FILED
FEB 21 2023
NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. SC-22-1111-GBS
EDWIN D. LICUP and CHRISTINE
TRACY CASTRO, Bk. No. 14-00809-CL7
Debtors.
Adv. No. 21-90050-CL
EDWIN D. LICUP; CHRISTINE TRACY
CASTRO,
Appellants,
v. MEMORANDUM*
JEFFERSON AVENUE TEMECULA,
LLC,
Appellee.
Appeal from the United States Bankruptcy Court
for the Southern District of California
Christopher B. Latham, Chief Bankruptcy Judge, Presiding
Before: GAN, BRAND, and SPRAKER, Bankruptcy Judges.
INTRODUCTION
Chapter 7 1 debtors, Edwin D. Licup and Christine Tracy Castro
(“Debtors”) appeal the bankruptcy court’s grant of summary judgment in
*
This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
1 Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code,
11 U.S.C. §§ 101–1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of
favor of appellee Jefferson Avenue Temecula, LLC (“Jefferson”) on its
adversary complaint to hold a judgment debt nondischargeable pursuant
to § 523(a)(3)(A). Debtors acknowledge that they failed to properly
schedule the debt because they listed an incorrect address for Jefferson, and
they admit that Jefferson did not have notice of the bankruptcy case in time
to file a proof of claim. They contend that the court erred by granting
judgment in the full amount of Jefferson’s claim and argue that, pursuant
to § 523(a)(3)(A), the portion of the claim excepted from discharge should
be limited to the distribution Jefferson would have received from the
liquidation of the estate had it timely filed a proof of claim.
Debtors maintain that by enacting § 523(a)(3)(A), Congress did not
intend to unjustly punish debtors who innocently list an incorrect address
for a potential creditor, nor to permit a windfall to the omitted claimant.
The language of § 523(a)(3)(A) is plain and unambiguous and does not
contain any equitable exceptions. See Mahakian v. William Maxwell Invs.,
LLC (In re Mahakian),
529 B.R. 268, 275 (9th Cir. BAP 2015). The bankruptcy
court properly applied the statute to except the debt—not merely a portion
of it—from discharge. We AFFIRM.
FACTS 2
Civil Procedure.
2 We exercise our discretion to take judicial notice of documents electronically
filed in the bankruptcy case and adversary proceeding. See Atwood v. Chase Manhattan
Mortg. Co. (In re Atwood),
293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
2
Prior to 2013, Christine Castro leased commercial property from
Jefferson. In late 2012, Jefferson filed an unlawful detainer action against
Christine Castro and obtained a state court judgment for $31,786.29 (the
“State Court Judgment”).
In 2014, Debtors filed a joint chapter 7 petition. They scheduled
Jefferson as an unsecured creditor with a $3,100 claim and listed Jefferson’s
former counsel as the address for service. However, in their schedules and
their list of creditors, Debtors incorrectly used “Sun Valley, CA” as the city
for Jefferson’s counsel, instead of “Tarzana, CA.” The chapter 7 trustee
determined that the estate would have assets to distribute and notified
creditors of the deadline to file proofs of claim. Jefferson did not receive
notice of the deadline, and it did not file a proof of claim.
In 2021, Jefferson filed an adversary complaint seeking to hold the
State Court Judgment nondischargeable under § 523(a)(3)(A). Jefferson
asserted that Debtors did not properly list or schedule the debt and it did
not have notice of the bankruptcy case in time to file a proof of claim.
Debtors filed an answer denying the allegations and asserting that, because
unsecured creditors received distributions of approximately 5.5% of their
claims, Jefferson’s damages should be limited to 5.5% of the State Court
Judgment amount.3
3 After Debtors failed to comply with discovery requests and failed to comply
with an order compelling their responses, Jefferson filed a motion for terminating
sanctions. The bankruptcy court partially granted the motion by imposing lesser
sanctions, including striking the portion of Debtors’ answer setting forth their “pro-rata
3
In March 2022, Debtors filed a motion for summary judgment
requesting judgment in favor of Jefferson in the amount of $1,614.74.
Debtors admitted that Jefferson held a prepetition claim which they did not
properly schedule. They argued that, despite the lack of notice, Jefferson’s
debt was discharged, and Jefferson should be entitled to only the amount
of the distribution it would have received had it timely filed a proof of
claim. Debtors cited White v. Nielsen (In re Neilsen),
383 F.3d 922 (9th Cir.
2004) and Beezley v. California Land Title Co. (In re Beezley),
994 F.2d 1433 (9th
Cir. 1993) in support of their argument and posited that because
§ 523(a)(3)(A) protects a creditor’s right to file a proof of claim and
participate in distributions, allowing the entire debt to be nondischargeable
would result in a windfall for Jefferson.
Jefferson opposed the motion and argued that because Debtors
admitted that Jefferson did not have notice of the case, the entire State
Court Judgment should be excepted from discharge. Jefferson maintained
that Neilsen and Beezley were inapposite because they involved no-asset
chapter 7 cases in which proofs of claim were never filed, and it argued
that the plain language of § 523(a)(3)(A) excepts the entire debt from
discharge.
distribution argument,” which the court likened to an affirmative defense. The
bankruptcy court noted that Debtor’s opposition to the motion was based largely on
their erroneous argument that § 523(a)(3)(A) entitles a creditor to a nondischargeable
judgment for only the pro-rata distribution it would have received if it filed a claim.
4
On April 19, 2022, Edwin Licup filed a second motion for summary
judgment, asserting that because he was not named as a defendant in the
state court action, he was entitled to judgment as a matter of law on the
nondischargeability complaint. Less than a week later, Christine Castro
filed a third motion for summary judgment and argued that she was
entitled to judgment as a matter of law because, although she was
individually named in the state court complaint, the judgment was entered
against “Christina Castro, LLC.”
At a status hearing on April 25, 2022, the bankruptcy court
suspended briefing on the second and third summary judgment motions
pending resolution of the first motion. The court reasoned that the second
and third motions focused on enforceability of the State Court Judgment,
which was separate from the core issue of whether the debt was
nondischargeable. The court informed the parties that if it determined the
debt to be nondischargeable, questions about enforceability against either
debtor could be decided in state court, where the judgment was entered.
Turning to the first summary judgment motion, the court noted that
Debtors addressed only legal questions about the operation of
§ 523(a)(3)(A), and because they appeared to concede that Jefferson did not
have actual notice or knowledge of the case, the court informed Debtors
that the motion could result in entry of summary judgment for Jefferson in
the full amount of the State Court Judgment. It set a deadline of May 9,
2022, for Debtors to file a brief explaining why judgment for Jefferson in
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the full amount of the debt was not warranted given their admission that
Jefferson never had actual notice of the bankruptcy case.
Debtors did not file a brief as requested by the court. Instead, they
filed a withdrawal of the first motion for summary judgment. On May 12,
2022, the bankruptcy court held a hearing on the first motion and took the
matter under submission.
The bankruptcy court issued a written order granting summary
judgment in favor of Jefferson for the entirety of the State Court Judgment.
The court reasoned that Debtors’ attempted withdrawal of the motion did
not affect the court’s ability to enter summary judgment because the court
gave notice under Civil Rule 56(f), incorporated by Rule 7056, that it might
enter judgment in favor of Jefferson, and it cited Albino v. Baca,
747 F.3d
1162, 1176 (9th Cir. 2014) (en banc) for the proposition that “where the
party moving for summary judgment has had a full and fair opportunity to
prove its case, but has not succeeded in doing so, a court may enter
summary judgment sua sponte for the nonmoving party.”
The bankruptcy court determined that summary judgment was
proper because the material facts relevant to nondischargeability under
§ 523(a)(3)(A)—whether Debtors improperly scheduled Jefferson and
whether Jefferson had actual notice or knowledge of the bankruptcy—were
undisputed, and the only legal issue was whether the full amount of the
State Court Judgment should be nondischargeable. The court held that
§ 523(a)(3)(A) excepts the entire amount of a debt and specifically held that
6
to the extent Jefferson has an enforceable debt against either or both
Debtors, the debt was nondischargeable. The bankruptcy court stated that
Debtors’ defenses to enforceability, including Edwin Licup’s omission from
the judgment and the inconsistent use of Christine Castro’s personal and
corporate identities, were beyond the scope of the nondischargeability
judgment and could be raised in another forum with proper jurisdiction.
The court entered judgment, and Debtors timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under
28 U.S.C. §§ 1334 and
157(b)(2)(I). We have jurisdiction under
28 U.S.C. § 158.
ISSUE
Did the bankruptcy court err by granting summary judgment to
except from discharge the full amount of Jefferson’s claim?
STANDARD OF REVIEW
We review de novo the bankruptcy court’s grant or denial of
summary judgment. Fresno Motors, LLC v. Mercedes Benz USA, LLC,
771
F.3d 1119, 1125 (9th Cir. 2014). We also review de novo the bankruptcy
court’s interpretation of the Bankruptcy Code. Masingale v. Munding (In re
Masingale),
644 B.R. 530, 536 (9th Cir. BAP 2022).
Under de novo review, “we consider a matter anew, as if no decision
had been made previously.” Francis v. Wallace (In re Francis),
505 B.R. 914,
917 (9th Cir. BAP 2014).
DISCUSSION
7
Civil Rule 56(a), made applicable by Rule 7056, provides
that summary judgment is appropriate when “there is no genuine dispute
as to any material fact and the movant is entitled to judgment as a matter of
law.” The moving party bears the initial burden of demonstrating an
absence of a genuine issue of material fact. See Matsushita Elec. Indus. Co. v.
Zenith Radio Corp.,
475 U.S. 574, 586 n.10 (1986). Debtors’ motion is based
solely on the legal effect of § 523(a)(3)(A); they conceded the material facts
giving rise to nondischargeability and disputed only whether the full
amount of the claim should be excepted from discharge. Thus, summary
judgment was appropriate, and we consider only whether the court erred
by interpreting § 523(a)(3)(A) to except from discharge the full amount of
the State Court Judgment.
Debtors argue that the bankruptcy court erred because Congress
intended to protect creditors’ rights to participate in distributions, not to
punish innocent debtors and provide a windfall to unscheduled creditors.
We find no error in the bankruptcy court’s application of
§ 523(a)(3)(A). The statute provides in pertinent part:
(a) A discharge under section 727 . . . does not discharge an
individual debtor from any debt—
***
(3) neither listed nor scheduled under section 521(a)(1) of this
title . . . 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
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such creditor had notice or actual knowledge of the case in time
for such timely filing . . .
11 U.S.C. § 523(a)(3)(A).
Debtors contend that Congress’s use of the term “in time to
permit . . . timely filing of a proof of claim” suggests that it intended the
provision to protect a creditor’s right to participate in distributions. Based
on their interpretation of congressional intent, Debtors urge us to construe
the statute to make nondischargeable only the amount a creditor would
have received had it timely filed a proof of claim.
We have previously found the language in this section to be clear and
unambiguous, In re Mahakian,
529 B.R. at 275, and Debtors do not persuade
us otherwise. “When the statute’s language is plain, the sole function of the
courts . . . is to enforce it according to its terms.” Lamie v. United States Tr.,
540 U.S. 526, 534 (2004) (quoting Hartford Underwriters Ins. v. Union Planters
Bank., N.A.,
530 U.S. 1, 6 (2000)). We “must presume that [Congress] says in
a statute what it means and means in a statute what it says there.” Conn.
Nat'l Bank v. Germain,
503 U.S. 249, 253-54 (1992).
Section 523(a)(3)(A) is clear that when a debtor fails to properly
schedule or list a debt, and the creditor does not have actual notice or
knowledge of the case in time to file a proof of claim, the debt is not
discharged. The term “debt” is defined in § 101(12) as “liability on a claim,”
which in turn is defined in § 101(5) as “right to payment, whether or not
such right is reduced to judgment, liquidated, unliquidated, fixed,
9
contingent, matured, unmatured, disputed, undisputed, legal, equitable,
secured, or unsecured.” Like every other instance of nondischargeability
under § 523(a), the obligation passes through bankruptcy unaffected by the
discharge. “[H]ad Congress intended to allow for the discharge of only a
pro rata portion of unlisted or unscheduled obligations, Congress could
have easily so provided.” Mountain W. Fed. Credit Union v. Stradinger (In re
Stradinger), Case No. 07-00024,
2007 WL 2319812, at *9 (Bankr. D. Mont.
Aug. 9, 2007).
We agree with Debtors that the purpose of § 523(a)(3)(A) is to protect
a creditor’s right to participate in distributions. But we find no support for
their argument that only a portion of the debt is rendered
nondischargeable. Congress chose to protect a creditor’s right to participate
by placing the burden of notice on the party who benefits from the
discharge, and by excepting the “debt” from discharge under appropriate
circumstances. See In re Beezley,
994 F.2d at 1440 (O’Scannlain, J.,
concurring) (“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 according to their own lights.”).
But under Debtors’ proposed construction, there is no incentive to
ensure proper scheduling of debts or to provide notice to creditors. Debtors
would effectively receive a discharge of all but the distributive share of
unscheduled creditors’ claims, and the distributive share would be
10
nondischargeable only after the creditor discovers the bankruptcy filing
and obtains a judgment from the bankruptcy court. And where the
potential pool of unscheduled creditors is unknown, determining the “pro-
rata” amount of a claim to render nondischargeable is impossible.4
Application of the statute may be harsh where Debtors’ mistake was
innocent, and it may result in a creditor maintaining a right to collect
substantially more than it would have received as a distribution. Yet, the
statute does not contain equitable exceptions, and “the court has no power
to disregard the clear language of § 523(a)(3)(A).” In re Mahakian,
529 B.R. at
277.
Debtors also argue that the bankruptcy court erred because Jefferson
does not have an enforceable claim against either debtor based on the State
Court Judgment. But the bankruptcy court limited its judgment to the
question of nondischargeability. See Hamilton v. Elite of L.A., Inc. (In re
Hamilton),
584 B.R. 310, 322; 324 (9th Cir. BAP 2018) (reasoning that because
“the state court had already adjudicated the debt . . . the only issue
remaining for the bankruptcy court was whether that debt was
dischargeable,” and stating that “[w]here there is a valid state court money
judgment, the bankruptcy court should not issue a new money
judgment.”). The bankruptcy court did not foreclose Debtors’ arguments
4 Additionally, we note that a creditor’s net recovery on a nondischargeable debt
is often less than the full amount of its claim, given the difficulties and expense in
collection. Part of the balance struck by Congress involves creditors receiving an
assured distributive share from a chapter 7 trustee’s administration of estate assets.
11
about enforceability and specifically held they could raise those arguments
in state court.
The bankruptcy court correctly applied the law and did not err by
granting summary judgment to hold the full amount of the State Court
Judgment—to the extent it is enforceable against either or both Debtors—
nondischargeable.
CONCLUSION
Based on the foregoing, we AFFIRM the bankruptcy court’s
judgment.
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