- BAP No. OR-15-1119-JuKiF & BAP No. OR-15-1158-JuKiF (BAP 9th Cir. Apr. 12, 2016)
- The BAP for the 9th Circuit reversed the ruling of the bankruptcy court (D. Or.) finding appellants in contempt for violating debtor's discharge injunction, finding the bankruptcy court erred by applying an incorrect legal standard. The BAP ruled that bankruptcy court erred in finding that appellants had actual knowledge that the discharge injunction applied to their fee request in the state court. Appellants’ request of state court that state court determine if discharge injunction barred attorney fee claim complied with 9th Circuit precedent, and reliance upon state court’s ruling, prevented finding of “willful” violation of discharge injunction. Further, bankruptcy court failed to apply proper 9th Circuit standards for determining actual knowledge prong of contempt test. Bankruptcy court’s test of appellants’ knowledge of discharge equated to strict liability, and failed to assess intent to violate injunction. Appellants’ subjective intent to violate stay applied to contempt standards; bankruptcy court’s application of objective intent analysis was more in line with willful violation of automatic stay.
- Procedural context:
- Debtor moved for contempt sanction, alleging violation of discharge injunction. Bankruptcy court denied motion. Debtor appealed to U.S. District Court. District court reversed and remanded. Bankruptcy court held hearing, and entered sanctions against appellants. Appellants appealed to BAP for 9th Circuit.
- Debtor was a general contractor who operated through a corporation, Builders, Inc. (Builders). Debtor helped form “SPBC” to build and operate a business park. SPBC was initially owned by four members, each with a 25% member interest. Debtor was manager. Under the operating agreement, members had right of first refusal before any transfer of a membership interest was made, and any transfer of a membership interest had to be approved by a majority of the other members. In late 2004, Debtor, and Builders began experiencing financial difficulty. Debtor began diverting funds intended for SPBC to his own use. One of the SPBC members acquired a 50% interest in Builders, and became adversarial to Debtor. Debtor encouraged creditors to file involuntary bankruptcy against Builders. SPBC’s members replaced Debtor as SPBC’s manager, who discovered that Debtor had diverted about $30,000 in cash from SPBC for his own purposes. SPBC sued Debtor in arbitration and obtained an award against him. Debtor’s attorney (Berman) paid the award. Debtor and Berman formed a new entity (BT), and transferred Debtor’s SPBC membership interest to BT. Debtor then sold his interest in BT to Berman for $200,000, effectively transferring the membership in SPBC to Berman. SPBC sued Debtor, BT, and Berman in the state court, asserting claims for breach of fiduciary duty, expulsion due to breach of contract, attorneys’ fees, and declaratory relief (State Court Lawsuit). SPBC sought to expel Debtor from the company and to unwind the transfers between Debtor and BT so that SPBC’s other members could purchase Debtor’s membership interest. Debtor counterclaimed. The day before trial, Debtor filed a chapter 7 petition. Shortly after the filing, the chapter 7 trustee filed a report of no assets available for distribution, and Debtor received his discharge. The State Court Lawsuit was stayed while Debtor’s case was pending, but the SPBC members resumed the suit following dismissal of Debtor’s bankruptcy case. They sought no money judgment against Debtor due to his discharge. The action ultimately went to trial. Debtor did not appear, although Berman did. The state court ruled in favor of SPBC by unwinding Debtor’s transfer of his membership interest and reinstating the other members’ right of first refusal to purchase the interest under the SPBC operating agreement. Plaintiffs then filed a motion seeking attorneys’ fees and costs incurred after entry of Debtor’s discharge. Plaintiffs also sought a ruling from the state court on the issue whether the discharge injunction applied to the post-discharge fee request, asserting that Debtor had “returned to the fray” under the holding in Boeing North American, Inc. v. Ybarra (In re Ybarra), 424 F.3d 1018 (9th Cir. 2005). Debtor opposed, arguing that he had not voluntarily returned to the fray under the Ybarra rule. After a hearing, at which Debtor testified, the state court issued a written ruling, finding that Debtor had returned to the fray and thus the discharge injunction did not apply to the post-discharge request for attorneys’ fees and costs under the Ybarra rule. The state court awarded SBPC its attorneys’ fees and costs, but denied fees and costs as to the individual members. Prior to the state court’s ruling, Debtor reopened his bankruptcy case and filed a motion seeking to hold the individual members, but not SBPC, in contempt for violating the discharge injunction under § 524(a)(2). The bankruptcy court ruled on the matter after the state court had ruled. The bankruptcy court denied Debtor’s motion, finding no error with the state court’s ruling on the applicability of the discharge injunction under Ybarra. Upon its own de novo review, the bankruptcy court also found that the record supported the finding that Debtor had voluntarily returned to the fray in the state court litigation and thus the discharge injunction did not apply to Appellants’ request for post-discharge attorneys’ fees. Debtor appealed the bankruptcy court’s decision to the district court. The district court reversed, finding that Debtor’s actions in the state court litigation were not sufficiently affirmative and voluntary to be considered “returning to the fray” under the Ybarra rule. The district court remanded the matter to the bankruptcy court to determine whether Appellants knowingly violated the discharge injunction by seeking attorneys’ fees in the state court. On remand, the bankruptcy court found that Debtor had proved by clear and convincing evidence that Appellants willfully violated the discharge injunction since they were aware of the discharge injunction and intended the actions which violated it. The court entered an order for contempt, and awarded sanctions in favor of Debtor and against SBPC members. The members appealed to the BAP for the 9th Circuit.
- Jury, Kirscher, Faris
In re Khabushani
Summarizing by Amir Shachmurove
Loughran v. Wells Fargo Bank, N.A.
Summarizing by Sarah Tomlinson
3268 in the system
3 Being Processed