In re: William C. Shaw
NC-15-1406-BSKu
| 9th Cir. BAP | Jun 27, 2017Background
- Shaw (debtor) ran a wheel-restoration business, formed an LLC, then filed Chapter 7; he received a discharge on December 16, 2014. Rogerson was a creditor who had loaned money under an Investment Agreement.
- Prepetition Rogerson sued Shaw (and his dba) in state court for sums claimed under the Agreement and other loans; those personal claims against Shaw were discharged in bankruptcy. Rogerson did not object to Shaw’s discharge.
- After discharge, Shaw dissolved the LLC and resumed business as a sole proprietor; the state court later found some assets belonged to the LLC and ordered turnover, including a $4,073 payment to Rogerson.
- Rogerson sought leave to file a first amended complaint (FAC). The FAC sued the LLC on most claims (Entity Causes of Action) and named Shaw personally only in a fraudulent-transfer claim alleging postpetition transfers and successor/continuation liability.
- Shaw moved in bankruptcy court to enforce the discharge injunction, alleging the FAC sought to relitigate prepetition personal liability and moved for contempt and sanctions. The bankruptcy court found Rogerson willfully violated the discharge injunction and awarded Shaw attorney’s fees and costs. Rogerson appealed.
Issues
| Issue | Rogerson's Argument | Shaw's Argument | Held |
|---|---|---|---|
| Did the FAC violate the discharge injunction by seeking to collect a discharged personal debt from Shaw? | FAC primarily sued the LLC; the sole claim against Shaw is for postpetition fraudulent transfer — thus not barred by discharge. | FAC artfully pleaded successor/continuation liability to resurrect Shaw’s discharged personal obligation. | Panel majority: unresolved; remanded — bankruptcy court erred in standard and must hold evidentiary hearing. Concurring judge: FAC did not violate the discharge injunction. |
| Did Rogerson have the requisite actual knowledge that the discharge injunction "applied" to her FAC (ZiLOG test prong 1)? | She disputed applicability and argued facts were unclear as to when liabilities/ transfers occurred, so she lacked actual knowledge the discharge applied. | Shaw argued she had notice of the discharge and should be held to know it applied to claims reasserting the same debts. | Court: bankruptcy court applied wrong standard (treated knowledge of the order as sufficient); remanded for evidentiary hearing to determine whether Rogerson knew the injunction applied to her claims. |
| Was the bankruptcy court required to hold an evidentiary hearing on knowledge? | Yes — ZiLOG requires a fact-based inquiry into whether contemnor knew the injunction applied; hearing needed when facts disputed. | Argued hearing unnecessary because facts established violation and she knew of the discharge. | Held: evidentiary hearing required; the court erred by not holding one. |
| Were sanctions properly awarded (attorney’s fees and costs)? | Not if the willfulness finding fails; burden to prove knowledge by clear and convincing evidence unmet. | Fees appropriate because willful contempt occurred. | Vacated: fee award vacated because contempt finding reversed; remand for further proceedings. |
Key Cases Cited
- ZiLOG, Inc. v. Corning (In re ZiLOG, Inc.), 450 F.3d 996 (9th Cir. 2006) (to hold in contempt for discharge violation, contemnor must know of the injunction and know it applies to their claim)
- Emmert v. Taggart (In re Taggart), 548 B.R. 275 (9th Cir. BAP 2016) (applies ZiLOG; distinguishes knowledge-of-applicability prong and intent prong; legal-standard review de novo)
- Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178 (9th Cir. 2003) (evidentiary hearing generally required to resolve knowledge of injunction when facts disputed)
- Nash v. Clark Cnty. Dist. Atty's Office (In re Nash), 464 B.R. 874 (9th Cir. BAP 2012) (standard for willful violation and available remedies for discharge injunction violations)