In re Hassanally, BAP No. CC-96-1403-OBV

• Decision Date: 14 March 1997
• Docket Number: Bankruptcy No. LA 92-12667 KL,Adversary No. 95-01685 KL.,BAP No. CC-96-1403-OBV
• Citation: 208 BR 46
• Parties: In re Siraj HASSANALLY and Erika Hassanally, Debtors. Siraj HASSANALLY and Erika Hassanally, Appellants, v. REPUBLIC BANK; Steven Earl Smith, Chapter 7 Trustee, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

208 B.R. 46 (1997)

In re Siraj HASSANALLY and Erika Hassanally, Debtors Siraj HASSANALLY and Erika Hassanally, Appellants, v. REPUBLIC BANK; Steven Earl Smith, Chapter 7 Trustee, Appellees.

BAP No. CC-96-1403-OBV, Bankruptcy No. LA 92-12667 KL, Adversary No. 95-01685 KL.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted October 23, 1996.

Decided March 14, 1997.

Al Funada, Schuchman & Funada, Torrance, CA, for Siraj and Erika Hassanally.

Steven L. Bergh, Prenovost, Normandin, Bergh & Dawe, Santa Ana, CA, for Republic Bank.

Before: OLLASON, BRANDT¹ and VOLINN, Bankruptcy Judges.

OPINION

OLLASON, Bankruptcy Judge:

OVERVIEW

In this appeal Siraj and Erika Hassanally ("Debtors") contend that the bankruptcy court erred by holding that a state court action against them for the tort of negligent construction could proceed to the extent it arose under state law postpetition. We Reverse.

STATEMENT OF FACTS

On November 13, 1989, Debtors executed a promissory note in favor of Republic Bank ("bank") in the amount of $1,641,500, and entered into a construction loan agreement. The funds were used by Debtors to finance the construction of a 12-unit condominium complex in Gardena, California, completed in 1990. Debtors owned the property site, and secured the note with a construction trust deed in favor of the bank. Siraj Hassanally was the alleged general contractor.

Debtors defaulted under the note and filed for Chapter 11² relief on January 22, 1992; the case was converted to Chapter 7 on May 12, 1993. The bank was listed as a secured creditor.

On July 27, 1993, the Chapter 7 trustee filed a Report of No Asset Case. The deadline for filing nondischargeability complaints was September 14, 1993; the bank did not file a complaint. Debtors received a discharge on October 19, 1993, and the case was closed on November 9, 1993.

In October of 1993, the bank obtained stay relief to foreclose upon the property. The bank alleged that upon taking possession of the property and preparing it for resale, it noticed several instances of negligent construction. The bank expended funds to make repairs. The foreclosure sale was held on December 22, 1993, and the bank purchased the property.

Two years later, on September 11, 1995, the bank filed a complaint in Los Angeles County Superior Court, naming Debtors as the defendants. The complaint alleged, inter alia, negligent construction of the project by Debtors.³

On November 29, 1995, Debtors' bankruptcy case was reopened to allow them to file a complaint requesting sanctions against the bank for its violation of the discharge injunction. Debtors filed a motion for summary judgment. Debtors filed the declaration of Siraj Hassanally, who averred that the project was completed in 1990, and that it passed all building code inspections. Hassanally stated that the project was periodically inspected by the bank's vice presidents.

The bank filed the declaration of Vice President Laurie Duncan, who averred that less than three percent of construction loans end up in foreclosure, so that foreclosure was not fairly contemplated. Furthermore, Ms. Duncan averred that less than one percent of construction projects result in negligent construction actions; thus defects giving rise to such actions also were not fairly contemplated. Ms. Duncan also stated that the inspections made by the bank employees of the property were for the purpose of assuring that the loan funds were allocated per the bank's instructions.

The bankruptcy court heard the motion on February 22, 1996, and its findings and conclusions and judgment were entered on April 18, 1996. The court effectively granted summary judgment in favor of the bank. It denied Debtors' complaint for sanctions concerning the claim for negligent construction, and ordered that the bank could proceed with the state tort action to the extent it was a postpetition claim under state law. The court concluded:

3. The claim for negligent construction . . . is based on a tort theory of liability has sic not been discharged to the extent that such liability arises out of Republic Bank\'s post-petition ownership or possession of the real property is sic based on a tort claim which did not arise under state law until after the commencement of the debtors\' bankruptcy case.

Findings of Fact and Conclusions of Law (with disjunctive interlineation).

Debtors timely appealed the judgment.

ISSUE

The sole issue on appeal is whether the bankruptcy court erred by concluding that § 524 does not enjoin the bank from pursuing its state law cause of action against Debtors for negligent construction because its claim was actually a prepetition claim under federal law that was discharged.

STANDARD OF REVIEW

The Panel reviews the bankruptcy court's summary judgment de novo. In re Kim, 163 B.R. 157, 159 (9th Cir.BAP 1994), aff'd, 62 F.3d 1511 (9th Cir.1995). Summary judgment is proper if there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986); Fed.R. Bankr.P. 7056/Fed.R.Civ.P. 56(c). Whether the state court suit is barred by the permanent injunction of § 524 is a question of law. In re Beeney, 142 B.R. 360, 362 (9th Cir.BAP 1992). Issues of statutory interpretation are reviewed de novo. In re Jensen, 995 F.2d 925, 927 (9th Cir.1993).

DISCUSSION

Section 727(b), as follows, provides for a discharge:

(b) Except as provided in section 523 of this title, a discharge under subsection (a) of this section discharges the debtor from all debts that arose before the date of the order for relief under this chapter, and any liability on a claim that is determined under section 502 of this title as if such claim had arisen before the commencement of the case, whether or not a proof of claim . . . is filed . . . and whether or not a claim based on any such debt or liability is allowed under section 502 of this title.

Section 524(a) states the effect of a discharge:

(a) A discharge in a case under this title—

(1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged under section 727 . . . of this title, whether or not discharge of such debt is waived;

(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived; . . .

Only debts that arise prepetition are dischargeable, and only actions for prepetition claims are enjoined by § 524(a)(2). In re Kewanee Boiler Corp., 198 B.R. 519, 526 (Bankr.N.D.Ill.1996); § 727(b). It has been held that the main purpose of § 524 is "to make it unequivocally unnecessary for the debtor to respond in the state court action." In re Walker, 180 B.R. 834, 842 (Bankr. W.D.La.1995).

Debtors contend that the bank is attempting to hold them personally liable for a prepetition claim. Furthermore, they contend that the bank did not contest the dischargeability of the claim, and there is no category for finding the negligence claim nondischargeable under the Code. On the other hand, the bank contends that its claim, pursuant to state law, did not arise until it acquired the property postdischarge.

Absent an overriding federal interest, the existence of a claim in bankruptcy is generally determined by state law. Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 917-18, 59 L.Ed.2d 136 (1979).

The term "debt" is defined in § 101(12) as "liability on a claim." Claim is defined in § 101(5) as:

(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; . . .

11 U.S.C. § 101(5); see also In re Daghighfekr, 161 B.R. 685, 687 (9th Cir. BAP 1993).

Although the concept of provability was important under the former Bankruptcy Act, it was abandoned in the Bankruptcy Code. In re Vasu Fabrics, Inc., 39 B.R. 513, 517 (Bankr.S.D.N.Y.1984).

The definition of "claim" was expanded and no longer are claims not fixed as to liability on the date of the filing precluded from participation. The result of the broad definition of "claim" and the abandonment of the concept of provability is that all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case. . . . Id. (citations omitted).

In re Upstairs Gallery, Inc., 167 B.R. 915, 917-18 (9th Cir. BAP 1994).

In this case it is to the bank's benefit to pursue Debtors' postbankruptcy assets because all debts which would have been dischargeable in a no-asset Chapter 7 case if scheduled, are discharged as if they were scheduled. In re Beezley, 994 F.2d 1433, 1434 (9th Cir.1993). The bank's claim was based on Debtors' negligent conduct. Thus, if it had been determined to be a prepetition claim, it would have been discharged in the Chapter 7 case. The movant bank had the burden of proving its assertion that its claim was postpetition and not prepetition.⁴

In California, a civil action ordinarily accrues when the wrongful act is done and liability arises, i.e., upon the occurrence of the last fact essential to the cause of action. Angeles Chemical Co., Inc. v. Spencer & Jones, 44 Cal.App.4th 112, 51 Cal.Rptr.2d 594, 597 (1996); Cal.Civ.Proc.Code § 312 (West 1982). The orthodox rule in cases of damage to real property is that the harmful acts occurred, and thus the action accrued, at the time of the construction. See Kirby v. Albert D. Seeno Constr. Co., 11 Cal.App.4th 1059, 14 Cal.Rptr.2d 604, 607 (1992). This rule is not applied, however, because latent defects are often involved. Instead, the traditional approach of delayed accrual of...