In re: Gerald D. Toste and Robin D. Toste

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: August 12, 2014
• Docket: EC-13-1266-TaJuKu
• Status: Unpublished

Opinion

FILED AUG 12 2014 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 OF THE NINTH CIRCUIT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. EC-13-1266-TaJuKu ) 6 GERALD D. TOSTE and ROBIN D. ) Bk. No. 12-26789 TOSTE, ) 7 ) Adv. No. 12-02333 Debtors. ) 8 ______________________________) ) 9 GERALD D. TOSTE; ROBIN D. ) TOSTE, ) 10 ) Appellants, ) 11 ) v. ) MEMORANDUM* 12 ) KENNETH SMEDBERG; BONNIE ) 13 SMEDBERG;** DARIN SMEDBERG, ) ) 14 Appellees. ) ) 15 Submitted Without Oral Argument*** 16 on May 15, 2014 17 Filed – August 12, 2014 18 Appeal from the United States Bankruptcy Court for the Eastern District of California 19 Honorable David E. Russell, Bankruptcy Judge, Presiding 20 21 * 22 This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may 23 have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1. 24 ** Kenneth and Bonnie Smedberg are named both individually 25 and as trustees of the Kenneth P. Smedberg and Bonnie L. Smedberg 26 Revocable Living Trust, Dated September 23, 1993. *** 27 On April 28, 2014, this Panel entered an order determining that this appeal was suitable for submission without 28 oral argument.

1 1 Appearances: Charles G. Kinney, on brief, for appellants.**** 2 Before: TAYLOR, JURY, and KURTZ, Bankruptcy Judges. 3 INTRODUCTION 4 Chapter 13 debtors Gerald Toste and Robin Toste appeal from 5 the bankruptcy court’s judgment excepting a state court judgment 6 from discharge under § 523(a)(6).1 We conclude that, because the 7 § 523(a)(6) claim for relief was not ripe for adjudication, the 8 bankruptcy court lacked subject matter jurisdiction. Therefore, 9 we REVERSE. 10 FACTS2 11 This appeal arises from a protracted and contentious dispute 12 between neighbors involving an easement between adjoining real 13 property located in El Dorado County, California. 14 In 2006, Kenneth Smedberg, Bonnie Smedberg, Darin Smedberg 15 (collectively, the “Smedbergs”) and Teresa Rowan3 filed an action 16 against the Debtors in California state court relating to the 17 18 **** 19 The Smedbergs failed to timely file a brief and, thus, waived the right to file a brief or participate in this appeal. 20 1 Unless otherwise indicated, all chapter and section 21 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. 22 All “Rule” references are to the Federal Rules of Bankruptcy Procedure. 23 2 We exercised our discretion to take judicial notice of 24 documents electronically filed in the adversary proceeding and underlying bankruptcy case. See Atwood v. Chase Manhattan Mortg. 25 Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003). 26 3 Prior to filing the adversary complaint, Ms. Rowan 27 assigned her interest in the Judgment to the Smedbergs; she, thus, was not a party to the adversary proceeding, nor is she a 28 party to this appeal.

2 1 easement dispute. Among other things, they sought to quiet title 2 to the easement, to obtain declaratory and injunctive relief, and 3 to recover damages for nuisance. The complaint also alleged that 4 the Debtors verbally threatened the Smedbergs, Rowan, and those 5 working for them. In connection with their injunction claims, 6 they obtained a preliminary injunction that prohibited the 7 Debtors’ interference with the easement during the pendency of 8 the state court action. Gerald, however, violated the 9 preliminary injunction. As a result, the state court issued a 10 pre-trial contempt of court order and awarded monetary sanctions 11 against Gerald. 12 Following a jury trial, the state court entered a judgment 13 (“Judgment”) based, in part, on a special verdict after trial. 14 The jury found that Gerald, but not Robin, engaged in conduct 15 amounting to nuisance. The jury also found that Gerald, but 16 again not Robin, engaged in “malicious, oppressive, or 17 despicable” conduct. The state court, thus, awarded the 18 Smedbergs $65,000 in general damages and $40,000 in punitive 19 damages. Moreover, the Judgment permanently enjoined both Gerald 20 and Robin from “harassing, annoying, intimidating, interfering 21 with and obstructing the [plaintiffs] and the [plaintiffs’] 22 invitees in their improvement, maintenance and use of the 23 easement.” Adv. Dkt. No. 1 at 32. Finally, the Judgment 24 provided for the recovery of costs from both of the Debtors 25 pursuant to California Code of Civil Procedure § 1032. 26 The dispute moved to the bankruptcy court after the Debtors 27 filed a chapter 13 bankruptcy case. The Smedbergs filed a proof 28 of claim based on the Judgment in the amount of $154,767.12.

3 1 They also initiated an adversary proceeding against the Debtors 2 that sought to except the Judgment from discharge under 3 § 523(a)(6) and objected to the Debtors’ discharge under 4 § 727(a)(2), (a)(4), and (a)(7). The bankruptcy court held a 5 bifurcated one-day trial. After first trying the § 727 claims, 6 it overruled the Smedbergs’ objections to discharge. The 7 bankruptcy court then heard argument as to the § 523(a)(6) claim 8 for relief. Stating that it was bound by the Judgment and 9 relying solely on issue preclusion, it determined that “[t]he 10 conduct of the debtor was willful and malicious and caused 11 injury, and that [was] sufficient under [§] 523(a)(6) to [except] 12 that particular judgment from discharge . . . .” Trial Tr. 13 (May 6, 2013) at 105:12-14. 14 The Debtors appealed from the bankruptcy court’s § 523(a)(6) 15 determination. 16 JURISDICTION 17 As discussed below, the bankruptcy court lacked subject 18 matter jurisdiction over the § 523(a)(6) claim for relief.4 We, 19 however, have jurisdiction to hear the appeal under 28 U.S.C. 20 § 158. See United States v. Corrick, 298 U.S. 435, 440 (1936) 21 (where trial court lacks jurisdiction, appellate court has 22 “jurisdiction on appeal, not of the merits, but merely for the 23 purpose of correcting the error of the lower court in 24 entertaining the suit”). 25 26 4 27 The denial of the § 727(a) claims is not on appeal; thus, we do not consider the propriety of their consideration in a 28 chapter 13 case.

4 1 ISSUE 2 Did the bankruptcy court have jurisdiction to determine the 3 § 523(a)(6) claim for relief given the Debtors’ chapter 13 case? 4 DISCUSSION 5 A. The § 523(a)(6) claim for relief was not ripe for 6 adjudication. 7 The parties raised neither jurisdiction nor ripeness before 8 the bankruptcy court or on appeal. Even so, we have an 9 independent obligation to consider jurisdictional and 10 justiciability issues. See Ervine v. Desert View Reg’l Med. Ctr. 11 Holdings, LLC, 753 F.3d 862, 866 (9th Cir. 2014) (jurisdiction); 12 Am. Civil Liberties Union of Nev. v. Lomax, 471 F.3d 1010, 1015 13 (9th Cir. 2006) (justiciability). 14 Federal court jurisdiction is limited to actual cases and 15 controversies. U.S. Const. art. III § 2, cl. 1. Unless a claim 16 is ripe for adjudication, a court lacks subject matter 17 jurisdiction under the case or controversy clause of article III 18 of the federal Constitution. See St. Clair v. City of Chico, 19 880 F.2d 199, 201 (9th Cir. 1989); see also Oklevueha Native Am. 20 Church of Hawaii, Inc. v. Holder, 676 F.3d 829, 835 (9th Cir. 21 2012). The ripeness requirement prevents “the courts, through 22 avoidance of premature adjudication, from entangling themselves 23 in abstract disagreements.” Id. (quoting Abbott Laboratories v. 24 Gardner, 387 U.S. 136, 148 (1967)). 25 The ripeness issue here arises because it was and remains 26 unnecessary to adjudicate the Smedbergs’ § 523(a)(6) claim for 27 relief in Debtors’ chapter 13 case. As discussed below, unless 28 and until Debtors seek a hardship discharge under § 1328(b),

5 1 § 523(a)(6) is unavailable as a basis for nondischargeability. 2 See 11 U.S.C. §§ 1328(c)(2) and 523(a); Fed. R. Bankr. 3 P. 4007(d). Thus, consideration of this claim for relief was 4 premature at best. 5 In the usual situation, a chapter 13 debtor obtains a 6 § 1328(a) bankruptcy discharge after the completion of plan 7 payments. This discharge is broader than that available under 8 other sections of the bankruptcy code, and it discharges some 9 claims that § 523(a) makes nondischargeable in other contexts. 10 Section 523(a)’s lead-in text makes no reference to § 1328(a). 11 Instead, § 1328(a) incorporates specific sub-parts of § 523(a); 12 as relevant here, it does not incorporate § 523(a)(6) willful and 13 malicious injury claims. Instead, § 1328(a)(4) makes only the 14 sub-group of civil awards based on willful or malicious personal 15 injury or wrongful death claims nondischargeable in a chapter 13 16 case. Section 1328(a)(4), thus, makes some, but not all 17 § 523(a)(6) type claims for relief nondischargeable in the 18 typical chapter 13 case. See Waag v. Permann (In re Waag), 19 418 B.R. 373, 377 (9th Cir. BAP 2009) (the two statutory sections 20 differ in significant ways and are not interchangeable). 21 In unusual cases, a § 1328(b) hardship discharge issues 22 despite a debtor’s failure to complete chapter 13 plan payments. 23 This discharge is narrower than the § 1328(a) discharge; the 24 nondischargeability provisions of § 523(a) all apply. Thus, any 25 claim that is nondischargeable under § 523(a)(6) may survive the 26 hardship discharge. A debtor who requests a § 1328(b) hardship 27 discharge must meet specific criteria and may bring the motion at 28 “any time after the confirmation of the plan and after notice and

6 1 a hearing.” 11 U.S.C. § 1328(b) (emphasis added). Rule 4007(d), 2 in turn, protects a creditor holding a § 523(a)(6) claim for 3 relief. It provides that when a debtor seeks a hardship 4 discharge, the court must establish a deadline for filing a 5 § 523(a)(6) nondischargeability complaint and provide no less 6 than 30 days’ notice. Fed. R. Bankr. P. 4007(d). 7 Here, the Debtors had not confirmed their chapter 13 plan 8 prior to the bankruptcy court trial.5 As a result, a § 1328(b) 9 discharge was neither available nor requested at the time of 10 trial. The Smedbergs’ § 523(a)(6) claim for relief, thus, was 11 not ripe for adjudication, and, as a result, the bankruptcy court 12 lacked jurisdiction to adjudicate the claim. See Krasnoff v. 13 Marshack (In re General Carriers Corp.), 258 B.R. 181, 190-91 14 (9th Cir. BAP 2001). 15 B. The record does not establish that § 1328(a)(4) supplies an 16 alternative basis for jurisdiction. 17 We may affirm on any basis supported by the record. Caviata 18 Attached Homes, LLC v. U.S. Bank, N.A. (In re Caviata Attached 19 Homes, LLC), 481 B.R. 34, 44 (9th Cir. BAP 2012). Thus, if this 20 case involved a judgment based on personal injury or wrongful 21 death claims, we could consider whether § 1328(a)(4) provided an 22 alternative basis for jurisdiction. 23 There is little case law construing § 1328(a)(4). It is 24 unclear, for example, whether “personal injury” for § 1328(a)(4) 25 purposes: (1) refers solely to personal bodily injury; 26 27 5 While this appeal was pending, an order confirming the 28 Debtors’ chapter 13 plan was entered on January 14, 2014.

7 1 (2) includes nonphysical injury but not business or financial 2 injuries; or (3) includes all injuries insofar as the injury is 3 treated as a personal injury under non-bankruptcy law. In the 4 context of 28 U.S.C. § 157(b)(5), the courts have disagreed as to 5 the scope of “personal injury.” See Adelson v. Smith 6 (In re Smith), 389 B.R. 902, 908 (Bankr. D. Nev. 2008) (observing 7 the three approaches taken by courts in determining personal 8 injury); see also Adams v. Adams (In re Adams), 478 B.R. 476, 486 9 (Bankr. N.D. Ga. 2012) (same). 10 Notwithstanding this dissonance, given that here the damages 11 awarded in the Judgment were based on a state law tort of 12 nuisance, we initially look to California law to determine 13 whether a private nuisance cause of action involves personal 14 injury. See id. at 487. The answer under California law 15 generally is not promising for the Smedbergs. See Institoris v. 16 City of Los Angeles, 210 Cal. App. 3d 10, 20 (1989) (“[A] private 17 nuisance can support recovery only for harm to a property 18 interest, not for personal injury”). 19 More importantly, however, on this record there is 20 insufficient evidence for us to determine that the Smedbergs 21 recovered any amount for emotional distress or anything else that 22 even remotely resembles personal injury, as opposed to 23 interference with their property interests. Neither the state 24 court complaint nor the Judgment plainly reflects that the 25 Smedbergs sought or obtained damages for emotional distress, 26 mental anguish, or physical harm. And, in contrast, it is clear 27 that they asserted causes of action based on interference with 28 property rights. We cannot base jurisdiction on such a

8 1 speculative basis.6 2 C. The bankruptcy court did not determine that the damages 3 award was nondischargeable as to Robin. 4 Finally, the Panel acknowledges the limitations of the 5 bankruptcy court’s determinations as to Robin. Based on our 6 review of the record, we conclude that the Smedbergs never 7 requested denial of Robin’s discharge in relation to the award of 8 damages and that the bankruptcy court correctly understood that 9 the damages award was not at issue as to Robin. Instead, as to 10 Robin, the Smedbergs sought to except from discharge only the 11 injunction. The bankruptcy court’s ruling as to the damages 12 award is consistent with their request.7 13 6 We note, however, that to the extent that any portion of 14 the Judgment encompassed a personal injury recovery, we question 15 the bankruptcy court’s reliance on issue preclusion. We assume that Congress intended to give § 1328(a)(4) willful or malicious 16 injury the same meaning as used in § 523(a)(6). See Patterson v. Shumate, 504 U.S. 753, 758 & n.2 (1992). Here, the jury granted 17 the Judgment based on nuisance. This finding did not require a determination of a state of mind that equates to willfulness or 18 malice. The jury also awarded punitive damages against Gerald. 19 In doing so, the jury found, in the disjunctive, that Gerald “engaged in conduct that was malicious, oppressive, or 20 despicable.” This finding is also insufficient as not all of the possible bases for the award require a determination of 21 willfulness or maliciousness within the meaning of § 1328(a)(4). 22 7 We also question whether the permanent injunction portion 23 of the Judgment can ever be nondischargeable. Both §§ 523 and 1328(a)(4) except only debts from discharge. The Code defines 24 “debt” as a “liability on a claim.” 11 U.S.C. § 101(12). A “claim,” in turn, refers either to a payment or to certain 25 equitable remedies. 11 U.S.C. § 101(5)(A)-(B). 26 Here, the permanent injunction enjoined the Debtors from interfering with the easement in the future and does not facially 27 provide a right to payment. Determining whether the injunction is a claim pursuant to § 101(5)(B) turns on whether it gives rise 28 continue...

9 1 CONCLUSION 2 Based on the foregoing, we REVERSE. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 7 24 ...continue to an alternative or corollary right to payment. See Matter of 25 Udell, 18 F.3d 403, 407 (7th Cir. 1994); United States v. The LTV 26 Corp. (In re Chateaugay Corp.), 944 F.2d 997, 1008 (2d Cir. 1991). Nothing in the current record establishes that the 27 Debtors have the option to pay the Smedbergs so as to continue interfering with the easement. See In re Chateaugay Corp., 28 944 F.2d at 1008.