In re Cardillo
| Decision Date | 30 August 1994 |
| Docket Number | Bankruptcy No. 93-67116. |
| Parties | In re Frank CARDILLO, Jr. and Susan A. Cardillo, Debtors. Frank CARDILLO, Jr. and Susan A. Cardillo, Movants, v. MOORE-HANDLEY, INC., Respondent. |
| Court | U.S. Bankruptcy Court — Northern District of Georgia |
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John B. Lyle, Marietta, GA, for movants/debtors.
William L. Kidd, Duluth, GA, for Moore-Handley, Inc., respondent/creditor.
CONTESTED MATTER
ORDER ON MOTION FOR CONTEMPT
Frank and Susan Cardillo, the debtors in this Chapter 7 case, (the "Debtors") move for an order holding a creditor, Moore-Handley, Inc. ("Moore"), in contempt and imposing sanctions for violating the automatic stay. Without this court's approval, Moore garnished Mr. Cardillo's wages shortly after obtaining an order determining that a debt owed to Moore by Mr. Cardillo was nondischargeable. The court has yet to grant or to deny a discharge to Mr. Cardillo under 11 U.S.C. § 727. The question presented is whether the entry of a final order under 11 U.S.C. § 523 determining a debt to be nondischargeable is a denial of a discharge within the meaning of 11 U.S.C. § 362(c)(2)(C), which provides that the automatic stay does not continue after the denial of a discharge. For the reasons stated below, the court holds that Moore violated the automatic stay.
With one possible immaterial exception noted below, the facts are not disputed. On March 18, 1992, Moore obtained a judgment in the amount of $48,924.18 against Mr. Cardillo in the Superior Court of Paulding County, Georgia. When the Debtors filed bankruptcy, Moore commenced an adversary proceeding against Mr. Cardillo seeking a determination that its judgment was not dischargeable under section 523(a)(6) of the Bankruptcy Code. The bankruptcy case began as a Chapter 7, was converted to Chapter 13, and in August 1993 was reconverted to Chapter 7.
In a second count of its complaint, Moore also sought a judgment denying Mr. Cardillo's discharge pursuant to sections 727(a)(2), (3) and (4) of the Bankruptcy Code. Mr. Cardillo answered the complaint but failed to respond to discovery requests of Moore. The court granted Moore's motion to compel discovery. Mr. Cardillo then failed to comply with the order compelling discovery. Finally, on November 2, 1993, on Moore's motion, the court (Hugh Robinson, Bankruptcy Judge) struck Mr. Cardillo's answer and entered an order determining the debt embodied in the state court judgment to be nondischargeable and entered a judgment against Mr. Cardillo for the same amount as the superior court judgment as demanded in the complaint.1
On December 13, 1993, Moore filed in the State Court of Cobb County, Georgia a continuing garnishment against Mr. Cardillo's employer. The employer answered the summons of garnishment on January 27, 1994. Moore contends that Mr. Cardillo voluntarily resigned his employment effective January 31, 1994. In the motion for sanctions, the Debtors assert that Mr. Cardillo's employment was in jeopardy because of the garnishment; in their brief in support of the motion, the Debtors assert that Mr. Cardillo left his employment because of the garnishment.2
On January 3, 1994, Moore moved to withdraw Count II of its complaint to deny the discharge of Mr. Cardillo. In an order and notice entered on February 16, 1994, this court notified creditors and the Chapter 7 trustee that Moore had moved to withdraw the complaint to deny discharge and that the trustee or any creditor had 30 days from the date of entry within which to seek to be substituted as plaintiff. The order and notice further provided that if no party in interest sought to be substituted as plaintiff, Count II of the complaint would stand dismissed without further order of the court. Moore's counsel filed a certificate of service certifying that on February 18, 1994, he served the February 16, 1994, order and notice on all creditors and the Chapter 7 Trustee. There was no response to that order.
There is a second adversary proceeding pending against Mr. Cardillo brought by ITT Small Business Finance Corporation ("ITT"). ITT filed that action one month after Moore initiated its action. The complaint in the ITT case also contains two counts, one under section 523 and one under section 727.
The Debtors contend that no provision in section 362 terminates the automatic stay upon the entry of a judgment determining a debt to be nondischargeable. They argue that permitting a creditor to execute a judgment prior to the grant of a general discharge would deny the debtor a fresh start, an important objective of the Bankruptcy Code. In particular, they say that Mr. Cardillo will be unable to afford an attorney to defend the other pending adversary proceeding brought by ITT, unless the stay remains in place. Although the Debtors allege that Mr. Cardillo left his job because of the garnishment, they show no damage arising from the alleged contempt. In lieu of a monetary sanction for contempt, they request the court to reopen the adversary proceeding and to require Moore to prove the amount of its actual damages on its underlying claim.
Moore asserts that the automatic stay does not apply to a holder of a section 523 judgment. Its defense is that because a general discharge under section 727 does not discharge a debt not dischargeable under section 523, it makes no sense to require a creditor to wait until a general discharge is granted to prosecute and collect its claim. In support of that argument, Moore cites decisions of the United States Court of Appeals for the Sixth Circuit and a Bankruptcy Appellate Panel of the Ninth Circuit.
The first reported appellate decision on the issue presented is Watson v. City National Bank (In re Watson), 78 B.R. 232 (9th Cir. BAP 1987) ("Watson One"). The Watson case had a somewhat unusual history. By a two to one vote, the Bankruptcy Appellate Panel reversed the entry of a preliminary injunction entered by Bankruptcy Judge Lisa Hill Fenning that had prevented a creditor from executing upon a judgment determining a debt to be nondischargeable. Twenty-three days and sixty-five pages in Volume 78 of West's Bankruptcy Reporter later, Samuel L. Bufford, a different bankruptcy judge in the same case, who was apparently unaware of the appeal, let alone of the panel decision, held that the collection efforts of the creditor undertaken prior to the entry of the preliminary injunction violated the automatic stay. Watson v. City National Bank (In re Watson), 78 B.R. 267 (Bankr.C.D.Cal.1987). ("Watson Two"). Judge Bufford viewed the violation as so serious that he awarded monetary sanctions to the debtor and further refused the creditor's request to offset the sanction award against the nondischargeable judgment. 78 B.R. at 272-73.
The United States Court of Appeals for the Sixth Circuit, relying entirely on Watson One, and mistakenly citing it as having reversed Watson Two, also held that the entry of a nondischargeability judgment modifies the automatic stay to permit collection of a debt determined to be nondischargeable. Boatmen's Bank of Tennessee v. Embry (In re Embry), 10 F.3d 401, 403 (6th Cir.1993). Thus, Embry relied on the decision of two bankruptcy judges in the Ninth Circuit, while ignoring the opinions and analysis of three other bankruptcy judges in the same circuit who reached a contrary result in the same case.
The court in Watson One reasoned that if the stay remained in force until a case is closed or dismissed or a section 727(a) discharge is granted, the debtor would enjoy "the opportunity to delay and/or hinder the creditor from executing upon post-petition property, which is not property of the estate, for no valid reason." Watson One, 78 B.R. at 234. To bolster that argument, the court pointed to section 362(b)(2), which excepts from the automatic stay the collection of alimony, maintenance and support obligations from property that is not property of the estate. It cited legislative history stating that one goal of the automatic stay is to protect the debtor's discharge, a goal not furthered if discharge can never be obtained. The court concluded that "there is a lack of logic in allowing a creditor release from a discharge only to hold him in place as if he were still affected by the discharge or the prospect thereof." Watson One, 78 B.R. at 235.
At least one other bankruptcy court and one district court have held that nondischargeable debts are subject to the automatic stay and that attempts to collect them prior to the closing of the case, dismissal of the case or grant of a discharge, 11 U.S.C. § 362(c)(2)(C), or prior to affirmative relief from the automatic stay is a violation of that stay. See, Dantes v. Tyhurst (In re Tyhurst), 1992 WL 25372 (D.Kan. Jan. 9, 1992); Miller v. Hulvey (In re Hulvey), 102 B.R. 703 (Bankr.C.D.Ill.1988). The Hulvey court relied on Watson Two, and the Tyhurst court relied on Hulvey.
Section 362(c)(2)(C) of the Bankruptcy Code provides in relevant part:
Section 727(a) provides in relevant part that "the court shall grant the debtor a discharge" unless the debtor fails to meet specified criteria. Section 523 deals with the determination of the dischargeability of various categories of debts described in that section and states in relevant part that "a discharge under section 727 . . . does not discharge an individual debtor from any debt" in any of the specified categories.
The court in Watson Two observed that there are thirteen exceptions to the automatic stay listed in 11 U.S.C. § 362(b), but...
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