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FILED

NOV 10 2014

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

NOTFOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. NC-13-1618-JuKuPa

)

RICARDO R. PEDROCHE and ) Bk. No. NC-10-44376-MEH

NELIA V. PEDROCHE, )

)

Debtors. )

______________________________)

)

LAUNCE YEN, )

)

Appellant, )

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

)

RICARDO R. PEDROCHE; )

NELIA V. PEDROCHE, )

)

Appellees. )

______________________________)

Argued and Submitted on October 23, 2014

at San Francisco, California 

Filed - November 10, 2014

Appeal from the United States Bankruptcy Court

for the Northern District of California

Honorable M. Elaine Hammond, Bankruptcy Judge, Presiding

_________________________

Appearances: Marc E. Voisenat, Esq. argued for appellant

Launce Yen; Jeff David Hoffman, Esq. argued for

appellees Ricardo R. Pedroche and Nelia V.

Pedroche.

________________________

Before: JURY, KURTZ, and PAPPAS, Bankruptcy Judges.

* 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 8013-1.

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 Judgment creditor Launce Yen appeals from the bankruptcy

court’s order finding him in contempt for violating the § 5241

discharge injunction and awarding compensatory and punitive

sanctions in favor of debtors, Ricardo and Nelia Pedroche. We

VACATE and REMAND. 

I. FACTS

Prior to debtors’ bankruptcy filing, Yen commenced a

lawsuit against Ricardo in the California state court. On the

form complaint, Yen checked the box showing that his claim was

based on breach of contract and that he sought $11,760.00 in

damages. The state court entered a default judgment against

Ricardo and in favor of Yen.

The next day, on April 17, 2010, debtors filed a chapter 7

bankruptcy petition. Debtors listed Yen’s lawsuit in their

statement of financial affairs, but he was not listed as a

creditor in their schedules or mailing matrix. The bankruptcy

court set July 12, 2010, as the last date for filing

dischargeability complaints under § 523(c).

On April 19, 2010, the state court issued an abstract of

judgment, which Yen recorded the next day, thereby creating a

judgment lien against debtors’ home. Debtors were not aware of

the lien. In July 2010, debtors obtained their discharge in

their no asset case and the case was closed. 

In early 2012, debtors attempted to refinance their home,

1 Unless otherwise indicated, all chapter and section

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

“Rule” references are to the Federal Rules of Bankruptcy

Procedure.

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but were unable to do so because of Yen’s lien. Debtors moved

to reopen their case for the purposes of amending their

schedules to add Yen as a creditor and to bring a § 522(f) lien

avoidance action, which the bankruptcy court granted.2

Debtors then filed a motion to avoid Yen’s judicial lien

under § 522(f). Yen opposed, arguing that he had no knowledge

of the bankruptcy filing when he recorded the abstract of

judgment and would be prejudiced if the motion were granted

because he had a nondischargeable claim. In an accompanying

declaration, Yen alleged that Ricardo falsely represented that

he would repay the loan when he had no intention of actually

repaying it.

In response, debtors pointed out that Yen had provided no

evidence that the debt was nondischargeable nor had he filed an

adversary proceeding. They further asserted that Yen’s debt was

discharged under the holding in Beezley v. Cal. Land Title Co.,

994 F.2d 1433 (9th Cir. 1993), because their case was a no-asset

case and they did not intentionally omit him from their

schedules. For the first time, debtors maintained that Yen’s

recording of the abstract of judgment postpetition violated the

2 The bankruptcy court initially granted debtors’ motion by

order entered June 25, 2012, for the limited purpose of adding an

omitted creditor. The court concluded however that debtors would

not be able to avoid Yen’s lien based on the holdings in Dewsnup

v. Timm, 502 U.S. 410, 419 (1992) and Concannon v. Imperial

Capital Bank (In re Concannon), 338 B.R. 90, 95 (9th Cir. BAP

2006), both of which prohibited lien stripping under § 506. 

Debtors moved for reconsideration, noting that they were seeking

to avoid Yen’s judicial lien under § 522(f) and thus the holding

in In re Concannon was not applicable. Agreeing with debtors,

the bankruptcy court granted debtors’ motion to reopen as

originally requested.

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automatic stay.

In debtors’ declaration filed in support, they explained

that (1) the basis for Yen’s claim was not a loan, but from

football gambling debts; (2) Ricardo had paid approximately $600

a month to Yen for a few months but was not able to continue the

payments; and (3) Yen demanded a promissory note on the gambling

debt, which Ricardo was forced to sign in fear of trouble at his

workplace since Yen and Ricardo worked for the same employer. 

Debtors declared that they inadvertently left Yen off their

schedules and that Yen had been aware of their bankruptcy case

since, at the latest, March 19, 2012, but refused to voluntarily

withdraw the abstract of judgment.

In a supplemental opposition, citing out-of-jurisdiction

case law, Yen argued that a technical violation of the stay did

not warrant voiding his lien. Yen also asserted that debtors

should be equitably estopped from asserting a violation under

§ 362 when they knew of the lawsuit but failed to list him in

their schedules. Alternatively, Yen requested the bankruptcy

court to grant him retroactive relief from stay.

In a supplemental reply, debtors argued that Yen was aware

of the bankruptcy case for no less than six months, yet he had

not filed a motion for relief from the automatic stay.

On October 10, 2012, the bankruptcy court entered an order

denying debtors’ motion to avoid Yen’s judicial lien under

§ 522(f) and instead voiding Yen’s judicial lien under § 362.3

Seven days later, debtors recorded the bankruptcy court’s order. 

3 This order was not appealed and became final.

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The following day, without debtors’ knowledge, Yen re-recorded

his judgment lien. Thereafter, debtors’ case was closed a

second time.

About ten months later, debtors filed a second motion to

reopen their case, this time for the purpose of enforcing the

discharge injunction. Debtors maintained that the bankruptcy

court had previously found that the debt owed to Yen was

discharged. Yen disputed this contention, arguing that there

had been no determination whether or not his debt was

discharged, but he did not oppose the reopening of the case for

the purpose of determining whether the debt was discharged. In

reply, debtors asserted that it was improper for Yen to raise

the dischargeability of the debt in the context of the motion to

reopen. Debtors also noted that Yen had repeatedly stated that

the debt was nondischargeable, but provided neither facts nor

legal authority to support his assertion. The bankruptcy court

granted debtors’ motion to reopen by order entered on

September 27, 2013. 

Debtors subsequently filed a motion for contempt, asserting

that Yen violated the § 524 discharge injunction by re-recording

his lien for a discharged debt against their property. Debtors

argued that Yen’s debt was discharged “by order of this court”

because Yen did not claim, nor could he, that the debt fell

within any exceptions to discharge under § 523(a)(2), (4) or

(6). Debtors requested actual and punitive damages. Filed with

the motion was the declaration of debtors’ attorney who attached

copies of Yen’s state court complaint and judgment. Also

included were invoices showing the attorney’s fees debtors had

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incurred to date.

Relying on Costa v. Welch (In re Costa), 172 B.R. 954

(Bankr. E.D. Cal. 1994), Yen argued in opposition that debtors

had the burden of demonstrating that the § 727 discharge applied

to his debt.4 Yen further maintained that because he did not

have actual knowledge that the petition had been filed in time

to file a timely dischargeability complaint, the failure to

initially schedule the claim may mean that it is

nondischargeable under § 523(a)(3)(B). Finally, citing Walls v.

Wells Fargo Bank, N.A., 276 F.3d 502, 507 (9th Cir. 2002), Yen

asserted that debtors were not entitled to punitive damages

because only compensatory damages were available in civil

contempt.

In reply, debtors argued there was “no dispute” regarding

whether the debt was discharged. Debtors maintained that Yen

would have no chance of prevailing in an adversary proceeding,

4 In Costa, the debtors had filed an adversary proceeding

seeking damages against a bank, the judgment creditor and the

judgment creditor’s attorney on the theory that the bank had

violated the discharge injunction by honoring the judgment

creditor’s writ of execution. Debtors had not listed the

creditor in their schedules and there was an issue regarding the

dischargeability of the debt. The bankruptcy court noted that

the debtor could have raised the affirmative defense of discharge

in the state court or have the state court or bankruptcy court

determine the dischargeability of the debt, but instead resorted

to an action for contempt. The bankruptcy court stated: 

“[W]here, as here, a genuine question about the applicability of

a discharge to a particular omitted debt remains after reasonable

investigation, a declaratory judgment action under section

523(a)(3) is better suited to resolve the dispute than the

bludgeon of contempt.” 172 B.R. at 964. In dismissing the

adversary proceeding for contempt, the court found that debtors

had not demonstrated that they were entitled to relief.

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rendering it a useless waste of resources by the parties and the

bankruptcy court. Filed with the reply was another declaration

of debtors’ attorney with additional invoices which showed

debtors’ had incurred $8,400 in fees for the reopening of their

case and filing the motion for contempt. 

Yen filed a request for judicial notice of his declaration

filed July 30, 2012, which stated that Ricardo had falsely

represented that he would pay back the loan. 

The bankruptcy court heard the matter on November 13, 2013. 

The bankruptcy court expressed its opinion that Yen had the

obligation of proving his debt was nondischargeable. The court

noted that Yen, instead of choosing to bring an adversary

proceeding seeking to determine that his debt was exempted from

discharge, filed a lien only a few days after the court ruled

that his lien was void. 

Yen’s counsel argued that the burden on the issue of

nondischargeability should not shift to him when debtors had the

initial burden of providing notice to him so that he could file

a timely nondischargeability complaint.

The bankruptcy court found that when the case was reopened

and the lien set aside, Yen was on clear notice that there was a

bankruptcy, there was a discharge injunction, and then he took

affirmative action in violation of it. The court emphasized

that when a creditor doesn’t know about the discharge then maybe

he isn’t running afoul of it, but “that’s not the case here.”

The court entered its findings on the record:

Here I find the creditor was on notice of the

discharge injunction and the actions taken were

intentional. Although the creditor asserts a

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discharge injunction may not apply if the debt were

determined to be nondischargeable, the only evidence

indicating a basis upon which to assert the debt may

be nondischargeable is a declaration from the creditor

with the conclusory statement that the debtor did not

intend to repay. In contradiction, the evidence

provided by the debtor, the state court complaint, and

the clerk’s default judgment show that this was

originally brought as a breach-of-contract claim.

Their . . . and there’s nothing in those documents

asserting a basis for additional claims.

Further, to the extent the creditor had any question

as to whether the discharge injunction applied, they -

the creditor should have sought a determination before

refiling the lien. The - the way the bankruptcy code

works is that when the debtor files . . . bankruptcy,

everything is discharged unless it is explicitly

exempt from discharge either by statute or by a

determination under an adversary proceeding. Here, if

there was a question after the creditor was on notice

of the discharge, essentially Beasley [sic] gives them

the opportunity to come back and open the time to

determine if it’s nondischargeable, but it doesn’t

shift the burden to the debtor to establish that a

debt is dischargeable.

In the end, the bankruptcy court awarded debtors $8,400 in

compensatory damages. Regarding the punitive damages, the court

found that they were appropriate because Yen’s actions were

either reckless or showed a callous disregard for the law under

the holding of Henry v. Assocs. Home Equity Servs., Inc.

(In re Henry), 266 B.R. 457, 481 (Bankr. C.D. Cal. 2001). The

bankruptcy court awarded $8,000 in punitive damages, rather than

the $50,000 requested, because that amount was approximately the

same as the compensatory damages.

The bankruptcy court entered the order granting debtors’

motion for contempt, to void lien and for actual and punitive

damages on December 12, 2013. Yen filed a timely notice of

appeal. 

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II. JURISDICTION

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

§§ 1334 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C.

§ 158. 

III. ISSUES

A. Whether the bankruptcy court erred in finding that Yen

violated the discharge injunction; and 

B. Whether the bankruptcy court erred in awarding

compensatory and punitive damages. 

IV. STANDARDS OF REVIEW

“We review the decision to impose contempt for an abuse of

discretion, and underlying factual findings for clear error.”

Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1191 (9th Cir.

2003) (citing FTC v. Affordable Media, 179 F.3d 1228, 1239 (9th

Cir. 1999)).

We review the bankruptcy court’s decision to impose

sanctions for an abuse of discretion. Nash v. Clark Cnty. Dist.

Atty’s. Office (In re Nash), 464 B.R. 874, 878 (9th Cir. BAP

2012). In determining whether the bankruptcy court abused its

discretion we first determine de novo whether the trial court

identified the correct legal rule to apply to the relief

requested and then, if the correct legal standard was applied,

we determine whether the court’s application of that standard

was “(1) illogical, (2) implausible, or (3) without support in

inferences that may be drawn from the facts in the record.” 

United States v. Loew, 593 F.3d 1136, 1139 (9th Cir. 2010).

V. DISCUSSION

Once debtors received their discharge, § 524(a)(2) operated

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as an injunction to enjoin creditors from collecting a

prepetition debt. A party who knowingly violates the discharge

injunction under § 524(a)(2) can be held in contempt under

§ 105(a). Zilog, Inc. v. Corning (In re Zilog), 450 F.3d 996,

1007 (9th Cir. 2006). To prove a sanctionable violation, the

debtor has the burden of showing that the creditor “‘(1) knew

the discharge injunction was applicable and (2) intended the

actions which violated the injunction.’” In re Nash, 464 B.R.

at 880 (quoting Espinosa v. United Student Aid Funds, Inc.,

553 F.3d 1193, 1205 n.7 (9th Cir. 2008)). Clear and convincing

evidence must be presented to show that a creditor has violated

the discharge injunction, and that sanctions are justified. 

In re Zilog, 450 F.3d at 1007; In re Nash, 464 B.R. at 880. 

With respect to the knowledge requirement, whether Yen

should be held in contempt for violating the discharge

injunction requires a factual inquiry into his knowledge. 

In re Zilog, 450 F.3d at 1007-09.

It is certainly true that a trier of fact could infer

knowledge of an automatic stay or discharge injunction

from the fact that a creditor knew of the bankruptcy.

Such an inference, however, would be a matter of fact,

not a presumption implied in law. Knowledge of the

injunction, which is a prerequisite to its willful

violation, cannot be imputed; it must be found. If,

as here, the creditors dispute that they had such

knowledge, a finding that they knew of the injunction,

and thus willfully violated it, can only be made after

an evidentiary hearing. Id. at 1008. 

Here, we conclude that the record does not support a contempt

order under Zilog’s high burden of proof.

Yen filed a declaration in connection with the lien

avoidance proceeding alleging that Ricardo had falsely

represented that he would repay the loan thereby raising the

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question whether the debt was nondischargeable. Yen requested

the bankruptcy court to take judicial notice of the declaration

in the contempt proceeding. The nondischargeability of the

debt, which was hotly contested throughout the lien avoidance

and contempt proceedings, raised a factual dispute as to whether

the discharge injunction applied to Yen’s debt.5

At the hearing on contempt, the bankruptcy court found Yen

had notice of the discharge injunction and that his actions were

intentional. However, to be held in contempt, Yen must not only

have been aware of the discharge injunction, but must also have

been aware that the injunction applied to his claim. See

In re Zilog, 450 F.3d at 1010 n.14. The bankruptcy court made

no factual finding that Yen knew that the discharge injunction

applied to his claim. As a result, there remains the question

of whether Yen was, in fact, unaware of the discharge

injunction’s potential applicability to his claim. Moreover,

since Yen disputed that the discharge injunction applied to his

debt, the bankruptcy court was required under Zilog to hold an

evidentiary hearing on that issue. This it did not do, instead

making its findings solely on a paper record. 

Due to these shortcomings, we conclude that the bankruptcy

court abused its discretion by finding Yen in contempt. It

follows that the compensatory and punitive damage awards cannot

stand.

5 Although Yen failed to file a nondischargeability

complaint, there was no time limit for him to do so under

§ 523(a)(3)(B). Furthermore, the bankruptcy court never set a

deadline for him to do so. Accordingly, whether the debt was

discharged is still at issue.

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VI. CONCLUSION

For the reasons stated, we VACATE AND REMAND.

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