In re Sherrie Nicole-Lockhart Johnson

Case Type:
Case Status:
Reversed and Remanded
20-1161 (9th Circuit, Jul 28,2021) Published
Presented with a creditor (CR) seeking to avoid the discharge of debt allegedly caused by a nondebtor spouse's fraud, the BAP found that the CR's non-dischargeability complaint had been insufficiently pled, as the BC had, but that an amendment could credibly undercut the community property discharge exception's application, thus leading it to vacate the BC's denial of the CR's motion for leave to amend on futility's basis. More broadly, the BAP limned the procedure to follow when a nondebtor, wrongdoing spouse's creditor aims to preclude a community property discharge in the spouse's case.
Procedural context:
Sharlene Willard (Willard) held a state court judgment against Steve Johnson (Johnson) arising from a contract for home repairs (Judgment). Independently of her husband, Steve’s wife Sherrie Lockhart-Johnson (Debtor) filed an individual chapter 7 bankruptcy petition in the BC, the United States Bankruptcy Court for the Central District of California. Within this case, sometime in March 2020, Willard filed a complaint to except the Judgement from discharge under § 523(a)(2)(A) based solely on Johnson's conduct, alleging neither any fraudulent conduct on the DR's part or the outstanding Judgment's status as "community" debt for which both spouses could potentially be held liable under generally applicable non-bankruptcy law. (More precisely, Willard alleged that Johnson had obtained funds from her through false pretenses, false representation, and actual fraud and, as a result, the debt was nondischargeable.) Because Willard had neglected to advance such allegations, the BC granted the DR's motion to dismiss (MTD). Conceding the deficiency of her complaint, Willard sought leave to amend. The BC, however, denied such leave, dismissing the complaint with prejudice, entirely because her allegations of fraud were pled against Johnson, a non-debtor. Willard timely appealed to the BAP, the U.S. Bankruptcy Appellate Panel of the Ninth Circuit. There, all three judges signed as to the above holding. One--Honorable Christopher M. Klein--wrote a separate concurrence to draw attention to a "little-used tool in the procedural toolbox": joinder under Federal Rule of Civil Procedure 19.
In 2017, Willard filed a complaint in state court against Johnson, among others, based on an agreement for home repairs. According to Willard, after an initial failed settlement, she obtained the Judgement, which named Johnson, not the DR, and which exceeded $10,000. In June 2019, Willard sought to garnish the DR's wages, asserting that they were community property under California law and thus liable for the debt. After Willard initiated this garnishment action, but prior to the hearing in state court, the DR commenced her chapter 7 case. The DR's filings shed some light on her uncertain relationship to Johnson. For example, while the DR indicated in her Statement of Current Monthly Income that she was married, she made clear that she was either legally separated or living separately from her spouse. In her Schedule H, meanwhile, she further averred that she had lived in a community property state in the past eight years--but that her spouse, the man that Willard had first sued, did not reside with her during that entire near decade. Finally, while the DR did not initially list Willard as a creditor, an amended list of creditors and an amended Schedule E/F filed in February 2020 did list a debt owed to Willard in the amount of $9,873. In those same papers, Willard classified that obligation to Willard as a community debt.
Scott H. Gan; Christopher M. Klein; and Laura S. Taylor

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