Cottle v. AZ Corp. Commission (In re Cottle)

BAP No. AZ-16-1078-JuFL (BAP 9th Cir. Oct. 17, 2016) (unpublished)
BAP for 9th Circuit affirmed rulings of bankruptcy court (D. Az.), entering net nondischargeable judgment against debtors after setting off stay violation penalties against creditor. The BAP agreed with bankruptcy court's prejudgment interest calculation under state law "contract rule" based on prepetition consent order entered into by debtors. BAP further agreed that the bankruptcy court correctly applied prejudgment interest from the date of the consent order to the entry of the bankruptcy court's judgment, notwithstanding an intervening state court judgment, because the interest would be the same if the court instead applied both state rate for pre and post judgment under the state "contract rule." Initial bankruptcy court order entering judgment stopped accruing prejudgment interest, notwithstanding subsequent motions by debtors for reconsideration. Bankruptcy court properly allowed creditor to setoff amounts owed debtors against amounts owed by debtors. State agency was "unitary creditor" with state, thus satisfying mutuality requirement. Debtors' motion to strike was deficient and procedurally improper.
Procedural context:
Debtors filed adversary against creditor post-discharge, alleging violation of discharge injunction, and creditor counterclaimed for nondischargeability. Bankruptcy court ruled partially in favor of debtors, setoff stay violation penalty, and entered net nondischargeable judgment. Debtors appealed to BAP for 9th Circuit.
In 2009, Arizona securities commission (ACC) began to investigate debtors for alleged state securities violations. On November 4, 2009, Debtors filed a chapter 7 petition. On April 6, 2010, they received a standard discharge. Two days later, Debtors entered into an Order to Cease and Desist; Order for Restitution; Order for Administrative Penalties and Consent to Same (Consent Order) with the ACC. The State of Arizona (the State) approved the Consent Order on April 27, 2010. The Consent Order was filed in the Maricopa County Superior Court, which entered a judgment concerning the order on May 11, 2010. The order imposed restitution payments of $2,637,880 and an administrative penalty of $150,000 and provided that ten percent interest would accrue on each amount until they were paid in full. After Debtors failed to begin making payments, the ACC commenced collection actions. On February 22, 2012, Debtors moved to reopen their bankruptcy case, alleging that the ACC had violated the automatic stay and that the debts owed were discharged. The bankruptcy court granted their motion to reopen by order entered on February 23, 2012. On April 3, 2012, Debtors filed an adversary proceeding against the ACC, alleging violation of the automatic stay, seeking release of the garnished funds, and requesting an order that would prevent the ACC from collecting under the Consent Order. On cross motions for summary judgment, the bankruptcy court found the restitution payment was discharged and awarded attorneys’ fees and costs in the amount of $33,105.79 against the ACC for the time and costs that Debtors incurred for defending the dischargeability of the Consent Order’s restitution portion under § 523(a)(19). On May 13, 2015, the bankruptcy court entered the order granting judgment in favor of Debtors against the ACC and finding that there was no just reason for delay of entry of the judgment as a final appealable judgment under Civil Rule 54(b), made applicable to the Bankruptcy Code by Rule 7054(a). Subsequently, the ACC moved for summary judgment, contending that the administrative penalty was nondischargeable under § 523(a)(7). The bankruptcy court ruled on April 1, 2015, that the administrative penalty was nondischargeable. On April 28, 2015, Debtors moved for reconsideration of the court’s decision. On April 29, 2015, the bankruptcy court entered an order granting the ACC’s summary judgment motion and finding the administrative penalty nondischargeable. The order contained a Civil Rule 54(b) certification. The bankruptcy court also made a notation on the top of the order which said, “[t]his court does not consider this order to be a final order subject to appeal until the court resolves the recently filed motion for reconsideration.” On September 1, 2015, the bankruptcy court denied Debtors’ motion for reconsideration. Debtors filed adversary against creditor post-discharge, alleging that creditor had violated authomatic stay by attempting to collect restitution debt and administrative penalty debt that debtors had agreed to pay in consent order, but which debtors asserted was discharged. Bankruptcy court entered an order on March 10, 2016, ruling that (1) prejudgment interest at the rate of ten percent would be awarded on the administrative penalty amount of $150,000 from April 8, 2010, to May 13, 2015; (2) this amount would be reduced by $7,804.86, the amount the ACC had garnished on the dischargeable restitution claim; (3) the amount would be further reduced by $33,105.79, this amount representing attorney fees, costs, and interest awarded against the ACC in connection with the restitution claim; and (4) the net sum after applying the previous provisions would accrue postjudgment interest at the rate set by 28 U.S.C. § 1961 from May 14, 2015, until fully paid. On the same date, the bankruptcy court entered a final judgment.
Jury, Faris, Lafferty

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