Opinion
Case No. 05-04824-B7, Adv. No. 05-90358-B7.
June 30, 2006
ORDER ON MOTION FOR SUMMARY JUDGMENT
Creative Capital Leasing Group, LLC, (Plaintiff) seeks summary judgment that its claim against the Debtors is nondischargeable based upon a settlement agreement in a prior bankruptcy case which so provided. Debtors seek damages based upon Plaintiff's alleged violation of the automatic stay in the present case. For the reasons set forth below, Plaintiff's motion is granted in part. Debtors' request for sanctions is denied.
This Court has subject matter jurisdiction over the proceeding pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b) (2) (A) (I).
FACTS
This is Debtors' second bankruptcy case. Debtors' first case was filed as a chapter 11 on February 25, 1997, Case No. 97-2797 (Prior Case). In the Prior Case Plaintiff filed its "Complaint to Determine Dischargeability of Debt," commencing Adversary Proceeding No. 97-90390. A few years later, the parties entered into a settlement agreement (Settlement Agreement) which the Court approved on June 21, 2001 via the "Stipulation of Parties Re: Settlement of Complaint to Determine Nondischargeability and Order Thereon." (Stipulation Order).
The Settlement Agreement provides in relevant part:
— that one of the disputes resolved thereby is Adv. Proc. No. 97-90390 (¶ I.A.);
— that the Debtors (with their wholly owned salons Bravo Hair Design, Inc., DFW Hair LLC, and Salon Group, Inc.) will pay to Plaintiff $360,000.00, in monthly installments of $7,500.00 beginning May 10, 2001 (¶ 11.1.);
— that the Debtors will pay an additional $55,000.00 prior to May 10, 2005 (¶ 11.1.); and
— that in the event of default the entire amount would become due and payable. ¶ 11.3.
The Settlement Agreement also provided that the $360,000.00 debt would be nondischargeable:
Non-discharaeability of Obligation. The monthly installment payments totaling $360,000 of Alfredo Dinunzio and Rosanna Dinunzio provided in this agreement have not and will not be discharged by any bankruptcy petition or proceeding of Alfredo Dinunzio and Rosanna Dinunzio, or Bravo Hair Design, Inc., including the proceedings pending in the United States Bankruptcy Court for the Southern District of California known as Case No. 97-02797 B11 (Dinunzio) and 97-02795 (Bravo). In furtherance of this agreement, Alfredo Dinunzio and Rosanna Dinunzio and Bravo Hair Design, Inc. will sign and submit to the court a stipulation regarding the non-dischargeability of their obligations as provided in this agreement and cooperate through their counsel to obtain an order from the United States Bankruptcy Court that the obligations provided by this agreement have not and will not be discharged pursuant to bankruptcy laws of the United States. If Bankruptcy Court approval of this agreement is required by law, or any party to this agreement requests Bankruptcy Court approval, the parties will also seek such approval and cooperate with one another in doing so.
Settlement Agreement ¶ 11.5.
Debtors made one or two payments under the Settlement Agreement ($10,000.00) but quickly defaulted.
On September 29, 2004, Plaintiff commenced an action in San Diego Superior Court seeking judgment on the Settlement Agreement. On May 27, 2005, judgment was entered in favor of Plaintiff in the amount of $525,403.56, representing the amounts owing under the Settlement Agreement plus pre-judgment interest as of May 27, 2005, (State Court Judgment). However, earlier on that same day the Debtors had filed the petition commencing the present bankruptcy case.
On August 15, 2005, Plaintiff filed a new complaint to have the debts determined excepted from discharge.
Plaintiff brought this motion for summary judgment seeking a ruling that the debt, as liquidated in the State Court Judgment, is nondischargeable under Bankruptcy Code § 523(a)(10) because it was determined to be non-dischargeable in the Prior Case. In their opposition Debtors contend that there was no determination that the debt was nondischargeable in the Prior Case. Debtors also seek sanctions against Plaintiff for its violation of the automatic stay in obtaining the State Court Judgment after the petition was filed and its reliance thereon in connection with this motion.
At the hearing the Court referred the parties to In re Moncur, 328 B.R. 183 (9th Cir. BAP 2005), a case which neither had cited. The Court heard argument and then gave the parties an opportunity to file supplemental brief on the applicability of the Moncur case. Plaintiff filed a supplemental brief, and the Court thereafter took the matter under submission.
DISCUSSION
Noridischargeability of the Debt
Plaintiff's motion has a couple of problems. First, Plaintiff cites to and relies upon § 523(a)(10) which provides:
(a) A discharge under section 727, 1141, 1228(a), 1228 (b), or 1328 (b) of this title does not discharge an individual debtor from any debt —
(10) that was or could have been listed or scheduled by the debtor in a prior case concerning the debtor under this title or under the Bankruptcy Act in which the debtor waived discharge, or was denied a discharge under section 727 (a) (2), (3), (4), (5), (6), or (7) of this title, or under section 14c (1), (2), (3), (4), (6), or (7) of such Act. . . .
The problem is that there is neither evidence nor even argument that the Debtors "waived discharge, or [were] denied a discharge under section 727" in the Prior Case. The fact is that an order granting the Debtors' discharge in the Prior Case was entered on December 4, 1998. Section 523(a)(10) simply does not apply to the facts of this case. See In re Garcia, 313 B.R. 307, 309 n. 6 (9th Cir. BAP 2004) ("Section 523(a) (10) is inapplicable here, as Debtors did receive their discharge in the 1993 California bankruptcy.")
However, while § 523(a) (10) does not afford Plaintiff the relief sought, 5 523(b) does. Moncur, 328 B.R. at 186. InMoncur the debtors had stipulated to a money judgment excepted from discharge in a chapter 12 case in favor of creditor Agricredit. Debtors filed a subsequent chapter 7 case and obtained a discharge. Agricredit did not file an adversary proceeding in the second case. Nevertheless, the Panel upheld the bankruptcy court's ruling that the debt remained nondischargeable in the second and any other subsequent case:
Section 523(b) indirectly acknowledges that, except for the several exceptions stated therein, the general rule is that if a particular debt is determined to be nondischargeable in a valid and final judgment by a court with jurisdiction and from which there was an opportunity to appeal, then the debt is always nondischargeable on the basis determined in the judgment. Paine, 283 B.R. at 37-38. In other words: once nondischargeable, always nondischargeable.
In re Moncur, 328 B.R. at 186. As stated above, in the Prior Case the Court did order that the specific debt to Plaintiff was nondischargeable. The Settlement Agreement resolved Plaintiff's nondischargeability adversary proceeding. The Settlement Agreement specifically provided that the payments totaling $360,000 called for in the Settlement Agreement "have not and will not be discharged by any bankruptcy petition or proceeding of [Debtors] including the [prior case]. . . .
Debtors admit entering into the Settlement Agreement, but contend that there was no adjudication of nondischargeability in the Prior Case because the Stipulation Order "does not provide for nondischargeability." The Court disagrees. The Settlement Agreement clearly provided that the $360,000 debt would be nondischargeable. The Stipulation Order provided that the "terms and conditions of the parties' settlement are set forth in detail in the fully executed Settlement Agreement and Release of All Claims attached hereto. . . ." Debtors have provided no authority for the implicit proposition that a specifically worded judgment is necessary. The cases the Court has reviewed indicate that no special wording is required. In Garcia the Panel held that a default judgment in a nondischargeability action was entitled to preclusive effect even though it did not specifically state that the claim was nondischargeable. Id. at 312-13. There is also no requirement that the issue have been litigated in the Prior Case. As noted above, as in this case, the order inMoncur was based upon a stipulation. The Court finds that there was clearly a finding of nondischargeability in the Prior Case.
Accordingly, under § 523(b)Plaintiff is entitled to a judgment that some portion of the debt is nondischargeable in this case.
The foregoing brings us to the second problem with Plaintiff's motion. Plaintiff seeks a judgment that "the debt owed by [Debtors] to [Plaintiff] in the sum of $523,403.56 is non-dischargeable." Motion at 4:20-21. The amount of the debt claimed by Plaintiff is based on the State Court Judgment. However, as noted above, the State Court Judgment was entered after the petition was filed. It is thus void ab initio. In re Schwartz, 954 F.2d 569, 571 (9th Cir. 1992). The amount of the debt based upon the Settlement Agreement and order thereon remains to be liquidated. The Court also notes that based upon the Settlement Agreement, not all of the claim appears to be nondischargeable. The Settlement Agreement provides only that the "[tlhe monthly installment payments totaling $360,000.00 of Alfredo Dinunzio and Rosanna Dinunzio provided in this agreement have not and will not be discharged. . . ." The nondischargeability order does not appear to reach the additional $55,000.00 to be paid by the Debtors under the Settlement Agreement. It is not clear from the record whether the amount of the State Court Judgment is based on only the $360,000.00 or also includes the $55,000.00. This, too, will have to be resolved.
Sanctions for State Court Judgment
This leaves us with Debtors' request for sanctions for Plaintiff's violation of the automatic stay in obtaining the State Court Judgment under Bankruptcy Code § 362(k) (formerly (h)) and for relying on the State Court Judgment in the declaration of Walter Chung in support of the motion for summary judgment under Rule 56(g) of the Federal Rules of Civil Procedure (made applicable to this adversary proceeding by
As the Court explained at the hearing, sanctions under § 362(k) must be sought in a separately noticed motion. See Fed.R.Bankr.Proc. 9014 and 9020. Counsel sought to avoid the requirement of a separately noticed motion by arguing that authority for sanctions could also be found in Rule 56(g) which provides:
(g) Affidavits Made in Bad Faith. Should it appear to the satisfaction of the court at any time that any of the affidavits presented pursuant to this rule are presented in bad faith or solely for the purpose of delay, the court shall forthwith order the party employing them to pay to the other party the amount of the reasonable expenses which the filing of the affidavits caused the other party to incur, including reasonable attorney's fees, and any offending party or attorney may be adjudged guilty of contempt.
FRCP Rule 56. The first question under this Rule is whether the Court finds that Plaintiff submitted an affidavit in bad faith. The only affidavit submitted by Plaintiff in support of its notion for summary judgment is the declaration of Walter Chung. The declaration does attach the State Court Judgment and provides "[slaid Judgment was filed May 27, 2005. There having been no 3ppeal taken to this order, it is now a final order under 3alifornia law." Chung Dec. at ¶ 12. This is not only an inaccurate statement of the facts and the law — as noted above the State Court Judgment was void ab initio — but it is also a statement Plaintiff and Plaintiff's counsel knew or should have known to be inaccurate. Nearly a year earlier, on June 7, 2005, counsel for the Debtors sent a letter to Mr. Chung explaining that the State Court Judgment had been obtained after the petition was filed, that it was void under federal bankruptcy law, and that it was incumbent upon him to take steps to cancel the judgment. Those were all accurate statements of the law and counsel should have, at the very least, ceased to rely on the State Court Judgment. Thus, the Court does find that to the extent the Chung declaration relies on the State Court Judgment it was filed in bad faith. The next question is whether and to what extent an award of sanctions is appropriate.
An award of damages under Rule 56(g) is limited by its terms to "the amount of the reasonable expenses which the filing of the affidavits caused the other party to incur. . . ." Counsel for the Debtors provided no evidence of any costs incurred due to Plaintiff's reliance on the State Court Judgment in connection with the motion for summary judgment. Debtors simply seek "attorney's fees for opposing this Motion, plus punitive damages. . . ." Clearly punitive damages are not available under Rule 56(g). The Court has reviewed the opposition and determines that any fees incurred as a result of Plaintiff's reliance on the void State Court Judgement in connection with the motion for summary judgment are negligible. The opposition does include a discussion of the voidness of the judgment and the availability of sanctions under § 362 (h) and 56 (g). However, counsel for the Debtors had done that research and drafted that identical language before the Chung declaration was even filed. Compare Cawdry Letter dated June 7, 2005 with the Opposition 5:15-6:26. All that was required of counsel for the Debtors was a simple cut and paste.
Accordingly, while the Court finds that the Chung declaration was filed in bad faith, no actual damages, as required under Rule 56(g), resulted.
CONCLUSION
Plaintiff's motion for summary judgment is granted to this extent — that portion of its claim which was stipulated to being nondischargeable under the Settlement Agreement remains nondischargeable in this case.
Debtors' motion for sanctions under § 362(k) is denied as it must be brought by separately noticed motion. Debtors' motion for sanctions under Rule 56(g) is denied as the Court finds no evidence that any violation thereof resulted in any actual damages.
The amount of plaintiffs' nondischargeable claim remains to be resolved. The parties will be notified of a status conference.
IT IS SO ORDERED.