Levy v. Bank of the Orient (In Re Levy)Levy v. Bank of the Orient (In Re Levy)
MEMORANDUM OF DECISION
There are no disputed issues of fact in this case. When the debtor filed his Chapter 7 petition in 1982, he was a defendant in a state court suit brought by Bank оf the Orient; this debt was duly scheduled. Two years later, long after the debtor’s discharge was entered, a codefendant in the state court action filed a cross-complaint against First Interstate Bank, which had also been scheduled as a creditor in the bankruptcy as to an unrelаted debt. First Interstate then filed a cross-complaint against the debtor for indemnity. The propriety of this cross-complaint is the central issue here.
Instead of ignoring the cross-complaint or immediately seeking the protection of the bankruptcy court, the debtor, in pro per, filed an answer to the cross-complaint raising his discharge as a defense. Thereafter, through inadvertence the debtor allowеd the state court action to proceed to trial in his absence. At trial, First Interstate filed an amended cross-complaint against the debtor and obtained a judgment on it. The state court made a finding that the debt was not discharged. Since Bank of the Orient had been assigned First Interstate’s rights pursuant to a settlement before the trial, it is the real party in interest here. The debtor brought this adversary proceeding when Bank of thе Orient took steps to enforce the judgment.
At first impression it seemed that the state court judgment, although clearly erroneous in its finding that the debt sued upon was not discharged, was valid and binding upon this court. 28 U.S.C. section 1334(b) provides that the district courts (and hence the bankruptcy courts) have original but not exclusive jurisdiction over all civil proceedings arising under the Bankruptcy Code. The advisory committee note to Bankruptcy Rule 4007 specifically states that jurisdiction over dischargeability issues, except those covered by section 523(c) of the Bankruptcy Code, is held concurrently by the bankruptcy court and any appropriate nonbankruptcy forum. On the face of it then, once the debtor placed thе issue of dischargeability before the state court that court had jurisdiction to decide the issue.
However, validating the state court judgment is troublesome because of the language and intent of section 524(a) of the Bankruptcy Code. Section 524(a) was designed and intended by Congress to eliminate historical circumvention of bankruptcy law through state court proceedings. In the old days, creditors would sue the debt- or оn a discharged debt in state court and, when the debtor through ignorance, inadvertence, or inability to afford counsel failed to plead the discharge as an affirmative defense, the discharge would be deemed waived and the debtor was subject to an enforceable judgment. Section 524(a) was designed to void any judgment obtained before or after the discharge without requiring the debtor to take any action at all. 3 Collier on Bankruptcy (15th Ed.), section 524.01, p. 524-9.
If section 524(a) was designed to protect the debtor from inadvertently losing the benefits of his discharge, it is difficult for the Court to find that the debtor here inadvertеntly turned a void action into a valid one by answering it. Moreover, it does not matter for jurisdictional purposes whether the issue of dischargеability is raised by affirmative defense or by allegation in the complaint.
1
' Therefore, if the law is as
There is a resolution of this matter which preserves the protections of section 524(a) without depriving the state court of its сoncurrent jurisdiction. There is an important exception to the applicability of the doctrines of res judicata and collateral es-toppel; they are generally not binding upon the bankruptcy court in dischargeability cases.
In re Daley
(9th Cir.1985)
Nor does the Court think that 28 U.S.C. section 1738 requires it to blindly allow enforcement of a default judgment it knows to be erroneous. While that statute does require the bankruptcy court to give full faith and credit to state court decisions, the Court believes that the proper rule of law was stated by Circuit Judge Gibbons in his concurring opinion in
Matter of McMillan
(3rd Cir.1978)
[W]e should admit an exception to the federal duty to recognize state court judgments imposed by section 1738. When congress expressly identifies an abuse, when it has the constitutional power to correct it, and when as herе it exercises that power, then the courts should give the congressional act its full effect.
This Court can give full effect to the debtor’s rights under sеction 524(a) of the Bankruptcy Code only by reviewing the merits of the judgment rendered by the state court in the absence of the debtor. For the rеasons stated above, the Court finds that it has the power and the obligation to do so.
The state court judgment cannot withstand scrutiny on the merits. It is based solely on
Matter of Frenville Co., Inc.
(3rd Cir.1984)
The undisputed fact is that First Interstate had actual notice of the bankruptcy in a timely manner. This rendered any debt owed to it, and not merely those scheduled, discharged unless a timely complaint was filed in this court pursuant to section 523(c) of the Code.
In re Ricketts
(9th Cir.B.A.P. 1987)
Counsel for the debtor shall submit an appropriate form of judgment.
Notes
. Because the Court finds that it may lоok behind the state court judgment, it need not deal