In re Eastburg

Decision Date23 August 2010
Docket NumberAdversary No. 10-1024 J,Bankruptcy No. 7-10-10131 JA
Citation440 B.R. 851
PartiesIn re Randall Scott EASTBURG and Lisa Sue Eastburg, Debtors. BUKE, LLC, A New Mexico limited liability company, Plaintiff, v. Randall Scott Eastburg and Lisa Sue Eastburg, Defendants.
CourtU.S. Bankruptcy Court — District of New Mexico

William R. Keleher, Albuquerque, NM, for Plaintiff.

Chris W. Pierce, Hunt & Davis, P.C., Albuquerque, NM, for Defendants.

MEMORANDUM OPINION

ROBERT H. JACOBVITZ, Bankruptcy Judge.

The Court is faced with the conundrum of how the discharge injunction under 11 U.S.C. § 524, which arises upon the entry of a debtor's discharge, affects pending pre-petition state court litigation that includes claims arising out of the same conduct, transactions and occurrences as those at issue in this timely-filed adversary proceeding to determine the dischargeability of certain debts under 11 U.S.C. § 523. The parties have stipulated, and the Court agrees, that the automatic stay terminated upon the entry of the Debtors' discharge on April 21, 2010. SeeCase No. 10-10 131 JA (Docket No. 43—Discharge of Debtor Lisa Sue Eastburg and Randall Scott Eastburg; Docket No. 79-Stipulated Order Regarding Automatic Stay). The issues before the Court are whether the discharge injunction or the Court's exclusive jurisdiction to determine whether a debt is excepted from the discharge prevents Plaintiff from pursuing any or all of the claims raised in its state court action when no determination has yet been made by this Court as to the dischargeability of any debts.

Plaintiff BUKE, LLC ("BUKE") asserts that the discharge injunction does not prevent it from proceeding against the Defendants in the state court action as to all claims raised in that action. BUKE reasons that because its state court claims against Defendants are based on the same conduct upon which its claims of non-dischargeability in this adversary proceeding are based, and because no determination of dischargeability of the debt at issue in the state court action has yet been made, the state court has concurrent jurisdiction to determine the validity and the amount of that debt. Consequently, BUKE believes it can continue to pursue its causes of action simultaneously in state court and in this adversary proceeding. Alternatively, if the Court were to determine that the discharge injunction applies to prosecution of its claims against Defendants in the state court action, BUKE argues that the Court can and should modify the discharge injunction to permit BUKE to proceed against the Defendants in the state court action.

Defendants counter that the discharge injunction enjoins BUKE from prosecuting its state court action against them, reasoning that the adjudication of all causes of action against them that have not been discharged due to this pending adversary proceeding court falls within the exclusive jurisdiction of the bankruptcy court, and that any debt associated with any other state court causes of action against them has been discharged. Finally, Defendants assert that this Court does not have the power to modify the discharge injunction to allow BUKE to pursue its claims against the Defendants in the state court action.

After consideration of the arguments of counsel, the relevant case law, and the applicable sections of the Bankruptcy Code, the Court finds that upon the timely filing of a complaint objecting to the dischargeability of a debt, the discharge injunction does not apply with respect to that debt until the Court makes a determination of the dischargeability of the debt. Bankruptcy courts and state courts have concurrent jurisdiction over causes of action under applicable nonbankruptcy law to establish the debt. The bankruptcy court has exclusive jurisdiction to determine whether such debt should be excepted from the discharge. Based on the Court's determination of the scope of the discharge injunction, it need not consider whether it has the power to modify the discharge injunction.1

UNDISPUTED FACTS

1. On January 15, 2010 (the "Petition Date"), Defendants commenced a voluntary case under Chapter 7 of the Bankruptcy Code, entitled In re Randall Scott Eastburg and Lisa Sue Eastburg, United States Bankruptcy Court, District ofNew Mexico, Case No. 7-10-10131 JA (the "Bankruptcy Case").

2. On the Petition Date, an action was pending in the Second Judicial District Court, State of New Mexico captioned, BUKE, LLC, Plaintiff, v. Cross Country Auto Sales, LLC, and other Defendants including Defendants Randall Scott Eastburg and Lisa Sue Eastburg, Case No. CV 2009 07479 (the "State Court Action"). The State Court Action remains pending.

3. The complaint in the State Court Action includes the following counts: a) Accounting; b) Conversion; c) Civil Conspiracy; d) Breach of Fiduciary Duty; e) Usurpation of Corporate Opportunity; f) Unfair Competition; g) Interference with Contractual Relationship; and h) Racketeering. See Memorandum Brief Regarding Automatic Stay, Discharge Injunction and Issues Related to 11 U.S.C. § 523 (Docket No. 33) ("BUKE Memorandum"), p. 2, ¶ 2; Defendant's Memorandum Brief on Automatic Stay, Discharge Injunction and § 523 Actions (Docket No. 25) ("Eastburg Memorandum"), p. 1, ¶ 2.

5. On March 3, 2010, BUKE filed this adversary proceeding objecting to the dischargeability of certain alleged debts of the Defendants pursuant to 11 U.S.C. § 523(a)(2) and (a)(4) on theories of Conversion, Breach of Fiduciary Duty, Civil Conspiracy, and Violation of the New Mexico Racketeering Act. See Docket No. 1.

6. On the same date, BUKE filed a motion for relief from the automatic stay in the Bankruptcy Case ("Stay Motion") and the Debtors filed a timely objection. See Bankruptcy Case, Docket No. 19 and Docket No. 31. In the Stay Motion, BUKE requested that the Court modify the automatic stay to allow BUKE to proceed against the Debtors in the State Court Action.

7. The Stay Motion also sought modification of the stay to allow BUKE to make adjustment to the capital accounts and membership interest of the Debtors. The request for relief from stay regarding adjustments to capital accounts and membership interests has been resolved by an agreed order entered May 24, 2010. See Bankruptcy Case, Docket No. 56.

8. The Debtors were granted a discharge under 11 U.S.C. § 727(a) by an order entered April 21, 2010. See Bankruptcy Case, Docket No. 43.

9. On May 19, 2010, BUKE filed an Amended Verified Complaint to Determine Non-Dischargeability of Debts, for Judgment on the Debts, for Declaratory Judgment, and for Modification of the § 524 Discharge Injunction ("Amended Complaint"). See Docket No. 16. The Amended Complaint added the following counts: 1) a count for declaratory judgment asking the Court to determine that the discharge injunction does not apply to the claims pending in this adversary proceeding or to the claims raised in the State Action; and 2) an alternative count requesting the Court to modify the discharge injunction. Id.

10. On July 19, 2010 BUKE and the Defendants stipulated that the automatic stay terminated upon the entry of the Debtors' discharge, rendering BUKE's Stay Motion moot. See Bankruptcy Case, Docket No. 79.

DISCUSSION

The issue before the Court, at its core, is whether BUKE's claims against Defendants in the State Court Action can be litigated in that action or whether they must be litigated in this adversary proceeding. BUKE contends that it is free to prosecute its claims against Defendants in the State Court Action because the automatic stay terminated and the discharge injunction is inapplicable until a determination of dischargeability has been made. Defendants assert that because the bankruptcy court has exclusive jurisdiction todetermine dischargeability issues, this Court has exclusive jurisdiction to determine BUKE's claims against them asserted in the State Court Action. BUKE counters that the State Court has concurrent jurisdiction to determine the amount and validity of its claims against the Defendants, and, once that determination has been made, the Bankruptcy Court determines whether such claims are dischargeable.

Termination of the Automatic Stay

The parties agree that the stay terminated upon the entry of the order discharging the Defendants in their Bankruptcy Case, and that the discharge injunction does not apply to a debt when a timely objection to dischargeability of the debt is made under 11 U.S.C. § 523(a)(2), (4) or (6) unless and until the bankruptcy court determines that the debt is discharged. The Court agrees that the parties' stipulation is a correct application of the law.

Bankruptcy Code § 362(c)(2)(C) provides that, except as to property of the estate, the automatic stay terminates in an individual debtor chapter 7 case when the discharge is granted or denied under 11 U.S.C. § 707(b). Defendants were granted a discharge under 11 U.S.C. § 727(a) by an order entered April 21, 2010. See Bankruptcy Case, Docket No. 43. Consequently, the stay terminated with respect to prosecution of claims against the Defendants.2

Applicability of the Discharge Injunction

Bankruptcy Code § 523(a) and (c) and (d) contemplate that a debt is not discharged if a timely complaint is filed objecting to discharge of the debt under 11 U.S.C. § 523(a)(2), (4) or (6) unless and until the court denies the objection.3 Here, because there has been no determination of the dischargeability of the debtthat BUKE seeks in this adversary proceeding to except from the discharge, the discharge injunction is not yet applicable to that debt.

This conclusion, however, does not end the inquiry. Prosecution of a cause of action against a debtor in state court after the entry of the discharge injunction to collect a debt as a personal liability of the debtor is outside the scope of the discharge injunction 4 only if there exists the required nexus between prosecution of the cause of action in state court and the determination in bankruptcy court of the...

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