Ruvacalba v. Munoz (In Re Munoz)Ruvacalba v. Munoz (In Re Munoz)
Lead Opinion
OPINION
This appeal requires us to revisit the problem of the effect of the bankruptcy discharge on nonbankruptcy litigation.
Treating the court’s procedurally incorrect order as a declaratory judgment that the discharge injunction prohibits an action designed to obtain payment from a source other than the debtor that might result in a nondischargeable debt, we REVERSE on the basis of Bankruptcy Code § 524(e) and the inability of a court to modify the § 524(a)(2) statutory injunction.
FACTS
Raul Munoz filed his chapter 7 bankruptcy case one week after the WCAB ruled that he was an “illegally uninsured employer” who was required to pay a workers’ compensation award of about $150,000 to the dependents (the appellants here) of an “employee” who died on the job.
The bankruptcy was filed October 19, 2000. A discharge was entered January 22, 2001. The case was closed February 2, 2001.
The bankruptcy led the WCAB to suspend proceedings on Munoz’s Reconsideration Petition (per
Faced with a stay by the WCAB that stymied their efforts to collect from the UEF, the appellants filed a “Motion For Relief From Automatic Stay/Modifieation For Relief From Discharge Injunction” in the bankruptcy court, which reopened the case. Their stated purpose was to obtain permission to establish the debtor’s liability following which “Movants will seek payment from the [UEF] only, and not the Debtor.”
The UEF supported the motion, urging that the discharge injunction be modified to allow the WCAB to finalize the award so that the UEF could pay. It also asserted that the ensuing reimbursement obligation would be nondischargeable.
The debtor opposed the motion, arguing that allowing the UEF to pay would offend the
The bankruptcy court ruled orally that it was “inclined to protect the discharge” and that it would treat the matter as a motion addressed to the automatic stay under
The “Order Denying Motion For Relief From Automatic Stay/Modification For Relief From Discharge Injunction” was entered March 7, 2002. This timely appeal ensued.
JURISDICTION
Federal subject matter jurisdiction is based on
ISSUES
1. Whether disregard of the requirement for an adversary proceeding to obtain a declaratory judgment was harmless error.
2. Whether the Bankruptcy Code
3. Whether Bankruptcy Code
STANDARD OF REVIEW
We review questions regarding construction of the Bankruptcy Code and applicable rules of procedure de novo. Yadidi v. Herzlich (In re Yadidi),
DISCUSSION
The record reflects some common myths about the bankruptcy discharge that need to be demythologized.
The assumption that the
Further, the assumption made by the WCAB that a bankruptcy court order is required any time an action is taken nominally against a debtor after discharge is also incorrect. The
I
We begin by addressing the chaotic procedure entailed in the “Motion For Relief From Automatic Stay/Modification For Relief From Discharge Injunction.”
The one thing that is clear is that the parties thought they were litigating, and the court thought it was deciding, the questions whether the
A
There are two procedural difficulties inherent in use of the “Motion For Relief From Automatic Stay/Modification For Relief From Discharge Injunction” to re
First, the existence of a discharge means that there is no automatic stay from which relief may be granted to permit an action against the debtor. Insofar as the automatic stay bars actions against the debtor, the stay automatically expires upon the grant of a discharge.
Second, determinations regarding the scope of the discharge require a declaratory judgment obtained in an adversary proceeding.
It is error to circumvent the requirement of an adversary proceeding by using a “contested matter” motion under
Such an error may nevertheless be harmless when the record of the procedurally incorrect “contested matter” is developed to a sufficient degree that the record of an adversary proceeding likely would not have been materially different. In such circumstances, the error does not affect the substantial rights of the parties and is not inconsistent with substantial justice.
But where the record might have been materially different with an adversary proceeding, reversal ensues. Golden Plan,
We conclude that, although it was error to have ignored the requirement of an adversary proceeding, the error is harmless this time. The material facts are few and undisputed. The critical questions are pure questions of law. Not only are the parties content with the procedure that has been followed, we are satisfied that neither the' factual record nor the quality of the presentation of the arguments would have been materially different had there been an adversary proceeding.
B
Having concluded that the incorrect procedure was harmless error, we are nevertheless confronted with the problem of
Exercising our authority under
Our focus shifts to the substantive questions of whether the
II
The first substantive question is whether the
A
We must consider the
The question, then, is whether there is a “clear and valid legislative command” constraining the bankruptcy court’s discretion over the
(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 [discharged] debt as a personal liability of the debtor, whether or not discharge of such debt is waived;
Nothing in this language hints at the existence of discretion over the terms of the injunction.
The
The closest discharge injunction analog to
In short, this statutory scheme constitutes a “clear and valid” legislative command that leaves no discretion in the court to “modify” the discharge injunction.
B
The fact that the court does not have authority to “modify” the
The
The court’s tools for dealing with these ambiguities lie in its power to “construe”
These differences are no mere semantics. While, at the margin of ambiguity, there may be little practical difference between “construing”
C
If the
One leading example is the Seventh Circuit’s decision in Hendrix in which it opined that, although the Bankruptcy Code is silent about modification of the discharge injunction, “any court that issues an injunction can modify it for good cause on the motion of a person adversely affected by it.” Hendrix,
A recent example of the genre from a district court in the Ninth Circuit on nearly identical facts to the instant appeal is Slali v. Ruiz (In re Slali),
The Slali court reasoned that the
In validating the bankruptcy court’s orders, the Slali court applied the so-called Czuba test articulated by a Minnesota bankruptcy court that focuses upon whether the discharged debtors are necessary parties, whether the litigation will be a financial hardship on the discharged debtors, and whether there would be a recovery from the debtor. Slali,
We think that the Slali court reached the correct result in the sense of permitting the WCAB actions to proceed, but do not agree with it (or with the Czuba court) that the discharge can ever be modified. Rather, we think that the Czuba test constitutes a sound method of construing
In short, the cases that purport to involve the modification of the
Ill
The final question requires us to construe the
A
The
The construction of this language is affected by
If a final WCAB judgment is rendered against the debtor and he does not pay within the period fixed by state law, then the UEF must pay. That situation straightforwardly complies with the requirements of
At the initial level, it is not an action directed at the “personal liability of the debtor” under
B
The next issue is whether it makes any difference that there is a potential that the WCAB judgment will precipitate a nondischargeable debt for an excise tax. In this analysis, we assume without deciding that the UEF reimbursement obligation would be a nondischargeable excise tax.
The key to the' statutory analysis is
(a) A discharge in a case under this title—
(1) voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged undersection 727 , 944, 1141, 1228, or 1328 of this title, whether or not discharge of such debt is waived;
This provision fits into the present analysis in two key respects. First, the emphasized language from
The corollary is that the
Second, the phrase “at any time obtained” in
This feature of
This self-executing feature of § 524(a)(1), which voids judgments to the extent they offend, complements parallel language of the § 524(a)(2) discharge injunction. It affords latitude to construe the injunction so as to permit nonbankruptcy actions to proceed post-discharge. It acts as a safety net by assuring that any judgment determining a debtor’s personal liability on a discharged debt cannot be enforced to that extent and can be collaterally attacked in bankruptcy court.
It follows that, to the extent the WCAB action leads to collection “as a personal liability of the debtor” on a debt that is excepted from discharge, the § 524(a)(2) discharge injunction does not apply because it does not involve a discharged debt.
The district court in Slali reasoned that one “cannot object that the court should protect them from the hardship of paying a debt which the law makes nondischargeable.” Slali,
CONCLUSION
We hold that the procedurally deficient order on appeal be deemed to be a declaratory judgment that the § 524(a)(2) discharge injunction precludes completion of the WCAB proceeding, that the § 524(a)(2) discharge injunction does not preclude such completion, and that the § 524(a)(2) discharge injunction does not protect a debtor from an action to determine the debtor’s liability on a nondischargeable debt. Accordingly, we REVERSE.
Notes
. In Beeney, we explained that the discharge injunction does not preclude an action naming the discharged debtor as a party in litigation in a nonbankruptcy forum where it is clear that recovery will be limited to insurance proceeds. The same rationale permits an action at the WCAB for the purposes of collecting from the UEF. It does not matter that the debtor is a nominal defendant, as in Beeney, or whether the litigation is not against the debtor but might result in liability of the debtor to a third party by operation of law.
. The subsection provides, in relevant part:
(2) the stay of any other act [i.e., other than acts against property of the estate] under subsection (a) of this section continues until the earliest of—
(C) if the case is a case under chapter 7 of this title concerning an individual or a case under chapter 9, 11, 12, or 13 of this title, the time a discharge is granted or denied.
.
Rule 61 F.R. Civ. P. applies in cases under the Code. When appropriate, the court may order the correction of any error or defect or the cure of any omission which does not affect substantial rights.
. The only arguable statutory basis for varying terms of the § 524(a)(2) discharge injunction would be
. The court’s authority over the automatic stay is conferred by the following language:
(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay—
. Chapter 9 incorporates § 1144(2).
. It warrants clarification and emphasis that the
. The Ninth Circuit has never actually held California's UEF reimbursement scheme to constitute a nondischargeable excise tax. Since workers’ compensation schemes are creatures of idiosyncratic state statutes, the fact the Arizona's similar reimbursement obligation was held to be an excise tax will not necessarily require the same conclusion for California. See Indus. Comm’n v. Camilli (In re Camilli),
Concurrence Opinion
concurring.
I concur in the result reached but I cannot join Part II of the opinion because it is dictum. In Part I, we quite properly treat the order on appeal as a declaratory judgment. In Part III, we reverse that redesignated judgment because we have concluded that Bankruptcy Code section 524(a)(2) does not bar appellants’ action before the WCAB.
Part II, on the other hand, focuses on issues extraneous to our holding
. Even if we needed to address the question of whether the discharge injunction could be modified, I would disagree with the majority on the substantive issue. While the authorities are cited properly and the logic of the analysis is sound, the fact is that nothing in