Lowery v. Nguyen

Lowery v. Hoang, et al., No. 2085, September Term, 2016
Filed: February 27, 2019, Opinion by Friedman, J.
HEADNOTES:
CJ § 5-202 > BANKRUPTCY > DENIAL OF DISCHARGE
When a debtor enters bankruptcy, CJ § 5-202 tolls a creditor’s claim if the debtor either is
denied a discharge pursuant to 11 U.S.C. § 727, or if the bankruptcy is dismissed.
Circuit Court for Montgomery County
Case No. 223525-V
REPORTED
IN THE COURT OF SPECIAL APPEALS
OF MARYLAND
No. 2085
September Term, 2016
______________________________________
JEFFREY LOWERY
v.
MINH-VU HOANG, ET AL.
______________________________________
Meredith,
Friedman,
Wilner, Alan M.
(Senior Judge, Specially Assigned),
JJ.
______________________________________
Opinion by Friedman, J.
______________________________________
Filed: February 27, 2019
Pursuant to Maryland Uniform Electronic Legal
Materials Act
(§§ 10-1601 et seq. of the State Government Article) this document is authentic.
2019-02-28
11:08-05:00
Suzanne C. Johnson, Clerk
The United States Constitution provides that:
The Congress shall have [p]ower [t]o … establish … uniform [l]aws on the
subject of [b]ankruptcies throughout the United States.
U.S. Const., art. I § 8, cl. 4. Despite this seemingly clear grant of power, it took Congress
a long while to establish federal bankruptcy law, and longer still for it to establish a
permanent bankruptcy law that preempted existing state insolvency laws. Thus, there were
long stretches during the 19th century in which Maryland had its own insolvency law that
operated alongside, or even instead of, federal bankruptcy law. State insolvency laws were
finally preempted in 18981 but Maryland’s version remained dormant, on the books, until
1975 when it was deleted.2 One provision of the old state insolvency law, however,
survived: a provision that tolls causes of action against a debtor during insolvency
proceedings:
If a debtor files a petition in insolvency which is later
dismissed, the time between the filing and the dismissal is not
included in determining whether a claim against the debtor is
barred by the statute of limitations.
Md. Code, Cts. & Jud. Proc. (“CJ”) § 5-202 (emphasis added).3 Despite the fact that CJ
§ 5-202 was designed for application to the old state insolvency procedure (and still uses
1
Nelson Act (Bankruptcy Act of 1898), ch. 541, 30 Stat. 544, (codified as amended
in scattered sections of 11 U.S.C.).
2
Ch. 49, § 3 of the Acts of 1975.
3
This version of CJ § 5-202 was adopted during code revision in 1973. 1973 Acts,
1st Spec. Sess. Ch. 2. When first adopted in 1815, the provision read:
[T]he time intervening between the petitioning of any said
debtors and the time that any of said petitions [for the benefit
its terminology), the Court of Appeals has instructed us to apply it to current federal
bankruptcy cases. Ali v. CIT Tech. Fin. Servs., 416 Md. 249 (2010). Thus, in Ali, the Court
of Appeals held that a “petition in insolvency,” as that term is used in CJ § 5-202, must be
read to include a modern bankruptcy petition, and held that state claims are preserved by
operation of CJ § 5-202 while a debtor is engaged in the federal bankruptcy process. 4 Id.
at 270-71.
This case follows Ali, but requires us to determine the meaning of the words
“dismissed” and “dismissal” as they appear in CJ § 5-202. Lowery proposes a broad
interpretation, which would include any termination of a bankruptcy proceeding, not just
dismissals. And because every bankruptcy must end, he argues, this statute tolls every
creditor claim when a debtor enters bankruptcy, until the bankruptcy ends. Hoang, by
contrast, advocates for a narrower reading that would limit “dismissed” and “dismissal” in
CJ § 5-202 to only cases that are “dismissed” in modern federal bankruptcy practice,
of the insolvency law] may be dismissed, shall not be
computed on any plea of limitation so as to defeat any claim of
any person against such debtor.
1815 Acts, Ch. 122 § 3. See note 8 and the Appendix for a further discussion of this
legislation. There were other intermediate formulations. Md. Code Pub. Gen. Laws, Art.
57, § 9 (1904); Md. Code Pub. Gen. Laws, Art 47, § 8 (1880).
4
When a debtor files for bankruptcy, an automatic stay is immediately enacted
which prohibits creditors from filing any claims against a debtor. 11 U.S.C. § 362. Federal
bankruptcy law preserves creditors’ claims against a debtor’s estate for the duration of the
automatic stay plus 30 days after it is lifted. 11 U.S.C. § 108(c)(2). Federal law also permits
the states to adopt longer periods. 11 U.S.C. § 108(c)(1). Thus, in Ali, the Court of Appeals
held that CJ § 5-202 serves as Maryland’s adoption of a longer period. 416 Md. at 259
(“[T]he Maryland Legislature has made it its business to give plaintiffs additional time.”).
2
meaning dismissed under 11 U.S.C. § 707(a) (providing for dismissal of a Chapter 7
bankruptcy), § 1112(b)(1) (providing for dismissal of a Chapter 11 bankruptcy), or
§ 1307(b) (providing for dismissal of a Chapter 13 bankruptcy). We will select an
intermediate course.
FACTS
There are three specific facts necessary to understand this case: (1) Hoang incurred
a debt to Lowery in 2002; (2) Hoang filed for bankruptcy in 2005 and was denied a
discharge; and (3) Hoang received $87,000 in 2016 out of which Lowery seeks to be paid
for the 2002 debt. We explain the details of each below.
A. The 2002 Debt
On April 11, 2002, the Circuit Court for Montgomery County entered a default
judgment in favor of Lowery against Hoang for $16,987. Lowery has yet to collect on that
judgment. With interest, Lowery’s judgment totaled over $41,000 by July of 2016. A
money judgment in Maryland expires after 12 years, unless it is renewed before it expires.
CJ § 5-102(a)(3) (establishing the limitations period).5 All parties agree that Lowery did
not renew that judgment within the 12-year period. Thus, the 2002 debt has been
extinguished if it was not somehow extended.
5
While CJ § 5-102(a)(3) establishes the 12-year statute of limitation, “Md. Rule 2-
625 implements the limitations period found in CJ § 5-102” by explaining when a judgment
expires and can be renewed. State, Comptroller of Maryland v. Shipe, 221 Md. App. 425,
435 (2015) (cleaned up).
3
B. Hoang’s Bankruptcy
Hoang petitioned for Chapter 11 bankruptcy protection on May 10, 2005 and the
bankruptcy court issued an automatic stay. See 11 U.S.C. § 362(a) (authorizing an
automatic stay). A bankruptcy trustee was appointed to administer Hoang’s bankruptcy
estate. For reasons that don’t concern us, Hoang’s bankruptcy was converted into a Chapter
7 bankruptcy on October 28, 2005. Hoang behaved badly and hid assets from the trustee. 6
As a result, on March 22, 2006, the Bankruptcy Court issued an Order denying Hoang
a discharge and lifting the automatic stay. See 11 U.S.C. § 727 (authorizing denial of
discharge); In re Packer, 520 B.R. 520, 533 (“The denial of a debtor’s discharge is akin to
financial capital punishment. It is reserved for the most egregious misconduct by a
debtor.”) (Cleaned up). Thus, Hoang’s bankruptcy case remains open: the
bankruptcy trustee has not yet finished marshalling her assets and distributing the proceeds
to her creditors. We are informed that this process may still take years.
6
Hoang’s bad behavior in bankruptcy is well-documented. As the federal court
described, after Hoang filed for bankruptcy:
the Trustee commenced numerous adversary proceedings to
recover property of the estate that [Hoang] had attempted to
conceal through various business entities with which she was
associated. She failed to report these entities on her bankruptcy
schedules and her statement of financial affairs, and she was
criminally indicted on charges related to bankruptcy and tax
fraud. On October 13, 2010, [she] pled guilty to conspiracy to
defraud an agency of the United States . . . [and] was sentenced
to a term of imprisonment of sixty months.
In re Minh Vu Hoang, 2015 U.S. Dist. WL 2345588, at *1 (D. Md. May 15, 2015).
4
C. The 2016 Recovery
In April of 2016, Hoang recovered $87,000 in the settlement of an unrelated real
estate dispute. Pursuant to a deal struck with her bankruptcy trustee, half of the settlement,
$43,500, went to the trustee for the benefit of her creditors and half went to Hoang’s
lawyer. Lowery learned of the settlement, however, and served a writ of garnishment in the
amount of $41,294.31 (the amount of the original 2002 judgment plus interest).
D. Subsequent Procedural History
Hoang moved to quash the writ of garnishment arguing that, as described
above, Lowery’s judgment was more than 12 years old and had expired pursuant to the 12-
year statute of limitations in CJ § 5-102(a)(3). Lowery responded that his time for
collecting the judgment had been extended by operation of CJ § 5-202. The circuit court
agreed with Hoang, finding that CJ § 5-202 did not toll the limitations period
on Lowery’s judgment. Lowery appealed.
ANALYSIS
The question that we must consider then is what the legislature intended when it
adopted (and repeatedly readopted) the precursor to what is now CJ § 5-202. If it meant
the words “dismissed” and “dismissal” to mean what they mean in modern bankruptcy law,
then Hoang’s bankruptcy has not been dismissed and may never be dismissed. If so,
Lowery must watch and wait. If Hoang’s bankruptcy is ever dismissed, then he may
resurrect his claim. Alternatively, if the legislature intended the words “dismissed” and
“dismissal” to have a broader meaning, then perhaps “dismissal” also includes other
resolutions of bankruptcy proceedings.
5
Our use of the traditional methods of statutory interpretation is inconclusive.
Although the Court in Ali discussed the meaning of dismissal as used in CJ § 5-202, it did
not settle on a conclusive meaning and did not reach a result that decides this case. 7 We
have reviewed the remaining legislative history8 (of which there is little), as well as
contemporaneous general dictionaries,9 contemporaneous legal dictionaries,10 and
7
When Ali argued that dismissal should be defined as the time at which the
automatic stay is lifted, the Court disagreed because “[CJ] § 5-202 is clear that the
limitation period is tolled until the dismissal of the bankruptcy petition.” Ali, 416 Md. at
270 n.16. From this we know only that the lifting of the automatic stay is not a “dismissal”
for purposes of CJ § 5-202. This does not tell us what is a dismissal.
8
The original bill, by which the predecessor to CJ § 5-202 was adopted, contained
three separate sections, each of which pertained to insolvency. Ch. 122 of the Acts of 1815
(full text in Appendix). Section 3 was the predecessor to CJ § 5-202 and used the word
“dismissal.” See supra note 3. Section 2 described the procedure that creditors should take
when reviving a judgment against the debtor, but used three terms: “dismissal,”
“withdrawing of any petition,” and “decisions thereon against the petitioner.” Thus, if the
drafters of the bill were using the word “dismissal” in § 3 in a manner that is consistent
with how they used it in § 2, we might infer that “dismissal” does not include a withdrawal
or an adverse decision. While interesting, this insight doesn’t get us any closer to
understanding what the drafters intended the scope of dismissal to be.
9
We looked at, for example, JOHN ASH, NEW AND COMPLETE DICTIONARY OF THE
ENGLISH LANGUAGE (1795) (defining “dismiss” as “[t]o send away, to give leave to depart,
to discard, to divest from office”); NOAH WEBSTER, A COMPENDIOUS DICTIONARY OF THE
ENGLISH LANGUAGE (1806) (defining “dismiss” as “to send or put away, discard or
dispose”). These definitions in contemporaneous general dictionaries are, unfortunately,
not very helpful in understanding what the legislature intended “dismissal” to include.
Because the definitions do not specify why a case would be disposed of, they could be read
broadly enough to encompass every reason a case ends (whether by dismissal or closure)
or narrowly enough to include only cases that end due to dismissal.
10
We looked at, for example, JOHN BOUVIER, A LAW DICTIONARY ADAPTED TO
THE CONSTITUTION AND LAWS OF THE UNITED STATES OF AMERICA (1839) (defining “to
dismiss a cause” as “removing a cause out of court without a formal hearing”); BLACK’S
LAW DICTIONARY (1st ed. 1891) (defining “dismissal” as “[t]o send away; to discharge; to
cause to be removed”). These contemporaneous legal definitions are not helpful in
6
contemporaneous legal practice manuals11—only to have emerged as uncertain as when we
began. Fortunately, however, we think a functional method of statutory interpretation
provides a historically accurate and correct interpretation.
As we understand it, under traditional Maryland insolvency practice, the debtor’s
nonexempt assets would be gathered and turned over to a trustee and eventually, the
creditors. 1805 Acts, ch. 110, §§ 3-5. In exchange, the debtor would receive a discharge of
debts and a fresh start. 1805 Acts, ch. 110, § 13. Of course, not all insolvencies reached
this successful conclusion. See e.g. 1805 Acts, ch. 110, § 9 (precluding debtors who are
convicted of deceiving their creditors from benefiting from the insolvency laws). The
predecessor to CJ § 5-202 was adopted to ensure that creditors, whose debtors failed in
obtaining a discharge, wouldn’t be worse off for cooperating in the process. Thus, if an
understanding what the legislature intended “dismissal” to include. Although they tell us
that a case is removed from the docket, the definitions don’t tell us why a case may be
removed, allowing the possibility that the legislature meant dismissal to be defined broadly,
like Lowery advocates, to include termination for any reason, or narrowly, like Hoang
prefers, to limit dismissal to the modern bankruptcy definition.
11
We have found two contemporaneous (or reasonably contemporaneous) legal
practice manuals that explain Maryland insolvency law. Unfortunately, neither helps us
resolve this case. Poe’s Practice and Procedure, a Maryland civil procedure manual that
includes insolvency practice, discusses the “term “dismissal” only in the context of
involuntary insolvency petitions. POE’S PRACTICE AND PROCEDURE § 800 (1st ed. 1880).
That doesn’t help us because CJ § 5-202, by its terms, applies only to voluntary
insolvencies and, in fact, Maryland didn’t adopt an involuntary insolvency procedure until
65 years later, in 1880. John Dorsey’s treatise on insolvency law described insolvency law
in many states, but sometimes focused on Maryland’s insolvency law. JOHN L. DORSEY, A
TREATISE ON THE AMERICAN LAW OF INSOLVENCY 82 (1832). Dorsey’s treatise described
instances when a creditor could move for “dismissal” if there was a defect in the petition
such as insufficiency of notice. Id. at 82. Regrettably, although Dorsey tells us when
“dismissal” was inappropriate, he neglects to tell us when it was appropriate. Id.
7
insolvency was successful, the creditors got the debtor’s available assets. 1805 Acts, ch.
110, § 7. If the insolvency was unsuccessful, the creditors’ claims were preserved and
everyone was restored to their prepetition status. Operationally, this was accomplished by
CJ § 5-202 extending the statute of limitations for the period during which the debtor was
pursuing insolvency up until the court determined that it was unsuccessful.
In modern bankruptcy, the vast majority of proceedings end in one of the same two
ways that insolvency proceedings ended 200 years ago. A successful bankruptcy today
results in a closure, by which the debtor’s estate is fully administered for the benefit of the
creditors. 11 U.S.C. § 350(a) (“After an estate is fully administered and the court has
discharged the trustee, the court shall close the case.”). The creditors recover what they can
and the debtor receives a discharge and a fresh start. Alternatively, bankruptcy cases can
end unsuccessfully, in a dismissal. 11 U.S.C. § 707(a) (providing for dismissal of a Chapter
7 bankruptcy), § 1112(b)(1) (providing for dismissal of a Chapter 11 bankruptcy), or
§ 1307(b) (providing for dismissal of a Chapter 13 bankruptcy). A bankruptcy can be
dismissed for a host of reasons, including failure to pay certain fees and material default of
the confirmed repayment plan. 11 U.S.C. § 1307(c) (listing what constitutes “cause” for
dismissing or converting a case). If the bankruptcy case is dismissed, the debtor does not
receive a discharge, but instead the automatic stay is dissolved and dismissal “restores the
assets and parties to their prepetition status, as if the case had never been filed.” In re
Woodhaven, Ltd., 139 B.R. 745, 748 (N.D. Ala. 1992).
8
Modern bankruptcy law, however, also permits a third possible outcome:12 a denial
of discharge. This is a rare occurrence,13 reserved for the most misbehaving debtors. In re
Packer, 520 B.R. at 533. The effect of a denial of discharge is really the worst of both
worlds for the debtor: the debtor remains in bankruptcy and his or her assets continue to be
administered for the benefit of the creditors. BANKRUPTCY CODE MANUAL, § 727:8 (“If a
debtor is denied a discharge under § 727(a), the debtor remains liable for all unpaid
obligations. Moreover, the assets that the nondischarged debtor may acquire in the future
are also subject to the claims of creditors.”). But a debtor who is denied a discharge will
never obtain a discharge in their case or a fresh start. In re Oliver, 819 F.2d 550, 552 (1987)
(explaining that a violation of 11 U.S.C. § 727 “entirely bars discharge”). As we said
before, however, the denial of discharge did not exist in Maryland insolvency law.
Lowery’s solution is that every outcome in bankruptcy—successful or
unsuccessful—ought to receive the benefit of the tolling provided by CJ § 5-202. This
theory is obviously wrong. The state legislature in 1815 only extended the benefit of tolling
to creditors when the debtor’s insolvency was unsuccessful. We won’t extend the benefit
to a situation that the legislature clearly intended to exclude: a successful bankruptcy.
Hoang’s solution is that dismissal in 1815 meant exactly the same as what dismissal means
12
There is a fourth option, conversion, in which a bankruptcy filed pursuant to one
chapter of the bankruptcy code is converted to proceed under a different chapter. 11 U.S.C.
§§ 707(b); 1112(a). That outcome is not relevant for our present purposes.
13
For example, in fiscal year 2016, there were 482,693 Chapter 7 Bankruptcy filings
and only 1,004 denials of discharge, a rate of around 0.2%. UNITED STATES TRUSTEE
PROGRAM, ANNUAL REPORT OF SIGNIFICANT ACCOMPLISHMENTS 4-5 (2016),
https://perma.cc/R57X-9DRX.
9
today. She argues that because her bankruptcy hasn’t been dismissed, her creditors are not
entitled to the benefit of tolling. This seems wrong too. The legislature wouldn’t have
intended for the worst debtors to be treated better than merely unsuccessful debtors, like
those whose cases are dismissed for failing to pay the correct fees or failing to file correct
information with the court within 15 days. 11 U.S.C. § 707(a).
We think that the solution is obvious. The legislature, in enacting CJ § 5-202,
intended to hold creditors unharmed by preserving their otherwise time-barred claims while
participating in an unsuccessful bankruptcy. That benefit was not necessary and therefore
was not provided for creditors participating in a successful bankruptcy. We hold that that
was the distinction that the legislature intended in 1815 and that we will enforce today by
holding that creditors of debtors whose bankruptcies are dismissed, as defined by 11 U.S.C.
§ 707(a), § 1112(b)(1), § 1307(b), or denied a discharge, pursuant to 11 U.S.C. § 727, are
entitled to the tolling offered by CJ § 5-202.14 This outcome, while not compelled by Ali,
is certainly consistent with the Court of Appeals’ statement that CJ § 5-202 was “enacted
to address the public’s complaint that debtors manipulated the bankruptcy and insolvency
process by entering bankruptcy, waiting for the statute of limitations to expire, and
subsequently dismissing the bankruptcy proceeding.” Ali, 416 Md. at 268. As a result, we
reverse the judgment of the circuit court and reinstate Lowery’s claim.15
14
Of course, if this is not what the current legislature thinks the 1815 legislature
intended, or if they have a new idea about how to deal with state claims while a debtor is
in bankruptcy, they are free to rewrite CJ § 5-202. We encourage it.
Because of our resolution of this issue, we need not reach Lowery’s claim that
15
Hoang is collaterally estopped from litigating this position. We note however, two
10
JUDGMENT OF THE CIRCUIT COURT
FOR MONTGOMERY COUNTY
REVERSED; COSTS TO BE PAID BY
APPELLEE.
problems with Lowery’s theory of collateral estoppel. First, the issue of whether CJ
§ 5-202 tolls claims during bankruptcy before a case is formally dismissed seems, to us, to
be a legal issue and not a factual issue. And collateral estoppel is most commonly, if not
exclusively, applied to the resolution of factual issues. See Shader v. Hampton
Improvement Association, Inc., 217 Md. App. 581, 605 (2014) (stating, without elaborating
upon what separates factual issues from legal, that “collateral estoppel precludes a party
from re-litigating a factual issue”) (emphasis added). Second, although it is apparently an
unresolved issue in Maryland law and throughout the United States, it appears that the most
common view is that a default judgment should not be considered to have been “finally
litigated” for purposes of collateral estoppel. John Crane, Inc. v. Puller, 169 Md. App. 1,
36 (2006) (stating, in obiter dicta, that a “default judgment does not have preclusive effect
where issues of fact were not actually litigated”) (cleaned up); RESTATEMENT (SECOND)
OF JUDGMENTS § 27 cmt. E (1982) (“[I]n the case of a judgment entered by . . . default,
none of the issues is actually litigated.”); BANKRUPTCY EVIDENCE MANUAL, § 3:14 (“[T]he
collateral estoppel effect of a prior default judgment under state law varies from state to
state.”); Collateral Estoppel in Default Judgments: The Case for Abolition, 70 COLUM. L.
REV. 522 (1970) (arguing against the application of non-mutual collateral estoppel to a
default judgment because choosing to default usually does not contemplate future inability
to litigate the issue against a different plaintiff).
11
APPENDIX
CHAPTER 122.
An additional supplement to the act entitled, an act for the
relief of sundry insolvent debtors.
Sec. 1. BE IT ENACTED by the General Assembly of
Maryland, That no petition for the benefit of the original act
for the benefit of sundry insolvent debtors, and the several
supplements thereto, now depending in any of the county
courts of this state shall be continued beyond the second
session of such court next after the passage of this act;
unless in cases where the court shall be satisfied a further
continuance is necessary to procure testimony material and
competent on the trial of any allegations made against the
petitioner’s discharge, nor shall, any such petition hereafter
to be filed, be continued beyond the first court next after the
filing thereof unless for the causes aforesaid.
2. AND BE IT ENACTED, That upon the dismissal or
withdrawing of any petition for the benefit of said acts, or
upon decisions thereon against the petitioner, it shall not be
necessary to revive by scire facias any judgment which may
have been suspended by such petition, and process of
execution may be issued upon such judgments as if no such
suspension had taken place.
3. AND BE IT ENACTED, That the time intervening
between the petitioning of any of said debtors and the time
that any of said petitions may be dismissed, shall not be
computed on any plea of limitation so as to defeat any claim
of any person against such debtor.
12