In re Ryan C. NASH, Debtor. Ryan C. Nash, Appellant, v. Clark County District Attorney‘s Office, Bad Check Diversion Unit; Hard Rock Hotel/Hard Rock Cafe & Casino; Hard Rock Hotel Holdings, LLC, Appellees.
BAP No. WW-11-1056-PaJuWa
Bankruptcy No. 09-18806-MLB
Adversary No. 10-01289-MLB
United States Bankruptcy Appellate Panel of the Ninth Circuit.
Decided Feb. 7, 2012.
464 B.R. 874
Argued and Submitted Oct. 21, 2011.
Before: PAPPAS, JURY and
OPINION
PAPPAS, Bankruptcy Judge.
Chapter 72 debtor Ryan C. Nash (“Nash“) appeals the bankruptcy court‘s judgment declaring that Nash‘s prepetition debt to Hard Rock Cafe and Casino (“Hard Rock“) was discharged in his bankruptcy case, but denying sanctions against Hard Rock and the Clark County, Nevada, District Attorney‘s Office (“the DA“) for violating the discharge injunction. We AFFIRM.
FACTS3
In 2007 and 2008, gambling was Nash‘s principal occupation and source of income. He traveled from his home in Washington State to Las Vegas approximately once per month for several days. As a frequent customer at Hard Rock, Nash was approved for a “marker account,” essentially a line of credit on which he could draw to gamble.4
In October and November 2008, Nash had insufficient funds in his bank account to cover $12,500 in markers owed to Hard Rock. Hard Rock referred these debts to the Bad Check Diversion Unit of the DA. The DA sent Nash a letter in January 2009, demanding full payment of the markers, plus administrative fees, within ten days. Nash contacted the DA and was informed that, to avoid prosecution, he could repay the debt in six monthly payments starting on February 26, 2009. At the time, Nash was working in a restaurant earning $200 per week and was unable to make the first payment.
On March 26, 2009, the DA sent Nash a second letter, informing him that a criminal complaint had been filed against him in Las Vegas, and that a warrant for his arrest had been issued. The letter indicated that a copy of the complaint was attached, but Nash insists that he never saw the complaint.
Nash filed a petition under chapter 7 of the Bankruptcy Code on August 27, 2009. In his Schedule F, he listed an undisputed debt of $13,876 owed to Hard Rock. Neither the DA nor Hard Rock appeared in the bankruptcy case. Nash was granted a discharge in the bankruptcy case on January 20, 2010.
On March 22, 2010, Nash was arrested by border police while returning to the United States from Vancouver, B.C., based
Nash retained counsel, Ms. Huelsman, who moved to reopen the bankruptcy case on April 1, 2010. The motion was granted on April 9, 2010.
Huelsman contacted the DA on April 8. An attorney for the DA informed Huelsman that the DA was aware of Nash‘s bankruptcy case and discharge, but that the DA would be pursuing the matter as a criminal proceeding. Huelsman later testified that the DA lawyer told her “if you can work out something with the Hard Rock, then we will postpone—and the word I do know he used was ‘postpone‘—the criminal case.” Hr‘g Tr. 16:7-10 (Dec. 14, 2010).
Huelsman contacted a manager at Hard Rock by phone later the same day. In the telephone conversation, the Hard Rock manager told Huelsman that Hard Rock was aware of Nash‘s bankruptcy case and discharge, but that its position was not impacted by the discharge because Hard Rock had originally acted in response to Nash‘s criminal activity. The manager explained Hard Rock‘s general policies concerning payment of past-due marker accounts to Huelsman, but the manager made no demand for payment. Instead, perhaps strategically, the manager suggested that Nash‘s counsel “get back to me if you want to make us any kind of firm offer.” Hr‘g Tr. 18:18-19 (Dec. 14, 2010).
On May 12, 2010, after voluntarily waiving extradition from Washington to Nevada, Nash was arraigned in Clark County and released on bail. He returned to Clark County on October 31, 2010, where he entered into a settlement agreement with the DA. Under the terms of that agreement, Nash agreed to pay $500 per month until the full amount of the debt was paid off.
On May 26, 2010, Nash filed an adversary “Complaint for Sanctions for Violation of the Discharge Injunction” against the DA and Hard Rock in the bankruptcy court. The complaint sought a declaratory judgment that his debt to Hard Rock was discharged, an injunction against Hard Rock and the DA to prevent any further collection activities, and the imposition of sanctions against Hard Rock and the DA under
Neither Hard Rock nor the DA responded to the complaint. Nash filed a motion for entry of default on July 12, 2010. The motion was not contested, and the bankruptcy court entered an Order of Default on August 11, 2010. Nash then moved for entry of a default judgment, which the bankruptcy court set for an evidentiary hearing.
Only Nash and his counsel appeared at the hearing on December 14, 2010. Although the hearing was uncontested, the bankruptcy court directed Nash to present evidence in support of his claims. The court cautioned Nash‘s attorney that, although a declaratory judgment that his debt was discharged was likely to be granted, the Ninth Circuit‘s decision in Gruntz v. County of Los Angeles (In re Gruntz), 202 F.3d 1074 (9th Cir. 2000) (en banc), suggested that sanctions against Hard Rock and the DA would be very difficult to establish.
At the hearing, Nash presented two witnesses, Huelsman and Nash. Huelsman testified about the phone conversations she had with the DA‘s attorney and the Hard Rock manager on April 8, 2010. Nash then testified regarding his experiences,
Nash filed a supplemental brief and proposed findings and conclusions on December 23, 2010. Nash attempted to distinguish In re Gruntz as applicable only to actions for automatic stay violations under
The bankruptcy court convened a hearing on January 7, 2011, at which it announced its decision. The court granted declaratory relief that Nash‘s debt to Hard Rock had been discharged in the chapter 7 case. However, the court declined to grant any further relief against Hard Rock, finding that any collection actions it took occurred before Nash‘s bankruptcy and, therefore, did not violate the discharge injunction. As to the alleged discharge violations by the DA, the court concluded that, given the facts, there was no “meaningful distinction” between Nash‘s
The bankruptcy court entered a judgment on January 19, 2011, providing that Nash‘s prepetition debt to Hard Rock had been discharged, but that Nash “is entitled to no further relief for his claims against the Defendants in this adversary proceeding.”
Nash filed this timely appeal.
JURISDICTION
The bankruptcy court had jurisdiction under
ISSUE
Whether the bankruptcy court abused its discretion in rejecting Nash‘s claims for sanctions under
STANDARD OF REVIEW
An award or denial of sanctions under
In applying the abuse of discretion standard, we first “determine de novo whether the [bankruptcy] court identified the correct legal rule to apply to the relief requested.” United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc). If the correct legal rule was applied, we then consider whether its “application of the correct legal standard was (1) illogical, (2) implausible, or (3) without support in inferences that may be drawn from the facts in the record.” Id. Only in the event that one of these three apply are we then able to find that the bankruptcy court abused its discretion. Id.
To the extent this appeal requires the Panel to review the bankruptcy court‘s interpretation of
I. Applicability of the Barrientos decision in this appeal.
The bankruptcy court entered the judgment that is the subject of this appeal in the adversary proceeding on January 19, 2011. About a month later, during the pendency of this appeal, the Ninth Circuit published an Opinion in which it held that an action “for contempt for violation of a discharge injunction under
In this case, in addition to seeking monetary sanctions and an injunction, Nash‘s adversary complaint prayed for a declaratory judgment that his debt to Hard Rock was discharged in his bankruptcy. An adversary proceeding targeting this type of relief is proper under Rule 7001(6) and (9) (providing for an adversary proceeding for a declaratory judgment or for a determination of dischargeability of a debt).5
Since it was announced during this appeal, the Barrientos decision was not briefed nor otherwise addressed by Nash. However, because of the multiple forms of relief sought by Nash in his complaint, the procedural history of this action, and the position adopted by the Panel on the merits of the issues below, we conclude it would not serve the interests of justice to remand this matter to the bankruptcy court solely to allow it to rehear Nash‘s request for relief as a contested matter rather than in an adversary proceeding. See Rule 1001 (“These rules shall be construed to secure the just, speedy, and inexpensive determination of every case and proceeding.“). Accordingly, without deciding whether Barrientos is implicated in this appeal, we will address the substance of Nash‘s arguments.
II. Neither the DA nor Hard Rock violated the discharge injunction.
In his adversary complaint, Nash sought three forms of relief: a declaratory judgment that his debt to Hard Rock had been discharged in the bankruptcy case, injunctive relief to prevent Hard Rock or the DA from future attempts to collect the discharged debt, and the imposition of compensatory sanctions pursuant to
(a) A discharge in a case under this title—... (2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived[.]
A party that knowingly violates the discharge injunction can be held in contempt under
The Ninth Circuit has held that the first prong of the Hardy test requires that the bankruptcy court be shown that the target creditor knew that the discharge injunction was applicable to its claim. ZiLOG, Inc. v. Corning (In Re ZiLOG, Inc.), 450 F.3d 996, 1007-09 (9th Cir. 2006). But, as discussed below, the evidence in this case shows that neither Hard Rock nor the DA acknowledged that the discharge injunction in Nash‘s bankruptcy case was applicable to collection of marker account debt. As they explained to Nash‘s attorney, it was instead their view that, because the matter was a criminal proceeding, it was not impacted by the discharge.
Moreover, as to the second prong, requiring that Hard Rock intend the actions which violated the discharge injunction, the evidence shows that Hard Rock took no post-discharge actions that violated the discharge injunction, and any actions taken by the DA were not sanctionable under the prosecutorial immunity exception to the discharge injunction acknowledged in In re Gruntz. We therefore agree with the bankruptcy court that sanctions were not justified against either Hard Rock or the DA.
A. Hard Rock did not violate the discharge injunction.
The bankruptcy court found that Hard Rock had not taken any collection actions against Nash after he filed his bankruptcy petition. Consequently, the court concluded the Hard Rock could not have violated the discharge injunction. We agree.
On appeal, Nash does not explicitly charge Hard Rock with actions that violat-
Nash points to two instances of post-discharge contact between Nash and Hard Rock, without explaining how they violated the injunction. First, through testimony of his former attorney, Huelsman, Nash cites the telephone meeting between Huelsman and the Hard Rock manager. However, it is undisputed that this contact was suggested by the DA, and that the phone conversation was initiated by Huelsman, not Hard Rock. The record is clear that there were no post-discharge contacts between Nash and Hard Rock initiated by Hard Rock.
Post-discharge contacts between a debtor and creditor occurring at the debtor‘s initiative do not necessarily violate the discharge injunction. Indeed, the Bankruptcy Code acknowledges that some post-discharge contacts with creditors initiated by the debtor are necessary. See, e.g.,
In this case, the contact between Nash and Hard Rock was initiated by the debtor through his attorney, and at the direction of the DA. Hard Rock merely responded to a phone inquiry by Nash‘s lawyer and made no further attempts to collect on the debt. Since there were no other contacts between Nash and Hard Rock post-discharge, there is no basis to find that Hard Rock acted to “harass” Nash. Under these facts, the bankruptcy court properly found that Hard Rock took no post-discharge acts that would violate the discharge injunction.
In his brief, Nash suggests that “[t]o avoid further prosecution, Mr. Nash settled out of court with Clark County and Hard Rock on October 31, 2011.” Op. Br. at 9. The implication of this statement is that Hard Rock was actively involved in the settlement agreement negotiations concerning the criminal prosecution, and that conduct violated the discharge injunction. But, again, there is no evidence in the record that Hard Rock participated in the settlement negotiations concerning the bad check charges. Indeed, the record suggests the contrary. In his testimony before the bankruptcy court, Nash described the settlement he reached with the DA. At the end of that description, Nash stated, “And the DA‘s office agreed to that.” Hr‘g Tr. 52:12 (Dec. 14, 2010). Nash made no mention in his testimony of Hard Rock‘s participation in the settlement agreement.
Debtor returned to Clark County on October 31, 2010 for his second court appearance.... He appeared [] in court and worked out an agreement with Clark County DA‘s office to make monthly payments of $500 per month until the full amount of the debt is paid off, starting in January 2011.
Again, there is no mention in Nash‘s proposed findings detailing any participation by Hard Rock in negotiating the settlement agreement.
In sum, as the bankruptcy court correctly determined, no evidence was submitted by Nash to show that Hard Rock engaged in post-discharge collection activity. Of the two incidents alleged in the brief, the first was a contact initiated by Nash‘s lawyer at the direction of the DA, and there is no evidence in the record to support the existence of the second. As to the notion that Hard Rock violated the discharge through collusion with the DA, the bankruptcy court rejected these unsupported allegations as “hypothetical and irrelevant.”
The bankruptcy court did not abuse its discretion in declining to award sanctions against Hard Rock.
B. Consistent with the Ninth Circuit‘s decision in In re Gruntz, the DA Did Not Violate the Discharge Injunction.
During the adversary proceeding, the bankruptcy court cautioned Nash‘s attorney that the Ninth Circuit‘s opinion in In re Gruntz might prove a formidable obstacle to Nash obtaining sanctions against the DA. The bankruptcy court was correct in this observation.
The Gruntz decision largely concerns “the proper role of federal bankruptcy courts, if any, in state criminal proceedings.” In re Gruntz, 202 F.3d at 1084. This analysis is of critical importance in this appeal.
The Ninth Circuit began its discussion by noting a strong policy basis for its decision:
We maintain the “deep conviction that federal bankruptcy courts should not invalidate the results of state criminal proceedings.” Kelly v. Robinson, 479 U.S. 36, 47, 107 S. Ct. 353, 93 L. Ed. 2d 216 (1986). This rule reflects a “fundamental policy against federal interference with state criminal prosecutions.” Younger v. Harris, 401 U.S. 37, 46, 107 S. Ct. 746, 27 L. Ed. 2d 669 (1971). It also recognizes that “the right to formulate and enforce penal sanctions is an important aspect of the sovereignty retained by the States.” Kelly, 479 U.S. at 47.
Id. The court emphasized the importance of this policy when it described it as the “philosophy in mind” in its discussion of the relationship of state court criminal proceedings to bankruptcy cases and other civil proceedings. Id.
The Ninth Circuit then examined the debtor‘s argument that the purpose of the criminal proceeding in state court was, at bottom, to collect a debt. Gruntz suggested that the Ninth Circuit‘s opinion in Hucke v. Oregon, 992 F.2d 950 (9th Cir. 1993), applied, which held that, if a criminal proceeding has the collection of a debt
Not only does our notion of cooperative federalism caution against interference with ongoing state criminal proceedings, but the theory of bankruptcy law does as well. “The purpose of bankruptcy is to protect those in financial, not moral, difficulty.” Barnette v. Evans, 673 F.2d 1250, 1251 (11th Cir. 1982)....
... Congress has specifically subordinated the goals of economic rehabilitation and equitable distribution of assets to the states’ interest in prosecuting criminals. The State of California has chosen to criminalize a parent‘s failure to support a dependent child. See
Cal. Penal Code § 270 . That is a judgment reserved to the state; it is not for the bankruptcy court to disrupt that sovereign determination because it discerns an economic motive behind the criminal statute or its enforcement.
In re Gruntz, 202 F.3d at 1085-86.
As can be seen, the court explicitly rejected the Hucke rule providing that if the “primary motivation” of the prosecution is debt collection then the prosecution violates the stay. In place of the primary motivation standard, the Gruntz court held that prosecutorial discretion was the preeminent concern:
[A]ny criminal prosecution of the debtor is on behalf of all the citizens of the state, not on behalf of the creditor. See Davis v. Sheldon (In re Davis), 691 F.2d 176, 178-79 (3d Cir. 1982). Once the state has made an independent decision to file criminal charges, the prosecution belongs to the government, not to the complaining witness. We cannot, and should not, “require a prosecutor to conduct a searching inquiry into the public spirit of the victim of a crime before proceeding with what appears to be an otherwise valid criminal prosecution.” Id. at 179. “In our system, so long as the prosecutor has probable cause to believe that the accused committed an offense defined by statute, the decision whether or not to prosecute, and what charge to file or bring before a grand jury, generally rests entirely in his discretion.” Bordenkircher v. Hayes, 434 U.S. 357, 364, 98 S. Ct. 663, 54 L. Ed. 2d 604 (1978). As the Supreme Court noted in Wayte v. United States, 470 U.S. 598, 607, 105 S. Ct. 1524, 84 L. Ed. 2d 547 (1985), “this broad discretion rests largely on the recognition that the decision to prosecute is particularly ill-suited to judicial review.” This admonition applies with special force to federal enjoinment of state criminal actions, such as that urged by Gruntz, because the stay would interdict state prosecution at its inception, based upon a bankruptcy court‘s surmise of the prosecutor‘s “true” motives.
The Gruntz court concluded its analysis with the following observation:
The veneer of this case suggested jurisdictional discord among the bankruptcy, federal habeas corpus and state court criminal systems; in reality, there is harmony. “Federalism in this nation
relies in large part on the proper functioning of two separate court systems.” Davis, 691 F.2d at 179. In turn, the operation of each system depends on freedom from unwarranted interference by the other. State criminal prosecutions should commence and continue unimpeded by the federal bankruptcy courts.
Although In re Gruntz was decided in the context of an alleged violation of the
In In re Byrd, 256 B.R. 246 (Bankr. E.D.N.C. 2000), Byrd was a gambler who traveled from his home in North Carolina to Las Vegas. In April 1998, he presented a check for $3,000 to Circus Circus Las Vegas, and five checks in the amount of $5,000 each to Caesar‘s Palace Casino. All of the checks were returned unpaid by Byrd‘s bank. The casinos notified the Clark County District Attorney‘s Bad Check Diversion Unit, which sent notices and warnings of prosecution to Byrd. Id. at 248. A warrant for Byrd‘s arrest was issued, but Byrd was not aware of the warrant.
Byrd filed a petition for relief under Chapter 7, listing the casinos as creditors. The casinos did not object to discharge of their claims against Byrd, and on December 14, 1998, Byrd received a discharge. Id.
On May 2, 2000, Byrd was involved in an automobile accident. When local police discovered the outstanding warrant, he was arrested. Byrd challenged the state criminal proceedings as a violation of the discharge injunction.
Noting In re Gruntz, the bankruptcy court held that “governmental prosecutors may initiate and continue criminal prosecutions without violating the automatic stay even if, as in this case, the primary purpose of the prosecution is to collect a dischargeable debt.”7 In re Byrd, 256 B.R. at 256.
In Fidler v. Donahue (In re Fidler), 442 B.R. 763 (Bankr. D. Nev. 2010), Fidler borrowed money from two individuals and later allegedly repaid the loans with bad checks. Fidler filed a chapter 7 petition,
In response to criminal complaints filed against him by the Nye County, Nevada, Sheriff‘s office for allegedly writing bad checks, Fidler commenced an adversary proceeding to enjoin the county prosecutor from pursuing Fidler. Fidler argued that the criminal prosecution amounted to debt collection action in violation of the discharge injunction of
The bankruptcy court ruled that In re Gruntz was controlling. As to the argument that In re Gruntz only applied to
Simply put, we agree with the bankruptcy court in this case, and the other decisions cited, that the Gruntz analysis applies not only in the context of a claim for violation of the automatic stay, but also where the injury alleged is a discharge violation. The strong public policy expressed in Gruntz advises against any interference by the bankruptcy court in the decisions of state prosecutors to pursue criminal charges and prevented the bankruptcy court from granting sanctions against the DA. Moreover, avoiding a bankruptcy conflict with criminal prosecutions would seem to be even more influential in the context of enforcement of the bankruptcy discharge, a permanent injunction, as compared to the automatic stay, a temporary injunction. Because enforcement of the Nash discharge under the facts would interfere with the Nevada criminal proceedings, and given In re Gruntz, we conclude that the bankruptcy court did not abuse its discretion in denying sanctions against the DA.
CONCLUSION
We AFFIRM the judgment of the bankruptcy court.
PAPPAS
BANKRUPTCY JUDGE