Lakhany v. Khan (In Re Lakhany)
538 B.R. 555
| 9th Cir. BAP | 2015Background
- Lakhany filed a voluntary Chapter 7 in 2012, a no-asset case, and received a discharge in 2013; case closed without listing Khan as a creditor.
- Khan had pending state court claims (State Action) in Orange County related to a consumer loan-modification scheme.
- FTC had a separate nondischargeability action against Lakhany; Lakhany stipulated to a fraud-based nondischargeability judgment.
- Khan learned of Lakhany’s involvement in the scheme during discovery in the State Action and sought to reopen the bankruptcy to pursue nondischargeability and later to obtain stay relief for the State Action.
- Bankruptcy court reopened the case, allowing Khan to file a nondischargeability complaint and indicating he could pursue state-court actions; Khan filed the adversary and later sought stay relief to add Lakhany as a defendant in the State Action.
- The bankruptcy court granted Khan’s Motion for Relief from Stay; an unsigned order followed in December 2014 and an amended order in January 2015; Lakhany appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the bankruptcy court abused its discretion by granting relief from stay. | Lakhany argues the stay had expired after discharge; proper focus was the discharge injunction. | Khan contends stay relief was appropriate to pursue state action and later nondischargeability. | Abuse of discretion; order recast as declaratory judgment. |
| Scope of discharge injunction under 524(a)(2) and whether it barred Khan’s action. | Discharge injunction protects against collection of discharged debts. | Discharge injunction does not bar nondischargeable debt proceedings or related actions. | Discharge injunction does not enjoin Khan’s attempt to establish nondischargeable liability; clarified via declaratory judgment. |
| Whether matter should have proceeded via adversary proceeding rather than contested matter. | Procedural error in using contested matter; adversary proceeding preferred for declaratory relief. | Record supports permissive handling; issues were largely legal and undisputed. | Harmless error; record permits declaratory relief in Adversary Proceeding as well as main case. |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (U.S. 1991) (upholds use of issue preclusion in nondischargeability determinations)
- Munoz v. Diaz, 287 B.R. 546 (9th Cir. BAP 2002) (discharge injunction scope and permissible alternate paths; endorses declaratory relief in some contexts)
- Beezley v. California Land Title Co., 994 F.2d 1433 (9th Cir. 1993) (523(a)(3)(B) requires predicate §523(a)(2),(4),(6) showing for nondischargeability)
- Arneson v. Farmers Ins. Exch., 282 B.R. 883 (9th Cir. BAP 2002) (abuse of discretion standard in stay-relief decisions)
- In re Kronemyer, 405 B.R. 915 (9th Cir. BAP 2009) (abuse of discretion and standards for stay relief)