November 10, 1998, the Debtor filed a motion to reopen her bankruptcy case. The motion was granted on November 30, 1998. Shortly thereafter, the Creditors filed a motion to annul the automatic stay retroactively and to declare their claims excepted from the discharge on equitable estoppel grounds.

The bankruptcy judge denied the motion to annul the automatic stay and held that the Creditors' claims were discharged. He based his ruling on the fact that the Creditors obtained a judgment based on negligent misrepresentation, which would not entitle them to except their claims from the Debtor's discharge.⁴See 11 U.S.C. § 523(a)(2), (4), (6). An order was duly entered denying the motion to annul the stay and declaring the Creditors' claims, as embodied in the state court judgment, discharged. The Creditors filed a timely notice of appeal from this order.

ISSUES PRESENTED

I. Whether the bankruptcy court erroneously declined to annul the automatic stay.

II. Whether the bankruptcy court erred in determining that the creditor\'s claim had been discharged in the context of a motion.

STANDARD OF REVIEW

Whether the automatic stay should be annulled is within a bankruptcy court's discretion. The denial of a motion to annul the automatic stay is reviewed for abuse of discretion. See In re Kissinger, 72 F.3d 107, 108 (9th Cir.1995), cited in In re National Envt'l Waste Corp., 129 F.3d 1052, 1054 (9th Cir.1997). Whether the correct procedures were followed in determining the issue presented is a question of law which is reviewed de novo. See In re Comm'l W. Fin. Corp., 761 F.2d 1329, 1334 (9th Cir.1985).

DISCUSSION

A. THE BANKRUPTCY COURT DID NOT ERRONEOUSLY DECLINE TO ANNUL THE AUTOMATIC STAY

The filing of a bankruptcy petition "operates as a stay . . . of . . . the . . . continuation . . . of a judicial . . . action . . . against the debtor that was . . . commenced before the commencement of the bankruptcy case. . . ." 11 U.S.C. § 362(a)(1). The stay of an act against the debtor that is covered by the automatic stay continues only until "the earliest of — (A) the time the case is closed; (B) the time the case is dismissed; or (C) if the case is a case under chapter 7 of this title concerning an individual . . . the time a discharge is granted or denied." 11 U.S.C. § 362(c)(2).⁵ Actions taken in violation of the automatic stay are void. See In re Schwartz, 954 F.2d 569 (9th Cir. 1992). However, the court may grant relief from the automatic stay for cause after notice and hearing. See 11 U.S.C. § 362(d). One of the forms of relief expressly authorized by 11 U.S.C. § 362(d) is an annulment of the stay. See id. By annulling the automatic stay, the bankruptcy court may validate an act that would otherwise be void as a violation of the automatic stay.

As noted above, the state court action was filed in July 1994. The Debtor filed her bankruptcy petition in March 1995 and received her discharge in July 1995. The jury trial did not commence until 1997. At the oral argument on appeal, the parties conceded that nothing occurred in the state court action during 1995 while the automatic stay protecting the debtor was in force.

An issue is moot when the court is unable to fashion a remedy for the wrong. In re Spirtos, 992 F.2d 1004, 1006 (9th Cir.1993), citing In re Roberts Farms, Inc., 652 F.2d 793, 797 (9th Cir.1981). When an issue is moot, the court lacks jurisdiction to decide it. "The doctrine of mootness precludes federal court decision of `questions that cannot affect the rights of litigants in the case before them.' North Carolina v. Rice, 404 U.S. 244, 246, 92 S.Ct. 402, 404, 30 L.Ed.2d 413 (1971)." In re Di Giorgio, 134 F.3d 971, 974 (9th Cir.1998).

Since nothing occurred during this period, there was nothing for the bankruptcy court to validate by annulling the stay, nor were any damages incurred by the Creditors that the court could have ordered compensated.⁶ Accordingly, the question of whether the automatic stay should be annulled was moot at the time the motion was presented to the bankruptcy court and remains moot today.

B. BANKRUPTCY COURT ERRED IN DETERMINING WHETHER CREDITORS' CLAIMS HAD BEEN DISCHARGED IN MOTION CONTEXT

The second issue presented by this appeal is whether a bankruptcy court may properly determine whether a debt has been discharged in bankruptcy in the context of a motion. Because we conclude that a bankruptcy court may not do so, we reverse that portion of the bankruptcy court's order declaring that the state court judgment is deemed discharged. Rule 7001(6) requires an adversary proceeding to determine the dischargeability of a debt. See Fed.R.Bankr.P. 7001(6); In re Lyons, 995 F.2d 923, 924 (9th Cir.1993) (sale of co-owned property); In re Zale Corp., 62 F.3d 746, 762-63 (5th Cir.1995) (injunction).⁷

In In re Laskin, 222 B.R. 872, 874 (9th Cir. BAP 1998), we affirmed the bankruptcy court's denial of a motion to avoid a lien under 11 U.S.C. § 506(d) despite our conclusion that the dispute should have been decided in the context of an adversary proceeding. We noted that the appellant was the party who had raised the issue by motion and that the record had been adequately developed. See id. at 874. Here, although the Creditors were the ones who raised the issue of dischargeability by motion, the record was not adequately developed.⁸

There are numerous procedural differences between a motion and an adversary proceeding. See Zale, 62 F.3d at 762-66. For example, a motion comes before the court without the focus that results from the adversary proceeding's more formal pleading requirements and more structured pretrial process. See Fed. R.Bankr.P. 7007-10 & 7012-16, incorporating Fed.R.Civ.P. 7-10 & 12-16. Moreover, the presentation of evidence at the hearing on the merits is more formal in the case of an adversary proceeding. Compare Fed.R.Civ.P. 43(a) (trial testimony), with id. 43(e) (evidence on motions), incorporated by Fed.R.Bankr.P. 9017; see generally Christopher M. Klein, "Bankruptcy Rules Made Easy: A Guide to the Federal Rules of Civil Procedure that Apply in Bankruptcy," 70 Am.Bankr.L.J. 301 (1996).

Some courts have held that a party may waive its right to proceed by adversary proceeding. See Zale Corp. at 763, citing In re Village Mobile Homes, Inc., 947 F.2d 1282, 1283 (5th Cir.1991) and In re Haber Oil Co., 12 F.3d 426, 440 (5th Cir.1994). Neither the Ninth Circuit nor this Panel has ruled on this question, and we need not, and do...