In re: William C. Shaw

FILED
JUN 27 2017
SUSAN M. SPRAUL, CLERK
1 NOT FOR PUBLICATION U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
2
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. NC-15-1406-BSKu
)
6 WILLIAM C. SHAW, ) Bk. No. 1:14-bk-11318
)
7 Debtor. )
)
8 )
LISA ROGERSON, )
9 )
Appellant, )
10 ) M E M O R A N D U M1
v. )
11 )
WILLIAM C. SHAW, )
12 )
Appellee. )
13 ______________________________)
14 Argued and Submitted on January 19, 2017,
at San Francisco, California
15
Filed - June 27, 2017
16
Appeal from the United States Bankruptcy Court
17 for the Northern District of California
18 Honorable Alan Jaroslovsky, Bankruptcy Judge, Presiding
19
Appearances: Stephen Davis Finestone argued for appellant Lisa
20 Rogerson; Ruth Elin Auerbach argued for appellee
William C. Shaw.
21
22 Before: BRAND, SPRAKER2 and KURTZ, Bankruptcy Judges.
23 Memorandum by Judge Brand
Concurrence by Judge Spraker
24
25
1
This disposition is not appropriate for publication.
26 Although it may be cited for whatever persuasive value it may
have, it has no precedential value. See 9th Cir. BAP Rule 8024-1.
27
2
Hon. Gary A. Spraker, Chief Bankruptcy Judge for the
28 District of Alaska, sitting by designation.
1 Creditor Lisa Rogerson appeals an order finding her in
2 contempt for violating the discharge injunction and awarding
3 attorney's fees and costs to chapter 73 debtor, William C. Shaw.
4 Because the bankruptcy court erred by applying an incorrect legal
5 standard to determine whether Rogerson had actual knowledge that
6 the discharge injunction applied to her amended complaint filed in
7 state court as required under ZiLOG, Inc. v. Corning (In re ZiLOG,
8 Inc.), 450 F.3d 996 (9th Cir. 2006), we REVERSE the court's
9 finding of contempt, VACATE the order awarding sanctions and
10 REMAND for further proceedings.
11 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
12 A. Prepetition events and Shaw's bankruptcy filing
13 Shaw has been in the automotive wheel restoration business
14 since 2003, primarily as a sole proprietor. Rogerson and Shaw
15 began dating in December 2012 and later rented a house together.
16 On May 7, 2013, Rogerson and Shaw entered into an Investment
17 Agreement/Promissory Note ("Agreement"), wherein Rogerson agreed
18 to provide Shaw dba Shaw's Wheel Restoration and "any liability
19 entity as may hereinafter be formed" with a line of credit not to
20 exceed $150,000 for the purpose of financing an automotive wheel
21 refinishing business. Shaw also promised to pay Rogerson a
22 "guaranteed investment return" up to $150,000 to coincide with the
23 amount of funds Rogerson ultimately loaned Shaw. For example, if
24 Rogerson loaned Shaw a total of $75,000, he was obligated to pay
25 her an additional $75,000 for the investment return. The entire
26
27 3
Unless specified otherwise, all chapter, code and rule
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
28 the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
-2-
1 loan was to be paid by April 2015. Monthly payments were to begin
2 in January 2014. If any payment was not made within 30 days of
3 being due, Rogerson could demand payment in full of the entire
4 balance, including the investment return.
5 A few weeks after Rogerson and Shaw signed the Agreement,
6 Shaw formed Shaw's Wheel Restoration, LLC (the "LLC"), to continue
7 his business in that form with him as the sole member. Shaw
8 contends the LLC never assumed the obligations of the Agreement as
9 the parties had contemplated.
10 When Shaw failed to make any of the monthly payments under
11 the Agreement, Rogerson sued Shaw and his dba Shaw's Wheel
12 Restoration in state court for four causes of action seeking to
13 recover $359,438, which included (1) monies owed under the
14 Agreement ($150,000 for money lent, $150,000 for the investment
15 return and $16,063 for interest owed), (2) $9,000 for a security
16 deposit, (3) $10,175 for other monies loaned to Shaw, and
17 (4) $24,200 for consulting fees owed to Rogerson.
18 Shaw filed a chapter 7 bankruptcy case on September 11, 2014,
19 which stayed the state court action. Shaw claimed in his
20 Schedule B that the LLC had $0 value, other than the assets listed
21 in Item 35 which consisted of a variety of tools and accounts
22 receivable valued at $34,715. Shaw claimed these same assets (and
23 some others potentially belonging to the LLC) exempt. Rogerson
24 was listed as both a secured and unsecured creditor. Shaw noted
25 in his Schedule I that his employer since May 2013 was the LLC.
26
27
28
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1 B. Postpetition events
2 1. Claim objection, dissolution of the LLC and Shaw's
discharge
3
4 Rogerson did not object to the discharge of her claims, but
5 she did object to certain claimed exemptions made by Shaw on the
6 grounds that the exempt property was owned by the LLC. The
7 bankruptcy court ruled that the exemptions were lawful but that
8 they did not extend to property not owned by Shaw. The court
9 reserved jurisdiction to adjudicate ownership of disputed
10 property, but Rogerson elected to proceed in state court.
11 After Shaw's discharge, the state court determined some items
12 of property belonged to the LLC and ordered Shaw to turn them over
13 to Rogerson because she held a security interest in the LLC's
14 personal property. Shaw complied with the orders. As part of
15 these orders, a payment of $4,073 was made on the Agreement to
16 Rogerson in April 2015. Although the cashier's check was made out
17 by Shaw, the parties dispute whether that payment actually came
18 from Shaw or the LLC.
19 On December 12, 2014, Shaw resumed his wheel restoration
20 business as a sole proprietor under the name Bill Shaw, dba Bill
21 Shaw's Wheel Restoration. Shaw cancelled the LLC on December 15,
22 2014.
23 On December 16, 2014, Shaw received his discharge. Rogerson
24 admitted receiving notice of Shaw's discharge.
25 2. Rogerson's amended state court complaint
26 In August 2015, Rogerson sought leave to file an amended
27 complaint ("FAC") in the state court action. The FAC alleged
28 twelve causes of action; the first eleven named only the LLC as
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1 the defendant (the "Entity Causes of Action") and the twelfth, a
2 claim for fraudulent transfer (the "Fraudulent Transfer Cause of
3 Action"), named both the LLC and Shaw. The basis for Rogerson's
4 Entity Causes of Action was the LLC's failure to pay her under the
5 Agreement and other additional LLC loans. These Entity Causes of
6 Action were essentially a variation of the same four causes of
7 action Rogerson had initially alleged against Shaw prepetition.
8 Rogerson conceded that any personal loans she made to Shaw
9 prepetition had been discharged in his bankruptcy case.
10 For the Fraudulent Transfer Cause of Action, Rogerson alleged
11 that Shaw had fraudulently cancelled the LLC in December 2014.
12 Rogerson alleged that Shaw and the LLC hindered, delayed and
13 defrauded her by transferring postpetition the LLC's assets to
14 Shaw or transmuting them into other unknown property to prevent
15 Rogerson from collecting any of the LLC's debt owed to her. For
16 this cause of action, Rogerson alleged she had been damaged in an
17 amount no less than $500,000.
18 The focus of the dispute between the parties lies in
19 paragraphs 39-41 of the FAC, which state:
20 (39) Because Mr. Shaw personally acquired the assets of
Shaw’s Wheel Restoration, LLC for no or inadequate
21 consideration, without assuming its liabilities, because
Mr. Shaw was the sole member of Shaw’s Wheel Restoration,
22 LLC, and because Mr. Shaw has continued to operate as a
sole proprietor the same business that Shaw’s Wheel
23 restoration, LLC operated, Mr. Shaw is a mere continuation
of Shaw’s Wheel Restoration, LLC.
24
(40) Thus, as Mr. Shaw, currently doing business as Bill
25 Shaw’s Wheel Restoration, is essentially the same business
as Shaw’s Wheel Restoration, LLC, Mr. Shaw may be held
26 liable for Shaw’s Wheel Restoration, LLC’s obligations to
Ms. Rogerson under the LLC Investment Agreement, the LLC
27 Oral Payments, and the LLC Consulting Agreement.
28 (41) Accordingly, Shaw’s Wheel Restoration, LLC/Mr. Shaw
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1 owes Ms. Rogerson the total of $344,792.84 [$295,927.00
(LLC Investment Agreement of $300,000 - $4,073.00 payment)
2 + $8,031.00 (LLC Oral Payments) + $18,174.84 (LLC Draw
Advances) + $22,660.00 (LLC Consulting Agreement $27,860
3 - $5,200 payment)].
4 In a letter dated September 10, 2015, Shaw's attorney
5 informed Rogerson's counsel that he believed the proposed FAC
6 violated the discharge injunction by seeking to impose
7 "continuation liability" on Shaw personally for the exact same
8 claims that were discharged in his bankruptcy case. Shaw's
9 attorney warned that, if Rogerson insisted on pursuing Shaw
10 personally for any prepetition obligations, he would ask the
11 bankruptcy court to hold Rogerson in contempt of the discharge
12 order and to award Shaw damages.
13 In response, Rogerson's attorney noted that the Entity Causes
14 of Action were brought against defendants other than Shaw. For
15 the Fraudulent Transfer Cause of Action, counsel contended that to
16 the extent Shaw had any liability it was due to his postpetition
17 actions respecting the LLC. Counsel asserted that Shaw had
18 committed fraud by wrongfully dissolving the LLC and transferring
19 to himself the LLC's assets. Counsel asserted that because these
20 actions occurred postpetition, they created a new, not discharged
21 liability for Shaw.
22 The state court granted Rogerson leave to file the FAC on
23 October 2, 2015.
24 3. Shaw's motion to enforce discharge injunction
25 After the bankruptcy court granted Shaw's motion to reopen
26 his bankruptcy case, Shaw filed his motion to enforce the
27 discharge injunction and award sanctions. Shaw argued that the
28 FAC violated the discharge injunction by including allegations and
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1 claims seeking to hold him personally liable as the conduit or
2 successor-in-interest to a defunct LLC that Rogerson was now
3 seeking to hold liable for the exact same personal obligations
4 upon which she sued him in the state court action and which were
5 discharged. Shaw argued that by artful pleading, Rogerson was
6 hoping to impose personal liability on him by falsely claiming
7 that the alleged personal obligations of Shaw were really
8 obligations of the defunct LLC. Shaw argued that Rogerson had
9 gone so far as to falsely allege that she had received a payment
10 from the LLC on the Agreement (the $4,073 cashier's check), even
11 though she knew the payment came from Shaw personally.
12 Shaw asserted that he had incurred $14,900 in legal fees and
13 $269.60 in costs in effort to enforce the discharge against
14 Rogerson. Shaw's counsel confirmed these amounts in his attached
15 declaration and time sheets, which disclosed that he spent
16 approximately 30 hours on the matter at an hourly rate of $500.00.
17 Rogerson opposed Shaw's motion on essentially three grounds.
18 First, Shaw had failed to acknowledge any distinction between his
19 direct liability and his continuation liability for the LLC's
20 debts. While Shaw's discharge covered his direct liability, it
21 did not cover any continuation liability that arose postpetition.
22 As for the Entity Causes of Action, which Rogerson said could have
23 been pleaded against Shaw but were not, Rogerson argued that Shaw
24 likely transferred the LLC's assets to himself postpetition; he
25 admitted that he "resumed" his sole proprietorship in December
26 2014. Shaw was the sole member of the LLC, and it appeared that
27 he had provided no adequate consideration for the LLC's assets.
28 Therefore, argued Rogerson, it was possible that Shaw was
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1 responsible for the LLC's debts as its successor. Second,
2 Rogerson argued that the Fraudulent Transfer Cause of Action did
3 not violate the discharge injunction because it sought damages for
4 postpetition transfers or in rem relief for any transfers.
5 Lastly, Rogerson argued that the bankruptcy court could not
6 find her in contempt for violating the discharge injunction
7 because she did not "knowingly" violate it. Shaw had argued that
8 he needed to prove only that Rogerson knew of the discharge order.
9 However, this was not the standard. Citing ZiLOG and Chionis v.
10 Starkus (In re Chionis), 2013 WL 6840485 (9th Cir. BAP Dec. 27,
11 2013), Rogerson contended that Shaw had to also prove she knew the
12 discharge order "applied" to her claim. Rogerson argued that one
13 could not reasonably conclude she knew her claim based on
14 continuation liability was prepetition and thus discharged, or
15 that she knew the fraudulent transfers occurred prepetition and
16 that she was enjoined from seeking damages from Shaw as
17 transferee. Rogerson contended that Shaw's own schedules were
18 incoherent, creating a situation where it was impossible to tell
19 what was owned by Shaw and what was owned by the LLC. Rogerson
20 argued that until those facts were adjudicated, it could not be
21 determined when the transfers occurred and when continuation
22 liability arose.
23 Along with his reply, Shaw filed a declaration stating that
24 he had incurred a total of $33,850 in legal fees and $281.01 in
25 costs to enforce the discharge injunction against Rogerson.
26 4. Hearing on Shaw's motion and ruling
27 The bankruptcy court held a hearing on Shaw's motion. After
28 some discussion about the nature of the claims in the FAC, counsel
-8-
1 for Rogerson argued his last point of whether Shaw had proven
2 Rogerson knowingly violated the discharge injunction. The court
3 opined that under any test Rogerson had violated the discharge
4 injunction. However, it believed that the test Rogerson set forth
5 in her brief was "not the most current statement of the law."
6 Hr'g Tr. (Oct. 23, 2015) 15:13-18.
7 The bankruptcy court issued a Memorandum Decision and Order,
8 finding Rogerson in contempt for willfully violating the discharge
9 injunction. The court found that the FAC was a "gross violation"
10 of Shaw's discharge because it named him personally and sought
11 damages against him for the same debt that was discharged in his
12 bankruptcy — the $300,000 debt based on the pre-bankruptcy
13 Agreement. The court rejected Shaw's successor liability theory,
14 that the discharged debt could be revived based on Shaw's
15 postpetition acts. Having found a sanctionable violation of the
16 discharge injunction, the court awarded Shaw his "very reasonable"
17 attorney's fees of $33,850 and $281.00 in costs. Rogerson timely
18 appealed.
19 II. JURISDICTION
20 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 133421 and 157(b)(2)(O). We have jurisdiction under 28 U.S.C. § 158.
22 III. ISSUE
23 Did the bankruptcy court err in determining that Rogerson
24 willfully violated the discharge injunction?
25 IV. STANDARDS OF REVIEW
26 Determining whether the bankruptcy court applied the correct
27 legal standard is a question of law we review de novo. Emmert v.
28 Taggart (In re Taggart), 548 B.R. 275, 286 (9th Cir. BAP 2016).
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1 The bankruptcy court's finding of a willful violation of
2 § 524 is reviewed for clear error. Id. A finding is clearly
3 erroneous when it is illogical, implausible or without support in
4 the record. Id. (citing United States v. Hinkson, 585 F.3d 1247,
5 1262 (9th Cir. 2009) (en banc)). An erroneous view of the law may
6 induce the bankruptcy court to make a clearly erroneous finding of
7 fact. Ozenne v. Bendon (In re Ozenne), 337 B.R. 214, 218 (9th
8 Cir. BAP 2006) (citing Power v. Union Pac. R.R. Co., 655 F.2d
9 1380, 1382–83 (9th Cir. 1981)).
10 The bankruptcy court’s decision as to whether sanctions
11 should be imposed for a violation of the discharge injunction is
12 reviewed for an abuse of discretion. Nash v. Clark Cnty. Dist.
13 Atty's. Office (In re Nash), 464 B.R. 874, 878 (9th Cir. BAP
14 2012). A bankruptcy court abuses its discretion if its decision
15 is based on an incorrect legal rule, or if its findings of fact
16 were illogical, implausible or without support in the record. Id.17 (citing Hinkson, 585 F.3d at 1262).
18 V. DISCUSSION
19 A. Governing law for violations of the discharge injunction
20 A discharge "operates as an injunction against the
21 commencement or continuation of an action . . . to collect,
22 recover or offset any [discharged] debt as a personal liability of
23 the debtor." § 524(a)(2). A party who knowingly violates the
24 discharge injunction under § 524(a)(2) can be held in contempt
25 under § 105(a). In re ZiLOG, Inc., 450 F.3d at 1007; Renwick v.
26 Bennett (In re Bennett), 298 F.3d 1059, 1069 (9th Cir. 2002);
27 In re Taggart, 548 B.R. at 286.
28 To be subject to sanctions for violating the discharge
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1 injunction a party’s violation must be "willful." In re Nash,
2 464 B.R. at 880. The party seeking contempt sanctions has the
3 burden of proving, by clear and convincing evidence, that the
4 alleged contemnor "(1) knew the discharge injunction was
5 applicable and (2) intended the actions which violated the
6 injunction." In re ZiLOG, Inc., 450 F.3d at 1007. Knowledge of
7 the injunction is a question of fact that can normally be resolved
8 only after an evidentiary hearing. Id. However, where the facts
9 are not in dispute, no hearing need be held. Id. at 1007 n.11
10 (citing Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1191-92
11 (9th Cir. 2003)).
12 For the second prong — the intent requirement for a finding
13 of willfulness — courts employ the same analysis for violations of
14 the discharge injunction as they do for violations of the
15 automatic stay. In re Taggart, 548 B.R. at 288. The focus is on
16 whether the offending party's conduct violated the injunction and
17 whether that conduct was intentional; it does not require a
18 specific intent to violate the injunction. In re Dyer, 322 F.3d
19 at 1191 (citing Hardy v. United States (In re Hardy), 97 F.3d
20 1384, 1390 (11th Cir. 1996); Havelock v. Taxel (In re Pace),
21 67 F.3d 187, 191 (9th Cir. 1995)). If a bankruptcy court finds
22 that a party has willfully violated the discharge injunction, it
23 may award the debtor actual damages, punitive damages and
24 attorney's fees and costs. In re Nash, 464 B.R. at 880.
25 We recently observed in Taggart that the Ninth Circuit has
26 crafted a strict standard for the "actual knowledge" requirement
27 in the context of contempt before a finding of willfulness can be
28 made. 548 B.R. at 288. This standard, with respect to the first
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1 prong, requires the moving party to show that the alleged
2 contemnor was aware of the discharge injunction and aware that it
3 applied to his or her claim. Id. (emphasis in original). See
4 In re ZiLOG, Inc., 450 F.3d at 1009 n.144; In re Chionis, 2013 WL
5 6840485, at *5. Whether a party is aware that the discharge
6 injunction is applicable to his or her claim is a fact-based
7 inquiry which implicates a party's subjective belief, even an
8 unreasonable one. In re ZiLOG, Inc., 450 F.3d at 1009 n.14;
9 In re Taggart, 548 B.R. at 288. On the other hand, subjective
10 self-serving testimony may not be enough to rebut actual knowledge
11 when the undisputed facts show otherwise. In re Taggart, 548 B.R.
12 at 288 (citing In re Chionis, 2013 WL 6840485, at *6).
13 Accordingly, each prong of the Ninth Circuit's two-part test
14 for a finding of contempt in the context of a discharge violation
15 requires a different analysis, and distinct, clear, and convincing
16 evidence supporting that analysis, before a finding of willfulness
17 can be made. Id.18 B. The bankruptcy court applied an incorrect legal standard to
find that Rogerson had willfully violated the discharge
19 injunction.
20 Rogerson contends the bankruptcy court erred by finding her
21 in contempt for willfully violating the discharge injunction
22 without making any finding as to whether she knew the discharge
23 injunction "applied" to her causes of action in the FAC. We
24
4
Specifically, the Ninth Circuit in ZiLOG held: "To be
25 held in contempt, the [alleged contemnors] must not only have been
aware of the discharge injunction, but must also have been aware
26 that the injunction applied to their claims. To the extent that
the deficient notices led the [alleged contemnors] to believe,
27 even unreasonably, that the discharge injunction did not apply to
their claims because they were not affected by the bankruptcy,
28 this would preclude a finding of willfulness."
-12-
1 agree.
2 Although the bankruptcy court expressly cited ZiLOG and its
3 two-part test, it misapplied the first prong of the test,
4 conflating the objective inquiry under the second prong of the
5 willfulness test regarding intent with the fact-intensive inquiry
6 under the actual knowledge requirement in the first prong. The
7 court found that Rogerson was aware of the discharge order, which
8 she never disputed. The court then went on to conclude that
9 Rogerson's good faith belief or subjective intent that her causes
10 of action in the FAC did not violate the discharge injunction was
11 irrelevant. As we noted in Taggart, this strict liability
12 analysis is consistent with the standards for a willful violation
13 of the automatic stay because § 362(k) does not have a specific
14 intent requirement. It is also consistent with an analysis under
15 the second prong of the willfulness test. However, it cannot
16 apply to the first prong of the discharge violation test, which
17 requires actual knowledge of applicability. 548 B.R. at 290-91.
18 In addition, as evident from the hearing transcript, the
19 bankruptcy court erred by shifting the burden to Rogerson to
20 disprove the applicability of the discharge order to her causes of
21 action in the FAC. The court ultimately determined that
22 Rogerson's legal theory of successor liability had no merit, a
23 determination that would appear to be within the province of the
24 state court, and that her acts appeared motivated by anger arising
25 from the termination of her relationship with Shaw rather than an
26 honest attempt to collect a debt. The court also never explained
27 how the Fraudulent Transfer Cause of Action seeking in rem relief
28 based on what were alleged postpetition acts by Shaw violated the
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1 discharge injunction.
2 Finally, since Rogerson disputed that the discharge
3 injunction applied to any of her causes of action in the FAC, the
4 bankruptcy court was required to hold an evidentiary hearing,
5 which it did not do. In re ZiLOG, Inc., 450 F.3d at 1007; Yen v.
6 Pedroche (In re Pedroche), 2014 WL 5840297, at *5 (9th Cir. BAP
7 Nov. 10, 2014). We are hard-pressed to conclude on this record
8 that Shaw had proven by clear and convincing evidence Rogerson
9 knew the legal theories of recovery she asserted in the FAC
10 violated the discharge injunction.
11 Because the bankruptcy court applied an incorrect legal
12 standard, its finding that Rogerson willfully violated the
13 discharge injunction is clearly erroneous. Accordingly, it abused
14 its discretion by finding Rogerson in contempt. It follows that
15 the award for attorney's fees and costs cannot stand.
16 VI. CONCLUSION
17 Because the bankruptcy court erred by applying an incorrect
18 legal standard and by not conducting the required evidentiary
19 hearing, we REVERSE its finding of contempt, VACATE the order
20 awarding sanctions and REMAND for the court to conduct an
21 evidentiary hearing and make findings consistent with In re ZiLOG,
22 Inc.
23
24 Concurrence begins on next page.
25
26
27
28
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1 SPRAKER, Bankruptcy Judge concurring.
2 I agree that if the FAC constitutes a violation of Shaw's
3 discharge that further proceedings are required to determine
4 whether Rogerson knew the discharge applied to her filing
5 consistent with ZiLOG, Inc. v. Corning (In re ZiLOG, Inc.),
6 450 F.3d 996 (9th Cir. 2006). I write this concurrence, however,
7 because I believe that filing the FAC did not violate Shaw's
8 discharge injunction.
9 The bankruptcy court determined that Rogerson's action
10 violated Shaw's discharge because:
11 It names him personally, and seeks damages against him
for the same $300,000.00 ($150,000.00 for money lent and
12 $150,000.00 for "investment return") based on the same
pre-bankruptcy agreement. The amended complaint is
13 based on Shaw's post-bankruptcy termination of the LLC
and reversion to doing business as a sole
14 proprietorship. Rogerson's theory is that the LLC was a
party to the agreement based on the "entity as may
15 hereinafter be formed" language, so that the debt on the
agreement is its debt as well; that Shaw is the
16 successor in interest to the LLC and is therefore liable
for all its debts; and therefore he has liability to
17 Rogerson on the agreement as a successor to the LLC even
though his direct obligation has been discharged.
18
19 This led the bankruptcy court to conclude that Rogerson
20 impermissibly sought "to recover the same debt against Shaw that
21 was discharged in his bankruptcy, and therefore is a blatant
22 violation of a discharge injunction."
23 Rogerson does seek to recover the same damages that were
24 discharged against Shaw within his personal bankruptcy. However,
25 as pleaded, she asserts all but one of her claims against the
26 California limited liability company in which Shaw was the sole
27 member. The debts derive from the same payments made by Rogerson
28 to Shaw, but they are alleged to have been made for, or to, the
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1 limited liability company, thereby contractually obligating it to
2 Rogerson. She sues for the entity's separate breaches of
3 contract. Shaw protests that the FAC is nothing more than artful
4 drafting. In support of his motion for contempt, he submitted a
5 declaration to the bankruptcy court challenging Rogerson's factual
6 allegations, and expressly denied that his entity ever signed, or
7 assumed, his personal debts owed to her.
8 Despite Shaw's criticism of the FAC, the Entity Causes of
9 Action assert claims against the LLC alone.1 Whatever the merits
10 of such claims, they seek recovery against a third party nondebtor
11 based upon its separate liability. Though Shaw was the only
12 member of his limited liability company, that entity remains
13 distinct from him individually. Cal. Corp. Code § 17701.04(a);
14 Kwok v. Transnation Title Ins. Co., 170 Cal. App. 4th 1562,
15 1570–71 (2009). Rogerson's claims against the LLC, therefore,
16 constitute nothing more than an effort to collect against a
17 jointly liable nondebtor third party. In this regard, the claims
18 are no different from any action against a guarantor or insurer to
19 recover a debt owed by a discharged debtor. Star Phoenix Mining
20 Co. v. W. Bank One, 147 F.3d 1145, 1148 (9th Cir. 1998) (debtor's
21 bankruptcy did not discharge guarantor's liability); Chapman v.
22
1
As noted previously, Rogerson’s FAC includes general
23 allegations that Shaw is the mere continuation of the LLC, and
states that “Shaw Wheel Restoration/Mr. Shaw” owes her damages.
24 However, the Entity Causes of Action are directed towards the LLC,
not Shaw, and are comprised of: the LLC’s breach of written
25 contract, indebitatus assumpsit-LLC investment agreement, breach
of oral contract, breach of implied contract, indebitatus
26 assumpsit-LLC oral payments, breach of contract-LLC draw advances,
breach of implied contract-LLC draw advances, indebitatus
27 assumpsit-LLC draw advances, breach of contract-LLC consulting
agreement, breach of contract-LLC consulting agreement,
28 indebitatus assumpsit-LLC consulting agreement.
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1 Bituminous Ins. Co. (In re Coho Res., Inc.), 345 F.3d 338, 343
2 n.14 (5th Cir. 2003) (quoting 4 Collier on Bankruptcy ¶ 524.05, at
3 524-46 (Lawrence P. King ed., 15th ed. rev. 2003)). Shaw's
4 personal bankruptcy did not, and could not, discharge a third
5 party's liability to the extent that it exists. § 524(e);
6 Patronite v. Beeney (In re Beeney), 142 B.R. 360, 362 (9th Cir.
7 BAP 1992) ("Subsection (e) makes clear that this injunction
8 applies only to the debtor's personal liability and does not
9 inhibit collection efforts against other entities."); In re Linda
10 Vista Cinemas, L.L.C., 442 B.R. 724, 742 (Bankr. D. Ariz. 2010)
11 ("The only comment in the legislative history of § 524(e) is
12 merely that it ‘provides the discharge of the debtor does not
13 affect co-debtors or guarantors.'"). Therefore, Rogerson's claims
14 against the LLC did not violate the discharge injunction.
15 Rogerson's remaining claim is directed against the debtor
16 personally.2 She contends that Shaw is liable for fraudulently
17 transferring the LLC's remaining assets to himself several months
18 after filing his personal bankruptcy. Rogerson alleges that both
19 Shaw and his entity acted with the actual intent to hinder, delay
20 and defraud Rogerson's recovery of the debt owed to her by the
21 entity. Rogerson's ability to recover against Shaw individually
22 for fraudulent transfers is wholly dependent upon whether the LLC
23 was actually indebted to her. Cal Civ. Code § 3439.04(a). But,
24
2
As noted in the memorandum, the FAC includes general
25 allegations referencing successor liability. But, the only cause
of action against Shaw individually is for fraudulent transfer.
26 Whether Rogerson seeks to impose liability under a claim for
successor liability or fraudulent transfer, both are based upon
27 the LLC’s underlying liability rather than Shaw’s prepetition
personal liability. Moreover, Shaw’s personal liability under
28 either claim would be based upon post-petition activity.
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1 if such allegations are established, Shaw would become
2 individually liable based upon his postpetition receipt of a
3 fraudulent transfer, rather than resurrection of his direct
4 liability for his breach of contract. Shaw's discharge does not
5 protect him from postpetition liability. § 727(b); see First
6 Prof'l Bank, N.A. v. Wrobel (In re Mullen), 200 B.R. 352, 355
7 (Bankr. C.D. Cal. 1996). Therefore, the claim for fraudulent
8 transfer did not violate the discharge injunction either.
9 The bankruptcy court viewed these claims as a mere artifice
10 to reimpose individual liability upon Shaw for discharged debts.
11 However, debtors should not be permitted to collaterally attack
12 the merits of claims against third parties under the guise of
13 discharge litigation. The question before the bankruptcy court
14 was limited to whether Rogerson's FAC against the LLC violated
15 Shaw's individual discharge; not whether those claims were
16 meritorious. Rogerson sued a third party, and does not seek to
17 recover against Shaw personally except for his post-petition
18 receipt of allegedly fraudulently transferred assets. While the
19 bankruptcy court's skepticism of Rogerson's claims against the
20 limited liability company may be well founded, that determination
21 must be made by the state court. Should Rogerson's claims prove
22 to be frivolous, remedies exist to address that situation. For
23 purposes of the motion for contempt, it suffices that Rogerson is
24 not suing Shaw to recover upon his own prepetition breach of
25 contract damages. I would reverse the bankruptcy court's finding
26 of contempt and its award of sanctions on this basis, thereby
27 mooting the need to remand the case for further proceedings.
28
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