In re Russell, Bankruptcy No. 91-14721-B7.
| Decision Date | 28 February 1996 |
| Docket Number | Bankruptcy No. 91-14721-B7. |
| Citation | 193 BR 568 |
| Parties | In re Keith D. RUSSELL and Dorothy Russell, Debtors. |
| Court | U.S. Bankruptcy Court — Southern District of California |
Kenneth C. Noorigian, Eric L. Hoffland, Gorman & Noorigian, San Diego, CA, for Debtors.
Laurie E. Wright, San Diego, CA, for Carlos and Linda Shannon.
Keith and Dorothy Russell ("Debtors") sold certain real property to Carlos and Linda Shannon ("Shannons") for $715,000 in 1991. Twelve days later, debtors filed a petition under chapter 7. The Shannons were never listed as creditors of the debtor. Several years later, a plumbing break disclosed that the property suffered from soil subsidence problems. The Shannons subsequently discovered that such a break had occurred before, that debtors were aware of the subsidence problem, and that debtors had failed to disclose this problem prior to purchase. The damages from the break were estimated at over $100,000 and the Shannons brought an action to recover these damages from the debtors in Superior Court.
The debtors now bring this motion to reopen the case, add the damage claim, and discharge any debt to the Shannons through their bankruptcy on the theory that the Shannons are unintentionally omitted creditors. The Shannons assert that this is a post-petition claim and not subject to the previous bankruptcy.
This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).
The present case raises the continually troubling issue of when a claim accrues within the bankruptcy context. There is determinative case law concluding that Congress intended the term "claim" to have a broad scope for bankruptcy purposes in order to assure the debtor a fresh start. See Ohio v. Kovacs, 469 U.S. 274, 105 S.Ct. 705, 83 L.Ed.2d 649 (1985). Indeed, the term "claim" is defined in the Bankruptcy Code to mean:
(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).
The dilemma is simple to define; the answer is less so. The Shannons bought a home, without knowledge or disclosure of any soil subsidence problem. The sellers then filed bankruptcy, did not list the Shannons as possible creditors, and obtained their discharge. When the subsidence problem manifested itself, the Shannons learned of the pre-existing problem and sued the sellers to recover their losses. The sellers assert that the Shannons' claim is a pre-petition claim arising from the sales transaction. Because it is a pre-petition claim, it was discharged along with their other pre-petition unsecured debts. Therefore, argue the debtors, they should be allowed to reopen their case to amend their schedules to add the Shannons' claim so that it can be shown to have been discharged.
In the routine circumstance of an omitted debt in a no asset case, this Court need not grant a motion to reopen because a state court has concurrent jurisdiction to determine if the nature of the debt made it a dischargeable one even though it was not listed in the debtor's schedules. In re Beezley, 994 F.2d 1433 (9th Cir.1993); In re Franklin, 179 B.R. 913 (Bankr.E.D.Cal. 1995). That circumstance is made more difficult, however, when the threshold issue of whether a claim is prepetition or postpetition is raised. State courts are accustomed to adjudicating whether a cause of action exists and is ripe for resolution. However, it is generally recognized that:
while non-bankruptcy law governs the existence of a claim under the Code, it is not dispositive of the time at which a claim arises under the Code.
In re National Gypsum Co., 139 B.R. 397, 405 (N.D.Tx.1992). As that court noted:
It is immaterial for the purpose of bankruptcy, whether EPA\'s claims against the debtors are ripe for adjudication under CERCLA, as long as all the elements that can give rise to liability under CERCLA have occurred pre-petition.
Id. The time when a claim arises — a "claim" within the meaning of 11 U.S.C. § 101(5) — is an issue peculiar to bankruptcy law.
In recent years, the issue of when a claim arises for bankruptcy purposes has been considered most carefully in the environmental cleanup and mass tort cases, with some differing results. In the Ninth Circuit, the central decision is In re Jensen, 995 F.2d 925 (1993). In that case, a representative of a state agency visited the business site several weeks after a Chapter 11 petition was filed for the business. The representative noted the presence of toxic chemicals, wrote to the owner about the potential risk of harm, and requested prompt amelioration. Within a few days thereafter, the owner filed a personal bankruptcy under Chapter 7. The owner's bankruptcy was concluded a year later, in 1985. In 1987, a separate state agency notified the owner that he would be held personally liable for the cleanup costs. Subsequently, the owner's bankruptcy was reopened to allow him to list the state agency as a creditor and to bring an adversary proceeding to determine that the owner's liability for cleanup costs had been discharged. The Bankruptcy Court held that the agency's claim arose postpetition, so it was not discharged. The Bankruptcy Appellate Panel reversed, so the agency appealed to the Ninth Circuit.
The Court of Appeals reviewed different analyses utilized by various courts. It recognized that a few courts, including the Bankruptcy Court in Jensen, required that each element of a CERCLA claim must exist, including the incurring of costs before a claim arose. The Ninth Circuit noted that that approach had not gained currency and had been rejected by the BAP in Jensen.
Another approach, relied upon by the BAP in Jensen, was the conduct test. Specifically, if there was a prepetition release or threat of release of toxic substances, then the conduct had occurred and the claim had arisen, regardless of who knew of it.
The Court of Appeals looked also to what it called the "`relationship' test". In re Jensen, 995 F.2d at 929. That test "establishes the date of a bankruptcy claim `at the earliest point in the relationship between the debtor and the creditor.'" Id. To illustrate, the court cited to In re Edge, 60 B.R. 690 (Bankr.M.D.Tenn.1986), and wrote:
For example, although a debtor dentist\'s pre-petition negligence may escape detection until post-petition, a bankruptcy claim arises at the point of the dentist\'s negligent act.
The Ninth Circuit then reviewed each of the approaches. It rejected the approach used by the Bankruptcy Court, that each of the elements must exist, including response costs. The court concluded that approach was inconsistent with the breadth of the definition of "claim" under the Code and would render meaningless certain provisions of the definition, such as contingent and unmatured.
The appellate court also found difficulty with the conduct test used by the BAP. In support, it quoted one source:
One commentator has noted that "despite Congress\'s repeal of the `provability\' requirement and its broad definition of `claim\', nothing in the legislative history or the Code suggests that Congress intended to discharge a creditor\'s rights before the creditor knew or should have known that its rights existed." (Citation omitted.)
The court next turned to the relationship test. Quoting from the same source, the court indicated that there should be some nexus between the relationship and the prepetition situation which gives rise to the claim or a creditor, particularly a governmental agency creditor, so that the creditor "`may anticipate its potential claim.'" Id.
Finally, the Ninth Circuit turned to a decision which it felt "carefully balanced" the "sometimes competing policy goals of environmental law and the bankruptcy code. . . ." The court looked to the decision in In re National Gypsum, 139 B.R. 397 (N.D.Tx. 1992), as the source for what it called the "fair contemplation" test. That test provides:
"all future response and natural resource damages cost based on pre-petition conduct that can be fairly contemplated by the parties at the time of debtors\' bankruptcy are claims under the Bankruptcy Code."
995 F.2d at 930. The Ninth Circuit then noted:
The Ninth Circuit then reached its conclusion under the facts in Jensen. The original agency representative who discovered the toxic chemicals on the business site...
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