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FILED

JUN 29 2015

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

NOT FOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. NC-14-1423-DKiTa

)

MOON JOO LEE and JIYOUNG JEONG, ) Bk. No. 09-48849

)

Debtors. )

________________________________ )

)

BRIAN H. SONG; CHANGBEOM IM, )

)

Appellants, )

)

v. ) M E M O R A N D U M1

)

MOON JOO LEE; JIYOUNG JEONG, )

)

Appellees. )

________________________________ )

Argued and Submitted on May 14, 2015

at San Francisco, California

Filed - June 29, 2015

Appeal from the United States Bankruptcy Court

for the Northern District of California

Honorable William J. Lafferty, Bankruptcy Judge, Presiding

 

Appearances: Brian Huibum Song argued for Appellants Brian H. Song

and Changbeom Im; David S. Henshaw on the brief for

Appellees Moon Joo Lee and Jiyoung Jeong.

 

Before: DUNN, KIRSCHER, and TAYLOR, Bankruptcy Judges.

FILED

JUN 29 2015

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

1 This disposition is not appropriate for publication. 

Although it may be cited for whatever persuasive value it may have

(see Fed. R. App. P. 32.1), it has no precedential value. See 9th

Cir. BAP Rule 8024-1.

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This appeal highlights the perils awaiting creditors and

attorneys who ignore the bankruptcy discharge based on a mistaken

and subjective belief that it does not apply to claims against the

debtor. Here, a creditor who had actual knowledge of a debtor’s

bankruptcy did nothing to assert his fraud claims against the debtor

until two years after the discharge injunction provided by § 5242

arose. The creditor and his counsel apparently had convinced

themselves that the debtor’s actions were so “nefarious” that the

bankruptcy discharge could not apply to bar the creditor’s claims.

The bankruptcy court saw it differently. It found the creditor and

his attorney in contempt for violating the discharge injunction and

imposed substantial sanctions against both. We AFFIRM. 

I. FACTUAL BACKGROUND

The Relationship between Appellant Im and Appellee Lee

Appellant Changbeom Im and his wife, Yeunwha Seo, met Appellee

Moon Joo Lee early in 2008. At that time, both Appellant Im and Ms.

Seo, Korean nationals whose visas were about to expire, were looking

for a lawful way to remain in the United States. Appellee Lee, as

President of Mad Fish Pier39, Inc. (“MP39"), was engaged in the

development in Northern California of “Little Madfish” fast food

restaurants, which serve sushi and other Asian foods. Although

neither Appellant Im nor Ms. Seo had either business experience

2 Unless specified otherwise, all chapter and section

references are to the Bankruptcy Code, 11 U.S.C. §§ 101–1532, and

all “Rule” references are to the Federal Rules of Bankruptcy

Procedure, Rules 1001–9037. All “Civil Rule” references are to the

Federal Rules of Civil Procedure.

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generally or experience in restaurant management, they spoke with

Appellee Lee about the possibility of acquiring E-2 “Treaty

Investor” visas by investing a sufficient sum of money in, and

taking over at least 50% management of, one of the proposed

restaurants. 

In March 2008, Ms. Seo provided Appellee Lee $200,000 as an

investment in MP39. The business agreement executed in conjunction

with this payment recited that Appellant Im and Ms. Seo wanted to

set up a corporation, ISIF, to do business as a Little Madfish

restaurant on Christie Street in Fremont, California (“Christie

Street Restaurant”). On March 15, 2008, ISIF issued a stock

certificate granting Ms. Seo 500,000 shares, representing one-half

of ISIF’s total stock.

Appellee Lee thereafter referred Appellant Im and Ms. Seo to an

immigration attorney, who applied for an E-2 visa for Ms. Seo; the

visa application listed Appellant Im as a “derivative spouse.” 

The Christie Street Restaurant opened in September 2008. 

Appellant Im was its manager. In October 2008, Ms. Seo had a

friend, Go Wook, invest another $250,000 in ISIF on her behalf,

after which Ms. Seo owned 70% of ISIF.

Appellant Im operated the Christie Street Restaurant from

October 2008 through April 2009. Sales were not good, and the

Christie Street Restaurant was not profitable. Appellant Im and

Appellee Lee each believed the other was responsible for the lack of

success. 

In an apparent effort to resolve the disputes between them,

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Appellee Lee took over management of the Christie Street Restaurant

and worked with Appellant Im to find a new location that might prove

more successful. Appellant Im rejected an opportunity to move the

investment in ISIF to a planned Madfish restaurant on Paseo Padre

Parkway in Fremont. Appellant Im eventually agreed to become a 50%

co-investor in Redwood City MF, Inc. (“RCMF”), which was developing

a Madfish restaurant (“Redwood City Restaurant”) in Redwood City,

California. No payment was made by Appellant Im in exchange for the

50% ownership interest in RCMF. An individual unconnected to the

dispute before us, Emil Howes, owned the other 50% interest in RCMF. 

Appellee Lee was to participate with Appellant Im and Mr. Howes in

preparing the Redwood City Restaurant for opening.

Issues again developed between Appellant Im and Appellee Lee,

apparently stemming from Appellant Im’s alcohol-related problems,

which caused Appellant Im substantial absences from work. Appellee

Lee and Mr. Howes prepared the Redwood City Restaurant for opening

with little assistance from Appellant Im. In an effort to solve the

problem of Appellant Im’s absenteeism and allay Mr. Howes’ growing

concern about his business partner, Appellant Im, at the insistence

of Appellee Lee, signed an agreement that if he did not make contact

with Appellee Lee every 24 hours3 he would give up his stock in

RCMF.

On November 11, 2009, Appellant Im executed a Stock Transfer

3 Appellant Im apparently “disappeared” for approximately one

month, prompting this check-in requirement.

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Agreement pursuant to which he transferred his 500,000 shares in

RCMF to Hyeong Geon Lee (“HG Lee”), a business associate and friend

of Appellee Lee. After he was divested of his ownership interest in

the Redwood City Restaurant, Appellant Im worked at Mad Fish

restaurants Appellee Lee operated in Vacaville and Fremont,

California until September 2011. 

Appellee Lee’s Bankruptcy Case

Appellee Lee and his wife, Jiyoung Jeong, filed a chapter 11

petition on September 22, 2009 (“Bankruptcy Case”). The Bankruptcy

Case was converted to chapter 7 on November 30, 2009, on the

debtors’ motion. The Appellees received their chapter 7 discharge

on July 16, 2010.

On August 12, 2010, Appellant Brian H. Song, representing Ho

Kon Yoo, a creditor of the Appellees, filed an adversary proceeding

(“Yoo Adversary Proceeding”) in the Bankruptcy Case, seeking to

revoke the Appellees’ discharge. Thus, not later than August 12,

2010, Appellant Song had actual knowledge of the existence of the

discharge.

After Mr. Yoo failed to make the initial disclosures required

by Civil Rule 26 as ordered by the bankruptcy court, Appellees moved

for terminating sanctions. Shortly thereafter, Appellant Song

signed the stipulation pursuant to which the Yoo Adversary

Proceeding was dismissed on June 8, 2012.

State Court Litigation Against Appellee Lee

Meanwhile, on March 8, 2012, three months before signing the

stipulation for the dismissal of the Yoo Adversary Proceeding, and

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notwithstanding that he had actual notice of the discharge,

Appellant Song commenced litigation (“Im Litigation”) against

Appellees and others on behalf of another client, Appellant Im, in

the Alameda County, California Superior Court (“State Court”). 

The operative complaint (“Complaint”) in the Im Litigation

stated nine separate claims for relief as follow:

- Fraud (Suppression and Concealment of Material Facts)

against Appellee Lee, his mother, S.B. Park, and two

corporate entities of which Appellee Lee was the

President: MP39 and ISIF.

- Rescission of Stock Purchased (Under Cal. Corp. Code

§ 25501) against ISIF.

- Joint and Several Liability With Persons Liable Under

§ 25501 (Under Cal. Corp. Code § 25504) against Appellee

Lee and Ms. Park.

- Breach of Contract against ISIF, Appellee Lee, and

Ms. Park. 

- Fraud (Promise Without Intent to Perform) against

Ms. Park and Appellee Lee. 

- Violation of Franchise Investment Law (Failure to

Register or Secure Exemption) against MP39.

- Violation of Franchise Investment Law (Joint and Several

Liability) against Appellee Lee and Ms. Park.

- State Statutory Unfair Competition Law (Cal. Bus. &

Prof. Code § 17200, et seq.) against Appellee Lee and

Ms. Park.

- Unjust Enrichment against Appellee Lee, Appellee Jeong,

Ms. Park, Hae Suk Lee (Appellee Lee’s father), and Hyeong

Geon Lee (Appellee Lee’s friend and business partner).

In his deposition on January 9, 2013, Appellant Im testified

regarding his knowledge of Appellee Lee’s bankruptcy filing:

Q: Did you know that he filed bankruptcy?

A: I found out in January 2011 while I was researching

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him online. I found the document. Then I realized he

once told me about that. He didn’t tell me when or why he

filed it.

Q: When did he tell you?

A: I don’t remember exactly. I didn’t take it seriously

because I didn’t believe it. He lived in a luxurious

house. He owns three Mad Fish restaurants. Who would

believe that? I didn’t believe that. I regarded it as

one way to hide his money.

Q: Before January 2011, you knew that he had filed for

bankruptcy; is that correct?

A: I didn’t believe it.

Q: Did he tell you that?

A: Yeah. He told me he used to file Chapter 11. He

didn’t tell me why or when. That was it. He didn’t tell

me any details. I found out later.

Tr. of Jan. 9, 2013 Deposition of Changbeom Im at 93:18-94:10.

On February 28, 2013, Mr. Henshaw, as Appellee Lee’s counsel,

sent an email communication to Appellant Song, the subject line of

which was “Dismissal Demand.” In the email, Mr. Henshaw pointed out

that both Appellant Im and Appellant Song had notice of the

discharge at the time the Im Litigation was filed. Because it was

now clear that Appellant Im knew of the Bankruptcy Case while it was

still in chapter 11, Mr. Henshaw stated that Appellant Im had a duty

to bring any fraud claim against the Appellees in the bankruptcy

court prior to entry of the discharge. Mr. Henshaw demanded that

Appellant Song dismiss Appellees from the Im Litigation not later

than March 6, 2013. Mr. Henshaw warned that, in the absence of

dismissal as demanded, he would file an adversary proceeding in the

bankruptcy court for violation of the injunction contained in the

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discharge. Appellant Song responded in what the bankruptcy court

characterized as a bullheaded manner that effectively translated to

“[s]ee you in court.” Tr. of August 6, 2014 Hr’g at 20:9-20. 

Also on or about February 28, 2013, Mr. Henshaw filed various

motions in limine in the State Court, including one that asserted

the discharge. It is noteworthy that Appellants made three

arguments in opposition to the motions in limine. First, the debts

were not discharged as a result of the application of § 523(a)(19). 

Second, Appellant Im’s claim arose in mid-2011 and therefore

constituted a post-discharge claim. Finally, Appellant Im was not

scheduled as a creditor in the Bankruptcy Case so § 523(a)(3)

preserves Appellant Im’s right to pursue the Im Litigation. 

On March 21, 2013, the State Court disposed of six of the

claims for relief on the various motions in limine Appellees and

their co-defendants had filed, and dismissed a seventh as to

Appellee Lee only.4 Significant to the issues in this appeal, the

State Court dismissed the two claims for relief based on alleged

violations of California securities laws. The State Court then

bifurcated the trial of the remaining claims for relief.

4 The breach of contract claim against Appellee Lee was

dismissed on the basis that it had been discharged in the bankruptcy

case. 

 Appellant Song immediately filed a writ of mandamus to the

California Court of Appeal, First Appellate District, requesting

that the appellate court direct the State Court to vacate its order

granting the motions in limine. The appellate court denied the writ

of mandamus on March 22, 2013.

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 The breach of contract claim against only ISIF and Ms. Park

and the fraud (promise without intent to perform) claim against

Ms. Park and Appellee Lee were tried to a jury between March 21 and

March 27, 2013. As to the fraud claim relating to Appellee Lee, the

jury found that Appellee Lee had not committed fraud. 

The State Court conducted a bench trial of the statutory unfair

competition claim against Ms. Park and Appellee Lee on April 2 and

3, 2013, after which the State Court ruled that the statutory unfair

competition claim against Appellee Lee was barred by the discharge. 

The State Court entered its findings on May 22, 2013. Appellants

confirmed at oral argument that the State Court judgment as to

Appellee Lee is final as to all claims. 

On May 24, 2013, Appellant Song notified the State Court and

Mr. Henshaw of his intent to file a notice of appeal once the

judgment was entered. Mr. Henshaw responded by informing Appellant

Song that he would be seeking attorneys’ fees in the Im Litigation

and sanctions in the bankruptcy case for violation of the discharge

injunction.

Appellees Seek Sanctions Against Appellants in the Bankruptcy Court

On May 29, 2013, Appellees filed in the bankruptcy court a

motion to reopen their bankruptcy case for the purpose of seeking

sanctions against Appellant Im and Appellant Song for violating the

discharge injunction by commencing and continuing the Im Litigation.

The Appellants opposed the motion to reopen on the bases that

(1) the Appellees had waived their right to assert the discharge

because they failed to plead it as an affirmative defense in the Im

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Litigation, (2) § 523(a)(19) applied such that Appellant Im’s claim

was not barred by the discharge, and (3) Appellees were not entitled

to the benefits of the discharge because they had unclean hands. In

the memorandum filed in support of their opposition to the motion to

reopen, the Appellants admitted that only two of the State Court

claims for relief were for alleged violations of California

securities law: the claim for rescission of stock purchase asserted

against ISIF pursuant to Cal. Corp. Code § 25501, and the derivative

joint and several liability claim asserted against Appellee Lee and

Ms. Park pursuant to Cal. Corp. Code § 25504. They further conceded

that the securities claims were determined by the State Court’s

ruling on a motion in limine Appellees had filed in March 2013,

immediately before the commencement of trial. The other bases upon

which they relied to support pursuing the Im Litigation in the face

of the discharge injunction were (1) the Im Litigation was mostly

against other defendants,5 (2) Appellees waived the benefit of the

discharge as to the Im Litigation when they failed to assert it as

an affirmative defense, and (3) Appellant Im’s subjective belief

that the discharge itself was not valid.

The bankruptcy court reopened the bankruptcy case by its order

entered July 22, 2013. The Appellees promptly filed their motion

5 Appellees assert that although there were a total of seven

defendants in the Im Litigation, it was primarily directed against

Appellee Lee. In fact, Appellant Song took the deposition of only

two of the defendants: Appellee Lee over a period of four days; and

HG Lee over two days, with questions primarily directed to HG Lee’s

interactions with Appellee Lee.

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for contempt seeking sanctions (“Sanctions Motion”). 

The Appellants opposed the Sanctions Motion on several grounds;

all lack merit. First, Appellant Im asserted he successfully could

move the bankruptcy court for an order retroactively annulling the

§ 362 automatic stay, which, when granted, would render the

Sanctions Motion moot. Second, asserting that because (a) a

bankruptcy discharge is available only to the honest but unfortunate

debtor, (b) Appellee Lee is neither honest nor unfortunate where his

bankruptcy case was filed fraudulently, and (c) § 105(a) precludes

the bankruptcy court from granting relief that is inconsistent with

the Bankruptcy Code, i.e. to any but an honest debtor, the

Appellants argued that the bankruptcy court could not utilize

§ 105(a) to impose sanctions on the Appellants. 

At a hearing held September 25, 2013, the bankruptcy court

ruled that the discharge injunction had been violated with respect

to all claims for relief asserted in the Im Litigation except any

which related to § 523(a)(19). The bankruptcy court therefore

granted the motion, subject to a “prove up” hearing as to the amount

of attorneys fees incurred by Appellees. The bankruptcy court

directed the parties to meet and confer regarding the amount of

these fees and established a timetable for future pleadings if they

could not resolve the dispute regarding the amount of the fees. 

When no agreement was reached, on November 12, 2013, Appellees

filed “Debtors’ Statement of Fees and Costs in Support of Contempt

Motion” (“Fee Statement”) seeking $102,145.00 in fees and $3,198.23

costs jointly and severally from Appellant Im and Appellant Song for

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their willful violation of the discharge injunction. The Fee

Statement broke fees down based on categories of work performed as

follows:

A - Attending trial in Im Litigation $24,427.50

B - Preparing for trial in Im Litigation $23,370.00

C - Conducting discovery in Im Litigation $20,735.00

D - Law and motion work in Im Litigation $24,002.50

E - Preliminary matters in Im Litigation $ 3,955.00

F - Post-trial work (opposing motion to vacate

 Judgment filed by Appellants) $ 570.00

G - Work in the Bankruptcy Case re sanctions $ 5,085.00

Costs: $ 3,198.23

The Appellants opposed the Fee Statement on the basis that

there were no “offending” causes of action in the Im Litigation,

again arguing that all of the “counts” were related to a securities

transaction and therefore authorized by § 523(a)(19). They further

asserted that in any event, no damages had been incurred by

Appellants as a result of the Im Litigation where (1) Mr. Henshaw

represented all seven defendants, not just Appellants;

(2) Appellants had never produced a bill from Mr. Henshaw nor

provided any evidence they had paid him; and (3) schedules in the

subsequent bankruptcy filed on behalf of ISIF did not reflect a debt

owed to Mr. Henshaw as of the petition date. Finally, the

Appellants argued that damages should be reduced from those in the

Fee Statement. Interestingly, Appellants asserted that while “[i]t

might . . . have felt that [Appellant Song] was going after

[Appellee Lee] only,” the Im Litigation was not directed at Appellee

Lee, because “there was little or no incentive to go after [Appellee

Lee] because he was recently bankrupt;” Appellee Lee only was

pursued as an agent of other defendants. Appellant Song complained

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that Mr. Henshaw waited until February 28, 2013, to assert that the

discharge injunction barred the Im Litigation. Appellants asserted

that the State Court did not dismiss the fraud claim against

Appellee Lee; and the matters at trial did not exceed the scope of

the order granting the motion in limine. Finally, and most

significantly for purposes of this appeal, Appellant Song averred

that he had calculated the fees that appeared to relate to other

defendants in the Im Litigation, and that the identified amount was

$11,080. Appellants requested the opportunity for discovery with

respect to the Fee Statement.

At the initial hearing to determine the sanctions amount, the

bankruptcy court ordered the parties to try to reach a settlement

with the assistance of the bankruptcy court’s alternative dispute

resolution program. The record reflects that this settlement

attempt failed. 

Ultimately, at what was noticed as a status conference, the

bankruptcy court, after giving the parties yet another opportunity

to settle, made findings with respect to the Sanctions Motion. The

bankruptcy court determined that Appellant Im knew of the Bankruptcy

Case in time to file an adversary complaint with regard to his fraud

claim against Appellee Lee, and that Appellant Song knew of the

existence of the discharge. Notwithstanding that they were charged

with knowledge of the discharge injunction, they still filed the Im

Litigation. 

THE COURT: -- look, your client knows a week after the

case is filed that there’s a case. You as an officer of

the Court are here [in the Yoo Adversary] telling me to

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revoke a discharge, and [years] later, your client hauls

off and sues somebody in State Court. You simply cannot

convince me on those facts that you, number one, and your

client, number two, [did not know] exactly what the

discharge injunction was about.

MR. SONG: No, Your Honor, I knew that there was an

injunction –

THE COURT: Don’t bother to argue with me about it.

MR. SONG: Your Honor –

THE COURT: Mr. Song, don’t bother. It’s not going to –

I’m hearing you say the same thing over and over again. 

I’m not agreeing with you. On these facts – I mean this

is a reprehensible record. This is not a close call. 

This is a God-awful record Mr. Song.

MR. SONG: Your Honor, let me –

THE COURT: And I’ve tried very hard to indulge you and to

take you seriously, and I’m coming to the very reluctant

conclusion that this is about nothing more than a cash

management exercise, that you simply don’t want to pay the

money that this guy should be paid because he went through

all kinds of difficulty he never should have gone through. 

Tr. of August 6, 2014 Hr’g at 28:25-29:23.

Although the Fee Statement sought damages of $102,145.00,6

which Mr. Henshaw asserted were incurred in his representation of

Appellee Lee in the Im Litigation, the bankruptcy court reduced the

fees substantially. First, it limited the recovery to fees from the

date of the Dismissal Demand email, February 28, 2013, on the basis

6 In advance of this hearing, Appellees’ counsel filed a

supplemental declaration to evidence that an additional $4,290 in

attorney fees had been incurred between December 3, 2013 and

July 29, 2014 in the efforts to prosecute and/or settle the issue of

the sanctions amount. Thus, although the amount at issue was

$106,435, the bankruptcy court appears to have utilized only the

$102,145 amount in its analysis.

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that it was giving both Appellants the benefit of the doubt with

respect to when they knew that the discharge was an issue in

conjunction with the Im Litigation. The bankruptcy court calculated

that $55,665 of the fees were incurred after February 28, 2013,

including fees incurred in the bankruptcy court to pursue the

contempt matter. Tr. of August 6, 2014 Hr’g at 31:6-11. The

bankruptcy court then applied a formula to account for claims

asserted against Appellee Lee when compared to all other defendants

and awarded Appellee Lee 90% of the post-February 28 fees as

sanctions for Appellants’ contempt in violating the discharge

injunction.

THE COURT: I’m simply going to, on a meat cleaver basis,

take 90 percent of the – actually it probably should have

been 89 percent, now that I think of it, but there’s been

a little bit of trouble getting here, and I think that’s

worth something too. I’m going to multiply the $55,665

that was incurred after February 28th by – and I did this

math myself, okay, -- by .9 and that gets me to

$50,098.50, and I think that is unquestionably the time

after which Mr. Im knew about the discharge injunction and

was on notice for all purposes about that, and I’m going

to take at face value the notion that (a)(19) was part and

parcel of the claims going forward, and it would have been

pursued, and even though Mr. Henshaw is telling me he made

some reduction, I’m going to make a further one because I

just think it makes some sense in overall fairness to do

that.

Tr. of August 6, 2014 Hr’g at 51:15-52:5. 

The bankruptcy court entered its order in the amount of

$50,098.50 and a judgment in the amount of $50,000.00 awarding

sanctions, jointly and severally, against Appellant Im and Appellant

Song, with instructions that the award be paid to Appellee Lee in

twelve monthly installments beginning in September 2014. Appellants

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filed a timely Notice of Appeal.

II. JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334

and 157(b)(2)(I) and (O). We have jurisdiction under 28 U.S.C.

§ 158.

III. ISSUE

Whether the bankruptcy court erred when it determined that

Appellants willfully had violated the discharge injunction.

Whether the bankruptcy court abused its discretion in

calculating the sanctions award based on its finding of contempt.

IV. STANDARDS OF REVIEW

We review the bankrupt court’s award of sanctions, made under

§ 105(a), for an alleged violation of the § 524(a) discharge

injunction, for an abuse of discretion. Nash v. Clark Co. Dist.

Att’ys Off. (In re Nash), 464 B.R. 874, 878 (9th Cir. BAP 2012).

A bankruptcy court abuses its discretion if it applies an

incorrect legal standard or misapplies the correct legal standard,

or its factual findings are illogical, implausible or without

support from evidence in the record. TrafficSchool.com, Inc. v.

Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011). Only if the

bankruptcy court did not apply the correct legal standard or

improperly applied it, or if its fact findings were illogical,

implausible, or without support in inferences that can be drawn from

facts in the record, is it proper to conclude that the bankruptcy

court abused its discretion. United States v. Hinkson, 585 F.3d

1247, 1262 (9th Cir. 2009) (en banc).

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We may affirm the decision of the bankruptcy court on any basis

supported by the record. See ASARCO, LLC v. Union Pac. R. Co., 765

F.3d 999, 1004 (9th Cir. 2014); Shanks v. Dressel, 540 F.3d 1082,

1086 (9th Cir. 2008).

V. DISCUSSION

The contempt remedy is available with respect to violations of

the discharge injunction pursuant to § 105(a) of the Bankruptcy

Code. Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1191-92

(9th Cir. 2003); Walls v. Wells Fargo Bank, N.A., 276 F.3d 502,

506-07 (9th Cir. 2002). To be subject to sanctions for violating

the discharge injunction, the alleged contemnor's violation of the

discharge injunction must be "willful." Under Ninth Circuit law, a

violation of the discharge injunction is willful when the alleged

contemnor (1) knew that the discharge injunction applied, and

(2) intended the actions that violated the discharge injunction. 

See Zilog, Inc. v. Corning (In re Zilog, Inc.), 450 F.3d 996, 1007

(9th Cir. 2006); Hardy v. United States (In re Hardy), 97 F.3d 1384,

1390 (9th Cir. 1996). 

The burden of proof on the issue of willfulness is clear and

convincing evidence. See In re Zilog, Inc., 450 F.3d at 1007; 

Renwick v. Bennett (In re Bennett), 298 F.3d 1059, 1069 (9th Cir.

2002) ("The moving party has the burden of showing by clear and

convincing evidence that the contemnors violated a specific and

definite order of the court.").

Resolution of this appeal requires that we examine the

interface between and among three provisions of the Bankruptcy Code

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that impact a debtor’s discharge: §§ 523(a)(3), 523(a)(19), and

524(a)(2).

As relevant to this appeal, § 523(a) provides:

(a) A discharge under section [727] of this title does

not discharge an individual debtor from any debt –

. . .

(3) neither listed nor scheduled under 521(a)(1) of this

title, with the name, if known to the debtor, of the

creditor to whom such debt is owed, in time to permit –

(A) if such debt is not of a kind specified in

paragraph (2), (4), or (6) of this subsection,

timely filing of a proof of claim, unless such

creditor had notice or actual knowledge of the case

in time for such filing; or

(B) if such debt is of a kind specified in paragraph

(2), (4), or (6) of this subsection, timely filing

of a proof of claim and timely request for a

determination of dischargeability of such debt under

one of such paragraphs, unless such creditor had

notice or actual knowledge of the case in time for

such filing.

. . . 

(19) that –

(A) is for –

(I) the violation of any of the Federal

securities laws (as that term is defined in

section 3(a)(47) of the Securities Exchange

Act of 1934), any of the State securities

laws, or any regulation or order issued under

such Federal or State securities laws; or

(ii) common law fraud, deceit, or manipulation

in connection with the purchase or sale of any

security; and

(B) results, before, on or after the date on which

the petition was filed, from –

(I) any judgment, order, consent order, or

decree entered in a Federal or State judicial

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or administrative proceeding;

(ii) any settlement agreement entered into by

the debtor; or

(iii) any court or administrative order for

any damages, fine, penalty, citation,

restitutionary payment, disgorgement payment,

attorney fee, cost, or other payment owed by

the debtor.

Section 524(a)(2) provides:

(a) A discharge in a case under this title –

. . .

(2) 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 [debt discharged

under section 727] as a personal liability of the debtor,

whether or not discharge of such debt is waived . . . .

A. The Appellants Knew That the Discharge Injunction Applied.

The record is clear that both Appellants knew that the

discharge injunction existed before they commenced the Im

Litigation. Appellant Song filed and pursued an adversary

proceeding on behalf of another client for the express purpose of

revoking the discharge. Appellant Im knew of the bankruptcy case

shortly after its initial filing. 

1. General Application of the Discharge Injunction.

Appellants assert that the first part of the Zilog test

required a finding that they knew that the discharge injunction

"applied" to the Im Litigation. 

Appellants contend first that the discharge injunction did not

apply to the Im Litigation because Appellant Im’s alleged claim

arose on November 11, 2009, the date on which Appellant Im

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transferred his stock in RMF to HG Lee. As a consequence,

Appellants contend the Im Litigation is for a post-petition claim

that could not have been discharged in Appellee’s bankruptcy case. 

We disagree. Section 348(d) provides: “A claim against the estate

or the debtor that arises after the order for relief but before

conversion in a case that is converted under section 1112 . . . of

this title, other than a claim specified in section 503(b) of this

title, shall be treated for all purposes as if such claim had arisen

immediately before the date of the filing of the petition.” 

As their primary issue on appeal, the Appellants contend that

the bankruptcy court erred when it held them in contempt in the face

of what they characterize as their “good faith belief” that the

discharge injunction did not apply to the Im Litigation. They

assert the bankruptcy court should have taken into account their

“subjective” belief regarding the applicability of the discharge

injunction to the Im Litigation.

However, case law governing the imposition of sanctions under

Rule 11 instructs that a good faith belief is viewed from an

objective standpoint. See Smyth v. City of Oakland

(In re Brooks–Hamilton), 329 B.R. 270, 283 (9th Cir. BAP 2005),

aff'd in part, rev'd in part, and remanded, 271 F. Appx. 654 (9th

Cir. 2008) (per curiam)(attorney compliance with Rule 9011 is

assessed through an objective standard). Subjective bad faith is

not necessary; the attorney must only fail to meet the standard of a

“competent attorney admitted to practice before the [pertinent]

court.” Id. (quoting Zaldivar v. City of Los Angeles, 780 F.2d 823,

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830 (9th Cir. 1986), overruled on other grounds by Cooter & Gell v.

Hartmarx Corp., 496 U.S. 384 (1990)). 

On this record, it is clear that Appellants did not hold a

“good faith belief” that the discharge injunction did not apply to

the Im Litigation. Here, the Appellants merely chose to ignore the

law and conclude on their own that Appellees were not entitled to

the discharge and its protections.

Regardless, the determination of whether the discharge

injunction applied to the Im Litigation does not allow for a

subjective belief, good faith or otherwise. "In determining whether

the contemnor violated the stay, the focus ‘is not on the subjective

beliefs or intent of the contemnors in complying with the order, but

whether in fact their conduct complied with the order at issue.'" 

In re Dyer, 322 F.3d at 1191 (quoting Hardy, 97 F.3d at 1390).

Hardy, as adopted by the Ninth Circuit, effectively imposes a

strict liability standard with respect to the first element of the

willfulness test: "If the court on remand finds, as plaintiff

claims, that IRS received notice of Mr. Hardy's discharge in

bankruptcy, and was thus aware of the discharge injunction,

Mr. Hardy will then have to prove only that IRS intended the actions

which violate the stay." Hardy, 97 F.3d at 1390.

In Lone Star Sec. & Video, Inc. v. Gurrola (In re Gurrola),

328 B.R. 158, 175 (9th Cir. BAP 2005), we highlighted the sanctity

of the discharge injunction, stating that once entered, it was "good

against the world." 

Thus, unless there is a basis other than Appellants’ “good

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faith belief” that Appellee Lee should not have the benefit of the

discharge injunction in connection with the Im Litigation, the first

prong of the Zilog test was met.

2. Applicablity of the Discharge Injunction in Light of

 § 523(a)(3).

Appellants assert, relying on § 523(a)(3), that the injunction

was not applicable to the Im Litigation because Appellant Im’s claim

was not included in either the chapter 11 schedules or the chapter 7

conversion schedules. If this were true, Appellant Im’s alleged

claims for breach of contract and fraud might have survived entry of

the discharge, an issue which could have been brought as a

declaratory judgment claim. However, the bankruptcy court

determined that § 523(a)(3) does not provide a defense to Appellants

where Appellant Im had actual knowledge of the bankruptcy case in

time to avail himself of the protections of the Bankruptcy Code with

respect to his alleged claims. We agree.

3. Applicability of the Discharge Injunction in Light of

 § 523(a)(19).

As noted by the bankruptcy court, § 523(a)(19) authorizes a

creditor to pursue certain claims, specifically those stemming from

securities fraud, against a debtor notwithstanding the discharge

injunction. Appellants admitted in the context of the motion to

reopen that only two of the claims for relief in the Im Litigation

were for violation of California securities laws: the claim for

rescission of stock purchase asserted against ISIF pursuant to Cal.

Corp. Code § 25501, and the derivative joint and several liability

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claim asserted against Appellee Lee and Ms. Park pursuant to Cal.

Corp. Code § 25504. Appellants further conceded that the particular

claims asserted under California securities laws were determined and

dismissed by the State Court’s ruling on a motion in limine

Appellees had filed in March 2013. 

In a disingenuous attempt to avoid a contempt finding for

having proceeded against Appellee Lee on non-securities related

claims, Appellant Song asserted his argument that the Im Litigation

pursued only a single “claim for relief” with nine separate

“counts,” all of which arose under a common nucleus of operative

facts. This interpretation of the Im Litigation runs counter to the

well-known policy regarding exceptions to discharge. The Ninth

Circuit has admonished in the context of § 523(a)(19) that it, like

all other Bankruptcy Code provisions which impact the scope of a

debtor’s discharge, is to be construed narrowly. See Sherman v. SEC

(In re Sherman), 658 F.3d 1009, 1015 (9th Cir. 2011), abrogated on

other grounds by Bullock v. BankChampaign, N.A., ––– U.S. –––, 133

S.Ct. 1754, 185 L.Ed.2d 922 (2013): “[T]he Supreme Court has adopted

a rule of construction interpreting exceptions to discharge

narrowly. See Kawaauhau v. Geiger, 523 U.S. 57, 62, 118 S.Ct. 974,

140 L.Ed.2d 90 (1998) (‘[E]xceptions to discharge should be confined

to those plainly expressed’).” The bankruptcy court did not err

when it ruled that each theory of recovery should be examined

separately to determine whether it fell within the § 523(a)(19)

exception to discharge.

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B. Appellants Intended the Actions Which Violated the Discharge

 Injunction.

By initiating and pursuing the Im Litigation which asserted

claims for relief against Appellee Lee personally, the Appellants

violated the discharge injunction. The record is clear that they

intended those actions. Not even warnings of contempt and sanctions

derailed their intent to continue the Im Litigation to judgment.

Appellee Lee proved both elements of the willfulness test, and

the bankruptcy court properly found the Appellants in contempt for

violating the discharge injunction.

C. The Bankruptcy Court Did Not Abuse Its Discretion in 

 Determining the Amount of Sanctions.

The Appellants assert on appeal that the bankruptcy court erred

by holding a “prove-up” hearing rather than an evidentiary hearing

to determine the amount of alleged damages. We disagree. Rule 9017

provides that Civil Rule 43 applies in contested matters in

bankruptcy cases. Civil Rule 43 authorizes the court to hear the

matter on declarations. Both the Fee Statement and Appellants’

response to it were supported by declarations. 

The Appellants assert there was no evidence, in the form of

either a retainer agreement, bills, or payment records, that the

Appellees ever owed Mr. Henshaw attorneys’ fees as a consequence of

the Im Litigation. They posit that other than in a contingent fee

arrangement, no attorney would represent a client for fifteen months

without payment. We deem it unlikely, however, that Mr. Henshaw

would have entered into a contingent fee arrangement with the

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Appellees in conjunction with his defense of them against the

allegations of the State Court complaint. There is no evidence that

there was a counterclaim filed seeking damages on behalf of the

Appellees. Further, Mr. Henshaw’s declaration in support of the Fee

Statement provides some evidence both as to the fees incurred and of

the clients he represented in the Im Litigation. Appellants

themselves have acknowledged that Mr. Henshaw represented the

Appellees in the Im Litigation, and there is no question he did so

in the contempt proceedings before the bankruptcy court.

The Appellants also assert that the bankruptcy court abused its

discretion in the award of sanctions by failing to consider the

“undeserving debtor factor.” They contend that Appellee Lee created

the problem that led to the violation of the discharge injunction. 

They assert, in effect, that Appellee Lee failed to include

Appellant Im on any of the bankruptcy schedules, continued business

as usual after the discharge was entered and failed to raise the

issue of the discharge injunction until just before trial. 

The record reflects that the bankruptcy court did in fact

balance the equities, by expressly giving the Appellants the benefit

of every doubt that they did not know until February 28, 2013, that

the discharge injunction barred many claims for relief in the Im

Litigation. This determination of the bankruptcy court is

inconsistent with the facts throughout the record. Appellant Im had

actual knowledge of the Bankruptcy Case within weeks after it was

filed, but he did nothing but disbelieve that it existed. 

Nevertheless that actual knowledge charges him with notice of entry

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of the discharge. Appellant Song worked on behalf of another client

to obtain a revocation of the discharge. He clearly knew of the

discharge injunction at or shortly after the time it was entered. 

It is a disturbing premise that voluntary ignorance of the

implications of the bankruptcy discharge injunction can provide a

defense against sanctions. This is in effect what the bankruptcy

court allowed when it set February 28, 2013 as the date after which

the Appellants are accountable for contempt for violating the

discharge injunction. Appellant Im decided for himself either that

the Bankruptcy Case was not real or that Appellee Lee was not

entitled to the benefit of the discharge injunction. Appellant Song

similarly refused, to the point of misconstruing case law in a

manner that he believed allowed him to proceed as he wanted, to

credit the discharge injunction. The various theories argued to

both the bankruptcy court and this Panel highlight his willful

refusal to recognize that the injunction “applied” to the claims

asserted in the Im Litigation, either because the claims were

outside the scope of the discharge as he interpreted it or because

Appellee Lee was undeserving of the protection Congress and the

bankruptcy court granted him upon the entry of the discharge. 

Finally, Appellants argue that the amount of the reduction in

the fees based upon Mr. Henshaw’s representation of other defendants

was not adequate where it was based on Mr. Henshaw’s estimate during

colloquy of how much time was incurred in defense of those other

defendants. We note, however, that Appellants’ pleadings expressly

conceded that the amount of time in the Fee Statement attributable

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to the other defendants was $11,080. 

On this record we cannot say that the bankruptcy court abused

its discretion to the detriment of Appellants in calculating the

amount of sanctions.7

VI. CONCLUSION

Appellants steadfastly refused to honor the discharge entered

in the Appellees’ Bankruptcy Case. Their convoluted assertions on

appeal reflect their continuing refusal to accept the meaning and

scope of a bankruptcy discharge.

The bankruptcy court did not err when it determined that

Appellants violated the discharge injunction by prosecuting claims

for relief against Appellee Lee that were discharged.

The bankruptcy court did not abuse its discretion to the

detriment of Appellants in awarding sanctions, jointly and severally

against the Appellants, in the amount of $50,098.50. To the extent

the judgment itself was entered in the amount of $50,000.00 it is

inconsistent with both the bankruptcy court’s oral ruling and the

order awarding sanctions. The amount appears to be a scrivener’s

error which the bankruptcy court is authorized to correct upon

receipt of an amended form of judgment from Appellees.

We AFFIRM the bankruptcy court’s entry of the sanctions order.

7 Appellees did not cross-appeal as to the amount of sanctions

awarded by the bankruptcy court against the Appellants. 

Accordingly, we do not consider whether the bankruptcy court abused

its discretion in making an award of sanctions that was too low in

the circumstances of this case.

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