W. Valley Med. Partners, LLC v. Menaker (In re Menaker)W. Valley Med. Partners, LLC v. Menaker (In re Menaker)
I.
JURISDICTION
Thе Court has jurisdiction over this adversary proceeding pursuant to
II.
FACTUAL BACKGROUND
In October 2009, the Plaintiff leased commercial office space located at 5363 Balboa Blvd., Ste. 121, Encino, California to the Defendants, who used the premises to operate a medical sleep study clinic. The lease was for a seven-year term commencing on October 22, 2009, expiring on September 30, 2016. By April of 2013, the Defendants had vacated the premises.
On December 16, 2013, the Defendants' chapter 13 plan was confirmed. Thereafter, the chapter 13 trustee filed her Notice of Intent to Pay Claims (the "Notice,"). Case Dkt. 35. Because the Defendants did not schedule the Plaintiff as the holder of a claim, the Plaintiff was not listed on the Notice.
On December 3, 2014, unaware of the filing of the bankruptcy case, Plaintiff filed a complaint for breach of the lease against the Defendants in the Los Angeles Superior Court. Defendants did not respond to the state court action.
On January 26, 2015, the Defendants filed an amended schedule F in this case to include the Plaintiff as an unsecured creditor in the amount of $47,000. The amended schedule lists Dan Persoff, the Plaintiff's state court counsel, as the cоntact, as well as his law firm's address.
On April 15, 2015, the Defendants' bankruptcy counsel, Elena Steers, served on Persoff a Notice of Stay of Proceedings (the "Notice of Stay") in the state court action. Thereafter, Persoff also filed a Notice of Stay in the state court action.
On January 17, 2017, the Defendants obtained their discharge in the bankruptcy case. On January 25, 2017, the bankruptcy case was closed. On March 27, 2017, the Plaintiff filed a motion to reopen the case for the purpose of determining the nondischargeability of a debt under Bankruptcy Code section 523(a)(3). On April 6, 2017, the Court entered an order reopening the case.
On May 5, 2017, the Plaintiff filed its Complaint to Determine Dischargeability of Debt Pursuant to
i. "Should the obligation to Plaintiff be deemed nondischargeable pursuant to11 U.S.C. § 523 (a)(3) ?"
On June 8, 2018, the Court entered its Order Approving Joint Pre-Trial Stipulation . Adv. Dkt. 26.
On October 1, 2018, the parties stipulated to the joint use of Defendants' exhibit register at trial. Adv. Dkt. 37. On October 12, 2018-just one Court day before trial-the Plaintiff then filed an Emergency Motion to Amend Joint Exhibit Register to Replace Exhibit B (the "Emergency Motion"). Adv. Dkt. 42. By way of the Emergency Motion, the Plaintiff sought to replace thе tenant ledger identified as Exhibit B in the Joint Exhibit Register with an updated version that previously had not been shared with the Defendants. The Court denied the Emergency Motion.
At trial, the Court received live testimony from (1) Gary Grabel, the principal of the Plaintiff, (2) Dan Persoff, former counsel to the Plaintiff, (3) Ian Landsberg,
III. LEGAL ANALYSIS
The Complaint alleges one cause of action under section 523(a)(3)(A). The creditor-plaintiff bears the burden of proof by a preponderance of the evidence. Grogan v. Garner ,
(a) A discharge under ... this title does not discharge an individual debtor from any debt-
...
(3) neither listed nor scheduled under sеction 521(a)(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit-
(A) if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing.
Plaintiff contends that it has met its burden of proof under the plain language of the statute by showing that its debt was not listed or scheduled by the Defendants prior to the deadline for filing claims in this case, and that Plaintiff did not have notice or actual knowledge in time to file a timely proof of claim. The Defendants do not deny that they failed to timely schedule the Plaintiff's debt, but argue that the debt nevertheless should be subject to the discharge in this case. First, as a matter of equity, they contend that the omission was justified and should not result in the exclusion of the Plaintiff's claim from the discharge. Second, even though the Plaintiff did not receive a case commencement notice or claims bar date notice, the Defendants contend that Plaintiff effectively had knowledge of the case prior to the claims bar date. Additionally, the Defendants assert the equitable defense of laches, arguing that the Plaintiff's delay in bringing this suit was prejudicial and should preclude a determination that the debt is nondischargeable. The Court explains below why each of the Defendants' arguments fails.
A. The Application of Section 523(a)(3)(A)
1. The Plain Language Approach
The Bankruptcy Appellate Panel for the Ninth Circuit ("BAP") has held that the language of section 523(a)(3)(A) should be construed in accordance with its plain language-which does not provide for any equitable exception. "The language contained in section 523(a)(3)(A) is clear and not ambiguous: a debt is excepted from discharge if the creditor was neither listed nor scheduled and did not otherwise know of the bankruptcy case in time to file a timely [proof of сlaim]. As there is nothing for us to interpret, we must enforce the statute according to its terms." In re Mahakian,
The decision in In re Mahakian is instructive. Although it first appeared to be a no-asset chapter 7 case, the trustee later identified assets to administer for the benefit of creditors and the court fixed a bar date for filing claims. See
Four months after the bar date expired, the debtor in In re Mahakian amended his schedules to include the omitted debt and provided notice of the amendment to the affected creditor.
The BAP rejected the debtor's position, holding that even if the claim filed by the debtor was deemed timely, the court could not ignore the language in section 523(a)(3)(A) rendering the debt nondischargeable for failure to schedule it and provide notice to the debt holder. In re Mahakian ,
The two-paragraph per curiam opinion in Beezley held that it is futile for a debtor to amend his/her schedules in a no-asset, no-bar date chapter 7 case to add a debt covered by section 523(a)(3)(A) because, under those circumstances, all such debts are discharged under Bankruptcy Code section 727. In re Beezley ,
In examining the legislative history of section 523(a)(3), Judge O'Scannlain observed that "Congress has expressly disapproved the importation of equitable notions of a debtor's good faith or a creditor's fair opportunity to participate in the bankruptcy process into the interpretation and analysis of section 523(a)(3)."
He warned, moreover, that the importation of equitable principles into section 523(a)(3) would upset the delicate balance struck by Congress between the rights of debtors and creditors:
Our task is, perhaps, a relatively easier one, for we have only to apply the law as Congress has written it. What Congress deemed a proper balancing of the equities as between debtor and creditor with respect to unlisted debts it has enacted in section 523(a)(3) of the Bankruptcy Code. It is not for the courts to restrike that balance acсording to their own lights.
Id. at 1440 ; see also Norwest Bank Worthington v. Ahlers ,
The import of these authorities is that when applying Bankruptcy Code section 523(a)(3), the reason why a debt was omitted from a debtor's schedules is not relevant to whether the debt is dischargeable. The appropriate inquiry is whether the debtor listed the debt and provided notice in time for the creditor to timely file a proof of claim or whether the creditor otherwise had notice or actual knowledge of the bankruptcy case in time fоr such a filing. Equitable considerations have no place in the analysis. Here, the Defendants admit that Plaintiff's claim was not listed or scheduled, and that Defendants did not attempt to give written notice of the bankruptcy case, until well after the claims bar date had passed. As discussed below, moreover, the Court is not persuaded that Plaintiff had notice of the case in time to file a timely proof of claim. As such, the Plaintiff's debt is nondischargeable under section 523(a)(3).
Rather than adhere to the plain language of the statute, the Defendants urge the Court to apply the multi-factor equitable test adoрted by the Fifth Circuit Court of Appeals to determine if a claim is non-dischargeable under section 523(a)(3). See Stone v. Caplan (In re Stone),
The Defendants also argue that the Plaintiff-upon learning of the bankruptcy-should have requested leave to file a late claim, thеreby minimizing the impact of that claim on the Defendants' chapter 13 case. The Defendants contend that if the Plaintiff had done so, the Defendants might have been able to address the debt under their chapter 13 plan, e.g., by extending the plan from a three-year plan to a five-year plan and making partial payments on the claim. They argue that it would be inequitable under these circumstances to "reward" the Plaintiff with a nondischargeable debt.
The Court does not find these arguments persuasive. As a threshold matter, the Court declines to follow the Fifth Circuit approach articulated in Stone and Robinson . Although the Defendants cite to several California bankruptcy decisions that have followed the Fifth Circuit approach, these cases appear to be no-asset, no-bar date chapter 7 cases and all precede the decisions in In re Beezley and In re Mahakian . See In re Bowen ,
The case presently before the Court is a chapter 13 case in which a bar date was set, a plan confirmed and monthly payments made to creditors. There are no exceptions to the plain language of the statute. This is consistent with the position advocated by Judge O'Scannlain in his Beezley concurrence, and applied by Ninth Circuit courts in cases involving the existence of estate assets and the fixing of a bar date. See In re Mahakian,
3. The Defendants' Equitable Arguments
Even if the Defendants' equitable arguments under section 523(a)(3) were legally rеlevant to the analysis, the Court does not find them persuasive. The Defendants' first equitable argument is that they did not schedule the Plaintiff's debt because Grabel told Maria Menaker, during an in-person conversation in December 2012, that he did not intend to pursue a claim against the Defendants for breach of the lease. Maria Menaker testified that she "sincerely believed" Grabel had made such a commitment, but her direct testimony describing what Grabel actually said does not provide objective evidence of such a commitment. Maria testified that after telling Grabel she intended to discontinue the business, move out of the premises and file bankruptcy, Grabel stated:
Yeah. What am I going to do with this bankruptcy? I'm not going to get anything from you. You don't have anything for me to get. What, am I going to get this picture of the bankruptcy, just put it on my wall? No. I have someone that is interested in the facility. I have the Children's Hospital. They want to come in.
Trial Record at 2:58 p.m. Her counsel thereafter asked her directly "Do you remember specifically that he said he was not going to pursue this debt from you?"
More importantly, whatever Grabel's statement, and whatever Maria's understanding of it, the Defendants' alleged reliance on it was not justified. First, the lease itself provides that the terms and conditions thereunder cannot be modified other than in a writing signed by all parties. See Exhibit A at ¶ 35.13 ("This Lease ... may not be modified except by a written document executed by the parties hereto."). Maria testified that there was no writing evidencing Grabel's alleged commitment not to pursue Plaintiff's rights under the lease. Second, the Bankruptcy Code is set up to provide debtors certainty about debts that may or may not have been satisfied or extinguished prepetition. The Bankruptcy Code enables a debtor to schedule a debt on his/her schedules and obtain a discharge-in this instance upon completion of all payments due under a chapter 13 plan. See
The Defendants' second equitable argument is that Defendants should have requested leave to file a late claim, upon learning of the chapter 13 case. The Defendants contend that if the Plaintiff had sought leave to file a late claim, the Defendants may have been able to amend their plan to treat that claim over the term of the plan. If accepted, however, this argument would turn the Bankruptcy Code on
Moreover, untimely notice of the opportunity to file a proof of claim in a chapter 13 case and possibly participate in distributions under a chapter 13 plan does not necessarily "restore" the rights to which a creditor is entitled. Untimely notice may come only after distributions have begun under a chapter 13 plan and the only available distributions will result in less than the creditors' pro rata entitlement. Untimely notice of the case also may deprive the creditor of other important rights in the life of a chapter 13 case, such as the right to conduct discovery and object to confirmation of the chapter 13 plan, the right object to other claims and thereby increase the creditor's share of the estate, and the right to challenge any proposed dispositiоn of assets prior to confirmation of the plan.
Thus, it would be fundamentally unfair to require a creditor to file a claim in a chapter 13 case after the bar date has elapsed. See In re Fugate,
B. Actual Knowledge of the Bankruptcy Case
The nondischargeability of a debt under Bankruptcy Code section 523(a)(3)(A) requires not only that the debtor fail to schedule the debt in time for the creditor to timely file a claim, but also that the creditor not have "had notice or actual knowledge of the case in time" to file such a claim. While it is undisputed by the Defendants that the Plaintiff did not receive timely written notice of the bankruptcy case or the claims bar date, the Defendants argue that Maria Menaker's statements to Grabel in December 2012 nevertheless were adequate to give the Plaintiff notice for purposes of section 523(a)(3)(A). The Court disagrees. An open-ended statement by a debtor regarding his/her intent to file bankruptcy in the future is not a substitute for notice that the debtor actually has filed a bankruptcy case, the date of such filing, the court in which such case has been filed, and the bar date set in that case for filing proоfs of claim. Maria Menaker's statement in December 2012 of her intent to someday file bankruptcy does not constitute notice of the actual filing of a bankruptcy case that did not occur for another five months. To construe the actual notice exception of section 523(a)(3)(A) in this manner defies logic, and would undermine the burden Congress clearly placed on debtors to timely list and schedule all creditors against whom bankruptcy relief is sought.
The Defendants invoke the equitable doctrine of laches to contend that Plaintiff should be denied relief because it waited an unreasonable amount of time to commence this proceeding under Bankruptcy Code section 523(a)(3)(A). The Defendants contend that Plaintiff learned of the Defendants' bankruptcy case in either January 2015 or April 2015, but did not commence this adversary proceeding for nearly two years, after the bankruptcy case was closed. The Defendants rely on Beaty v. Selinger (In re Beaty),
Even if the Court assumes for the sake of argument that the holding in In re Beaty is equally applicable to actions under both sеctions 523(a)(3)(A) and 523(a)(3)(B), the Defendants have failed to show by a preponderance of the evidence that the requirements of this defense have been satisfied. As a general matter, "the affirmative defense of laches 'requires proof of (1) lack of diligence by the party against whom the defense is asserted, and (2) prejudice to the party asserting the defense.' "
The Court concludes that the Defendants have not met their burden to demonstrate a lack of diligence by Plaintiff and prejudice to the Defendants resulting from that lack of diligence. Mere delay alone does not establish a lack of diligence for a laches defense.
In In re Beaty, the Ninth Circuit held that a section 523(a)(3) action should not be barred without a "particularized showing of demonstrable prejudicial delay."
The Defendants make similar arguments here. The Defendants contend that they have been substantially prejudiced because: (1) they have been deprived the finality of their discharge; (2) they are facing a potential non-dischargeable judgment that may exceed $371,000, (3) they believe that if Plaintiff had filed a late proof of claim during that period, Plaintiff would have received a distribution of approximately $12,000, (4) they are incurring attorney's fees that they otherwise would not have faced; and (5) there is unspecified documentary evidence and witness testimony that is unavailable because of the passаge of time. As in In re Beaty , these arguments are without merit.
The Plaintiff's delay in bringing this adversary proceeding did not deprive the Defendants' of the finality of their discharge. As to Plaintiff's debt, it is Defendants' failure to timely schedule the debt that has deprived them of finality-and ultimately the discharge itself. As to all other claims, this adversary action has had no effect whatsoever on the Defendants' discharge. Likewise, the potentially large amount of the non-dischargeable judgment the Defendants are facing is not the result of Plaintiff's delay in bringing this action but is a result of the Defendants' prepetition breach. Further, the Defendants' contention that Plaintiff could have received a distribution (and the Defendants could have received a discharge) if Plaintiff had sought leave to file a late claim is likewise irrelevant. As discussed above, Plaintiff was not obligated to do so and its election not to do so is not a form of prejudice to the Debtors. Even if that were not the case, logically speaking, any such prejudice would not be the result of Plaintiff's delay in filing this lawsuit, but instead of its election not to seek to file a late claim. Similarly, the Defendants have failed to (i) demonstrate that the attorneys' fees incurred defending this adversary proceeding could have been avoided if the proceeding had been commenced earlier or (ii) identify any documentary evidence or witness testimony that would have assisted in the Defendants' defense of this action but that is no longer available.
In short, the Defendants have failed to meet their burden of proof to demonstrate that the claim asserted in this adversary proceeding is barred by the doctrine of laches.
IV. CONCLUSION
For all the foregoing reasons, the Court finds the Plaintiff has established, by a preponderance of the evidence, that it holds a nondischargeable debt under
Notes
The listed address does not include the suite number for the law firm.
Federal Rule of Bankruptcy Procedure 3004 permits a debtor to file a proof of claim on behalf of a creditor who fails to do so timely, provided the debtor does so within 30 days of the bar date by which the creditor was required to file that claim. See Fed. R. Bankr. P. 3004.
Pioneer establishes a four-factor equitable test for determining whether a party's neglect of a bar date is excusable: "the danger of prejudice to the [non-moving party], the length of the delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was in the reasonable control of the movant, and whether the movant acted in good faith."
As Judge O'Scannlain explained, no bar date for filing proofs of claim is set in a no-asset chapter 7 case because there are no assets to distribute. Because there is no bar date, no claim filed in such a case can ever be untimely. Bankruptcy Code section 523(a)(3) is not implicated in that scenario because no creditor will be deprived of the right that the statute protects. See Beezley ,
The BAP in In re Mahakian stated that Judge O'Scannlain's concurring opinion in In re Beezley was "adopted" by the Ninth Circuit in In re Nielsen . See In re Mahakian ,
The Court does not find it necessary to determine whether service on Persoff of the Defendants' amended schedule F on January 26, 2015 was legally ineffective, and whether notice of the case was not effectively given until the Notice of Stay was served on Persoff on April 15, 2015. In either instance, service was approximately two years after the bar date had expired and the chapter 13 plan had been confirmed.
That approach requires consideration of three factors to determine whether a debtor's failure to list a creditor will prevent discharge of the unscheduled debt: "(1) the reasons the debtor failed to list the creditor, (2) the amount of disruption which would likely occur, and (3) any prejudice suffered by the listed creditors and the unlisted creditor in question." Stone,
See supra note 4.
See also Kansas v. Colorado,