In re Paine
| Decision Date | 30 August 2002 |
| Docket Number | BAP No. SC-02-1081-KMaKi.,Bankruptcy No. 01-06861-PB7. |
| Citation | 283 B.R. 33 |
| Parties | In re Lloyd Delaus PAINE and Lorna J. Paine, Debtors. Lloyd Delaus Paine and Lorna J. Paine, Appellants, v. Weldon Griffin; Weldon Griffin, Trustee of the Howard C. Kuhle 1980 Trust; Ronald F. Woods, Appellees. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Harold D. Thompson, San Diego, CA, for Appellants.
Martin A. Eliopulos, Higgs, Fletcher & Mack, San Diego, CA, for Appellees.
Before KLEIN, MARLAR, and KIRSCHER,1 Bankruptcy Judges.
This is an appeal from dismissal of an adversary proceeding filed by debtors seeking to have debts that were "excepted from discharge" on due process grounds in a prior bankruptcy declared to be dischargeable in a second chapter 7 case. Although the court shoehorned the prior judgments into 11 U.S.C. § 523(a)(10) notwithstanding that there was a discharge in the prior case, we hold that it is not necessary to find an independent basis for excepting the debts from discharge in the second case and AFFIRM based on res judicata principles.
We publish to emphasize the poorly-understood rule recognized in 11 U.S.C. § 523(b) that most final judgments of nondischargeability rendered by bankruptcy courts, even if erroneous, are preclusive in subsequent bankruptcy cases.
Appellants, Lloyd and Lorna Paine, filed chapter 7 bankruptcy case No. 95-03045-PB7 in the Southern District of California on May 26, 1995.
No deadline was fixed for filing proofs of claim. The chapter 7 trustee found no assets. The discharge was issued July 27, 1995. The case was closed August 18, 1995.
Lloyd Paine provided the information used to prepare the schedules and statement of financial affairs.
Lloyd Paine intentionally omitted from the schedules (among other things) interests in: real estate worth about $1 million; a baby grand piano; art originally purchased for about $25,000; nine items of intellectual property registered with the Library of Congress Copyright Office; and interests in three patents.
Lloyd Paine also intentionally did not schedule (among other debts) more than $1.45 million owed on the omitted real estate to: appellee Weldon Griffin on two separate obligations; appellee The Howard C. Kuhle 1980 Trust ("Kuhle Trust"), of which Griffin is trustee, on a note and junior deed of trust; and beneficiaries of a senior note and deed of trust (of which Kuhle Trust eventually acquired a 76.322 percent interest).
The deadline to revoke the Paines' chapter 7 discharge under 11 U.S.C. § 727(1) was July 27, 1996.
Without knowledge of the Paine bankruptcy, Griffin sued the Paines twice on his own behalf as Case Nos. 697374 and 706696, San Diego County Superior Court, before February 13, 1997.
Beneficiaries of the senior note and deed of trust, without knowledge of the Paine bankruptcy, filed an action for judicial foreclosure and a personal liability judgment against the Paines on February 13, 1997. Dickey v. Paine, Case No. 708008, San Diego County Superior Court. Kuhle Trust joined the action as a fractional interest holder in the note and added a count for breach of contract on its junior note.
The Paines settled Griffin's Case No. 697374 for $20,000, and the state court awarded him $227,649.49 in Case No. 706696 on January 30, 1998, all without revealing the Paine bankruptcy.
Neither Griffin, nor Kuhle Trust, nor the other trust deed beneficiaries on the debt of which Kuhle Trust now owns a 76.322 percent interest, learned of the existence of the 1995 bankruptcy until the Paines filed a short-lived chapter 13 bankruptcy case on March 2, 1998, in which they scheduled some 1995 assets and liabilities that were omitted in the 1995 bankruptcy, including debts owed to Kuhle Trust, the senior trust deed beneficiaries, and Griffin. That chapter 13 case was dismissed on May 11, 1998.
In Case No. 708008, the state court awarded Kuhle Trust $314,933.92 on June 19, 1998, plus $20,577.00 in fees and costs, and awarded a $779,886.99 deficiency judgment to the senior deed of trust beneficiaries on January 21, 1999. Kuhle Trust's 76.322 percent interest in the deficiency judgment was $595,225.34.
The bankruptcy court reopened bankruptcy Case No. 95-03045 on August 2, 1999, on motion of Griffin and Kuhle Trust.
Kuhle Trust and Griffin filed adversary proceedings in the reopened Case No. 95-03045, challenging the discharge of their debts on two theories: fraud per 11 U.S.C. § 523(a)(3)(B); and the due process principles applied in Ford v. Ford (In re Ford), 159 B.R. 590 (Bankr.D.Or.1993) (Perris, B.J.) ("Ford"). Griffin v. Paine, Adv. No. 99-90608; The Howard C. Kuhle 1980 Trust v. Paine, Adv. No. 99-90671.
After a two-day trial, the court ruled that Kuhle Trust did not prove its underlying debt was procured by fraud. Hence, it could not be nondischargeable under § 523(a)(3)(B).
Nevertheless, on the Ford due process theory, the bankruptcy court held in favor of Kuhle Trust as against Lloyd (but not Lorna) Paine. It reasoned that the question was whether Kuhle Trust would have successfully objected to discharge under § 727. As to Lloyd Paine, the court ruled that there were material omissions and false statements and:
that Mr. Paine had the requisite intent to mislead and deceive the trustee and creditors by omitting material information from the schedules and statement of affairs.... [P]laintiff has carried its burden of showing that the plaintiff would have prevailed on the [§] 727(a)(4)(A) claim as against Mr. Paine.
Invoking Ford, it entered judgment in Adv. No. 99-90671 on March 15, 2001, holding the Kuhle Trust debt "excepted from discharge" against Lloyd Paine on due process grounds. No appeal was taken.
On May 1, 2001, a stipulated judgment that mirrored the Kuhle Trust judgment and "excepted from discharge" the Griffin debts was entered in Adv. No. 99-90608. No appeal was taken.
On June 28, 2001, the Paines filed the current chapter 7 bankruptcy case, scheduling the debts to Kuhle Trust and Griffin. The Paines also listed their personal residence as an asset.
On July 19, 2001, Kuhle Trust and Griffin, represented by appellee Ronald F. Woods, commenced a civil action in state court against various Paine entities and relatives on several theories, including fraudulent transfers in anticipation of judgments in favor of the trust and Griffin. The Paines were not named as defendants. Griffin v. The DeLaus Trust, et al., Case No. 771021, San Diego County Superior Court.
Although the Paines were not defendants, the relief sought included a declaration that appellees' judgments are liens on the Paines' residence. No relief from automatic stay was obtained.
On September 18, 2001, the Paines filed an adversary proceeding seeking: declaratory judgments that the Griffin and Kuhle Trust debts could be discharged in the 2001 bankruptcy; and damages for an allegedly "willful" automatic stay violation entailed in filing a civil action that sought to impress a lien on their residence. Paine v. Griffin, et al., Adv. No. 01-90375.
The court dismissed the Paines' adversary proceeding on summary judgment. Although appellees argued res judicata, the court (accepting that the judgments remained valid) reasoned that the debts were nondischargeable under § 523(a)(10), just as if appellees had not been deprived of their due process right to object to discharge (on which objection, the bankruptcy court held, they would have succeeded).
As to the alleged violation of the automatic stay, the court ruled that the conduct was not a "willful" violation of the stay and directed that the state court complaint be amended to delete the request for imposition of a lien on the Paines' residence.
An order reflecting the court's rulings was entered on January 23, 2002.2 This timely appeal followed.
1. Whether debts excepted from discharge in one bankruptcy case continue to be excepted from discharge in later cases.
2. Whether the bankruptcy court erred in finding that there was not a willful violation of the automatic stay.
We review summary judgment de novo. Svob v. Bryan (In re Bryan), 261 B.R. 240, 243 (9th Cir. BAP 2001).
The material facts are few and undisputed. Griffin and Kuhle Trust were entitled to judgment as a matter of law.
The bankruptcy court's final words in its ruling on the dischargeability issue hit the nail on the head: "we've got a problem and we've got to have a way to deal with it." What the court did not realize was that, by invoking § 523(a)(10), it had unnecessarily complicated a problem it had already solved.
Although the dubious invocation of § 523(a)(10) is assigned as error, the issue is a red herring. By not appealing the prior judgments, the debtors made a complex problem simple.
The key to the analysis is Bankruptcy Code § 523(b), which states an exception that proves a rule.
The rule is that res judicata principles apply in bankruptcy so that once a debt is "excepted from discharge" in a judgment that meets the requirements for preclusion, it is, except for the eight exceptions named in § 523(b), "excepted from discharge" in all subsequent chapter 7 cases without need for an independent basis for excepting the debt from discharge in the later case.
This rule is implicit in the statement of the exceptions at § 523(b):
(b) Notwithstanding subsection (a) of this section, a debt that was excepted from discharge under subsection (a)(1), (a)(3), or (a)(8) of this section, under section 17a(1), 17a(3), or 17a(5) of the Bankruptcy Act, under section 439A of the Higher Education Act of 1965, or under section 733(g) of the Public Health Service Act in a prior case concerning the debtor under this title, or under the Bankruptcy Act, is dischargeable in a case under this title unless, by the terms of subsection (a) of this section, such debt is not dischargeable...
To continue reading
Request your trial
-
In re Cohen
...that is automatically perfected without filing. STANDARD OF REVIEW We review summary judgment de novo. Paine v. Griffin (In re Paine), 283 B.R. 33, 36 (9th Cir. BAP 2002). We are entitled to raise the jurisdictional question of standing sua sponte, which question we consider de novo. Menk v......
-
In re Brawders
...about which doctrine Debtors rely upon and our reasoning applies to all such doctrines. See generally Paine v. Griffin (In re Paine), 283 B.R. 33, 38-39 (9th Cir.BAP 2002) and The Alary Corp. v. Sims (In re Associated Vintage Group, Inc.), 283 B.R. 549 (9th Cir.BAP 2002) (each discussing re......
-
In re Grafton Partners
...as a preference in bankruptcy by 11 U.S.C. § 546(e). STANDARD OF REVIEW We review summary judgment de novo. Paine v. Griffin (In re Paine), 283 B.R. 33, 36 (9th Cir. BAP 2002). DISCUSSION The parties agree that a membership interest in an LLC that is required to be the subject of a registra......
-
In re Elias
...F.3d 1035, 1038 n. 4 (9th Cir.2000); In re Associated Vintage Group, Inc., 283 B.R. 549, 554-55 (9th Cir. BAP 2002); In re Paine, 283 B.R. 33, 38-39 (9th Cir. BAP 2002). Despite the parties' use of all four terms in their submissions, in the interest of clarity and consistency, the Court wi......