In re McGhan

• Decision Date: 07 May 2002
• Docket Number: No. 99-56956.,99-56956.
• Citation: 288 F.3d 1172
• Parties: In re Lon McGHAN, aka Lon L. McGhan fdba Envirotrend, Inc. fdba McGhan Management, Debtor. Lon McGhan, Appellant, v. Jason Rutz, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

288 F.3d 1172

In re Lon McGHAN, aka Lon L. McGhan fdba Envirotrend, Inc. fdba McGhan Management, Debtor.

Lon McGhan, Appellant, v. Jason Rutz, Appellee.

No. 99-56956.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 10, 2001.

Filed May 7, 2002.

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John C. Tobin, Hanover & Schnitzer, San Bernardino, CA, for the debtor-appellant.

William J. Light, David B. Felsenthal, Law Offices of Todd Rash, Riverside, CA, for the appellee.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel, Pappas, Meyers and Marlar, Judges, Presiding. BAP No. CC-99-01219-PaMeMa.

Before: McKEOWN and FISHER, Circuit Judges, and HAGEN,^* District Judge.

FISHER, Circuit Judge.

Appellee Jason Rutz was a listed creditor in his stepfather's — appellant Lon McGhan — bankruptcy proceedings. Rutz, a minor at the time, did not file a complaint of nondischargeability in those proceedings. As a result, the bankruptcy court issued an order discharging Rutz's claim and issued a permanent injunction barring Rutz from collecting on the debt. After Rutz attained maturity, he nonetheless filed a civil action against McGhan to collect on the discharged debt. Over McGhan's objections, the state court in which that action was filed ruled that Rutz's action could proceed because Rutz had inadequate notice of the earlier bankruptcy proceedings. Arguing that only the bankruptcy court had jurisdiction to resolve that question, McGhan then moved the bankruptcy court to reopen his bankruptcy case to review the state court's decision. The bankruptcy court denied the motion, reasoning that McGhan's desire to relitigate an issue already heard in state court was insufficient cause to reopen the case. We reverse. Relying on Gruntz v. County of Los Angeles (In re Gruntz), 202 F.3d 1074 (9th Cir.2000) (en banc), we hold that state courts lack jurisdiction to determine whether a listed and scheduled creditor received adequate notice of discharge proceedings. We also hold that the state court lacked authority to modify the bankruptcy court's orders discharging Rutz's claim and permanently enjoining Rutz from collecting on the debt. In light of those holdings, we conclude that it was an abuse of discretion for the bankruptcy court to decline to reopen McGhan's bankruptcy case. The bankruptcy court was required to reopen the proceedings to protect its exclusive jurisdiction over the enforcement of its own orders.

FACTS AND PROCEDURAL BACKGROUND

In 1991, McGhan was charged with five counts of sexual molestation of Rutz, his stepson. At the time the charges were filed, Rutz was 12 years old. McGhan pled guilty to one count of felony violation of California Penal Code § 288(a) (lewd and lascivious acts committed on a child under 14).

Shortly after his conviction, McGhan filed a voluntary petition for bankruptcy under Chapter 7 of the Bankruptcy Code. When a debtor files a Chapter 7 petition, the debtor lists each of his creditors. The appointed bankruptcy trustee convenes a meeting of these creditors pursuant to 11 U.S.C. § 341(a).¹ All creditors must receive at least 30 days' advance notice of the creditors' meeting. Rule 4007(c). Within 60 days after the date first set for that meeting, any creditor wishing to have a debt characterized as nondischargeable must file a complaint alleging nondischargeability of the debt. Id. If the creditor has adequate notice of the meeting but fails to make a timely complaint, his claim is automatically discharged pursuant to § 523(c)(1). Although debts for intentional torts such as Rutz's claim ordinarily are not dischargeable under § 523(a)(6) of the code, which states that debts for "willful and malicious injury" are nondischargeable, such claims will be discharged automatically if the listed creditor fails to make a timely objection. When a debtor is discharged under the Bankruptcy Code, the discharge "operates as a permanent injunction against any attempt to collect or recover on a ... debt." Irizarry v. Schmidt (In re Irizarry), 171 B.R. 874, 878 (B.A.P.9th Cir.1994); accord Am. Hardwoods, Inc. v. Deutsche Credit Corp. (In re Am. Hardwoods, Inc.), 885 F.2d 621, 626 (9th Cir.1989).

A different provision of the code is implicated when the creditor was not listed on the bankruptcy petition. An unlisted creditor's claim ordinarily is not discharged. Under § 523(a)(3) of the code, however, the debt will be discharged if the creditor had "notice or actual knowledge" of the bankruptcy proceedings in time to permit the creditor to file a proof of claim and, if necessary, challenge its dischargeability. Under § 523(a)(3)(B), which applies to debts for "willful and malicious injury" defined by § 523(a)(6), the debt will not be discharged if the creditor (1) was neither listed nor scheduled and (2) did not have "notice or actual knowledge" of the case in time for timely filing a proof of claim and timely request for a determination of dischargeability. Federal courts have exclusive jurisdiction over §§ 523(a)(6) (nondischargeability of willful and malicious injury) and 523(c)(1) (adequacy of notice to a listed creditor) of the code, whereas state and federal courts have concurrent jurisdiction over § 523(a)(3) (unlisted or unscheduled debt) proceedings.

With respect to Rutz's claim, McGhan's bankruptcy proceedings followed the general scheme for a listed creditor rather than an unlisted one. His petition for bankruptcy listed Rutz as a creditor holding an unsecured nonpriority claim against him.² As Rutz's guardian, Rutz's mother received timely notice of the creditors' meeting and the deadline for creditors to file a complaint objecting to discharge of the debtor or to determine dischargeability of debts, but she did not file a nondischargeability claim on her son's behalf. Applying § 523(c)(1), the bankruptcy court issued a discharge order automatically discharging McGhan's debt to Rutz. The discharge order also stated that "any judgment... obtained in any court other than this court is null and void as a determination of the personal liability of the debtor with respect to" any debt under § 523(a)(6). Pursuant to § 524, the discharge order also permanently enjoined any listed creditor "from instituting or continuing any action ... to collect such debts as personal liabilities of the above-named debtor." The bankruptcy court closed McGhan's case.

Upon reaching adulthood, Rutz filed a civil action against McGhan in California Superior Court, seeking damages arising out of his sexual molestation at the hands of McGhan. McGhan promptly moved to dismiss the action, arguing that Rutz's claim had been discharged by the bankruptcy court's discharge order and that Rutz's civil suit was enjoined by the § 524 discharge injunction. At McGhan's request, the state court took judicial notice of numerous documents from McGhan's bankruptcy case, including McGhan's bankruptcy petition, which listed Rutz as a creditor, and the discharge order containing the permanent injunction, which showed that Rutz's claim had been automatically discharged. McGhan contended that the bankruptcy court possessed exclusive jurisdiction over the dischargeability of Rutz's claim and that Rutz was estopped from collaterally attacking the validity of the discharge order and injunction in state court. Rutz responded that neither he nor the state court should be bound by the discharge order or permanent injunction because he had not received the notice required by § 523(c)(1) as a prerequisite to automatic discharge. Because notice of the proceedings had been provided only to his mother and her interests had conflicted with his own, he contended, the bankruptcy court's orders did not apply to his action against McGhan.³ The superior court agreed with Rutz. First, the court reasoned that it had jurisdiction pursuant to § 523(a)(3) to determine the sufficiency of Rutz's notice and the applicability of the discharge order. Second, the court agreed with Rutz that notice had been inadequate.⁴ Accordingly, the court ruled that Rutz was not bound by the discharge order and allowed Rutz's case to proceed.⁵

McGhan then sought to collaterally attack the state court's ruling in federal court. He moved to reopen his Chapter 7 bankruptcy case in the bankruptcy court, seeking leave to file a complaint against Rutz for violation of the § 524 permanent discharge injunction. In denying McGhan's motion, the bankruptcy court agreed that the state court had jurisdiction to adjudicate the adequacy of Rutz's notice under § 523(a)(3)(B) and reasoned that McGhan's desire to relitigate an issue already properly decided by the state court did not constitute sufficient cause to reopen.⁶ The Bankruptcy Appellate Panel ("BAP") affirmed, holding that the bankruptcy court had not abused its discretion in refusing to reopen McGhan's case. Like the state court and the bankruptcy court, the BAP assumed that the state court's jurisdiction validly rested on § 523(a)(3). The BAP also affirmed on the alternative ground that the Rooker-Feldman doctrine precluded the bankruptcy court from reversing or modifying the state court decision.⁷ McGhan appeals.

STANDARDS OF REVIEW

We review jurisdictional issues in bankruptcy appeals de novo. Durkin v. Benedor Corp. (In re G.I. Indus., Inc.), 204 F.3d 1276, 1279 (9th Cir.2000). A refusal to reopen a bankruptcy case is reviewed for an abuse of discretion. Weiner v. Perry, Settles & Lawson, Inc. (In re Weiner), 161 F.3d 1216, 1217 (9th Cir.1998). We review the decision of the BAP de novo, Scovis v. Henrichsen (In re Scovis), 249 F.3d 975, 980 (9th Cir.2001), and independently review the bankruptcy court's rulings. Oyama v. Sheehan (In re Sheehan), 253 F.3d 507, 511 (9th Cir.2001).

DISCUSSION

I. State Court Jurisdiction

To assess whether the bankruptcy court abused its discretion by denying McGhan's § 350(b) motion to reopen his bankruptcy case, we first must determine whether the state court had the authority to...