FILED JUN 2 2023 ORDERED PUBLISHED SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
OF THE NINTH CIRCUIT
In re: BAP No. NC-23-1008-FSG RS AIR, LLC, Debtor. Bk. No. 20-51604
RS AIR, LLC; REARDEN LLC; STEPHEN G. PERLMAN, individually and as trustee of the First Amendment and Complete Restatement of the Stephen G. Perlman Revocable Trust by Declaration of Trust dated February 12, 2004, Appellants, v. OPINION NETJETS AVIATION, INC.; NETJETS SALES, INC.; NETJETS SERVICES, INC., Appellees.
Appeal from the United States Bankruptcy Court for the Northern District of California M. Elaine Hammond, Bankruptcy Judge, Presiding
APPEARANCES: Jennifer C. Hayes of Finestone Hayes LLP argued for appellant RS Air, LLC; Jeffrey L. Fillerup of Rincon Law, LLP argued for appellant Stephen G. Perlman; Kelly Singer of Squire Patton Boggs (US) LLP argued for appellees.
Before: FARIS, SPRAKER, and GAN, Bankruptcy Judges.
FARIS, Bankruptcy Judge: INTRODUCTION
Once a debtor receives a bankruptcy discharge, § 524(a) 1 precludes a
creditor from enforcing a prepetition debt as a personal liability of the
discharged debtor. The discharge injunction does not, however, extinguish
the debt or protect any other entity from its liability on that debt. After
chapter 11 debtor RS Air, LLC received its discharge, creditors sued to
collect a discharged debt from RS Air’s alleged alter egos. RS Air claims
that this was a violation of the discharge injunction. We agree with the
bankruptcy court that the creditors did not violate the discharge injunction.
We therefore AFFIRM.
We publish to confirm that the discharge injunction does not protect
a debtor’s alter egos.
FACTS
A. Prepetition events
RS Air is a Delaware limited liability company. Appellant Stephen G.
Perlman is its founder and sole managing member. Its stated purpose was
to provide aircraft transportation services to Mr. Perlman.
Mr. Perlman is trustee of the First Amendment and Complete
Restatement of the Stephen G. Perlman Trust by Declaration of Trust dated
1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, all “Rule” references are to the Federal Rules of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of Civil Procedure.
2 February 12, 2004 (the “Perlman Trust”). He also allegedly owns and
controls appellant Rearden LLC.
Appellees NetJets Aviation, Inc., NetJets Sales, Inc., and NetJets
Services, Inc. (collectively, “NetJets”) are in the business of selling and
leasing fractional interests in private jets. RS Air purchased a 6.25% interest
in two aircraft from NetJets and entered into multiple management
agreements with NetJets regarding the aircraft.
NetJets filed a complaint in Ohio against RS Air for breach of certain
agreements and refusal to pay certain fees and return title to the aircraft to
NetJets. RS Air counterclaimed for breach of contract and fraud.
B. The chapter 11 case
In November 2020, just before trial in Ohio was set to commence, RS
Air filed a bankruptcy petition under subchapter V of chapter 11.
NetJets filed a proof of claim for approximately $2.133 million. It also
filed a motion to dismiss the chapter 11 case, as well as an objection to RS
Air’s designation as a subchapter V small business debtor. These efforts
were unsuccessful.2
NetJets filed a motion requesting standing to pursue claims against
Mr. Perlman, the Perlman Trust, and Rearden (collectively, the “Perlman
2 NetJets also filed a motion for relief from the automatic stay to pursue the Ohio litigation and to apply setoff. The bankruptcy court did not grant stay relief as to the Ohio litigation but granted stay relief to allow NetJets to setoff monies owed to RS Air against its claim. We affirmed. RS Air, LLC v. NetJets Sales, Inc. (In re RS Air, LLC), BAP No. NC-21-1080-TBG, 2022 WL 1288463 (9th Cir. BAP Apr. 26, 2022). 3 Parties”) as alter egos of RS Air, or, alternatively, to dismiss the bankruptcy
case. It argued that RS Air and the Perlman Parties “operated as [a] single
economic unit to the detriment of creditors” such that the court should
pierce the corporate veil.
The bankruptcy court denied NetJets’ motion for standing. It
examined both Delaware and Ninth Circuit law and concluded that NetJets
failed to allege facts in the proposed complaint that would allow NetJets to
pierce the corporate veil. NetJets appealed to the BAP.
In the meantime, the bankruptcy court confirmed RS Air’s third
amended plan. The plan entitled NetJets to receive, at minimum, a pro-rata
distribution from a $100,000 contribution by Mr. Perlman. NetJets appealed
the confirmation order to the BAP. We affirmed the bankruptcy court’s
confirmation order and its order denying NetJets’ objection to RS Air’s
subchapter V election. NetJets Aviation, Inc. v. RS Air, LLC (In re RS Air,
LLC), 638 B.R. 403 (9th Cir. BAP 2022).
In a separate decision, we vacated the bankruptcy court’s order
denying NetJets’ motion for standing to pursue alter ego claims. NetJets
Sales, Inc. v. RS Air, LLC (In re RS Air, LLC), BAP No. NC-21-1102-GTB, 2022
WL 1284012 (9th Cir. BAP Apr. 26, 2022). We held that the bankruptcy
court erred in its application of the colorability standard when deciding
whether NetJets could assert a veil-piercing claim under Delaware law.3
3 We stated, however, that, “even if the estate has exclusive standing to pierce its corporate veil [during the bankruptcy],” that exclusivity “will terminate upon the 4 We remanded the matter to the bankruptcy court.
C. The alter ego Ohio litigation
Prior to the bankruptcy court entering RS Air’s discharge, NetJets
filed a new complaint (the “Ohio Complaint”) against Mr. Perlman
(individually and as trustee of the Perlman Trust) and Rearden in the
United States District Court for the Southern District of Ohio. The Ohio
Complaint did not name RS Air as a defendant but included allegations
that RS Air was “conclusively liable” to NetJets on the underlying debt. It
contained a single cause of action for a judgment declaring that the
Perlman Parties are alter egos of RS Air and are liable to NetJets for
$1,767,571.15.
RS Air received its discharge shortly thereafter. Although the
standard discharge order does not identify the creditors whose claims are
discharged, RS Air’s discharge order provided for a discharge of all debts
“including, but not limited to, the debt evidenced by the proof of claim
filed by NetJets Aviation, Inc., NetJets Sales, Inc., and NetJets Services, Inc.
as Claim No. 1 . . . .”
The Perlman Parties filed motions to dismiss the Ohio Complaint.
The Ohio district court found that there was no alter ego liability as to
Reardon but denied the motion as to Mr. Perlman and the Perlman Trust.
confirmation order becoming effective.” 2022 WL 1284012 at *1 n.2. We further stated that, “[u]pon the confirmation order becoming effective, any right of the estate to assert a veil-piercing action will terminate.” Id. at *1 n.3.
5 D. The motion for contempt
Meanwhile, RS Air and the Perlman Parties (collectively, the “RS Air
Parties”) filed a motion for contempt (“Contempt Motion”) against NetJets
for violation of the discharge injunction under § 524(a)(2).
They argued that the Ohio Complaint’s alter ego claim impermissibly
sought to recover a discharged debt because the alter ego allegation meant
that “the Defendants are all one and the same.”
NetJets opposed the Contempt Motion. It argued that the BAP had
stated that the discharge injunction did not preclude the Ohio Complaint. It
also contended that the discharge injunction does not apply to non-debtors
and that RS Air’s discharge could not discharge the alter ego claims against
the Perlman Parties in the Ohio Complaint.
After a hearing, the bankruptcy court issued its order denying the
Contempt Motion. It analyzed whether “(1) NetJets knew RS Air’s
Discharge injunction applied, and (2) NetJets intended the actions that
violated the Discharge.”
The bankruptcy court quickly disposed of the second question,
holding that NetJets intended its actions because the filing of the Ohio
Complaint seeking recovery on its claim was an intentional act.
As to the first question, the bankruptcy court concluded that there
was a “fair ground of doubt” whether the discharge injunction applied to
the Ohio Complaint. The bankruptcy court favored NetJets’ argument that
§ 524(e) expressly provides that the discharge injunction does not apply to
6 the liabilities of “any other entity,” including the Perlman Parties. It held
that, because the Ohio Complaint did not name RS Air as a defendant,
NetJets had an objectively reasonable basis to determine that the discharge
applied only to RS Air and that it did not violate the discharge injunction
as to the Perlman Parties.
E. The motion for clarification
The RS Air Parties filed a motion for clarification and reconsideration
of the contempt order (“Clarification Motion”). They said that, although
the bankruptcy court held that NetJets had not committed contempt, the
court did not answer the threshold question of whether NetJets had
violated the discharge injunction as to RS Air.
RS Air acknowledged that it was not named personally in the Ohio
Complaint but argued that the bankruptcy court’s ruling potentially
allowed NetJets to add RS Air to a judgment against the Pearlman Parties
under California Code of Civil Procedure (“CCP”) § 187. RS Air argued
that this threat constituted a violation of the discharge injunction.4
The bankruptcy court agreed that it should have expressly decided
whether NetJets had violated the discharge injunction. It clarified its ruling
and determined that NetJets did not violate the discharge injunction.
The court concluded that the Ohio Complaint “does not seek relief
against RS Air,” so the alter ego allegations did not violate the discharge
4 Counsel later conceded that CCP § 187 only applies if an Ohio judgment for NetJets is domesticated in California. 7 injunction as to RS Air. However, it cautioned that, “[s]hould NetJets . . .
act to collect or recover any debt of RS Air as a personal liability, then
NetJets will violate the discharge. . . . [T]hus far NetJets has not acted in
violation of Section 524(a)(2) and, as such, no violation of RS Air’s
discharge has occurred.”
The bankruptcy court entered an order reiterating its denial of the
Contempt Motion. The RS Air Parties timely appealed both orders.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Whether the bankruptcy court erred in holding that the alter ego
allegations in NetJets’ Ohio Complaint did not violate the discharge
injunction.
STANDARDS OF REVIEW
“The scope of the bankruptcy discharge injunction is a mixed
question of law and fact to be reviewed either de novo or for clear error,
depending upon whether questions of law or questions of fact
predominate.” Reed v. Nielsen (In re Reed), 640 B.R. 932, 938 (9th Cir. BAP
2022) (citation omitted), aff’d in part, appeal dismissed in part, No. 22-60021,
2023 WL 1879516 (9th Cir. Feb. 10, 2023). In this case, the facts are
uncontroverted and questions of law predominate, so our review is de
novo. Similarly, we review de novo the bankruptcy court’s statutory
8 interpretation of § 524(a). Id.
“De novo review requires that we consider a matter anew, as if no
decision had been made previously.” Francis v. Wallace (In re Francis), 505
B.R. 914, 917 (9th Cir. BAP 2014).
We review for an abuse of discretion the denial of sanctions for an
alleged violation of the discharge injunction, see In re Reed, 640 B.R. at 938,
and the ruling on a motion for relief under Civil Rule 59 or Civil Rule 60
(made applicable in bankruptcy cases by Rules 9023 and 9024), see Rigby v.
Mastro (In re Mastro), 585 B.R. 587, 591 (9th Cir. BAP 2018). To determine
whether the bankruptcy court has abused its discretion, we conduct a two-
step inquiry: (1) we review de novo whether the bankruptcy court
“identified the correct legal rule to apply to the relief requested” and (2) if
it did, we consider whether the bankruptcy court’s application of the legal
standard was illogical, implausible, or without support in inferences that
may be drawn from the facts in the record. United States v. Hinkson, 585
F.3d 1247, 1262-63 (9th Cir. 2009) (en banc).
DISCUSSION
A. The discharge injunction precludes any act to recover a debt as a personal liability of the debtor.
This appeal hinges on the effect of RS Air’s discharge under § 524.
Our analysis begins with the statutory language. If that language is plain,
our analysis also ends there. See Lamie v. U.S. Tr., 540 U.S. 526, 534 (2004)
(“It is well established that when the statute’s language is plain, the sole
9 function of the courts—at least where the disposition required by the text is
not absurd—is to enforce it according to its terms.” (cleaned up));
Smallwood v. Allied Van Lines, Inc., 660 F.3d 1115, 1121 (9th Cir. 2011) (“Our
analysis begins, as it must, with the text of the statute in question. Under
the ‘plain meaning’ rule, where the language of a statute is plain and
admits of no more than one meaning the duty of interpretation does not
arise, and the rules which are to aid doubtful meanings need no
discussion.” (cleaned up)).
By the plain terms of the statute, the discharge only protects the
debtor from personal liability. The discharge “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[.]”
§ 524(a)(2). Similarly, the discharge “voids any judgment at any time
obtained, to the extent that such judgment is a determination of the
personal liability of the debtor” with respect to a discharged debt.
§ 524(a)(1).
The statute also plainly provides that the discharge only protects the
debtor and not any other person who is liable with the debtor. Subject to an
exception not applicable here, the “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.” § 524(e).
10 B. The bankruptcy court correctly held that NetJets’ alter ego allegations did not violate the discharge injunction.
1. The alter ego allegations did not concern RS Air’s “personal liability.”
Following the plain language of the statute, we have repeatedly
emphasized that the discharge only affects the debtor’s “personal liability.”
See, e.g., In re Reed, 640 B.R. at 939 (“But the discharge only affects the
debtor’s ‘personal liability.’”); Mellem v. Mellem (In re Mellem), 625 B.R. 172,
182 (9th Cir. BAP 2021) (“[T]he extent [of] the discharge is limited to
‘personal liability of the debtor.’”), aff’d, No. 21-60020, 2021 WL 5542226
(9th Cir. Nov. 26, 2021); Ruvacalba v. Munoz (In re Munoz), 287 B.R. 546, 550
(9th Cir. BAP 2002) (“[T]he assumption . . . that a bankruptcy court order is
required any time an action is taken nominally against a debtor after
discharge is also incorrect. The § 524(a)(2) discharge injunction prohibits
only actions to recover a debt as a personal liability of the debtor. Where
the purpose of the action is to collect from a collateral source, such as
insurance . . . , and the plaintiff makes it clear that it is not naming the
debtor as a party for anything other than formal reasons, no bankruptcy
court order is necessary.”).
Here, there is no dispute that the Ohio Complaint does not name RS
Air as a defendant and does not seek any relief against RS Air. It repeatedly
mentions RS Air’s liability but only seeks to hold the non-debtor Perlman
Parties liable for RS Air’s debt. Neither § 524(a)(1) nor (a)(2) prohibits this.
11 At oral argument, counsel for RS Air and Mr. Perlman conceded that
RS Air was not named as a party in the Ohio Complaint but argued that
merely requiring RS Air to participate in discovery for that litigation
violated the discharge injunction. But the discharge injunction only enjoins
personal collection of a discharged debt and does not relieve a discharged
debtor from all forms of imposition or inconvenience. We have repeatedly
held that a discharged debtor’s obligation to participate in discovery is not
an effort to personally collect a debt and does not violate the discharge
injunction. See, e.g., Groner v. Miller (In re Miller), 262 B.R. 499, 506 (9th Cir.
BAP 2001) (“Section 524(a)(2) provides that a debtor’s discharge operates as
an injunction ‘against the commencement or continuation of an action [or]
the employment of process’ to collect a discharged debt. Judicial
interpretations of this section indicate that calling a debtor to testify does
not violate the injunction against ‘employment of process.’”); Patronite v.
Beeney (In re Beeney), 142 B.R. 360, 363 (9th Cir. BAP 1992) (holding that the
proposed litigation did not violate the discharge injunction because
“allowing [creditor’s] suit to proceed merely leaves [debtor] in the position
of a witness who would appear at trial”); see also In re Traylor, 94 B.R. 292,
293 (Bankr. E.D.N.Y. 1989) (Where the creditors “are not seeking any
recovery from the debtor himself[,]” “the debtor, whether discharged or
not, is under the same obligations as would be any witness, regardless of
the inconvenience to him, to attend any trial that may take place if the relief
is granted.”).
12 Moreover, § 524(e) explicitly provides that the discharge injunction
“does not affect the liability of any other entity on” the discharged debt.
The Ninth Circuit employs an especially strict reading of § 524(e): “This
court has repeatedly held, without exception, that § 524(e) precludes
bankruptcy courts from discharging the liabilities of non-debtors.” Resorts
Int’l, Inc. v. Lowenschuss (In re Lowenschuss), 67 F. 3d 1394, 1401 (9th Cir.
1995); see Blixseth v. Credit Suisse, 961 F. 3d 1074, 1082 (9th Cir. 2020) (“We
have interpreted the section generally to prohibit a bankruptcy court from
discharging the debt of a non-debtor.”); In re Beeney, 142 B.R. at 362
(“Subsection (a) enjoins creditors from attempting to collect from the
debtor or the debtor’s assets debts that have been discharged in
bankruptcy. Subsection (e) makes clear that this injunction applies only to
the debtor’s personal liability and does not inhibit collection efforts against
other entities.”). 5
5 At oral argument, counsel for Mr. Perlman argued that § 524(e) was inapplicable because the Ohio Complaint was seeking to hold RS Air liable not as “any other entity,” but as an entity that is one and the same as the Perlman Parties. We disagree. The parties have previously agreed that Delaware law controls the alter ego analysis. See In re RS Air, LLC, 2022 WL 1284012, at *3 (stating that “[t]he parties also agree that because Debtor is a Delaware LLC, Delaware law governs” and examining “veil-piercing claims” under Delaware law). Although the alter ego doctrine requires a showing that the two entities “operated as a single economic entity,” Official Unsecured Creditors’ Comm. of Broadstripe, LLC v. Highland Cap. Mgmt., L.P. (In re Broadstripe, LLC), 444 B.R. 51, 102 (Bankr. D. Del. 2010), the result is not to deem the entities the same, but to hold one liable for the other’s debts, see Blair v. Infineon Techs. AG, 720 F. Supp. 2d 462, 469 (D. Del. 2010) (“[T]he corporate veil can be pierced, as a tool of equity, to disregard the existence of a corporation and impose liability on the corporation’s individual principals and their personal assets. The alter ego doctrine for piercing the 13 We asked RS Air’s counsel at oral argument if NetJets could avoid a
discharge violation by amending its complaint. Counsel responded that
NetJets would have to allege that RS Air’s debt to NetJets is “zero dollars.”
This reveals a fundamental flaw in the RS Air Parties’ position: the
discharge does not extinguish the debt; instead, it protects only the debtor
from personal liability on that debt. As the Ninth Circuit stated:
That § 524(e) confines the debt that may be discharged to the “debt of the debtor”—and not the obligations of third parties for that debt—conforms to the basic fact that a discharge in bankruptcy does not extinguish the debt itself but merely releases the debtor from personal liability. . . . The debt still exists, however, and can be collected from any other entity that may be liable.
Blixseth, 961 F.3d at 1082 (cleaned up); see also id. at 1083 (stating that the
discharge injunction “does not, however, absolve a non-debtor’s liabilities
for that same ‘such’ debt”). RS Air continues to owe the full amount of the
debt; the discharge injunction precludes collection of that debt from RS Air,
but not from anyone else.
Relying on the legislative history of § 524, the RS Air Parties argue
that § 524(e) applies only to co-obligors or guarantors, i.e., “parties legally
bound by contract on a discharged debt[.]” But we turn to legislative
history only when the statutory language is ambiguous. See Transwestern
corporate veil allows derivative liability to be placed upon a corporation’s individuals.” (citations omitted)).
14 Pipeline Co. v. 17.19 Acres of Prop. Located in Maricopa Cnty., 627 F.3d 1268,
1271 (9th Cir. 2010) (“If the plain meaning of the statute is unambiguous,
that meaning is controlling and we need not examine legislative history as
an aid to interpretation unless the legislative history clearly indicates that
Congress meant something other than what it said.” (citation omitted)).
Section 524(a) and (e) are not ambiguous.
Even if we considered the legislative history, we would reject this
argument. While it is true that the legislative history mentions co-obligors
and guarantors, there is no reason to think that Congress intended to limit
the broad sweep of § 524(e) to those examples. The statute speaks broadly
of “the liability of any other entity[.]” If Congress had intended the result
that the RS Air Parties favor, it would have said, “the liability of any other
entity that is legally bound by contract on a discharged debt.” We may not
interpolate that phrase into the plain statutory language; instead, we must
assume that Congress meant exactly what it said.
At oral argument, counsel for RS Air predicted that the bankruptcy
court’s decision would open the floodgates to post-discharge litigation on
prepetition alter ego claims, particularly concerning single-member LLCs.
We do not foresee such a result. The corporate veil is a formidable obstacle,
and parties that file baseless alter ego claims risk sanctions for frivolous
filings.
2. The cases cited by the RS Air Parties are unpersuasive.
The RS Air Parties primarily rely on three cases: Yan v. Lombard Flats,
15 LLC (In re Lombard Flats, LLC), Case No. 15-cv-00870-PJH, 2016 WL 1161593
(N.D. Cal. Mar. 23, 2016), In re Ostrander, Case No. 11-33801, 2022 WL
999680 (Bankr. N.D. Ohio Apr. 1, 2022), and In re Torres, 594 B.R. 890
(Bankr. C.D. Cal. 2018). Lombard Flats and Ostrander are distinguishable,
and we think that Torres was incorrectly decided.
In Lombard Flats, Martin Eng transferred real property to his LLC.
Later, the LLC filed a chapter 11 petition, successfully completed its
reorganization plan, and received its discharge. 2016 WL 1161593, at *1.
The creditors sued the LLC and Mr. Eng to recover on four
promissory notes made by Mr. Eng. The complaint alleged that the LLC
was liable for Mr. Eng’s debts because the LLC was Mr. Eng’s alter ego. Id.
at *3.
The LLC filed a motion for contempt against the creditors’ attorney
for violation of the discharge injunction. The bankruptcy court agreed that
the attorney had violated the discharge injunction. The district court
affirmed, holding that the alter ego claim against the LLC was a “claim”
under bankruptcy law. Id. at *6. It stated that “Section 524(a)(1) provides
that any judgment on a debt that is discharged is void as a determination of
the debtor’s personal liability. . . . Characterizing the alter ego theory as a
‘judgment collection remedy,’ rather than a claim for substantive relief,
does not escape enforcement of the discharge.” Id. (citation omitted).
Lombard Flats is not applicable because the creditor sought to collect a
debt from the LLC even though the LLC had received its discharge in
16 bankruptcy. This plainly violated § 524(a). In this case, however, NetJets is
doing the opposite: it has a claim against discharged debtor RS Air, but it is
seeking to collect the debt from the Perlman Parties, who are not protected
by the discharge. Lombard Flats says nothing about a creditor’s ability to
collect a debt (owed by a discharged debtor) from a non-debtor.
The RS Air Parties argue that Lombard Flats “held that mere alter ego
allegations against the debtor violated the discharge injunction.” They
contend that “the collection target is irrelevant[,]” such that an allegation
involving the debtor violates the discharge injunction. The RS Air Parties
are wrong. The district court in Lombard Flats said no such thing. To the
contrary, the district court made clear that the complaint sought to hold the
debtor liable for the discharged debt: the creditors “sought to hold debtor
liable on [Mr.] Eng’s debts as [Mr.] Eng’s alter ego.” Id. at *3.
In Ostrander, a creditor had claims against an individual debtor,
Bonnie Ostrander, and two companies she controlled. After Ms. Ostrander
received a chapter 7 discharge, the creditor filed a state court complaint to
collect its claims. Ms. Ostrander asked the bankruptcy court to hold the
creditor in contempt for violating the discharge.
The bankruptcy court exhaustively analyzed the complaint (which it
described as “a mess”). 2022 WL 999680 at *28. The court held that many of
the causes of action in the complaint did not violate the discharge
injunction because they stated claims only against the companies, not
Ms. Ostrander. Id. at *13.
17 But the court also found that some of the causes of action seemed to
assert discharged claims against Ms. Ostrander. For example, one of the
causes of action alleged that Ms. Ostrander’s corporations were her alter
egos and sought to hold her and others “personally liable for the entities[’]
acts . . . .” Id. at *25. The court concluded that the overall effect of the
complaint was a violation. Because the confusing drafting of the complaint
made it difficult to separate the permissible and impermissible claims,
Ms. Ostrander did not have counsel to assist her with that task, and the
companies had no known assets, “the practical, objective effect of the
complaint overall is to coerce and pressure [Ms.] Ostrander to repay
discharged debts.” Id. at *30.
We need not opine on the Ostrander court’s reliance on the overall
effect of the complaint, because the facts on which the Ostrander court
relied are not present in this case. NetJets’ Ohio Complaint is clearly
drafted and carefully avoids asserting discharged claims. The RS Air
Parties have defended themselves aggressively with the assistance of able
counsel. There is no reason to think that NetJets is trying to slip a
discharged claim by the Ohio court and no discernible risk that it would
succeed if it tried.
In Torres, Katherine Torres personally guaranteed the loan made to
her wholly-owned business. 594 B.R. at 891-92. The creditor sued
Ms. Torres and her business, alleging that she was an alter ego of the
business. Id. at 892. Shortly thereafter, Ms. Torres and her husband filed a
18 chapter 7 petition and received a discharge. Id. at 893.
The creditor resumed prosecution of the state court complaint against
the business but voluntarily dismissed Ms. Torres without prejudice. The
creditor did not dismiss or amend the alter ego allegation and moved for
an entry of default against the business. Id. at 894.
Ms. Torres moved for sanctions against the creditor for a discharge
violation. The bankruptcy court acknowledged that the creditor was
proceeding only against the business but was concerned by the alter ego
allegations in the complaint. Id. It noted that California courts have held
that, under CCP § 187, a court may amend a judgment against a defendant
by adding the defendant’s alter egos as judgment debtors. The court stated
that “the matter is not entirely free from doubt,” but concluded that “the
most likely outcome is that in the normal course of events, and without any
intervention by this Court based upon the discharge injunction, [the
creditor] would be successful in adding Ms. Torres to a default judgment
obtained against [the business] under the authority of [CCP] § 187.” Id. at
896.
The bankruptcy court relied on Lombard Flats. It said that it
stands for the proposition that if A receives a bankruptcy discharge, an action against B alleging that A and B are alter egos violates the discharge injunction if it is shown that the alter ego claim is a prepetition claim. Thus, [Lombard Flats] indicates that not only is the continuation of the State Court Action against Ms. Torres (recipient of the discharge) a violation of the discharge injunction but also that the State
19 Court Action’s continuation against [the business] likewise violates the discharge injunction as long as the alter ego allegations remain in the Complaint.
Id. at 896-97. Ultimately, however, the court declined to sanction the
creditor because he did not know that the discharge injunction applied to
the state court action.
We respectfully disagree with Torres. First, the Torres court misread
Lombard Flats. Lombard Flats did not hold that, if the debtor receives a
discharge, any action against the principal alleging that the debtor and its
principal are alter egos violates the discharge injunction. Rather, it held
that an action to recover a debt against the discharged debtor violates the
discharge injunction.
Second, we do not agree that a discharge violation exists whenever a
creditor might later seek a judgment against the discharged debtor. If
Torres is right, the discharge protects non-debtor parties whenever CCP
§ 187 or a similar statute or doctrine might apply. This would gut § 524(e),
since no one could ever rule out the possibility that a creditor might violate
the discharge in the future. Further, it is unnecessary because a creditor’s
later attempt to add the discharged debtor to a judgment would
unquestionably violate the discharge injunction.
There is no fair ground of doubt that NetJets would violate the
discharge injunction if it sought a judgment against RS Air under CCP
§ 187 or on any other basis. See Taggart v. Lorenzen, 139 S. Ct. 1795, 1804
20 (2019) (“A court may hold a creditor in civil contempt for violating a
discharge order where there is not a ‘fair ground of doubt’ as to whether
the creditor’s conduct might be lawful under the discharge order.”). We
will not protect the Perlman Parties from liability based on an assumption
that NetJets will commit an obvious contempt.
CONCLUSION
The bankruptcy court did not err in denying the Contempt Motion
and deciding the Clarification Motion. We AFFIRM.