Monday, November 17, 2008

Retroactive Effect of U.S. Supreme Court Opinion Decided During Pendency of Unrelated Bankruptcy Case on Appeal



By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

Ditto v. McCurdy (In re McCurdy)
Ninth Circuit Case No. 02-16252

December 14, 2007


This Ninth Circuit opinion addressed both substantive issues about nondischargeability "for willful and malicious injury by the debtor" under § 523(a)(6) of the Bankruptcy Code, and various procedural issues including 1) the retroactive effect of a Supreme Court opinion decided during the pendency of a case, and 2) amending a complaint to add a § 727 discharge objection to the § 523 dischargeabililty claim. The substantive nondischargeability matters are addressed in this website's Bulletin article of 11/13/08 entitled After 18 Years of Litigation Ninth Circuit Holds $2.8 Million Medical Malpractice Judgment "Not Non-Dischargeable" Under Section 523(a)(6). The two procedural issues are dealt with here in this Litigation Report.

1) Retroactive Effect of US Supreme Court Opinion on Pending Unrelated Cases
This case had a torturous procedural history spanning 18 years and including three different journeys up the chain of appellate courts, to the Hawaii Supreme Court once and to the Ninth Circuit twice. It is no wonder that the applicable case law changed in the interim.

Without detailing all the twists and turns of this history, here are the salient events for our purpose: a) After plaintiff won a large judgment in Hawaii state court against debtor in 1992, debtor both appealed that judgment and filed a Chapter 7 bankruptcy. b) In Plaintiff's adversary proceeding against the debtor for the nondischargeability of her claim based on her state court judgment, she won a summary judgment in her favor in 1996; she prevailed because of 9th Circuit case law of the time that "willful and malicious injury" under § 523(a)(6) meant that plaintiff did not have to show that "debtor acted with intent to injure" but only that he "committed a wrongful act . . . , done intentionally, necessarily produc[ing] harm and . . . without just cause or excuse, . . . even absent proof of a specific intent to injure." c) The following year the state trial court judgment found its way to the Hawaii Supreme Court, which affirmed the gross negligent portion of the judgment but reversed the fraud portion. d) Debtor filed a motion in bankruptcy court to set aside the nondischargeability summary judgment in light of this Hawaii Supreme Court decision. The bankruptcy court denied the motion, and debtor appealed to the U.S. District Court and then to the Ninth Circuit. e) But before this Court ruled on that motion, in 1998 the U.S. Supreme Court held in Kawaauhau v. Geiger, 523 U.S. 57 that “debts arising from recklessly or negligently inflicted injuries do not fall within the compass of § 523(a)(6).” f) As a consequence this Court overturned the bankruptcy court and U.S. District Court decisions, setting aside the summary judgment against debtor which had been based on pre-Geiger law. g) Debtor then prevailed in bankruptcy court in a summary judgment establishing the dischargeability of plaintiff's debt against him, the U.S. District Court affirmed, and plaintiff appealed to this Court, which is the matter now before it.


As to whether the Geiger decision should be applied to this case, generally speaking "a federal court must applly a new and supervening rule of federal law when applicable to the issues in the case." Accordingly the Ninth Circuit had applied Geiger retroactively in a number of cases. But this present case is distinguishable in that plaintiff "had already obtained a final judgment in 1996, which became non-appealable as of January 19, 1997—more than a year before Geiger was decided. [Plaintiff] maintains that the law as of that date ought to apply to this case, even after the former judgment was vacated following [debtor's] successful Rule 60(b) motion" to set it aside.

But instead the Ninth Circuit decided to the contrary, applying its own rationale that "[w]hen a judgment has been set aside pursuant to Rule 60(b), the case stands as if that judgment had never occurred in the first place. The case remains open on direct review, and the court must apply the law as it stands, including any intervening precedents," such as Geiger.

Note that the Court did not cite any case law in support for this analysis, only a reference in a footnote to Am. Jur. 2nd Judgments about the setting aside of a judgment placing "the parties in the position they occupied before entry of the judgment," without any reference to the applicability of an intervening change in the case law.

2) Amending a Complaint to Add a § 727 Claim to a § 523 One
Referring (much more briefly!) to the procedural history above, plaintiff's original adversary proceeding complaint in 1992 contained not just a § 523(a)(6) nondischargeability claim but also § 727(a)(4) and (7) objections to discharge. After winning summary judgment in her favor on the § 523(a)(6) claim, she dismissed the § 727 claims. But then after that judgment was eventually set aside on remand from this Court in 2000, and the bankruptcy court granted debtor a discharge in February 2000, in May 2001 plaintiff moved to amend her complaint to add back her § 727 claim.

In determining whether to give plaintiff leave of court to amend the complaint, the Court referred to "[f]our factors . . commonly used to determine the propriety of a motion for leave to amend. These are: bad faith, undue delay, prejudice to the opposing party, and futility of amendment." But the appellate standard for reviewing how these rather vague factors were weighed by the bankruptcy court is whether the bankruptcy court abused its discretion, that is, whether the Ninth Circuit has "a definite and firm conviction that the district court committed a clear error of judgment in the conclusion it reached."

Noting that plaintiff had waited "more than fifteen months" between the discharge granted in 2000 and her motion to amend complaint, the Court held that the bankruptcy court had not abused its discretion in not permitting this amendment. It reasoned: "If the ordinary action of § 727(a) is extreme, it must surely be still more extreme to order, retroactively, a revocation of the discharge. Given the value of finality in bankruptcy, as well as the difficulty of unscrambling an egg by effectively revoking discharge . . . , we hold that the bankruptcy court did not err in denying [plaintiff] leave to amend her complaint."

Comment
Chapter 7 trustees commonly file motions to revoke the discharge when debtors fail to pay their oblgations to the estate, and no one complains then about "the difficulty of unscrambling an egg." And given that about eight years had passed between the filing of the Chapter 7 case in 1992 and the granting of the discharge in 2000, and given that the discharge of this debt continued to be under appeal for another seven years, the fifteen months that the Ninth Circuit considered to be excessive delay does not seem to be so in this context. At the very least, the Court does not explain its position well, although given the low "abuse of discretion" standard perhaps it does not need to beyond what it did.


by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys

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