Opinion
Case No. 00-20504.
April 10, 2003
MEMORANDUM OF DECISION
INTRODUCTION
On March 4, 2003 a hearing was held on an Order to Show Cause issued at the request of chapter 7 Debtor John Allen Hawley ("Debtor"). The Order was directed to Amberlyn Reeves ("Reeves"), and it contended that she had violated § 524's discharge injunction. The matter was taken under advisement on March 20 following post-hearing submissions. This Decision constitutes the Court's findings of fact and conclusions of law. F.R.Bankr.P. 9014, 7052.
BACKGROUND AND FACTS
The following is established by evidence presented at hearing, including certified copies of applicable state court pleadings, and this Court's own record considered under Fed.R.Evid. 201.
Reeves and Debtor lived together starting in 1994 or 1995, but they never married. Due to Debtor's poor credit and his inability to obtain his own credit cards, Reeves added Debtor to certain credit card accounts as a person entitled to use the account. Reeves also became a co-obligor to creditor Ford Motor Credit ("Ford") regarding Debtor's 1997 Ford F-250 pickup truck because Debtor had negative equity in his trade-in and otherwise insufficient credit worthiness to obtain the vehicle without a co-obligor.
Debtor filed a voluntary petition commencing the instant case on April 28, 2000. Doc. No. 1. Reeves was aware of Debtor's bankruptcy filing and in fact accompanied him to his counsel's office when the case was prepared. At the time of filing and thereafter, Reeves and Debtor lived together and jointly addressed their ongoing financial obligations as would be expected in such a relationship. Reeves was listed on schedule H as a co-debtor on the claim owed Ford. Doc. No. 4, at schedule H. Reeves was also listed on Debtor's mailing matrix, but she was not listed on any of the creditor schedules (schedules D, E, or F).
As indicated in the schedules, Ford held a purchase money security interest in Debtor's truck. Doc. No. 1 at schedule D. Ford's claim was for $22,600.00, of which $20,225.00 was secured. Reeves and Debtor talked about his reaffirmation of the Ford debt with Debtor's counsel, and Debtor's § 521 statement of intention contemplated reaffirming the Ford debt. However, no reaffirmation agreement on the pickup truck was ever reached or submitted for Court approval. Instead, Debtor kept possession of the vehicle after filing the petition, and he made post-bankruptcy payments for a period of time. Debtor essentially utilized the right to continue making payments on the secured portion of the obligation without reaffirming the debt. See In re Parker, 139 F.3d 668, 672-73 (9th Cir. 1998).
Debtor's discharge was entered on August 23, 2000, and the case was closed as a no-asset chapter 7 case.
Debtor and Reeves had a child on January 9, 2001. In March of that year, they ceased living together and `separated.' On August 9, 2001 Debtor and Reeves entered into a "Memorandum Agreement." See Exhibit 1. This Agreement recites that they lived together for approximately six years and had a child born as a result of their relationship; that the State of Idaho had instituted a paternity action and an order had been entered therein giving Reeves custody of the child and ordering Debtor to pay child support; and that the parties had separated and "in order to resolve property division and debt issues, ha[d] entered into this Agreement."
The Agreement specifically provided that "[Debtor] will pay directly to, or reimburse Reeves, amounts due to the following creditors, together with interest as charged by those creditors:
Ford Motor Credit $20,362.36 Balance owed after sold
Mastercard $ 7,500.00
Amberlyn Reeves $ 1,230.00
Id. at 1. Reeves was to pay debts to Visa, two miscellaneous credit cards, and Potlatch Federal Credit Union on a vehicle for which Reeves was the sole obligor. Id. 2.
The underlined portions were handwritten insertions; Amberlyn was inserted in the place of "Debra."
After the separation, Reeves had found it difficult to insure Debtor made payments on the Ford. As reflected in the Agreement, the parties agreed the truck would be surrendered to Ford and sold. Reeves surrendered the vehicle to Ford, and the net balance due after a September 2001 liquidation was $10,013.92. Ford looked to Reeves, as a co-obligor, for the deficiency.
The Mastercard obligation that Debtor assumed in the Agreement was not listed in his bankruptcy. The evidence establishes that the Mastercard was Reeves', not Debtor's, obligation but that Debtor was allowed to use the account. Additionally, the evidence indicates that the Mastercard debt described in the Agreement reflected post-bankruptcy expenditures for joint living and related expenses. Debtor's agreement to pay Mastercard, or Reeves in relation to the Mastercard account, arose when the Agreement was signed a year after discharge.
The $1,230 obligation to Reeves listed in the Agreement arose from funds advanced to Debtor and to Reeves by Reeves' mother, Debra. As such, Debra may have had a claim against Debtor, but it was not established that Amberlyn had a pre-bankruptcy claim against him for this amount. The typed Agreement initially indicated that Debtor would pay this amount to Debra Reeves; it was changed by the parties to make the obligation payable to Amberlyn Reeves, thus giving rise to an obligation to her at that time.
Reeves filed a complaint in state court against Debtor in November 2001 alleging that he had failed to pay the debts specified in the Agreement. Debtor appeared and answered the complaint raising several defenses, specifically including the defense of bankruptcy discharge.
Reeves' action ultimately came on for trial before the District Court of the Second Judicial District in Nez Perce County in June 2002. On August 26, 2002, District Judge Kerrick issued his Findings of Fact, Conclusions of Law and Order. Exhibit 3. In the same, the court rejected Debtor's defenses and concluded that Debtor was in breach of the Agreement. The court ordered Debtor to pay Reeves $10,013.92 on the Ford debt, $7,500.00 on the Mastercard debt, and $1,230.00 as set forth in the Agreement. On September 23, 2002 a Judgment was entered in the amount of $23,224.49. Exhibit 2. This included $227.82 in costs and $4,252.75 in attorneys fees.
Debtor never appealed the Judgment. When the $23,224.49 remained unpaid, Reeves obtained a writ of garnishment. The writ prompted Debtor to reopen the bankruptcy case and request the Order to Show Cause.
DISCUSSION AND DISPOSITION
Debtor seeks an order from this Court establishing that the state court Judgment is void and that Reeves' conduct in obtaining and executing on the Judgment violated the discharge injunction of § 524(a)(2). He seeks fees and costs on a theory of contempt. See Renwick v. Bennett (In re Bennett), 298 F.3d 1059, 1069 (9th Cir. 2002) (noting that § 524 may be enforced by a bankruptcy court's contempt power under § 105(a)).
Debtor's contention that his three obligations to Reeves under the Agreement were somehow subject to his bankruptcy discharge was expressly presented to and resolved by the state court. In the Findings of Fact, Conclusions of Law and Order, Exhibit 3, the court addressed in detail each of the three debts, in a manner fully consistent with the evidence presented to this Court as outlined above. Id. at 3-4. The court rejected Debtor's contentions, and concluded that Debtor's obligations to Reeves, arising under the Agreement entered into a year subsequent to discharge, were not barred. Id. at 4-9. These conclusions followed a trial before the state court in which Debtor's bankruptcy discharge defense was clearly presented. Debtor even identified his bankruptcy lawyer as a potential witness. As noted earlier, Debtor never appealed the state court's adverse ruling.
Predictably, Reeves argues Debtor's current litigation is barred by principles of res judicata and collateral estoppel, and is thus an impermissible collateral attack on the state court Judgment. There is little doubt that if Debtor attempted to relitigate these issues in state court he would be summarily barred by principles of res judicata given Judge Kerrick's earlier decision. Since this Court is obligated to give the same preclusive effect as would state courts, the same result should hold.
Res judicata protects litigants from the burden of litigating the same cause of action with the same party. Hindmarsh v. Mock, 57 P.3d 803, 805 (Idaho 2002). For res judicata to apply as a bar to litigation: (1) the same claim or cause of action arising out of the same facts must be involved in both suits; (2) there must be a final judgment on the merits in the prior action; and (3) the parties in the instant action must be the same as or in privity with the parties in the prior action. Id.
While federal law on res judicata is consistent with Idaho's approach, see Elsaesser v. Hemme (In re Shewey), 03.1 I.B.C.R. 68, 69 (Bankr. D. Idaho 2003) (discussing The Alary Corp. v. Sims (Associated Vintage Group, Inc.), 283 B.R. 549 (9th Cir. BAP 2002)), Idaho rules would apply here. See Hemme, 03.1 I.B.C.R. at 69 n. 3 (noting that federal courts give valid and final judgments the same preclusive effect as they would receive from the court that rendered the original judgment).
Debtor argues that because the Bankruptcy Court's discharge order is implicated, this Court should entertain this matter and decide (again) if Reeves violated § 524 in obtaining and seeking to enforce the Judgment.
Similar issues were before the Ninth Circuit in McGhan v. Rutz (In re McGhan), 288 F.3d 1172 (9th Cir. 2002). The Court there held that "a state court . . . lacks authority to modify or dissolve a discharge order or the § 524 discharge injunction." Id. at 1180 (relying on Gruntz v. County of Los Angeles (In re Gruntz), 202 F.3d 1074 (9th Cir. 2000) (en banc); and citing Lenke v. Tischler (In re Lenke), 249 B.R. 1, 10 (Bankr. D. Ariz. 2000), and Pavelich v. McCormick, Barstow, Sheppard, Wayte Carruth LLP (In re Pavelich), 229 B.R. 777, 782 (9th Cir. BAP 1999)). In McGhan, the court determined that the state court process and judgment at issue was in excess of the state court's authority because it impermissibly modified the bankruptcy court's discharge order. Id. at 1180-81. The Court stated:
The facts in McGhan were compelling. The Debtor had been charged with multiple counts of sexual molestation of his stepson, Rutz. Rutz was 12 years old at the time the charges were filed. The Debtor pleaded guilty to a felony charge of lewd and lascivious conduct on a minor and shortly after his conviction filed a chapter 7 petition. Debtor listed Rutz as a creditor holding an unsecured claim but notice was provided only to Rutz's mother as his guardian. No dischargeability action was ever brought and a discharge was entered. Upon reaching adulthood Rutz sought damages arising out of the sexual molestation. The state court determined that the notice to Rutz's mother was inadequate and held that Rutz was not bound by the bankruptcy discharge.
Accordingly, we conclude that the state court lacked authority to adjudicate the adequacy of the notice received by Rutz. By reaching that issue, the state court held that Rutz was bound by neither the discharge order nor the discharge injunction, documents that on their face plainly barred Rutz's action. The state court effectively modified both orders, and in so doing impermissibly infringed upon the bankruptcy court's jurisdiction to enforce its orders. See Gruntz, 202 F.3d at 1082.
In so deciding, we do not hold that a state court is divested of all jurisdiction to construe or determine the applicability of a discharge order when discharge in bankruptcy is raised as a defense to a state cause of action filed in state court by a listed creditor. See Pavelich, 229 B.R. at 783 (holding that "state courts have the power to construe the discharge and determine whether a particular debt is or is not within the discharge" because "discharge in bankruptcy is a recognized defense under state law").
288 F.3d at 1180. Therefore, a state court can determine the applicability of a discharge order when faced with bankruptcy discharge as a defense, but if the state court proceeds and in error modifies the discharge injunction, it "risks having its final judgment declared void." Gruntz, 202 F.3d at 1087 (dealing with a state court's interpretation of the applicability of the automatic stay).
Here, the state court concluded that Debtor's abortive reaffirmation of the debt with Ford was not material and that Reeves "was not the creditor to whom this debt was owed at the time of Mr. Hawley's bankruptcy." Exhibit 3, at 6. It further concluded that the Agreement created a later obligation to Reeves "entirely separate and apart from any pre-bankruptcy debt owed to Ford Motor Credit[:]"
Whether or not Mr. Hawley's obligation to Ford Motor Credit was discharged, the fact remains he entered into a new obligation nearly a year after his bankruptcy, in which he agreed to pay Ms. Reeves the money that she was now obligated to pay to Ford."
Id. Thus, the state court decided that the Agreement entered into post-bankruptcy was "a simple contract [that should] be considered apart from the bankruptcy." Id.
McGhan compels this Court to review the state court's holding. Upon such a review, this Court finds that the state court's decision relating to the Ford debt triggers McGhan's jurisdictional bar because that ruling impermissibly modifies the discharge injunction.
Whether or not Debtor reaffirmed the Ford debt, Reeves as a co-obligor was exposed at the time of Debtor's petition to the possibility that she would be called upon to answer to Ford. Thus, she had a pre-bankruptcy claim against Debtor, even though it was unliquidated at the time Debtor filed for bankruptcy relief. See § 101(5) (broadly defining "claim"). Creditors who are aware of a bankruptcy are subject to the discharge of their pre-bankruptcy claims against a debtor, regardless of the manner in which the debtor listed or scheduled them.
Although Reeves was not listed "as a creditor" on schedules D through F, the record shows that Reeves had actual notice of the bankruptcy. She participated in the preparation and filing of Debtor's chapter 7 case, was listed on the mailing matrix, and was provided with the Court's notices issued in the case. In addition, she was aware that she was a co-obligor on the Ford obligation and knew that obligation was being addressed in Debtor's bankruptcy. As stated in McGhan:
In this case, those [bankruptcy] documents showed that Rutz was a listed creditor, that Rutz's claim was discharged and that Rutz was enjoined from taking any action to collect on the debt. The state court should have given effect to the bankruptcy court's orders. By going further, the state court exceeded its jurisdiction, even if the state court believed that Rutz had valid grounds to object to the orders.
288 F.3d at 1180. McGhan is binding on this Court, and Reeves' claim against Debtor in regard to Ford, while only memorialized in the Agreement after Debtor's discharge, was in fact a pre-bankruptcy claim that was discharged in Debtor's chapter 7 case. The Court thus must conclude that the portion of the underlying Judgment related to the Ford debt of $10,013.92 is void, see § 524(a)(1), and cannot be enforced, see § 524(a)(2).
For several reasons, this conclusion is reluctantly reached. First, certain portions of McGhan's analysis can be fairly debated. Four bankruptcy judges (the trial court and the members of the Bankruptcy Appellate Panel) clearly did not analyze the issues in the same manner as did the Circuit in reversing. Gruntz, on which McGhan relied, has also generated discussion. See e.g In re Lenke, 249 B.R. 1, 5 (Bankr. D. Ariz. 2000) (" Gruntz is a troubled and troubling case.")
Additionally and to this Court more importantly, Debtor very obviously seeks a second bite of the litigation apple after failing to persuade the state court of precisely the same issues it now urges here. This is offensive to principles of res judicata and collateral estoppel, as above indicated, and certainly raises questions as to Debtor's "clean hands." Bankruptcy courts are, as is often noted, "courts of equity." See, e.g, Beaty v. Selinger (In re Beaty), 306 F.3d 914, 922 (9th Cir. 2002) ("bankruptcy court is a court of equity and should invoke equitable principles and doctrines, refusing to do so only where their application would be `inconsistent' with the Bankruptcy Code.") There is manifest inequity in Debtor's approach. However, McGhan speaks to the issue of whether the state court's ruling (even with the apparent consent of the debtor) exceeded its jurisdiction. McGhan must be followed by this Court.
This ruling is compelled by the fact that Reeves had actual notice of the bankruptcy and that her claim against Debtor, in relation to Ford, existed at the time of the bankruptcy. However, the Court concludes that the other debts addressed in the Agreement of August, 2001 and in the state court's Judgment are different. The preponderance of the evidence before the Court persuades it that both the Mastercard obligation of $7,500.00 and Debtor's Agreement to pay Reeves (rather than Reeves' mother) the amount of $1,230.00 are post-petition in nature.
As McGhan noted, the state court is not divested of all jurisdiction to construe or determine the applicability of the bankruptcy discharge when discharge is raised as a defense or to determine whether a particular debt is within that discharge. That a debt arises subsequent to the filing of the petition is a valid basis to determine that it is not within the scope of the discharge. This Court finds no support for Debtor's collateral attack on those state court rulings since, as noted, the evidence supports a finding that Debtor only became obligated to Reeves on these debts after the commencement of his bankruptcy case. Similarly, the state court's award of costs and attorneys' fees in the litigation is fully within its ability, and that ruling will not be disturbed.
Therefore, Debtor's assertions of discharge violations are not well taken as to all aspects of the state court Judgment except the $10,013.92 Ford-related obligation. Debtor meets his burden on the Ford-related debt by showing that Reeves knew of the bankruptcy and the discharge injunction and intended the act which violated that injunction. Bennett, 298 F.3d at 1069 (citing Hardy v. United States (In re Hardy), 97 F.3d 1384, 1390 (11th Cir. 1996)). Whether Reeves intended to violate the discharge injunction is not material. Id. The question now turns to the consequences, if any, for Reeves conduct.
Section 524 is enforced through the Court's contempt powers. Bennett, 298 F.3d at 1069. The decision to impose civil contempt sanctions rests in the sound discretion of this Court. See Knupfer v. Lindblade (In re Dyer), No. 01-56319, 2003 W.L. 10901 76, at *8-9 (9th Cir. Mar. 13, 2003) (commenting on the "permissive nature of the contempt authority" and reviewing a bankruptcy court's decision to impose contempt sanctions for an abuse of discretion); see also Bassett v. Am. Gen. Fin. Co. (In re Bassett), 255 B.R. 747, 757-58 (9th Cir. BAP 2000) (noting that bankruptcy courts have broad discretion in determining whether to issue orders to show cause regarding contempt and, thereafter, in fashioning a remedy for proven violations of the discharge injunction), aff'd in part, rev'd in part on other grounds, 285 F.3d 882 (9th Cir. 2002).
Here, the Court concludes that Debtor's request for contempt sanctions should be denied.
Civil contempt penalties must be either compensatory or designed to coerce compliance. Dyer 2003 WL 1090176, at *11. The Court finds that no sanctions are necessary to coerce compliance in this case. Reeves, while aware of Debtor's discharge and intentionally acting to collect the Ford-related debt, has not shown a cavalier attitude toward the discharge injunction or a propensity to violate it. The state court's decision, which rejected Debtor's discharge-related defenses, gave Reeves a plausible and good faith basis to pursue the claim. The Court has no reason to believe that Reeves will not comply with the discharge injunction as to the Ford debt from this point on. Therefore, the Court finds coercive sanctions unnecessary.
The Court finds compensatory sanctions equally unnecessary. A significant portion of the state court Judgment (some $13,210.57 before consideration of post-judgment interest) is fully proper and enforceable against Debtor without implicating or violating the discharge. The amounts garnished to date by Reeves may be retained as applicable and attributable to the valid portion of the Judgment. Therefore, Debtor was not injured by the garnishment proceedings.
Moreover, any theoretically compensable injuries stemming from this action could have been entirely avoided by Debtor. Debtor did not seek to avail himself of bankruptcy court enforcement of the discharge until well after the state court had ruled adversely to him. Debtor could have removed the state court action at the time it was filed and raised discharge injunction issues directly in the bankruptcy court in the first instance. Reeves' actions taken in reliance on these facts and circumstances do not warrant contempt sanctions to compensate Debtor for the present litigation. Accord, Maroney v. Bowman (In re Maroney), 195 B.R. 452, 455 (Bankr. D. Ariz. 1996) (refusing to award sanctions, despite finding a creditor's state court process to have violated § 524, where debtor allowed the matter to be tried in the state court, to a final and unappealed decision in favor of creditor, and creditor proceeded in reliance and in good faith throughout).
Thus, the Court in the exercise of its discretion, declines to impose any sanctions against Reeves.
The Court has concluded that $10,013.92 of the Judgment is subject to the discharge, and any future efforts to collect that amount would expose Reeves to an action for contempt sanctions for violation of § 524(a)(2). However, enforcement and collection of the balance of the Judgment is proper and appropriate, and would not violate the discharge injunction. Additionally, it would appear that matters related to paternity, custody, and support are likewise outside the compass of the bankruptcy discharge. If Reeves' collection activities adhere to the foregoing, there will be no further reason for this Court's involvement with the matter.
The Court concludes that, even though § 524(a)(1) makes the Judgment partially "void," it would be improper for this Court to attempt to somehow revise or restate the amount of the state court's Judgment. The determination of voidness simply means that the described portion of the Judgment may not be collected. If Reeves were to attempt to collect that portion of the Judgment, she would expose herself to the possibility of further litigation on the question of contempt. That prospect can be eliminated through conscientious accounting of amounts received, application of those amounts toward the remaining portions of the Judgment and interest accruing thereon, and by filing a satisfaction of Judgment when all amounts, save and except the $10,013.92, have been recovered.
CONCLUSION
Upon the foregoing, the Order to Show Cause will be deemed satisfied and Debtor's request for sanctions, in the nature of contempt or otherwise, shall be denied. Counsel for Reeves may prepare an appropriate form of order.