Walker, In re

• Decision Date: 13 March 1991
• Docket Number: No. 89-4086,89-4086
• Citation: 927 F.2d 1138
• Parties: 24 Collier Bankr.Cas.2d 1517, Bankr. L. Rep. P 73,857 In re Ralph L. WALKER, Debtor. Ralph L. WALKER, Appellee, v. Robert WILDE, Monty Higley and Jonnie Higley, Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1138

927 F.2d 1138

24 Collier Bankr.Cas.2d 1517, Bankr. L. Rep. P 73,857

In re Ralph L. WALKER, Debtor.

Ralph L. WALKER, Appellee, v. Robert WILDE, Monty Higley and Jonnie Higley, Appellants.

No. 89-4086.

United States Court of Appeals, Tenth Circuit.

March 13, 1991.

John K. Rice, Midvale, Utah, for appellants.

Before LOGAN, MOORE and BALDOCK, Circuit Judges.

LOGAN, Circuit Judge.

Defendants-appellants Robert Wilde, Monty Higley and Jonnie Higley seek to establish the Higleys' right to recover from Utah's Real Estate Recovery Fund for a discharged claim against debtor-appellee Ralph L. Walker. As part of this effort, defendants filed motions with the bankruptcy court for relief from the Bankruptcy Code's injunction against continuing or commencing actions concerning discharged debts, see 11 U.S.C. Sec. 524(a)(2), and for an extension of time in which to challenge the discharge of their claim against Walker. The bankruptcy court denied both motions and the district court affirmed. We affirm in part and reverse in part.

The following facts are undisputed unless otherwise noted:

In April 1985, the Higleys, through their counsel Robert Wilde, filed suit against real estate agent Ralph L. Walker and others in Utah state court for Walker's alleged deceptive appropriation of funds from the Higleys during a consumer real estate transaction. The proceeding was halted temporarily when Walker filed a chapter 11 petition in bankruptcy court in Utah, but resumed when that petition was dismissed. On the day before trial, however, Walker, who was not represented by counsel, telephoned Wilde and the bankruptcy court and reported that he would not appear at trial because he again intended to file for bankruptcy. Trial nonetheless proceeded in Walker's absence and concluded with the court stating that upon consideration of the Higleys' offer of proof, it would enter judgment in their favor in the amount of $3950.00 plus fees, costs and interest. Walker filed for chapter 7 bankruptcy one day later, on November 21, 1986, in the United States Bankruptcy Court for the District of Colorado.

The state district court formally entered judgment against Walker on November 26, 1986, five days after he had filed his second bankruptcy petition. Walker did not inform the state district court that he had filed for bankruptcy before the court entered this judgment. The record also establishes that the Higleys did not receive the bankruptcy court's January 22, 1987, notice of the filing. ¹ Instead, the Higleys first learned of Walker's bankruptcy filing on February 26, 1987, more than three months after they obtained judgment, when another of Walker's creditors provided Wilde with the name and address of the bankruptcy court in which Walker had filed, the case number and the name and address of Walker's chapter 7 trustee. Wilde called the Colorado bankruptcy court to verify this information, but was told to submit a written inquiry. Wilde did so on March 12, 1987, but did not receive a response from the court until May 21, 1987, well after the bankruptcy court's April 12, 1987, bar date for filing objections to the dischargeability of any of Walker's debts. Neither Wilde nor the Higleys appear to have taken any other action to protect the Higleys' rights in the bankruptcy court after they learned of Walker's bankruptcy. Walker ultimately was issued a chapter 7 discharge of his debts, including the Higleys' claim against him, on June 26, 1987.

After learning that Walker had declared bankruptcy, the Higleys petitioned the state district court for an order directing payment of their judgment out of Utah's Real Estate Recovery Fund (Fund), a monetary fund established by the State of Utah to satisfy judgments against real estate licensees in actions based on fraud, misrepresentation or deceit committed in real estate transactions. See Utah Code Ann. Secs. 61-2a-1 through -12. The state district court granted the Higleys' petition and on September 21, 1987, the State of Utah complied with the court's order by paying the Higleys $3950.00.

Two days later, on September 23, 1987, Walker filed a motion in Utah state court to vacate the judgment against him. ² In his motion, he alleged that the judgment was void because it was entered after he filed for bankruptcy and hence after the automatic stay imposed by 11 U.S.C. Sec. 362(a) had gone into effect. On November 16, 1987, Walker filed an adversary proceeding against the Higleys and attorney Wilde, similarly claiming violation of the Bankruptcy Code's automatic stay provisions and seeking damages under 11 U.S.C. Sec. 362(h).

The state district court denied Walker's motion to vacate the state court judgment on the ground that it was untimely. Walker appealed, and on March 3, 1988, the Utah Supreme Court reversed and ruled that the state court judgment was void because it was entered after Walker had filed his last bankruptcy petition. On May 23, 1988, the state district court entered an order vacating the judgment pursuant to the supreme court ruling. The Utah Attorney General then requested that the state court order the Higleys to repay the Fund the $3950.00 previously paid to them in satisfaction of the now-void judgment. The record on appeal does not reveal whether this motion was successful or whether the Higleys have otherwise been compelled to repay the Fund.

On July 15, 1988, the Higleys responded to the recovery efforts of the Utah Attorney General by filing various motions in the bankruptcy court ³ intended to confirm their right to the monies received from the Fund. These motions included requests for the bankruptcy court (1) to annul the automatic stay and retroactively validate the prior state court judgment; (2) to modify the permanent post-discharge injunction set forth in 11 U.S.C. Sec. 524(a)(2) to allow the Higleys to finalize and enforce their judgment against the Fund; (3) to determine that their claim against Walker was not dischargeable and hence was not included in Walker's June 1987 discharge and/or (4) to allow them an extension of time in which to challenge the dischargeability of this claim. The bankruptcy court denied each of these motions in a published memorandum opinion. Walker v. Wilde (In re Walker), 91 B.R. 968 (Bankr.D.Utah 1988).

The Higleys appealed the bankruptcy court's denial of their motions for relief from the post-discharge injunction or for an extension of time in which to determine the dischargeability of their claim against Walker. The district court affirmed, Walker v. Wilde (In re Walker), 103 B.R. 281 (D.Utah 1989), and this appeal timely followed.

I

In reviewing the bankruptcy court's decision, we will accept the court's findings of fact unless clearly erroneous, while considering its conclusions of law de novo. C.I.T., Fin. Servs., Inc. v. Posta (In re Posta), 866 F.2d 364, 366-67 (10th Cir.1989). Based on this review, we reverse the district court's decision on the injunction issue, but affirm its decision regarding the Higleys' untimely attempt to challenge the discharge of their claim.

Section 524(a)(2) of the Bankruptcy Code provides:

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

. . . . .

(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;

11 U.S.C. Sec. 524(a)(2). Thus, this section enjoins the Higleys from commencing or continuing any action or other process to hold Walker personally liable on their discharged claim against him. See Landsing Diversified Properties-II v. First Nat'l Bank & Trust Co. (In re Western Real Estate Fund, Inc.), 922 F.2d 592, 598 (10th Cir.1990); Owaski v. Jet Florida Sys., Inc. (In re Jet Florida Sys., Inc.), 883 F.2d 970 973 (11th Cir.1989). The intent of this post-discharge injunction is to protect debtors like Walker in their financial "fresh start" following discharge. In re Jet Florida Sys., 883 F.2d at 972; see Wimmer v. Mann (In re Mann), 58 B.R. 953, 958 (Bankr.W.D.Va.1986).

Section 524 further provides, however, that "discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt." 11 U.S.C. Sec. 524(e). It is well established that this provision permits a creditor to bring or continue an action directly against the debtor for the purpose of establishing the debtor's liability when, as here, establishment of that liability is a prerequisite to recovery from another entity. In re Western Real Estate Recovery Fund, 922 F.2d 592, 601 n. 7 ("the fact that the debtor may be involved in the ensuing litigation, even named as a defendant where necessary to enable recovery against a codefendant (such as a liability insurer), does not permit invocation of section 524(a) to preclude a creditor's post-bankruptcy pursuit of a discharged claim against a third party"); In re Jet Florida Sys., 883 F.2d at 976 (suit against debtor permitted to establish right to recover from debtor's insurer); Shade v. Fasse (In re Fasse), 40 B.R. 198, 200 (Bankr.D.Colo.1984) (suit against debtor permitted to establish right to recovery from Colorado Real Estate Recovery Fund); see generally 3 R. Babitt, A. Herzog, H. Novikoff & M. Sheinfeld, Collier on Bankruptcy p 524.01 at 524-16 (15th ed. 1990). Logically enough, this exception to section 524(a)'s post-discharge injunction hinges "upon the condition that the debtor not be personally liable in a way that would interfere with the debtor's fresh start in economic life." In re Jet Florida Sys., 883 F.2d at 975; see In re Mann, 58 B.R. at 958; In re McGraw, 18 B.R. 140, 143 (Bankr.W.D.Wis.1982) (suit against debtor may not result in collection efforts against debtor or his property).

In this case, the Higleys seek to continue their state court action against Walker for the sole purpose of...