Watson v. City National Bank (In Re Watson)

78 B.R. 232, 17 Collier Bankr. Cas. 2d 840, 1987 Bankr. LEXIS 898, 16 Bankr. Ct. Dec. (CRR) 578

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: September 9, 1987
• Docket: Bankruptcy No. LA 83-19815 RM, BAP No. CC 86-2075 MeMoV, Adv. No. LA 86-2816 RM
• Status: Published

Opinions

OPINION

MOOREMAN, Bankruptcy Judge:

This is an appeal from the entry of a preliminary injunction entered by the trial court preventing the appellants from executing upon a bankruptcy court judgment of nondischargeability they received pursuant to 11 U.S.C. Section 523. The trial court held that appellants were precluded from pursuing their claims without first seeking relief from the automatic stay imposed by Section 362. We reverse.

FACTS

The Watsons, debtors herein, sought relief under Chapter 11, 11 U.S.C. 1101 et seq., in October 1983. Due to a lack of compliance with the reporting requirements of the U.S. Trustee and the local rules, the case was converted on March 14, 1984 to a Chapter 7. Pursuant to a “order and notice of hearing” issued by the clerk of the bankruptcy court on June 1,1984, all objections to discharge and all complaints had to be filed no later than September 1, 1984.

City National Bank, (“CNB”), appellant herein, brought a timely action pursuant to Section 523 seeking an judgment of nondis-chargeability. The debtors, after filing an answer to the complaint, failed to comply with the trial court’s order concerning pretrial discovery and settlement discussions. CNB moved to strike the debtors’ answer for their failure to comply with the court order. The debtors did not respond and the trial court granted the motion. In the judgment on the complaint, which was entered on October 11,1984 as a result of the stricken answer, the court indicated that the judgment was “non-dischargeable in this or any subsequent proceeding.”

CNB obtained a writ of execution from the court and proceeded to levy upon a bank account held by the debtors. Subsequently a second levy was issued and executed on other funds in an account held by the debtors. There is no dispute that the amounts levied upon were post-petition funds. The debtors then filed a complaint seeking the imposition of an injunction preventing further execution of the judgment and for return of the levied funds. The trial court issued an injunction, finding that the actions taken by CNB were in violation of the automatic stay provisions of Section 362. In addition, all of the the funds levied upon were ordered to be turned over to the debtors. CNB timely appealed.

ISSUE PRESENTED

Is a creditor of the debtor, having obtained a judgment of non-dischargeability pursuant to 11 U.S.C. Section 523 from the bankruptcy court, required to seek relief from the automatic stay prior to execution on the judgment?

STANDARD OF REVIEW

The grant or denial of an injunction is reviewed for an abuse of discretion. See S.E.C. v. Carter Hawley Hale Stores, Inc., 760 F.2d 945, 947 (9th Cir.1985). Application of an incorrect legal standard is an abuse of discretion. Id. In making this determination, issues pertaining to the interpretation of statutes are reviewed de novo. See e.g. E.E.O.C. v. First Citizens Bank of Billings, 758 F.2d 397, 401 (9th Cir.1985).

DISCUSSION

In the present case, the trial court enjoined the actions of CNB on the sole basis that such conduct was in violation of the automatic stay provisions contained in Section 362. The relevant language of that section provides as follows:

(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, * * * operates as a stay, applicable to all entities, of—

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title;

* * * * * *

(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.

11 U.S.C. section 362 (emphasis supplied).¹

On its face, the foregoing language can be read to stay “any act to collect” a pre-bankruptcy claim. However, it is recognized that a creditor may proceed with an action to hold its debt non-dischargeable in the bankruptcy court without violation of the automatic stay provisions of Section 362. See e.g. American Spinning Mills, Inc., 43 B.R. 365, 367 (Bankr.E.D.Penn.1984). Upon the successful completion of that action by the creditor, the question presented herein is whether it is able to execute on the non-dischargeable judgment or must it wait until the closing or dismissal of the case or the general discharge of the debtor.² The language and intent of the Bankruptcy Code, as presently drafted, indicates that the creditor may pursue its non-dischargeable judgment, albeit only upon property not within the bankruptcy estate, such as property acquired after bankruptcy. 11 U.S.C. section 521.

We begin with the language of Section 523(a), which provides that “[a] discharge under section 727 * * * does not discharge an individual debtor from any debt— ” A creditor bringing a successful action under Section 523(a), such as CNB, thereby precludes a discharge of the debt owed by the individual debtor to the respective creditor. Therefore, as to a creditor holding a judgment of non-dischargeability, the general discharge provided to the debtor under Section 727(a) is ineffective. See Section 727(b). Accordingly, a requirement that this creditor be forced to wait until entry of the 727(a) discharge is unsound.

If the non-dischargeable judgment is not subject to execution until the closing or dismissal of the case or a 727(a) discharge, see Section 362(c), the debtor is given the opportunity to delay and/or hinder the creditor from executing upon post-petition property, which is not property of the bankruptcy estate, for no valid reason. See In re Newnum, 2 B.R. 500, 501 (Bankr.Ariz.1980).

In addition, a review of other types of claims that are not subject to the automatic stay reveals a similar conclusion. For example, Section 523(a)(5) excepts from discharge claims for alimony and child support. Section 362(b)(2) precludes application of the automatic stay to such claims made against property which is not property of the bankruptcy estate. In the legislative discussions leading to the enactment of this provision, the following statement was made:

The automatic stay is one means of protecting the debtor’s discharge. Alimony, maintenance and support obligations are excepted from discharge. Staying collection of them, when not to the detriment of other creditors (because the collection effort is against property that is not property of the estate), does not further that goal.

House Report No. 95-595, 95 Cong., 1st Sess. 342-43 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 6299. This Panel finds the same reasoning persuasive in the instant appeal.

The purpose of the automatic stay is to give the debtor a breathing spell from his creditors and relieve him of the financial pressures that drove him to bankruptcy. Id. Upon the filing of the petition, CNB was precluded from pursuing its claim against the debtor except through those avenues provided under the provisions of the Bankruptcy Code. During the time it took to obtain its judgment of nondischargeability, the debtors enjoyed the benefit of the automatic stay. Upon such a judgment, the debt owed to the creditor is excepted from discharge. The trial court held that the debt is non-dischargeable in any subsequent proceedings as well. The debtors have failed to set forth any valid reasons why CNB should not be entitled to pursue the execution of its judgment against property which is not property of the estate. There is a lack of logic in allowing a creditor release from a discharge only to hold him in place as if he were still affected by the discharge or the prospect thereof. Therefore, this Panel concludes that the automatic stay provisions of Section 362 do not preclude the execution of a judgment, which has been held by the bankruptcy court to be non-dis-chargeable, upon property of the debtor which is not property of the estate.³

The order of the trial court is hereby reversed and this matter is remanded for further proceedings consistent with this opinion. In light of the above disposition, this Panel need not reach the other matters raised by the appellant.

1 . There is no dispute that the property levied upon by CNB was not within the definition of properly of the estate as defined by Section 541. The automatic stay contained in Section 362, as set forth in subsection (a)(1) and (6), remains effective until the earliest of — (A) the case is closed: (B) the time the case is dismissed; or (C) if the case is one under chapter 7 involving an individual, the time a discharge is granted or denied. See Section 362(c).

2 . A review of the briefs herein and the relevant authorities reveals a lack of authority on the issue before us. Appellant has cited In re Vaughn, 462 F.Supp. 1052, 1055 (N.D.Tex.1978), which was decided prior to the creation of the present Bankruptcy Code. In dictum, the court indicated that under prior Bankruptcy Rule 401(a), the predecessor to the current 11 U.S.C. Section 362, "non-dischargeable debts * * * are not stayed.” Id. CNB argues that although Section 362 did not adopt the precise language of prior Rule 401(a), the substance of the law has not changed. The debtors contend that Congress clearly indicated its intent by deleting the language regarding the effect of the automatic stay upon judgments of non-dischargeability contained in Rule 401(a) from Section 362. Nevertheless, reading the Bankruptcy Code as a whole, actions such as adversary proceedings and contested matters are not only anticipated, they are mandated for creditors to prevent discharge of their claims. See e.g. Section 523(c) (allowing discharge unless creditor acts); In re American Spinning Mills, Inc., 43 B.R. 365, 367 (Bankr.E.D.Penn.1984) ("the stay implicitly does not bar a party from commencing an adversary or contested proceeding against the debtor ...”).

3 . The dissent argues that this decision creates an exception to the automatic stay provisions of Section 362, and expresses concern that this decision "will encourage other parties to resort to self-help on the false hope that the equities of their situation will be thought enough to likewise carve out yet another exemption to the dictates of Section 362(a)." This decision makes no such "exception" to Section 362. Rather, once the bankruptcy court has determined a judgment is non-dischargeable, the judgment holder may execute upon property of the debtor which is not property of the estate. Under these circumstances, Section 362 simply does not apply.

We also note that Section 105 provides the trial court with authority to enter a stay in actions not covered by the automatic stay provisions of Section 362. It may be, given proper circumstances, that actions by creditors holding judgments determined to be non-dischargeable, may be within the court’s injunctive authority, but no showing has been indicated here warranting consideration of such extraordinary relief.