Toste v. Smedberg (In re Toste)

In re Toste, No. EC-13-1266-TaJuKu (9th Cir. B.A.P. Aug. 12, 2014).
A section 523(a)(6) action in a chapter 13 case is not ripe, and the bankruptcy court lacks jurisdiction, if the debtors have not yet sought a hardship discharge. (Not-for-publication memorandum.)
Procedural context:
In this chapter 13 case, creditors initiated an adversary proceeding to except a prepetition judgment from discharge under 11 U.S.C. § 523(a)(6). The debtors had not sought a hardship discharge. The bankruptcy court determined that the judgment was excepted from discharge under section 523(a)(6). The debtors appealed to the BAP, which reversed.
Before bankruptcy, the creditors sued the debtors in California state court relating to a dispute regarding an easement. The creditors sought to quiet title to the easement, obtain declaratory and injunctive relief, and recover damages for nuisance. After a jury trial resulting in a special verdict, the state court entered a judgment finding that one of the debtors engaged in nuisance and “malicious, oppressive, or despicable” conduct. The state court awarded the creditors general and punitive damages and costs. If the debtors obtain a general discharge under 11 U.S.C. § 1328(a), section 1328(a)(4) will exclude from that discharge civil awards based on willful or malicious personal-injury or wrongful-death claims. But the California private-nuisance claim for which the creditors obtained money damages in their judgment was for harm to a property interest and not for “personal injury” under section 1328(a)(4). And there was no evidence in the record that the creditors recovered any amount for emotional distress or anything else resembling personal injury. To the extent that the judgment did encompass a personal-injury recovery, the BAP questioned in a footnote the bankruptcy court’s reliance on issue preclusion, because the state-court judgment was based on a finding of nuisance, which did not require a determination of a state of mind that equates to willfulness or malice. Also, not all the possible bases for the punitive damages award against one of the debtors required a determination of willfulness or malice under section 1328(a)(4). If the debtors later request a hardship discharge under section 1328(b), that discharge will exclude claims described in section 523(a)(6), and FRBP 4007(d) will require the bankruptcy court to establish a deadline for filing a section 523(a)(6) nondischargeability action and provide at least 30 days’ notice of that deadline. Here, the debtors had not yet sought a hardship discharge. Thus, the action was not ripe, and the bankruptcy court lacked jurisdiction over it.
Laura S. Taylor, Meredith A. Jury, and Frank L. Kurtz, Bankruptcy Judges.

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