Griffin v. Wardrobe (In re Wardrobe)
Ninth Circuit Court of Appeals Case No. 07-16635
March 16, 2009
This opinion addressed an issue of first impression in the Ninth Circuit: "the narrow question whether a limited relief from stay order can be expanded by a creditor to obtain a non-dischargeable judgment when the motion for the limited relief requested only permission to litigate the factual question of the damages caused by a breach of contract."
From the way the Court couched the issue here, it signaled its decision: No. Creditor, a homeowner, received an order granting it relief from stay to litigate the amount of damages on a state court breach of contract claim against the debtor, a construction contractor, for the stated purpose of proceeding against the bonding companies of the debtor, a construction contractor. Even though this order granting relief was arguably open-ended, it nevertheless did not permit the creditor to amend the state court complaint to add allegations of intentional fraud and get a default judgment against debtor on that new nondischargeable claim, because the motion for relief from stay had not contemplated such an amendment.
The bankruptcy court had decided to the contrary, so there is more to this story.
Additional Critical Facts
A homeowner sued her building contractor and his bonding companies for breach of contract on a home repair. Shortly before trial, the contractor filed bankruptcy, a Chapter 13, which turned into a Chapter 7. Homeowner filed a motion for relief from stay which "expressly stated that “[t]he stay relief will only allow her to go to state court and proceed against [the bonding companies]." Relief was granted with the order explicitly stating that "Creditor may not proceed to enforce that judgment against the Debtor, or property of the estate without further order of this court." The order did not address whether additional claims could be raised against the debtor and brought to judgment.
Importantly, homeowner then filed an motion in the bankruptcy court to extend the bar date to objecting to dischargeability of the debt until “thirty days after there has been a notice of entry of judgment" in the state court case. The motion pointedly stated that “[homeowner] believes her debt is non-dischargeable under 11 U.S.C. § 523(a)(2), (4) and (6).” The motion was unopposed and granted.
Debtor received his discharge, his attorney withdrew from the state court case, the homeowner settled with the bonding companies and then proceeded against debtor in the state court case. She amended the complaint to add allegations of intentional fraud, got a default judgment against the debtor for more than $250,000, including $50,000 of punitive damages, and filed an adversary proceeding in the bankruptcy case to establish the nondischargeabilty of that judgment debt under § 523(a)(2)(A), the "false representation, or actual fraud" provision.
The Courts Below
The bankruptcy court "determined that the state court judgment was entitled to preclusive effect and 'that the elements necessary to establish a cause of action under . . . Section 523(1)(2)(A) have been established in this matter.' " All but the punitive damages portion of the state court judgment was determined to be nondischargeable.
The BAP reversed. In an unpublished opinion it held that in allowing homeowner to amend her complaint to include the claim for fraudulent misrepresentation, “the state court impermissibly modified the stay as to [debtor],” resulting in a violation of the stay and leaving its findings “void and without preclusive effect.” So the BAP remanded to the bankruptcy court to try the § 523(a)(2)(A) claim. Homeowner appealed. (Note: Judge Randall Dunn was on this panel, but no author is indicated on the unpublished "Memorandum.")
Ninth Circuit's Rationale and Holdings
1) Under Ninth Circuit case law, federal courts are required to give full faith and credit to state judicial proceedings, however, “[b]ecause . . . judicial proceedings in violation of the stay are void ab initio, the bankruptcy court is not obligated to extend full faith and credit to such judgments.”
2) Also under Ninth Circuit precedent, "the continuation of the [stayed] proceeding can derive legitimacy only from the bankruptcy court order," the terms of which must therefore be strictly construed.
3) The purpose of the automatic stay--preserving assets both for the debtor and other creditors--is promoted by "[l]imiting the relief available to a creditor to that which was currently alleged in a pending complaint or specifically requested in the motion for relief forces creditors to disclose the causes of action they intend to pursue and ensures that the bankruptcy court is fully apprised of the nature of the lawsuit so that the court can determine whether cause exists to grant relief from the stay."
4) Adopting the rationale of an unpublished Ninth Circuit opinion, the Court held: "an order granting limited relief from an automatic stay to allow a creditor to proceed to judgment in a pending state court action is effective only as to those claims actually pending in the state court at the time the order modifying the stay issues, or that were expressly brought to the attention of the bankruptcy court during the relief from stay proceedings."
New Litigation Reports on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.
From the way the Court couched the issue here, it signaled its decision: No. Creditor, a homeowner, received an order granting it relief from stay to litigate the amount of damages on a state court breach of contract claim against the debtor, a construction contractor, for the stated purpose of proceeding against the bonding companies of the debtor, a construction contractor. Even though this order granting relief was arguably open-ended, it nevertheless did not permit the creditor to amend the state court complaint to add allegations of intentional fraud and get a default judgment against debtor on that new nondischargeable claim, because the motion for relief from stay had not contemplated such an amendment.
The bankruptcy court had decided to the contrary, so there is more to this story.
Additional Critical Facts
A homeowner sued her building contractor and his bonding companies for breach of contract on a home repair. Shortly before trial, the contractor filed bankruptcy, a Chapter 13, which turned into a Chapter 7. Homeowner filed a motion for relief from stay which "expressly stated that “[t]he stay relief will only allow her to go to state court and proceed against [the bonding companies]." Relief was granted with the order explicitly stating that "Creditor may not proceed to enforce that judgment against the Debtor, or property of the estate without further order of this court." The order did not address whether additional claims could be raised against the debtor and brought to judgment.
Importantly, homeowner then filed an motion in the bankruptcy court to extend the bar date to objecting to dischargeability of the debt until “thirty days after there has been a notice of entry of judgment" in the state court case. The motion pointedly stated that “[homeowner] believes her debt is non-dischargeable under 11 U.S.C. § 523(a)(2), (4) and (6).” The motion was unopposed and granted.
Debtor received his discharge, his attorney withdrew from the state court case, the homeowner settled with the bonding companies and then proceeded against debtor in the state court case. She amended the complaint to add allegations of intentional fraud, got a default judgment against the debtor for more than $250,000, including $50,000 of punitive damages, and filed an adversary proceeding in the bankruptcy case to establish the nondischargeabilty of that judgment debt under § 523(a)(2)(A), the "false representation, or actual fraud" provision.
The Courts Below
The bankruptcy court "determined that the state court judgment was entitled to preclusive effect and 'that the elements necessary to establish a cause of action under . . . Section 523(1)(2)(A) have been established in this matter.' " All but the punitive damages portion of the state court judgment was determined to be nondischargeable.
The BAP reversed. In an unpublished opinion it held that in allowing homeowner to amend her complaint to include the claim for fraudulent misrepresentation, “the state court impermissibly modified the stay as to [debtor],” resulting in a violation of the stay and leaving its findings “void and without preclusive effect.” So the BAP remanded to the bankruptcy court to try the § 523(a)(2)(A) claim. Homeowner appealed. (Note: Judge Randall Dunn was on this panel, but no author is indicated on the unpublished "Memorandum.")
Ninth Circuit's Rationale and Holdings
1) Under Ninth Circuit case law, federal courts are required to give full faith and credit to state judicial proceedings, however, “[b]ecause . . . judicial proceedings in violation of the stay are void ab initio, the bankruptcy court is not obligated to extend full faith and credit to such judgments.”
2) Also under Ninth Circuit precedent, "the continuation of the [stayed] proceeding can derive legitimacy only from the bankruptcy court order," the terms of which must therefore be strictly construed.
3) The purpose of the automatic stay--preserving assets both for the debtor and other creditors--is promoted by "[l]imiting the relief available to a creditor to that which was currently alleged in a pending complaint or specifically requested in the motion for relief forces creditors to disclose the causes of action they intend to pursue and ensures that the bankruptcy court is fully apprised of the nature of the lawsuit so that the court can determine whether cause exists to grant relief from the stay."
4) Adopting the rationale of an unpublished Ninth Circuit opinion, the Court held: "an order granting limited relief from an automatic stay to allow a creditor to proceed to judgment in a pending state court action is effective only as to those claims actually pending in the state court at the time the order modifying the stay issues, or that were expressly brought to the attention of the bankruptcy court during the relief from stay proceedings."
New Litigation Reports on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.
by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com
PLEASE NOTE that this Litigation Report and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
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