Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-05-06048/USCOURTS-ca8-05-06048-0/pdf.json

Parties Involved:
4745 Second Avenue
Appellee
James Leslie Everly
Appellant

Document Text:

United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

__________

No. 05-6048SI

__________

In re: James Leslie Everly, *

 *

Debtor. *

 *

James Leslie Everly, *

 * Appeal from the United States

Debtor - Appellant, * Bankruptcy Court for the 

 * Southern District of Iowa

v. *

 *

4745 Second Avenue, Ltd., *

 *

Creditor - Appellee. *

__________

Submitted: June 15, 2006

Filed: August 2, 2006 (Corrected on August 3, 2006)

__________

Before KRESSEL, Chief Judge, MAHONEY and McDONALD Bankruptcy

Judges.

__________

KRESSEL, Chief Judge.

This case has its origins in arson and burglary at a strip club called Big Earl’s

Goldmine. The debtor pled guilty to burglary and was ordered to pay $62,400.00 in

restitution to Big Earl’s. The principle issue in this appeal is whether the bankruptcy

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 The Honorable Lee M. Jackwig, United States Bankruptcy Judge for the

Southern District of Iowa.

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court1 abused its discretion when it denied the debtor’s motion for sanctions against

the owners of the strip club for violating the discharge injunction when it brought a

civil action in Iowa state court. We conclude that it did not and affirm.

BACKGROUND

On March 9, 1999, the debtor started a fire at Big Earl’s Goldmine causing

significant damage. He pled guilty to the crime of burglary in the second degree on

December 28, 1999 in the Polk County District Court. He received a suspended

sentence and probation. On August 16, 2000 the court ordered the debtor to pay

restitution in the amount of $163,206.96. The debtor objected to the restitution order

and on April 10, 2001, in an amended order, the court reduced the restitution amount

to $62,400.00. The judgment indicated that “The amount of restitution ordered in this

case does not preclude [the] victim from relitigating in a later civil case the amount

of damages sustained.”

The debtor filed a Chapter 13 petition on June 21, 2002. In his Schedule F, he

listed the unpaid debt for restitution in the amount of $60,976.00 owed to Big Earl’s

Goldmine c/o Melvin Bryson at 64th Street, Urbandale, IA 50322. The official name

of the corporation is 4745 Second Avenue Ltd. d/b/a Big Earl’s Goldmine. Melvin

was an agent who received a management fee from Big Earl’s Goldmine, managed the

reconstruction of the club after the fire, and is Big Earl’s son. Big Earl’s wife

Vaunetta Washington is the president, treasurer, secretary and was the registered agent

for 4745 at all relevant times. 

On August 19, 2002, 4745's attorney filed a notice of appearance and a request

for notice in the debtor’s Chapter 13 case. 4745 appeared through its attorney at two

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hearings on confirmation of the debtor’s Chapter 13 plan. On November 4, 2002, the

debtor moved to have his case dismissed and on November 7, 2002 the bankruptcy

court dismissed his case. The Chapter 13 case was closed on December 20, 2002. 

The debtor filed a Chapter 7 petition on January 14, 2003. In his Schedule F,

he again listed the $60,976.00 restitution debt, indicated its proper name as 4745

Second Avenue Ltd., but continued to list its address as c/o Melvin Bryson 64th

Street, Urbandale, IA 50322. The debtor did not list 4745's attorney. A notice of the

meeting of creditors was mailed to the creditors on January 14, 2003 and an amended

notice was sent on July 21, 2003. 4745 claims to have received neither notice.

Vaunetta testified that she never received any notice from the bankruptcy court at the

4745 address relating to the debtor’s bankruptcies. Similarly, Melvin testified that he

did not receive notice of the debtor’s Chapter 7 case. Melvin testified that he was

managing another club in Las Vegas, NV at the time and did not always receive the

mail sent to his Urbandale, IA address. The bankruptcy court found that 4745 had

been an active participant in the Chapter 13 case and the court would have expected

that 4745's attorney would be added to the list to receive notice of the Chapter 7 case.

The debtor received his Chapter 7 discharge on April 16, 2003. The case was closed

on May 5, 2003.

In January 2004, 4745 filed a petition in Iowa state court seeking actual

damages of $163,000.00, accrued interest, $500,000.00 in exemplary damages, plus

costs, for “purposely and intentionally” burning or procuring the burning of Big Earl’s

Goldmine. Eight months later, on September 21, 2004 the debtor sent a letter to 4745

advising it that the petition it filed in state court violated the discharge injunction.

4745's attorney responded in a letter dated September 22, 2004 that his client believed

the debt owed to it was not discharged. 

On October 20, 2004, over nine months after 4745 filed the state court petition,

the debtor filed a motion to reopen his Chapter 7 case to pursue relief based on a claim

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that 4745 violated the discharge injunction. The motion to reopen the case was not

served on 4745 or its attorney. The bankruptcy court granted the motion to reopen the

case on October 25, 2004. 

Three months later, on January 24, 2005, the debtor filed a motion for

sanctions. When asked at a hearing held on February 15, 2005 why he did not include

4745's attorney on the schedules, the debtor claimed to have used the addresses from

the schedules in the Chapter 13 case to file the Chapter 7 case. In an order after that

hearing the bankruptcy court ordered the debtor to schedule the motion for an

evidentiary hearing and be prepared to explain why he waited so long after the

commencement of the state court action to reopen his bankruptcy case. The

bankruptcy court held an evidentiary hearing on August 11, 2005. 

The bankruptcy court summarized the debtor’s argument during the August 11,

2005 hearing by saying “...I gather the debtor seems to think that I can simply find

that the address that was used was good enough because it worked the first time...”.

The court found it was deficient under the totality of the circumstances not to notice

a “very active attorney” for a creditor in the debtor’s previous Chapter 13 case. The

bankruptcy court also left to the Iowa state court to determine whether the debt was

discharged. 

In an August 11, 2005 order the bankruptcy court denied the motion for

sanctions. The debtor appeals from this order. 

 

STANDARD OF REVIEW

We review the decision on whether to award sanctions for an abuse of

discretion. Cooter & Gell v. Hartmarx, Corp, 496 U.S. 384, 399-405 (1990); Shwartz

v. Kujawa (In re Kujawa), 270 F.3d 578, 581-582 (8th Cir. 2001); Hanson v. Sabala

(In re Sabala), 334 B.R. 638, 641 (B.A.P. 8th Cir. 2005) (Finding the bankruptcy

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court did not abuse its discretion when it imposed sanctions against a creditor for

violating the discharge injunction.)

DISCUSSION

Discharge

Pursuant to 11 U.S.C. § 727(b), a discharge in a Chapter 7 case discharges the

debtor from all debts that arose before the date of filing of the bankruptcy petition,

except those that are excepted from discharge. 

Except as provided in section 523 of this title, a discharge ... discharges

the debtor from all debts that arose before the date of the order for relief

under this chapter, and any liability on a claim that is determined under

section 502 of this title as if such claim had arisen before the

commencement of the case, whether or not a proof of claim based on any

such debt is filed under section 501 of this title, and whether or not a

claim based on any such debt or liability is allowed under section 502 of

this title. (Emphasis added)

11 U.S.C. § 727(b).

The discharge injunction “operates as an injunction against the commencement

or continuation of an action, the employment of process, or an act, to collect, recover,

or offset any such debt as a personal liability of the debtor whether or not discharge

of such a debt is waived...” 11 U.S.C. § 524(a)(2). The purpose of the discharge

injunction is to “ensure that once a debt is discharged, the debtor will not be pressured

in any way to repay it.” H.R. Rep. No. 95-595 1st Sess. 365-368 (1977): S. Rep. No.

95-989 95th Con. 2d Sess. 80 (1978). The Supreme Court described the protection

afforded by the discharge injunction as one of the “critical features of every

bankruptcy proceeding [sic]...” Cent. Virginia Cmty. Coll. v. Katz, — U.S. —, 126

S. Ct. 990, 996, 163 L.Ed.2d 945, 74 U.S.L.W. 4101 (2006).

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 At the time this case was filed, there were four, but the change is

immaterial to this case. For convenience we will refer to the current version of 

§ 523.

6

Exceptions to Discharge

11 U.S.C. § 523 lists those debts which are excepted from discharge. The

discharge injunction obviously does not operate as to these debts. There are nineteen

exceptions to discharge listed in § 523(a) and all but three are self-effectuating.2

Palmer v. Nordin (In re Nordin), 299 B.R. 915 (B.A.P. 8th Cir. 2003). By selfeffectuating, we mean that no action is required before the discharge is entered. The

debts are excepted from discharge simply because of the nature of the debts.

Obviously, there may be later disputes (this case is an example) over whether the debt

fell into one of the appropriate categories. “Thus while it is not entirely obvious,

careful analysis reveals that the scope of a discharge is final when entered and

subsequent events do not change what debts were or were not discharged by that

discharge. However, under § 523, certain debts were excepted from that discharge

when entered.” In re Anderson, 72 B.R. 495, 496 (Bankr. D. Minn. 1987). 

The parties seem to recognize that the restitution already awarded by the state

court falls within one of the self-effectuating exceptions and was not discharged.

Section 523(a)(7) provides an exception for discharge for a debt: 

to the extent such debt is for a fine, penalty, or forfeiture payable to and

for the benefit of a governmental unit, and is not compensation for actual

pecuniary loss, other than a tax penalty...

11 U.S.C. § 523(a)(7).

The Supreme Court determined that a restitution order entered prior to the filing

of the debtor’s case as a condition of the debtor’s probation was excepted from

discharge as a fine or penalty under 11 U.S.C. § 523(a)(7). Kelly v. Robinson, 479

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 4745 also argued that the debt owed to it was excepted from discharge

under 11 U.S.C. § 523(19)(iii). We assume it meant 11 U.S.C. §

523(a)(19)(B)(iii). This subsection allows for an exception for various forms of

securities violation and has no applicability to this case.

7

U.S. 36, 50-52 (1986). The Court reasoned that a restitution order is not made

primarily for the benefit of the victim of a crime but rather for the benefit of society

as a whole. Id, at 52. 

The state court ordered the debtor in this case to pay restitution to 4745 for

burglary as part of his sentence. The unpaid restitution debt of $60,970.00 is the type

of debt the Supreme Court in Kelly determined was excepted from discharge under §

523(a)(7).

Three exceptions to discharge are not self-effectuating. A creditor who has a

debt of a kind listed in § 523(a)(2), (4), or (6) must file a complaint under Fed R.

Bankr. P. 4007(c) to determine dischargeability no later than 60 days after the first

date set for the meeting of creditors. Fed. R. Bankr. P. 4007(c); In re Nordin, 299

B.R. at 915. A failure to timely file such a complaint will result in the discharge of

those debts. 4745 has obviously missed this deadline.

However among the self effectuating exceptions to discharge is the one relied

on by 4745.3

 Section 523(a)(3) contains an exception to discharge for debts that are

neither listed nor scheduled in time to permit - 

if such debt is of a kind specified in paragraph (2),(4), or (6) of this

subsection, timely request for a determination of dischargeability of such

debt ... unless such creditor had notice or actual knowledge of the case

in time for such timely filing and request;... 

11 U.S.C. § 523(a)(3)(B).

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This provision protects creditors who missed the deadline for filing § 523(c)

complaints because they were not properly scheduled. Peterson v. Anderson (In re

Anderson), 72 B.R. 783, 786 (Bankr. D. Minn. 1987).

Section 523(a)(3) litigation differs from § 523(a)(6) litigation in two important

ways: jurisdiction and timing. First, bankruptcy courts have exclusive jurisdiction

to determine whether debts are non-dischargeable under § 523(a)(2), (4), or (6). A

state court has jurisdiction, concurrent with the bankruptcy court, to determine the

dischargeability of all other debts. Section 523(c)(1) states:

Except as provided in subsection (a)(3)(B) of this section, the debtor

shall be discharged from a debt of a kind specified in paragraph (2), (4),

or (6) of subsection (a) of this section, unless on request of the creditor

to whom such debt is owed, and after notice and a hearing, the court

determines such debt to be excepted from discharge under paragraph (2),

(4), or (6), as the case may be, of subsection (a) of this section.

11 U.S.C. § 523(c)(1).

“The court” referred to in the statute is the bankruptcy court. By negative implication

the bankruptcy court shares jurisdiction with other courts of competent jurisdiction

over all other exceptions to discharge.

Second, there is no bankruptcy created time limitation on filing a complaint

under § 523(a)(3). In re Honeycutt, 228 B.R. 428, 430 (Bankr. E.D. Ark. 1998). A

complaint other than under 11 U.S.C. § 523(c) may be filed at any time. Fed. R.

Bankr. P. 4007(b) 

“In short, the penalty to the debtor for failing to schedule a [debt under §

523(a)(2)(4) or(6)] or otherwise inform the creditor of the bankruptcy is forfeiture of

the right to enjoy exclusive federal jurisdiction and loss of the sixty-day limitations

period applicable in the exclusive jurisdiction actions.” In re Jenkins, 330 B.R. 625,

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 It could be in a United States District Court if it had jurisdiction over the

underlying cause of action.

9

631 (Bankr. E.D. Tenn. 2004)(quoting First Nat’l Ins. Co. of Am. v. Bartomeli (In re

Bartomeli)), 303 B.R. 254, 269 (Bankr. D. Conn. 2004); Fed. R. Bankr. P. 4007(b).

A § 523(a)(3) determination would go something like this. The creditor will

commence an action on the debt in state court.4

 Since discharge in bankruptcy is an

affirmative defense, see Fed. R. Civ. P. 8(c) and Iowa Code Ann. R. 1.419, a

defendant who claims the debt was discharged will plead discharge as a defense. The

state court will then have to decide at least four things.

1. Is the debt of a kind described in § 523(a)(2), (4), or (6)?

2. Was the debt listed or scheduled (as that term has been interpreted) under 

§ 521(1) of the Bankruptcy Code with the name of the plaintiff?

3. Did the plaintiff have actual knowledge of the case in time to timely file an

adversary proceeding in the bankruptcy court under § 523(a)(2), (4), or (6)?

4. Does the plaintiff’s case have merit?

Although the bankruptcy court in this case had jurisdiction to determine the

dischargeability of 4745's claim, it explicitly declined to do so. The debtor could have

filed a complaint as required by Fed. R. Bankr. P. 7001(6), but chose not to do so.

Because the debtor failed to properly raise the issue, it was perfectly appropriate for

the bankruptcy court to leave that issue for the state court and address only that issue

explicitly presented to it: should 4745 be sanctioned for commencing the state court

action?

Sanctions

The authority for a court to impose civil sanctions for violation of the discharge

injunction arises under 11 U.S.C. § 105(a).

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The court may issue any order, process, or judgment that is necessary or

appropriate to carry out the provisions of this title. No provision of this

title providing for the raising of an issue by a party in interest shall be

construed to preclude the court from, sua sponte, taking any action or

making any determination necessary or appropriate to enforce or

implement court orders or rules, or to prevent an abuse of process.

11 U.S.C. § 105(a).

“Section 105 provides to bankruptcy courts the broad power to implement the

provisions of the bankruptcy code and to prevent an abuse of the bankruptcy process,

which includes the power to sanction counsel.” Clark v. LaBarge (In re Clark), 223

F.3d 859, 864 (8th Cir. 2000).

The bankruptcy court reviewed the facts and found that 4745 had no actual

knowledge of the debtor’s bankruptcy case when it commenced the action in state

court. That finding is not clearly erroneous. It also reviewed the debtor’s conduct in

failing to make efforts to make sure that 4745's attorney knew about the Chapter 7

bankruptcy case and delaying several times in bringing this dispute to the bankruptcy

court’s attention. 

Congress has provided for jurisdiction in state courts to determine the

dischargeability of most debts. In light of this Congressional decision, we think that

as long as a creditor has a good faith basis for believing that its debt was excepted

from discharge or, as in this case, had no knowledge of any such discharge, the

creditor is not subject to sanctions for violating the discharge injunction when it

proceeds in state court. 

The bankruptcy court carefully reviewed the facts that lead up to the

commencement of the action in state court and found no basis for sanctioning 4745.

We certainly cannot say that this decision was an abuse of the bankruptcy court’s

discretion.

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CONCLUSION

The bankruptcy court left it to the state court to decide whether the debtor’s

debt to 4745 was discharged. The bankruptcy court determined that it would not

sanction 4745 for commencing that action. We find no abuse of discretion by the

bankruptcy court in reaching that decision and we affirm.

 

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