Selinger v. Beaty (In Re Beaty)

268 B.R. 839, 2001 Daily Journal DAR 11721, 2001 Bankr. LEXIS 1404, 2001 WL 1349657

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: July 23, 2001
• Docket: BAP No. SC-00-1566-RyKR. Bankruptcy No. 91-10342-A7. Adversary No. 98-90205-A7
• Status: Published

Opinions

OPINION

RYAN, Bankruptcy Judge.

After Thomas and Nancy Beaty (“Debtors”) received a chapter 7¹ discharge, David Selinger obtained a state court default judgment against Thomas (the “Default Judgment”). Selinger then filed an adversary proceeding seeking to revoke Debtors’ discharge under § 727 (the “ § 727 Action”). After a hearing, Debtors were granted summary judgment. Later, Selinger filed a second complaint (the “Complaint”) against Thomas, alleging that the Default Judgment was nondis-chargeable under §§ 523(a)(2), (4), and (6). Both Selinger and Thomas filed cross-motions for summary judgment (collectively, the “Motions”). Selinger also filed a motion to strike portions of Thomas’ answer. After a hearing, the bankruptcy court (1) denied the motion to strike; (2) denied Selinger’s motion for summary judgment; and (3) granted Thomas’ motion for summary judgment (the “Order”). Selinger then filed a motion to alter or amend, which the bankruptcy court denied. Sel-inger timely appealed.

We AFFIRM IN PART and REVERSE IN PART and REMAND.

I. FACTS

In January 1991, Selinger filed a complaint in California state court against Sar-aston Development Company and DOES 1-50. The complaint alleged four causes of action: (1) breach of duty to exercise reasonable care, (2) negligence, (3) assumption of premises liability, and (4) fraudulent concealment with malice. At the time, Selinger did not know Thomas’ identity.

On September 12, 1991, Debtors filed a chapter 7 petition. Debtors did not list Selinger on their bankruptcy schedules as a creditor because Debtors did not know of Selinger’s identity. On January 10, 1992, Debtors received their discharge.

In June 1993, the state court entered the Default Judgment finding that Thomas had been properly served with the summons, complaint, and order substituting him as a named defendant and that Thomas had failed to timely appear and answer. The Default Judgment stated that Thomas had injured Selinger by willfully suppressing a material fact and that his “conduct was fraudulent, willful, malicious, and in conscious disregard” of Selinger’s rights. Default Judgment Against Thomas R. Beaty (June 10, 1993), at 1. Additionally, the Default Judgment awarded Selinger damages of $5,000 and provided that punitive damages would be determined later.

The state court also ordered Thomas to appear at a judgment debtor’s exam and to produce certain documents. In response, Thomas filed a notice of injunction informing the state court of Debtors’ bankruptcy and discharge. Nothing further happened in the state court.

On August 29, 1994, Selinger filed the § 727 Action. After a hearing, the bankruptcy court entered summary judgment in favor of Debtors, and Selinger filed a motion for reconsideration, which was denied. Selinger appealed to the district court, and the district court affirmed the bankruptcy court by an order entered on April 14,1997.

Shortly thereafter, Selinger filed the Complaint.² Thomas then filed a motion to dismiss, and on September 1, 1998, the bankruptcy court dismissed the Complaint. Selinger appealed the dismissal to the BAP (the “Appeal”).

Later, Thomas answered the Complaint, generally denying the allegations in the Complaint and affirmatively alleging lach-es. In his answer, Thomas stated that

Plaintiff had formal notice of the Defendant’s [Thomas] Chapter 7 bankruptcy and discharge no later than June of 1993. Plaintiff filed a complaint objecting to the Debtors’ discharge. Judgment was entered in Defendant’s [Thomas] favor, Plaintiff appealed, and the judgment was affirmed. Only after learning of a published court opinion which might give the Plaintiff a basis to claim non-dischargeability for punitive damages, Plaintiff brought this action to determine the dischargeability of his claim. Plaintiff has brought this action without excuse or justification to explain the unreasonable delay of almost six years since he first learned of the bankruptcy. This delay has prejudiced the Defendant, and the Plaintiffs complaint should be dismissed.

Defendant’s Answer to Plaintiffs Complaint to Determine Dischargeability of Debt (Feb. 24, 2000), at 4-5.

On March 9, 2000, we reversed the bankruptcy court’s decision to dismiss the Complaint and remanded the matter to the bankruptcy court.³ On April 20, 2000, a hearing was held on the motion to strike and the Motions, and on July 12, 2000, the Order was entered. Later, the bankruptcy court denied Selinger’s motion to alter or amend and Selinger thereafter timely appealed both orders.

II.ISSUES⁴

A. Whether the bankruptcy court violated Selinger’s right to due process.

B. Whether the bankruptcy court erred in granting Thomas’ motion for summary judgment.

C. Whether the bankruptcy court erred in denying Selinger’s motion for summary judgment.

III.STANDARD OF REVIEW

We review whether the bankruptcy court violated an individual’s right to due process de novo. See Duff v. United States Trustee (In re California Fidelity, Inc.), 198 B.R. 567, 571 (9th Cir. BAP 1996). We also review the bankruptcy court’s granting of summary judgment de novo. See Gertsch v. Johnson & Johnson Fin. Corp. (In re Gertsch), 237 B.R. 160, 165 (9th Cir. BAP 1999). Similarly, we review the bankruptcy court’s interpretation of the Code and Rules de novo. See Olson-Ioane v. Derham-Burk (In re Olson), 253 B.R. 73, 74 (9th Cir. BAP 2000).

IV.DISCUSSION

A. The Bankruptcy CouH Did Not Violate Selinger’s Right to Due Process.

The bankruptcy court denied the motion to strike Thomas’ laches defense. On appeal, Selinger contends that because the laches defense was inadequately pled, the bankruptcy court’s denial of his motion to strike was a denial of his due process rights. Similarly, Selinger contends that the bankruptcy court’s use of the laches doctrine violated his due process rights. We disagree.

The Fourteenth Amendment of the United States Constitution provides in pertinent part that no state shall “deprive any person of life, liberty, or property, without due process of law.” U.S. CONST, amend. XIV, § 1.

In Wade v. State Bar of Arizona (In re Wade), 948 F.2d 1122 (9th Cir.1991), the State Bar of Arizona brought a motion for relief from the automatic stay to pursue disciplinary action against the debtor. Id. at 1123. The bankruptcy court granted the motion before the debtor’s response was due under the court’s local rules, and the debtor claimed that this violated his due process rights. The Ninth Circuit disagreed, stating that if the debtor

had been deprived of any meaningful opportunity to respond to the Bar’s position before the Bankruptcy Court, there could have been a denial of due process .... However, the Wades were not deprived of such an opportunity.... The Bankruptcy Court thoroughly considered the Wades’ arguments and evidence when they were raised in the Wades’ motion for reconsideration of its order.

Id. at 1125.

Here, Selinger claims that the bankruptcy court’s ruling departed from the accepted and usual course of judicial proceedings. However, the Record shows that Selinger was provided ample opportunity to express his views. Selinger filed multiple documents⁵ in connection with the matter. Selinger was also provided his day in court, and the bankruptcy court heard his arguments.

Selinger argues that the answer did not adequately establish the basis for a laches defense. We disagree. The answer provided ample reasons for the laches defense, and Selinger was adequately placed on notice for pleading purposes.

Accordingly, we see no basis for Selinger’s assertion that the bankruptcy court violated his due process rights.

B. The Bankruptcy Court Erred in Granting Thomas’ Motion for Summary Judgment.

The bankruptcy court held that laches was a valid defense and operated as a time bar to the Complaint. On appeal, Selinger contends that the bankruptcy court erred in allowing laches to serve as an affirmative defense. We agree.

Section 523(c)(1) provides that

[e]xcept as provided in subsection (a)(3)(B) of this section, the debtor shall be discharged from a debt of a kind specified in paragraph (2), (4), (6), or (15) of subsection (a) of this section, unless, on request of the creditor to whom such debt is owed, and after notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2), (4), (6), or (15), as the case may be, of subsection (a) of this section.

11 U.S.C. § 523(c)(1). Subsection (a)(3)(B) provides that

A discharge under section 727 ... of this title does not discharge an individual debtor from any debt—

neither listed nor scheduled under section 521(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit—

if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim and timely request for a determination of dischargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the case in time for such timely filing and request; ....

11 U.S.C. § 523(a)(3)(B).

Rule 4007(c) provides a sixty-day time limit from the first date set for the § 341(a) creditors’ meeting for the filing of a nondischargeability complaint under §§ 523(a)(2), (4), or (6). However under Rule 4007(b), a § 523(a)(3)(B) complaint can be filed “at any time.” Fed. R.BaNkr.P. 4007(b) (emphasis added). Because Selinger’s debt was not scheduled, § 523(a)(3)(B) applied to the Complaint, which could be filed at any time. See Irons v. Santiago (In re Santiago), 175 B.R. 48, 51 (9th Cir. BAP 1994).

In Santiago, the debtor failed to list the creditor, and the creditor did not receive notice of the debtor’s bankruptcy until three months after the date that had been set for filing dischargeability actions. See Santiago, 175 B.R. at 48-49. Approximately eighteen months after receiving notice of the debtor’s bankruptcy, the creditor filed a dischargeability action. Id. We held that the creditor’s complaint was timely filed because Rule 4007(b) allowed for a suit to be filed at any time. Id. at 51. However, we noted that “[t]he Panel does not render any opinion on whether laches or estoppel may impose a time limit on cases filed under section 523(a)(3)(B) or Rule 4007(b).” Id. at 51 n. 4.

We now address this issue and hold that laches does not apply to either § 523(a)(3) or Rule 4007(b). While we have not directly addressed this issue before, the Ninth Circuit has hinted at the proper outcome. In Beezley v. California Land Title Co. (In re Beezley), 994 F.2d 1433 (9th Cir.1993), the debtor was denied the right to reopen his case and schedule an omitted debt because the no asset case had no bar date to filing claims. Id. at 1434. Therefore, the scheduling of the debt had no effect on its dischargeability. Id. In a lengthy concurring opinion, Judge O’Scannlain explained that § 523(a)(3) protects creditors without knowledge of the bankruptcy who hold claims that are non-dischargeable under §§ 523(a)(2), (4) or (6) from having their debts discharged. Id. at 1435-36. He noted that “Congress has expressly disapproved the importation of equitable notions ... into the interpretation and analysis of section 523(a)(3).” Id. at 1439 n. 4. He explained that

[i]t cannot be overemphasized that we deal here with matters that are absolutely fundamental to the integrity of the Bankruptcy Code: the balance struck between the rights of creditors on the one hand, and the policy of affording the debtor a fresh start on the other.... What Congress deemed a proper balancing of the equities as between debtor and creditor with respect to unlisted debts it has enacted in section 523(a)(3) of the Bankruptcy Code. It is not for the courts to restrike that balance according to their own lights.

Id. at 1439-40.

We also have hinted at what the proper outcome should be. In Santiago, we cited approvingly Krakowiak v. Lyman (In re Lyman), 166 B.R. 333 (Bankr.S.D.Ill.1994), which is the only court that has dealt squarely with this issue. In Lyman, numerous creditors were not given notice of the debtor’s bankruptcy until seven months after the bar date for filing a dischargeability complaint. Id. at 334. One year after receiving notice, the creditors filed a complaint alleging that the debts owed them were nondischargeable under §§ 523(a)(2) and (4), and the debtor moved to dismiss based upon laches and estoppel. Id. at 334-35. The court stated that the

debtor ha[d] not cited any rule that imposes a time limit for bringing a complaint to determine the dischargeability of a debt under section 523(a)(3); the bankruptcy rules simply do not provide one. Instead Rule 4007(b) expressly provides that a complaint other than under § 523(c) may be filed at any time.... Therefore, debtor’s argument that the complaint should be dismissed pursuant to laches or estoppel is without merit.

Id. at 337 (internal quotation marks and citations omitted).

In Wilborn v. Gallagher (In re Wilborn), 205 B.R. 202 (9th Cir. BAP 1996), we again cited Lyman with approval. We noted that Lyman stood for the proposition that the language of Rule 4007(b) allows for “lengthy extensions where creditors did not receive notice until after the bar date.” Id. at 209. We also noted that Lyman addressed the possibility of equitable defenses to the “any time” language of Rule 4007(b) and deemed these defenses inapplicable. Id. at n. 7.

Collier on Bankruptcy is also instructive on this point and affirms that the Rules do not contemplate a time limit for bringing these types of actions.

Dischargeability or nondischargeability proceedings regarding most types of debt may be initiated, either by the debtor or a creditor, at any time. They are not subject to the time limitations for filing complaints that apply to non-dischargeability proceedings seeking determinations under paragraphs (2), (4), (6), and (15) of section 523(a) of the Code, which are governed by subdivisions (c) and (d) of Bankruptcy Rule 4007....

The rule expressly contemplates that such dischargeability proceedings may be brought after the bankruptcy case is closed by providing that a case may be reopened, if necessary, to file a dis-chargeability complaint. The broad permissive language of the rule does not appear to give the bankruptcy court discretion to deny a reopening of the case for this purpose.

9 L. King, Collier On BANKRUPTCY, ¶ 4007.03 (15th ed.2000).

Here, the bankruptcy court stated that the Plaintiff [was] guilty of laches by failing to bring a Section 523 nondis-chargeability complaint for over five years after first learning the Defendant had filed bankruptcy.... Laches is an equitable doctrine, to be applied at the discretion of the Court so as to protect a party against whom a claim has been asserted from any prejudice which may result from the unreasonable delay of the party asserting the claim. Here, Mr. Selinger’s delay is inexcusable and was done for tactical reasons. The Plaintiff expressed an intent to await a change in the law with regard to dis-chargeability of punitive damages and to see what would happen with this [sic] 727 action in which he objected to Mr. Beaty’s discharge. Prejudice to the Defendant is obvious based upon these facts, and the Court rules that the Debt- or is entitled to a fresh start at this late date, having received his discharge in 1992.

Findings of Fact and Conclusions of Law re: Cross-motions for Summary Judgment and Motion to Strike (July 12, 2000), at 4. While we may agree that Selinger’s failure to act more promptly is questionable, we are not at liberty to rewrite the plain language of the Code or the Rules. See Graves v. Myrvang (In re Myrvang), 232 F.3d 1116, 1123-24 (9th Cir.2000) (a bankruptcy court is a court of equity and it should use principles and doctrines of equity except where their application would conflict with the Code). Rule 4007(b) states that an action may be brought at “any time.” See Fed.R.BanKR.P. 4007(b) (emphasis added). A laches defense to the filing of a § 523(a)(3)(B) complaint is in conflict with Rule 4007(b) and therefore is inappropriate.

The Rules also provide a debtor with a way to escape the apparent § 523(a) dilemma of having to face a nondischargeability action years after a discharge has been granted. Rule 4007(a) allows a debtor to bring an action to determine the dis-chargeability of a debt. See Fed. R.BanKR.P. 4007(a). Here, Thomas could have brought an action to determine the dischargeability of the Default Judgment and averted the years of delay that arguably prejudiced him. Because Thomas did not utilize this option, he cannot now complain that he has been unjustly treated.

Accordingly, the bankruptcy court erred in granting summary judgment in favor of Thomas.

C. The Bankruptcy Court Erred in Denying Selinger’s Motion for Summary Judgment.

The bankruptcy court denied Selinger’s motion for summary judgment because it had granted Thomas summary judgment. On appeal Selinger contends that the bankruptcy court erred by not giving pre-clusive effect to the Default Judgment.

Because the bankruptcy court did not reach the issue of whether the state judgment was subject to collateral estoppel, we cannot say whether the bankruptcy court erred by not giving preclusive effect to the Default Judgment. Accordingly, we remand to the bankruptcy court to determine whether the Default Judgment satisfies the elements of collateral estoppel.

V. CONCLUSION

In sum, the bankruptcy court did not violate Selinger’s right to due process. The bankruptcy court erred in granting Thomas’ motion for summary judgment. The bankruptcy court erred in denying Selinger’s motion for summary judgment. We remand to the bankruptcy court the issue of whether the Default Judgment satisfies the elements of collateral estop-pel, and for any additional proceedings that it deems necessary to resolve this matter.

AFFIRMED, in part, REVERSED, in part, AND REMANDED.

1 . Unless otherwise indicated, all chapter, section, and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330 and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036.

2 . Under the Ninth Circuit Judicial Workload Equalization Program, this matter was assigned to the Hon. John Peterson, Bankruptcy Judge for the District of Montana.

3 . Upon remand, the case was reassigned from Judge Peterson to Judge Adler.

4 . On appeal, Selinger fails to assign any error to the bankruptcy court’s denial of the motion to alter or amend. Accordingly, we do not address this issue. See Leer v. Murphy, 844 F.2d 628, 634 (9th Cir. 1988) (issue not raised in brief has been abandoned).

5 . Selinger filed (1) Plaintiff's Memorandum of Points and Authorities in Support of Motion to Strike (Mar. 30, 2000); (2) Plaintiff’s Reply to Defendant's Opposition to Plaintiff’s Motion to Strike (Apr. 7, 2000); (3) Plaintiff's Memorandum of Points and Authorities in Support of Motion for Summary Judgment (Mar. 23, 2000); (4) Plaintiff’s Reply to Defendant’s Opposition to Plaintiff's Motion for Summary Judgment (Apr. 12, 2000); (5) Plaintiff's Memorandum of Points and Authorities in Opposition to Defendant’s Motion for Summary Judgment (Apr. 7, 2000); (6) Plaintiff's Memorandum of Points and Authorities in Support of Motion to Alter the Judgment (July 24, 2000); and (7) Plaintiff’s Reply to Defendant's Opposition to Plaintiff's Motion to Alter the Judgment (Aug. 15, 2000).