Keena, II v. Zhiry

• Court: United States Bankruptcy Court, E.D. California
• Decided: March 14, 2023
• Docket: 22-02011
• Status: Unknown

Opinion

1 POSTED ON WEBSITE 2 NOT FOR PUBLICATION 3 4 UNITED STATES BANKRUPTCY COURT 5 EASTERN DISTRICT OF CALIFORNIA 6 7 In re: Case No. 21-22759-A-7

8 NADIA ZHIRY,

9 10 Debtor. 11

12 GERARD F. KEENA II, RECEIVER, Adv. No. 22-2011-A

13 Plaintiff, MEMORANDUM

14 V.

15 NADIA ZHIRY,

16 Defendant. 17

18 Argued and submitted on March 8, 2023 19 at Sacramento, California 20 Honorable Fredrick E. Clement, Bankruptcy Judge Presiding 21

22 Appearances: Kirk Rimmer for plaintiff Gerald F. Keena II; Peter G. Macaluso for defendant Nadia 23 Zhiry 24 25

27 1 11 United States Code 523(a)(7) excepts from discharge a debt 2 “for a fine, penalty, or forfeiture” that is “payable to and for the 3 benefit of a governmental unit.” The state court appointed plaintiff 4 Keena receiver over defendant Zhiry’s property, which is a public 5 nuisance. California law allows Keena is entitled to recover from 6 Zhiry fees for services rendered and costs incurred. Is Keena 7 entitled to except his debt from discharge? 8 I. FACTS 9 Nadia Zhiry (“Zhiry”) owns real property located at 1039 and 1049 10 Claire Avenue, Sacramento. Apparently, the property is dilapidated. 11 So much so that the city deemed it a public nuisance. 12 The City of Sacramento brought suit against Zhiry in Sacramento 13 County Superior Court. City of Sacramento v. Zhiry, No. 34-2017- 14 00208154 (Sacramento County Superior Court 2017). Zhiry stipulated to 15 judgment and a permanent injunction. When she failed to address 16 and/or rectify the problem, the City of Sacramento sought the 17 appointment of a receiver, Cal. Health & Safety Code § 17980.7(c), and 18 the Superior Court appointed Gerald F. Keena. 19 Keena commenced work to clean up Zhiry’s properties, but before 20 he could complete his task, Zhiry filed a Chapter 7 bankruptcy. Doing 21 so ousted Keena from his duties. But it did not do so before he 22 incurred fees and costs (including attorney’s fees) of $87,217. Keena 23 would like those back. 24 II. PROCEDURE 25 This is an action to determine the dischargeability of a 26 particular debt, i.e., Keena’s fees and costs incurred in the 27 abatement of a public nuisance on Zhiry’s real property. Compare Fed. 1 any debt”) with Rule 4007(b) (“actions to perfects rights as to 11 2 U.S.C. § 523(a)(2),(a)(4),(a)(6)). Keena contends that as a receiver, 3 authorized by provisions of California’s Health and Safety Code and 4 appointed by the state court, he is entitled to except from discharge 5 Zhiry’s debts to him for cleanup of her property as they are excepted 6 from discharge as a “fine, penalty, or forfeiture” that is “payable to 7 and for the benefit of a governmental unit.” Zhiry admits the 8 underlying facts but denies that her debt to Keena qualifies for 9 exception under 523(a)(7). 10 III. JURISDICTION 11 This court has jurisdiction. 28 U.S.C. §§ 1334(a)-(b), 157(b); 12 see also General Order No. 182 of the Eastern District of California. 13 Jurisdiction is core. 28 U.S.C. § 157(b)(2)(I). All parties have 14 consented to entry of final orders and judgments. 28 U.S.C. § 15 157(b)(3); Wellness Int’l Network, Ltd. v. Sharif, 135 S.Ct. 1932, 16 1945-46 (2015); Scheduling Order 2.0, ECF No. 12. 17 IV. LAW 18 A. Section 523(a)(7) 19 In most instances, Chapter 7 debtors are entitled to the 20 forgiveness—in bankruptcy parlance, discharge--of their pre-petition 21 debts. 11 U.S.C. 727. Some debts are excepted from discharge. 11 22 U.S.C. 523(a). Of those debts that are excepted, some are excepted 23 from discharge as a matter of law, e.g., 11 U.S.C. § 523(a)(5) 24 (domestic support obligations) and other debts are excepted only if a 25 creditor files a timely adversary proceeding and proves the existence 26 of specified bad acts. 11 U.S.C. § 523(a)(2) (fraud). 27 In some instances, knowing whether the debt held by the creditor 1 11 U.S.C. § 523(a)(3)(A) (unscheduled debts are excepted from 2 discharge “unless such [unscheduled creditor had notice or actual 3 knowledge of the case”), is difficult. The penalties for guessing 4 incorrectly and then attempting to collect a discharged debt are 5 severe. In re Roth, 935 F.3d 1270, 1275 (11th Cir. 2019) (contempt); 6 Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, 507 (9th Cir. 2002) 7 (same). 8 Mercifully, the rules provide creditors, who are uncertain as to 9 the applicability of the discharge as to their particular debt, a 10 mechanism to resolve the question prior to seeking to collect a debt. 11 Rule 4007(a) provides: “A debtor or any creditor may file a complaint 12 to obtain a determination of the dischargeability of any debt.” Fed. 13 R. Bankr. P. 4007(a). Such an action may be filed “at any time.” 14 Fed. R. Bankr. P. 4007(b). 15 Section 523(a)(7) is a debt excepted as a matter of law; it is a 16 deceptively simple appearing provision. It provides: 17 A discharge under section 727, 1141, 11921 1228(a), 1228(b), or 1328(b) of this title does 18 not discharge an individual debtor from any debt— 19 ... 20 to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a 21 governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty-- 22 (A) relating to a tax of a kind not specified in 23 paragraph (1) of this subsection; or 24 (B) imposed with respect to a transaction or event that occurred before three years before the 25 date of the filing of the petition. 26 11 U.S.C. 523(a)(7). 27 Section 523(a)(7) has four elements: “[t]he debt must (1) be a 1 (3) be payable for the benefit of a governmental unit, and (4) not be 2 compensation for actual pecuniary loss.” In re McDowell, 415 B.R. 3 612, 617 (Bankr. S.D. Fla. 2008), cited with approval by Medina v. 4 Vander Poel, 523 B.R. 820, 824 (E.D. Cal. 2015). 5 “Governmental unit” is a defined term: “The term “governmental 6 unit” means United States; State; Commonwealth; District; Territory; 7 municipality; foreign state; department, agency, or instrumentality of 8 the United States (but not a United States trustee while serving as a 9 trustee in a case under this title), a State, a Commonwealth, a 10 District, a Territory, a municipality, or a foreign state; or other 11 foreign or domestic government.” 11 U.S.C. § 101(27). 12 Courts have struggled with the application of § 523(a)(7) where 13 the plaintiff who seeks to enforce a debt is not the governmental unit 14 itself, but a third-party purporting to act on the government’s behalf 15 and with its blessing. Medina v. Vander Poel, 523 B.R. 820 (E.D. Cal. 16 2015) (qui tam plaintiff’s enforcing state labor law penalties); In re 17 Stevens, 184 B.R. 584 (Bankr. D. Idaho 1995) (collection agent acting 18 on behalf of the county was entitled to enforce parking and traffic 19 fines); In re Sanders, 589 B.R. 874, 880 n. 4 (Bankr. W.D. Wash. 2018) 20 (collection agency); contra, In re Dickerson, 510 B.R. 289, 301 21 (Bankr. D. Idaho 2014) (debt collector). 22 B. State Court Receivers 23 Public entities, e.g., cities and counties, regularly address 24 distressed real estate by virtue of the nuisance laws. A public 25 entity has three avenues to address a public nuisance: (1) criminal 26 proceedings; (2) a civil action (including the appointment of a 27 receiver); and (3) abatement proceedings. Cal. Civ. Code. § 3491; 6 California Real Estate 1 (4th ed. December 2022). 2 If a public entity brings a civil action, after judgment, it may 3 seek the appointment of a receiver. Cal. Health & Safety Code § 4 17980.7(c); City & Cnty. of San Francisco v. Daley, 16 Cal. App. 4th 5 734, 744-745 (1993). The rights and duties of a receiver are 6 specified by law. Cal. Health & Safety Code § 17980.7. The receiver 7 has the right to remediate the nuisance. Cal. Health & Safety Code § 8 17980.7(c)(4). In exchange, the receiver is entitled to “fees, 9 commissions, and necessary expenses.” Cal. Health & Safety Code § 10 17980.7(c)(5). Those fees and expenses may be secured by a lien 11 against the subject property, Cal. Health & Safety Code § 12 17980.7(a)(4)(G), and may be surcharged the owner of the property. 13 Cal. Health & Safety Code § 17980.7(c)(15). 14 V. DISCUSSION 15 Because Keena is unable to satisfy other portions of the statute, 16 the court need not decide whether a receiver, acting on behalf of a 17 governmental unit, may avail itself of the protections of § 523(a)(7). 18 A. Issue Preclusion 19 Issue preclusion applies to actions to except a debt from 20 discharge under 11 U.S.C. § 523. In re Comer, 723 F.2d 737, 740 (9th 21 Cir. 1984). Because the underlying judgment was rendered in federal 22 court, federal common law provides the contours of issue preclusion. 23 Taylor v. Sturgell, 553 U.S. 880, 891 (2008). The party asserting its 24 applicability has the burden of proving each of its elements. Id. at 25 907; Garity v. APWU Nat'l Labor Org., 828 F.3d 848, 855 (9th Cir. 26 2016). “Reasonable doubts about what was decided in a prior judgment 27 are resolved against applying issue preclusion.” In re Frye, No. 1 2008), citing Lopez v. Emergency Serv. Restoration, Inc. (In re 2 Lopez), 367 B.R. 99, 107–08 (9th Cir. BAP 2007). 3 The elements of federal issue preclusion are well-known: 4 (1) the issue at stake was identical in both proceedings; (2) the issue was actually litigated 5 and decided in the prior proceedings; (3) there was a full and fair opportunity to litigate the 6 issue; and (4) the issue was necessary to decide the merits. 7 Janjua v. Neufeld, 933 F.3d 1061, 1065 (9th Cir. 2019), citing 8 Oyeniran v. Holder, 672 F.3d 800, 806 (9th Cir. 2012), as amended (May 9 3, 2012); see also Howard v. City of Coos Bay, 871 F.3d 1032, 1041 10 (9th Cir. 2017). 11 Keena points to a stipulated judgment of non-dischargeability in 12 the amount of $58,500 under § 523(a)(7) between City of Sacramento and 13 defendant Zhiry in a related adversary proceeding. Stipulation & 14 Judgment, The City of Sacramento v. Zhiry, No. 22-2013 (Bankr. E.D. 15 Cal. 2022), ECF Nos. 22-23.1 There are two problems. First, the 16 plaintiff has not proven, and probably cannot prove, issue 17 identicality. Here, the receiver seeks to recover statutorily 18 authorized fees and costs. Cal. Healthy & Safety Code § 19 17980.7(c)(5). The City of Sacramento sought to except a debt as a 20 penalty, 11 U.S.C. § 523(a)(7), but it did not seek to recover 21 receiver’s fees and costs. Therefore, identity of issues does not 22 exist. 23 Second, there is an insufficient showing that the issue was 24 actually litigated: 25 Ordinarily, stipulated or consent judgments are 26 not entitled to preclusive effect because there was no actual litigation. In re Berr, 172 B.R. at 27 1 The court takes judicial notice of the Stipulation for Entry of 1 306. However, the actual litigation requirement may be satisfied when there is substantial 2 participation in an adversary contest in which the party is afforded a reasonable opportunity to 3 defend himself on the merits but chooses not to do so. In re Daily, 47 F.3d 365, 368 (9th 4 Cir.1995). 5 In re Bowen, 198 B.R. 551, 556 (B.A.P. 9th Cir. 1996). 6 Here, there is no showing of substantial participation. For 7 these reasons, there has been an insufficient showing as to the 8 applicability of issue preclusion or at least reasonable doubt as to 9 its applicability exits. 10 B. On the Merits 11 1. Fines, Penalties and Forfeitures 12 The debt must be penal, not compensatory. In re Scheer, 819 F.3d 13 1206, 1211 (9th Cir. 2016) (refund of attorney’s fees); Matter of 14 Towners, 162 F.3d 952, 953 (7th Cir. 1998) (investigative costs for 15 civil fraud discharged). 16 In re Schaffer, 515 F.3d 424 (5th Cir.2008), the court considered 17 an adversary proceeding very similar to this one. There, the 18 Louisiana State Board of Dentistry brought a disciplinary action 19 against a dentist. After a hearing, the Board of Dentistry found that 20 the dentist had “acted contrary to prevailing acceptable dental 21 standards and exhibited dental incompetence.” p. 426. After revoking 22 the dentist’s license, it assessed costs against him in the amount of 23 $217,852. Those costs were for expenses of the investigation, 24 attorneys’ fees, and costs of hotel, as well as meals, of committee 25 members during the license revocation hearing. The dentist filed 26 Chapter 7 bankruptcy and an adversary proceeding, apparently under 27 Rule 4007(a), followed. The bankruptcy court held the costs nondischargeable, 11 U.S.C. § 523(a)(7), and the District Court 1 affirmed. The Fifth Circuit reversed, holding that investigative 2 costs were compensatory, not punitive. It stated: 3 Yet there is a crucial distinction. The parish court, in entering the Board's order revoking 4 Schaffer's license and assessing costs, did not order restitution to the Board or to anyone else. 5 It ordered the payment of costs for the expenses of the civil administrative proceeding—the hotel 6 and meal expenses of the committee appointed by the Board to hear Schaffer's case, among other 7 expenses. The costs assessed are, at their core, “compensation for actual pecuniary loss”—in this 8 case, the losses to the Board caused by the cost of the proceeding. It does not appear to us, 9 looking to the language of the Louisiana statute and the Board's order, that the Board assessed 10 costs “to promote law enforcement by deterrence as well as by compensation.” Rather, it assessed 11 costs to repay some of the Boards' expenses incurred in the proceeding, such as those listed 12 in the statute—stenographers' and attorneys' and investigative fees, as well as the daily expenses 13 of the members of the committee appointed by the Board to hear this matter. 14 Id. at 433 (emphasis added). 15 This case is no different than Schaffer. The fees and costs were 16 authorized by California Health & Safety Code § 17980.7(c)(5), which 17 authorized the receiver to recover “fees” and “necessary expenses.” 18 There is no indication that the state legislature intended these fees 19 and costs to be anything other than paying the receiver for the 20 necessary costs of doing business. 21 While argument might be interposed that the City of Sacramento 22 benefits by shifting the costs of remediation to the landowner that, 23 alone, does not make these fees and costs penal in nature. Moreover, 24 the Kelly line of cases, excepting restitution from discharge under 11 25 U.S.C. § 523(a)(7), has been limited to criminal proceedings. Kelly 26 v. Robinson, 479 U.S. 36 (1986). So, fees and costs due Keena cannot 27 be justified as a restitution paid to a third party. 1 Finally, aside from the ipse dixit assertion, the fees and costs 2 “are to be considered a fine, penalty, or forfeiture,” Pl. Trial Br. 3 5:17-1, ECF No. 29, the plaintiffs have not directed this court to any 4 authority for the proposition that § 17980.7(c)(5) is anything other 5 than compensatory. 6 2. To and for the Benefit of a Governmental Unit 7 Finally, the debt must be “to and for the benefit” of the 8 government. 11 U.S.C. § 523(a)(7); Matter of Towers, 162 F.3d 952, 9 955 (7th Cir. 1998) (penalty payable to the Attorney General of 10 Illinois but “for the benefit of the victims” of the defendant’s fraud 11 was insufficient). 12 One particular case is instructive. Hughes v. Sanders, 469 F.3d 13 475 (6th Cir. 2006). There, Sanders (an attorney) represented Hughes 14 in an employment action against Ford Motor Company, apparently 15 unsuccessfully. Hughes then sued Sanders for malpractice; after 16 Sanders violated numerous court orders, the District Court struck his 17 answer and entered his default. The default judgment was for $894,316 18 for lost wages and interest; $143,602 for attorneys fees and costs in 19 the underlying case; and $25,873 for attorney’s fees and costs in the 20 malpractice case. Sanders filed a Chapter 7 bankruptcy and Hughes 21 brought an action under § 523(a)(7). Sanders moved to dismiss the 22 complaint in the adversary proceeding. Fed. R. Bankr. P. 12(b)(6). 23 The District Court dismissed the adversary proceeding and the Sixth 24 Circuit affirmed the dismissal, finding it was payable to Hughes and 25 was compensatory in nature. The court stated: 26 Under the plain language of 11 U.S.C. § 523(a)(7), Hughes cannot prevail unless he can 27 show both that the penalty owed by Sanders is payable to and for the benefit of a governmental It is undisputed 1 that the penalty is payable to Hughes. And it is undisputed that the judgment is for an amount 2 calculated to compensate Hughes for damages, attorney's fees and costs claimed in and arising 3 out of the malpractice action. He therefore has not stated and cannot state a claim for which 4 relief can be granted. 5 Id. at 479 (emphasis added). 6 Even if Keena could show that his own fees and expenses are 7 penal, rather than compensatory, the fact that they are paid directly 8 to him and for his ultimate benefit defeats any rights under § 9 523 (a) (7). 10 CONCLUSION 11 For each of the reasons set forth herein, judgment shall be for 12 defendant Nadia Zhiry. Dated: March 14, 2023 4 MSS Fredrick E. Clement 16 United States Bankruptcy Judge 17 18 19 20 21 22 23 24 25 26 27 28 11

1 Instructions to Clerk of Court

2 Service List - Not Part of Order/Judgment

3 The Clerk of Court is instructed to send the Order/Judgment or other court generated document transmitted herewith to the parties below. The Clerk of Court will send the document 4 via the BNC or, if checked ____, via the U.S. mail.

6 Attorneys for the Plaintiff(s) Attorneys for the Defendant(s)

7 Bankruptcy Trustee (if appointed in the case) Office of the U.S. Trustee Robert T. Matsui United States Courthouse 8 501 I Street, Room 7-500 9 Sacramento, CA 95814 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27