In re: Lisa Gay Mellem
OPINION
Appeal from the United States Bankruptcy Court for the Central District of California
Before: KLEIN,1 TAYLOR, and GAN, Bankruptcy Judges.
We venture to the fringes of the bankruptcy discharge injunction in this probate dispute to explore the meaning of “personal liability of the debtor” in
Here, the debtor contends that the chapter 71 discharge of a $75,000 debt to her mother prevented the mother from thereafter reducing her legacy by $75,000. A probate court ruling that the deceased mother‘s intention was to treat $75,000 as an advance on an inheritance, prompted the daughter to return to the bankruptcy court, alleging contempt of discharge. The bankruptcy court ruled there was no “debt” being collected “as a personal liability of the debtor;” hence, no contempt.
We agree and AFFIRM because a bankruptcy discharge does not constrain an individual‘s ability to make a testamentary disposition. We publish to clarify the scope of the
FACTS
Appellant Lisa Mellem is a self-represented discharged chapter 7 debtor who has been a member of the California Bar since 2003.
Lisa‘s mother, Dorothy, who died in 2017, created a revocable family trust in 1980 (hereafter “Trust“) into which she transferred all her assets as an estate planning device. The beneficiaries included her three children (Lisa, Carl, and Richard). Lisa‘s brother, Carl Mellem, is trustee of the now-irrevocable Trust.
In 2004, Lisa executed a promissory note in favor of her mother for $75,000 (“$75,000 Note“) on account of inter vivos (or “lifetime“) transfers.
In 2009, Lisa filed a chapter 7 bankruptcy case, receiving a discharge in a no-asset case in which no deadline to file claims was fixed. She scheduled about $248,000 in unsecured debt but did not schedule the $75,000 Note to her mother.2
Lisa excuses her omission by saying her mother had told her that she did not have to repay the $75,000 Note, which she took to mean that it was forgiven. Now she contends the debt existed but was discharged.
The Trust permits Dorothy to designate lifetime transfers that she wanted applied to an individual beneficiary‘s share of her final estate. In two holographic memoranda dated in 2012 and in 2013, Dorothy listed lifetime transfers of $75,000 and $10,000 with respect Lisa and Richard.
Carl took over as successor trustee in 2014. Dorothy died in August 2017. Attorney Edward Goldkuhl represents Carl in Probate Court.
On April 5, 2018, Carl sent to Lisa and Richard a status report projecting their respective Trust distributions: Carl, $172,920; Richard, $162,920 (=$172,920-10,000); and Lisa, $97,920 (=$172,920-75,000).
He explained the differences in distributions as accounting for lifetime advances of $75,000 to Lisa and $10,000 to Richard.
Lisa objected to the $75,000 reduction from her share. She said Dorothy forgave the $75,000 Note. Later, she interposed her bankruptcy discharge, contending that the $75,000 Note was an unscheduled “debt” that was discharged as a matter of law.3
Lisa‘s objection led Carl, as trustee represented by Goldkuhl, to file in Probate Court4 a petition denoted a Request for Instructions as permitted by
Carl provided declaration testimony and documentary evidence that Dorothy made writings that she kept in the same place and in the same manner as she kept her trust documents, including holographic notations dated October 15, 2012, and June 26, 2013, specifying $75,000 and $10,000 for Lisa and Richard, respectively.5 Carl asserted that these handwritings,
among other evidence, reflected Dorothy‘s intent that the referenced lifetime transfers be treated as advances on the transferees’ residual share of the Trust as provided for in
Lisa did not file written opposition, despite having had nearly three months of
Lisa thereafter tried to persuade the Probate Court that her bankruptcy discharge warranted reconsideration and revision of its order.7 The Probate Court was not persuaded.
Resorting to bankruptcy court, Lisa obtained an order reopening her chapter 7 case and requested an order of contempt. The court thereupon
ordered Carl and Goldkuhl to show cause why they should not be held in contempt for violation of the discharge injunction.
Upon considering the responses to the show cause order, the judge, without otherwise explaining herself, observed that bankruptcy courts are not appellate courts empowered to overturn Probate Court decisions, ruled that there was no “debt,” and denied Lisa‘s contempt motion. Lisa‘s motion to reconsider under
This appeal ensued.
JURISDICTION
The bankruptcy court had subject-matter jurisdiction under
ISSUES
- Does the bankruptcy discharge injunction of
11 U.S.C. § 524(a)(2) forbid a testator or settlor of a family trust from reducing a legacy to the discharged debtor? - Did the bankruptcy court abuse its discretion by refusing to find contempt and refusing to reconsider its ruling?
STANDARDS OF REVIEW
The scope of the bankruptcy discharge injunction is a mixed question of law and fact to be reviewed either de novo or for clear error, depending upon whether questions of law or questions of fact predominate. U.S. Bank Nat‘l Ass‘n ex rel CWCapital Asset Mgmt. LLC v. Vill. at Lakeridge, LLC, ___ U.S. ___, 138 S.Ct. 960, 967-68 (2018). As questions of law predominate in this instance, review is de novo.
If the discharge injunction is violated, the bankruptcy court‘s decision regarding contempt sanctions is reviewed for abuse of discretion. Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1191 (9th Cir. 2003); Freeman v. Nationstar Mortg. LLC (In re Freeman), 608 B.R. 228, 233 (9th Cir. BAP 2019).
Denial of a motion for relief under Civil Rules 59 and 60 is reviewed for abuse of discretion. Hansen v. Moore (In re Hansen), 368 B.R. 868, 875 (9th Cir. BAP 2007); United Student Funds, Inc. v. Wylie (In re Wylie), 349 B.R. 204, 208 (9th Cir. BAP 2006).
A bankruptcy court abuses discretion if it applies the wrong legal standard or makes factual findings that are illogical, implausible, or without support in the record. TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011); United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc).
DISCUSSION
As this appeal is from a bankruptcy court‘s ruling that contempt was not appropriate because the discharge injunction did not forbid the
challenged conduct, we begin with basic bankruptcy-related contempt principles before describing pertinent state law and drilling down on the scope of the bankruptcy discharge.
I
Bankruptcy contempt principles subdivide into law and procedure.
A
A bankruptcy court may hold a creditor in contempt for violation of the discharge injunction if “there is no objectively reasonable basis for concluding that the creditor‘s conduct might be lawful under the discharge order.” Taggart v. Lorenzen, ___ U.S. ___, 139 S. Ct. 1795, 1801 (2019).
Subjective good or bad faith is not controlling. While subjective bad faith is not necessary to impose civil contempt sanctions, it sometimes may be sufficient to impose contempt sanctions. Id., at 1802.
Conversely, a contemnor‘s subjective good faith will not prevent a civil contempt finding when no objectively reasonable basis is present, but good faith may be considered in determining the extent of sanctions to be imposed. Freeman, 608 B.R. at 234 (citing Taggart, 139 S. Ct. at 1802); In re LeGrand, 612 B.R. 604, 613 (Bankr. E.D. Cal. 2020) (same).
The Taggart refinements of the civil contempt standard in the bankruptcy discharge context did not otherwise alter a movant‘s threshold burden of going forward. The moving party still must show at the outset that the alleged contemnor: (1) knew the discharge injunction applied; and (2) intended the actions that violated the injunction. Ocwen Loan Servicing,
LLC v. Marino (In re Marino), 577 B.R. 772, 782-83 (9th Cir. BAP 2017), aff‘d in part & appeal dismissed in part, 949 F.3d 483 (9th Cir. 2020) (citing Zilog, Inc. v. Corning (In re Zilog, Inc.), 450 F.3d 996, 1007 (9th Cir. 2006)).
If the movant establishes the threshold elements, the burden of going forward then shifts to the responding party to show that it was impossible comply with the discharge order. Id. at 783.
The ultimate burden of persuasion remains on the movant to show, per Taggart, no objectively reasonable basis for concluding that the alleged contemnor‘s conduct might be lawful under the discharge order.
B
In contrast, an adversary proceeding under
C
There is merit to Lisa‘s complaint that the bankruptcy judge did not “find the facts specially” and did not render conclusions of law separately as required by
The court‘s conclusory assertion that there was no debt involved came without explanation.
The primary cost of deficient findings plays out on appeal. Without findings of fact, a reviewing court is not constrained by
While the bankruptcy court‘s ruling that no “debt” was involved in the Probate Court petition seeking instructions lacked detailed findings of fact and conclusions of law, the record is sufficient for this Panel fairly to decide this appeal. The essential facts are not in dispute. The crucial analysis entails questions of law that we are equipped to determine de novo.
II
The California Probate Code governs probate and family trust matters.
Family trusts are covered by Probate Code Division 9, “Trust Law.”
Discerning differences among gifts, loans, and transfers requires reference to Probate Code Division 11, “Construction of Wills, Trusts, and
Other Instruments,” Part 1, “Rules for Interpretation of Instruments.”
A
California probate law recognizes that lifetime transfers (i.e., inter vivos transfers) to trust beneficiaries may ultimately be treated as loans, gifts, or advancements on an inheritance.
A testator or settlor of a revocable family trust may change a debt or loan into an advancement, convert an advancement into a pure gift, or change a pure gift to an advancement. 64 Cal. Jur. 3d Wills § 591.
The terms “Advancement [or Advance] on an Inheritance” and “Ademption by Satisfaction” have come to be used interchangeably by California courts. Id.
The seminal California Supreme Court decision on the subject is In re Hayne‘s Estate, 165 Cal. 568, 573 (1913). That decision retains vitality. Sachs v. Sachs, 44 Cal. App. 5th 59, 61 (2020), review denied (Apr. 1, 2020) (lifetime gifts as advances on inheritances). The current codification of Hayne‘s Estate rule (which also applies to family trusts per Probate Code § 21101) is Probate Code § 21135 (“Lifetime gifts; satisfaction of at-death transfer; conditions“).8
B
Judicial procedure for family trust matters is governed by Probate Code Division 9, Part 5, “Judicial Proceedings Concerning Trusts.”
The superior court having jurisdiction over the trust has exclusive jurisdiction of proceedings concerning the internal affairs of a trust.
A trustee or beneficiary of an irrevocable trust may petition the Probate Court concerning the internal affairs of the trust.
The “internal affairs” of the trust are defined in a nonexclusive list of 23 categories set forth as § 17200(b).
Instructing the trustee is a specified internal affair for which there may be a petition.
Carl availed himself of this authority when he petitioned the Probate Court for “Instructions” regarding whether $75,000 and $10,000 should be treated as advances on inheritances based on Dorothy‘s expressions of intent. He presented evidence that Dorothy declared in contemporaneous writings that the respective values were to be deducted from the value of the at death transfers.
The applicable substantive law is that the transferor‘s intent controls.
The Probate Court was persuaded of Carl‘s position and did not regard Lisa‘s bankruptcy discharge as an impediment to its ruling.
III
The oddity that this is a probate situation prompts us to revisit our jurisdiction regarding the Probate Court activity in light of the so-called “probate exception” to federal jurisdiction.
A
Our navigational star regarding the probate exception is the Supreme Court decision in Marshall v. Marshall, 547 U.S. 293, 311-12 (2006).
Marshall clarified that the judge-made probate exception is to be understood as a statement of the general principle that when one court is exercising in rem jurisdiction over a res, a second court will not assume in rem jurisdiction over the same res. Id. Probate of a will, annulment of a will, and administration of a decedent‘s estate are matters reserved to state probate courts. Id.
Here, the Probate Court was exercising in rem jurisdiction over the res of the Trust to rule regarding the internal affairs of the Trust within the scope of
It is, of course, plausible that Probate Court decrees could be void by virtue of
To be sure, the power to enforce the discharge injunction does entitle bankruptcy courts to determine whether judgments rendered by nonbankruptcy courts operate to determine the personal liability of a debtor with respect to a discharged debt or entail the collection, recovery, or offset of a discharged debt as a personal liability of the debtor. This
enforcement power extends to subterfuges and circumventions. Heilman v. Heilman (In re Heilman), 430 B.R. 213, 220 (9th Cir. BAP 2010) (2-1 decision).
In Heilman, in the context of the analogous domestic relations exception to federal jurisdiction, we discerned invalid subterfuge and circumvention in financial provisions of a marital dissolution decree to the extent it operated to revive a discharged debt. Id.
In describing the interplay between state and federal courts with respect to the
C
The bankruptcy court also noted that it was not a court of appeals with power to review or overturn Probate Court decisions. This correct observation pertains to Lisa‘s attack on the merits of the Probate Court decision, appellate review of which is the province of California state
courts. E.g., Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 283-84 (2005); Lopez v. Emerg. Serv. Restoration, Inc. (In re Lopez), 367 B.R. 99, 103-04 (9th Cir. BAP 2007).
It follows that the probate exception does not necessarily constrain bankruptcy court jurisdiction to police subterfuges and enforce the bankruptcy discharge so long as there is no exercise of in rem jurisdiction over the res of the family trust or invasion of the legitimate province of state appellate courts.
IV
The crucial question in this appeal is the scope of the protection afforded by the bankruptcy discharge.
A
The discharge umbrella protects only the “personal liability with respect to any debt discharged” under the Bankruptcy Code.
The first facet of the effect of a bankruptcy discharge is
The second facet is
recover, or offset any discharged debt “as a personal liability of the debtor.”
In each case, the extent the discharge is limited to “personal liability of the debtor.”
B
Back to basics. In assessing whether there is a discharged “debt” that is being collected, recovered, or offset “as a personal liability of the debtor” within the meaning of the
1
The term “debt” is defined for Bankruptcy Code purposes: “The term ‘debt’ means liability on a claim.”
2
In turn, the term “claim” is likewise defined:
The “term” claim means --
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, disputed, undisputed, legal, equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.
3
The Supreme Court has explained that a “claim” is a right to payment and a “debt” is a “duty to pay.” Ohio v. Kovacs, 469 U.S. 274, 280-84 (1985).
Anything that does not qualify as a “claim” for purposes of
V
The question becomes whether Dorothy was collecting, recovering, or offsetting a discharged “debt.”
Although there may be little economic difference between a $75,000 discharged debt and a $75,000 advancement on an inheritance, legal differences matter. The key legal requirement is that the intent of the settlor of the trust takes precedence.
The legal difference here is that Dorothy, as the settlor of the Trust or as testator of a will, was entitled as a matter of law to direct the disposition of her assets at death in any manner she chose. Id.
The fact that she intended and directed the adjustment of otherwise equal distributions by treating $75,000 and $10,000 lifetime gifts to two of her three children as advancements on an inheritance does not amount to collecting a debt “as a personal liability” of the debtor within the meaning of
Nothing suggests that Dorothy was directing the trustee to enforce a “right to payment” within the meaning of
Instead, in the exercise of her personal autonomy over her assets as recognized by
Accepting Lisa‘s position would amount to ruling that the discharge of a debt in bankruptcy forever bars a testator or settlor of a trust from adjusting a legacy or distribution. Adherence to such a position would stretch the concept of “personal liability of the debtor” beyond reasonable bounds and stray into the realm of testamentary dispositions. Just as there was nothing to prevent Dorothy from entirely disinheriting Lisa, there was nothing to prevent Dorothy from requiring that $75,000 in lifetime transfers be considered advances on an inheritance.
In short, after parsing the definition of “debt” through the matrix of
VI
Back to burdens.
A
As we explained above, Taggart teaches that Lisa had the burden of persuasion to demonstrate there is no objectively reasonable basis for concluding that the offending conduct might be lawful under the discharge order. Taggart, 139 S. Ct. at 1801.
Ordinarily, the court‘s determination whether there was an objectively reasonable basis for concluding the offending conduct might be lawful under the discharge, would be reviewed for abuse of discretion. Dyer, 322 F.3d at 1191; Freeman, 608 B.R. at 233.
The absence of findings by the bankruptcy judge in this instance means that we need not afford any form of deference to the bankruptcy judge‘s implicit view that there was an objectively reasonable basis for concluding the targeted conduct was lawful because no “debt” was involved. Affording no deference, we nevertheless agree.
Applicable nonbankruptcy law authorizing a settlor of a family trust to dictate that specified lifetime transfers be deemed advancements on inheritances, the handwritten notes of the settlor, and the trustee‘s adherence to proper procedures for requesting instructions coalesce to provide an objectively reasonable basis for concluding that the conduct of the alleged contemnors was lawful under the discharge order.
On this record, we do not have occasion to assess whether the bankruptcy judge abused discretion regarding its determination of contempt, because, as a matter of law, the discharge injunction was not violated.
B
We turn to review of the motions for reconsideration under Civil Rules 59(e) and 60(b) that also are the subject of this appeal.
To support a motion seeking relief under
A motion for relief under Civil Rule 60(b)(2) and (3) requires demonstration of: “(2) newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b); [or] (3) fraud . . . misrepresentation, or other misconduct of an adverse party. . . .” Wylie, 349 B.R. at 210.
In her opening appeal brief, aside from some generic references to fraud, Lisa did not specifically and distinctly argue that the bankruptcy court committed reversible error when it denied her motion for relief under Civil Rules 59 and 60. Her failure to do so permits forfeiture of all issues related to her appeal from the denial of her motion. Dietz v. Ford (In re Dietz), 760 F.3d 1038 (9th Cir. 2014)(aff‘g & adopting 469 B.R. 11, 25 (9th Cir. BAP 2012)); Leigh v. Salazar, 677 F.3d 892, 897 (9th Cir. 2012).
Lisa tries to leverage what she brands as Carl‘s inconsistent positions regarding whether the $75,000 Note was forgiven or remained an obligation. The irony is that she blames Carl for repeating her inconsistent positions. By omitting to schedule the $75,000 Note in her chapter 7 case, Lisa represented that debt did not exist, and a discharge was granted on the assumption she was truthful; now she says the debt did exist and was discharged. Principles of judicial estoppel – the estoppel of inconsistent positions – teach that she should not have it both ways. Cheng v. K & S Diversified Invs., Inc. (In re Cheng), 308 B.R. 448, 453-54 (9th Cir. BAP 2004), aff‘d, 160 F. Appx. 644 (9th Cir. 2005) (standards for judicial estoppel).
The inconsistent positions, however, are not material. O‘Donnell v. Tristar Esperanza Props., LLC (In re Tristar Esperanza Props., LLC), 488 B.R. 394, 405 (9th Cir BAP 2013), aff‘d, 782 F.3d 492 (9th Cir. 2015). Regardless of whether the debt was discharged or forgiven by Dorothy in 2009, it is plausible that Dorothy intended as of 2009 that $75,000 would eventually be treated as an advancement on an inheritance. Even if that was not on Dorothy‘s mind in 2009, nothing prevented her in 2012 and 2013 from treating $75,000 as an advancement on an inheritance.
As Lisa did not carry her burden to show manifest error, newly-discovered evidence, fraud, or misrepresentation, the bankruptcy court did not abuse discretion in denying relief under Civil Rules 59(e) and 60(b).
CONCLUSION
The
AFFIRMED.
Notes
In the years that followed [settlement of her Trust], Mother made various loans and advances to all of her children. Some of those notes were paid back, and
(a) Property given by a transferor during his or her lifetime to a person is treated as a satisfaction of an at-death transfer to that person in whole or in part only if one of the following conditions is satisfied:
(1) The instrument provides for deduction of the lifetime gift from the at-death transfer.
(2) The transferor declares in a contemporaneous writing that the gift is in satisfaction of the at-death transfer or that its value is to be deducted from the value of the at-death transfer.
(3) The transferee acknowledges in writing that the gift is in satisfaction of an at-death transfer or that its value is to be deducted from the value of the at-death transfer.
(4) The property given is the same property that is the subject of a specific gift to that person.