In re Dana Kim Shelton

1 JS-6 [2] 3 cc: USBK [7] 8 UNITED STATES DISTRICT COURT 9 FOR THE CENTRAL DISTRICT OF CALIFORNIA [10] 11 IN RE DANA KIM SHELTON, Case No. 8:20-cv-00268-JWH 12 Debtor, 13 DANIEL KEITH LARSON; MEMORANDUM OPINION RE ERIN ELLEN LARSON; and APPEAL FROM ORDER OF THE 14 SHARON DEON SIMS, BANKRUPTCY COURT FOR CONTEMPT AGAINST 15 Appellants, APPELLANTS FOR VIOLATION OF THE BANKRUPTCY 16 v. DISCHARGE INJUNCTION 17 DANA KIM SHELTON, 18 Appellee. [27] 1 I. INTRODUCTION 2 Appellants Daniel Keith Larson, Erin Ellen Larson, and Sharon Deon 3 Sims appeal the order of the bankruptcy court holding them, jointly and 4 severally, in civil contempt for violation of the bankruptcy discharge injunction.1 5 The Court previously determined that this this matter is appropriate for 6 resolution without a hearing. See Fed. R. Bankr. P. 8019(b)(3); L.R. 7-15.2 For 7 the reasons set forth below, this Court AFFIRMS. 8 II. BACKGROUND 9 A. Shelton’s Bankruptcy Case 10 On July 20, 2017, Dana Kim Shelton filed a voluntary petition under 11 Chapter 7 of the Bankruptcy Code,3 thereby commencing bankruptcy case 12 No. 8:17-bk-12887-SC.4 In her bankruptcy schedules, Shelton listed, inter alia, 13 her interests in the real property located at 1221 N. Amelia Street, Anaheim, 14 California 92807 (the “Real Property”);5 her 25% interest as a beneficiary in the 15 Barbara Anne Larson Trust (the “Larson Trust”);6 her bank accounts;7 and the 16 first deed of trust against the Real Property with a 50% beneficial interest to the 17 Larson Trust and 50% beneficial interest jointly to Daniel Larson and Erin 18 Larson.8 Appellants Sims and Daniel Larson, as well as Peter Kote as trustee of [20] 1 See Am. Notice of App. (the “Notice”) [ECF No. 8]. 21 2 See Order [ECF No. 42]. 22 3 Unless otherwise indicated, all chapter and section citations refer to the Bankruptcy Code, 11 U.S.C. §§ 101–1532. 23 4 See Appellant’s App. (the “Appendix”) [ECF Nos. 36 through 36-4] 205. The Appendix consists of four consecutively paginated attachments [ECF 24 Nos. 36-1 through 36-4]. Unless otherwise indicated, all citations to the Appendix refer to the reference numbers appearing in the bottom right-hand 25 corner of the respective documents. 26 5 Id. at 215. 6 Id. at 218. [27] 7 Id. at 217. 1 the Larson Trust, are listed on the master mailing list for Shelton’s bankruptcy 2 case.9 Appellants actively participated in Shelton’s bankruptcy case, including 3 by seeking relief from the automatic stay, filing proofs of claim, and litigating 4 those claims.10 5 Shelton received a discharge of all pre-petition debts on November 6, 6 2017.11 7 B. Pre-Petition State Court Proceedings 8 On January 24, 2012, Daniel Larson and Sims commenced an action in 9 the Orange County Superior Court for the administration of the Larson Trust 10 (the “Trust Action”).12 Eventually, Daniel Larson and Sims moved to remove 11 Shelton as trustee of the Larson Trust. That motion was granted, and Peter 12 Kote was appointed as trustee. 13 More than a year later, in March 2013, Shelton commenced an action 14 against Appellants in the Orange County Superior Court in which Shelton 15 sought, among other relief, to quiet title to the Real Property and to enjoin 16 Appellants from foreclosing against the Real Property (the “Title Action”).13 17 On March 24, 2014, after a bench trial, the state court enjoined Appellants from 18 foreclosing but denied Shelton’s claim to quiet title. Thereafter, the Trust 19 Action and the Title Action were consolidated (the “State Court Action”). 20 On December 30, 2014, Daniel Larson and Sims filed a petition to recover 21 attorneys’ fees from Shelton in the State Court Action, asserting various 22 theories of recovery.14 That petition was stayed by the state court. More than [24] 9 Id. at 250–252. 25 10 See, e.g., id. at 250–252, 258–261, 263–280, 282-283, 285-286, & 288-289. 26 11 See id. at 254–256. 12 See id. at 77. [27] 13 See id. at 78. 1 four years later, on May 15, 2019, Appellants filed a renewed request in the State 2 Court Action to recover attorneys’ fees in connection with Shelton’s pre3 petition conduct.15 In the months thereafter, Appellants’ activities in the State 4 Court Action included arguing and conducting a hearing seeking attorneys’ fees 5 against Shelton, noticing a trial date, and conducting a trial on November 25, 6 2019.16 7 C. Bankruptcy Contempt Proceedings 8 On October 29, 2019, Shelton filed a motion in the bankruptcy court for 9 an order to show cause and for an order holding Appellants in contempt for 10 violating the discharge injunction.17 After a hearing on December 18, 2019, the 11 bankruptcy court granted Shelton’s OSC Motion and ordered Appellants to 12 show cause why they should not be held in contempt.18 On January 22, 2020, 13 the bankruptcy court conducted a hearing on the order to show cause and made 14 findings orally on the record that Appellants violated the discharge injunction. 15 On January 30, 2020, the bankruptcy court entered a written order imposing 16 civil contempt sanctions against Appellants for the reasons stated on the record 17 at the hearing (the “Order”).19 18 III. JURISDICTION 19 The bankruptcy court had jurisdiction over Shelton’s bankruptcy case 20 pursuant to 28 U.S.C. §§ 1334 & 157(b). This Court has jurisdiction over this 21 appeal under 28 U.S.C. § 158 (a). [24] 25 15 See id. at 99–121. 26 16 See id. at 3:10–15. 17 See id. at 57–194 (the “OSC Motion”). [27] 18 See id. at 201–203. 1 IV. ISSUES 2 1. Did the bankruptcy court have jurisdiction to hold Appellants in 3 civil contempt for violation of the bankruptcy discharge injunction? 4 2. Did the bankruptcy court err when it imposed civil contempt 5 sanctions against Appellants for violating the discharge injunction? 6 V. STANDARD OF REVIEW 7 This court examines the bankruptcy court’s conclusions of law de novo 8 and its factual findings for clear error. In re BCE W., L.P., 319 F.3d 1166 , 1170 9 (9th Cir. 2003); Carrillo v. Su (In re Su), 290 F.3d 1140, 1142 (9th Cir. 2002). 10 The bankruptcy court’s decision to impose civil contempt sanctions for a 11 violation of the discharge injunction is reviewed for an abuse of discretion. Nash 12 v. Clark Cty. Dist. Attorney’s Office (In re Nash), 464 B.R. 874, 878 (B.A.P. 9th 13 Cir. 2012). Under the abuse of discretion standard, the first step is to determine 14 de novo whether the bankruptcy court applied the correct legal rule. United 15 States v. Hinkson, 585 F.3d 1247 , 1261–62 (9th Cir. 2009) (en banc). The failure 16 to apply the correct legal rule constitutes an abuse of discretion. Mujica v. 17 AirScan, Inc., 771 F.3d 580, 589 (9th Cir. 2014). If the bankruptcy court applied 18 the correct legal rule, then the second step is to determine whether the 19 bankruptcy court’s application of the law to the facts was: “(1) ‘illogical,’ 20 (2) ‘implausible,’ or (3) without ‘support in inferences that may be drawn from 21 the record.’” Id. (quoting Hinkson, 585 F.3d at 1262 ). 22 VI. DISCUSSION 23 A. The Bankruptcy Court Had Jurisdiction to Hold Appellants in Civil 24 Contempt for Violating the Discharge Injunction 25 Federal district courts “have original but not exclusive jurisdiction of all 26 civil proceedings arising under title 11, or arising in or related to cases under 27 title 11.” 28 U.S.C. § 1334 (b). District courts are further authorized to refer 1 arising in or related to a case under title 11” to the bankruptcy judges for the 2 district. 28 U.S.C. § 157 (a). Under that statute, bankruptcy judges “may hear 3 and determine all cases under title 11 and all core proceedings arising under 4 title 11, or arising in a case under title 11, referred under subsection (a) of this 5 section, and may enter appropriate orders and judgments, . . . .” 28 U.S.C. 6 § 157(b). 7 The bankruptcy judge must determine whether a proceeding is a core 8 proceeding; however, a “determination that a proceeding is not a core 9 proceeding shall not be made solely on the basis that its resolution may be 10 affected by State law.” 28 U.S.C. § 157 (b)(3). Core proceedings include, inter 11 alia, “determinations as to the dischargeability of particular debts,” 28 U.S.C. 12 § 157(b)(2)(I), “objections to discharges,” 28 U.S.C. § 157 (b)(2)(J), and 13 proceedings to determine whether a violation of the discharge injunction has 14 occurred, see Walls v. Wells Fargo Bank, N.A., 276 F.3d 502 , 505–506 (9th Cir. 15 2002). See also Stern v. Marshall, 564 U.S. 462 , 473–474 (2011). 16 Here, after Shelton received her discharge, Appellants renewed their 17 claim for pre-petition attorneys’ fees and costs in the State Court Action against 18 Shelton and took further overt acts in furtherance of that effort. For the reasons 19 discussed in detail in the subsequent section, Appellants’ claim was a discharged 20 debt, and, thus, it was subject to the discharge injunction. Accordingly, the 21 bankruptcy court had exclusive jurisdiction to determine whether Appellants 22 violated the discharge injunction and to impose civil contempt sanctions after 23 finding any such violation. See Walls, 276 F.3d at 505–506; 11 U.S.C. §§ 105 (a) 24 & 524; 28 U.S.C. § 157 (b). In other words, the bankruptcy proceeding at issue 25 was one “arising under title 11, or arising in a case under title 11.” 28 U.S.C. 26 § 157(b)(1); see Stern, 564 U.S. at 475–477; In re Ray, 624 F.3d 1124 , 1131 (9th 27 Cir. 2010) (“A matter ‘arises under’ the Bankruptcy Code if its existence 1 cause of action created or determined by a statutory provision of the Bankruptcy 2 Code.”). 3 Appellants’ arguments to the contrary are not persuasive. Appellants 4 appear fundamentally to misunderstand the claims at issue in this appeal. 5 Indeed, Appellants’ abstention-related jurisdictional arguments are premised 6 upon the idea that the bankruptcy court did not have jurisdiction over issues 7 related to the State Court Action or, more generally, to the Larson Trust.20 But 8 this appeal concerns the bankruptcy court’s authority to conduct proceedings to 9 determine whether Appellants violated the discharge injunction, and those 10 proceedings are unmistakably core proceedings over which the bankruptcy court 11 has jurisdiction. See Walls, 276 F.3d at 505–506. The bankruptcy court did not 12 adjudicate any issues in relation to the State Court Action; it merely considered 13 whether Appellants’ conduct in connection with that action, after Shelton 14 received a discharge, constituted a violation of the discharge injunction. 15 Appellants’ contention that the bankruptcy court lacked personal 16 jurisdiction21 is similarly erroneous. The record reflects that Appellants served 17 the underlying OSC Motion by U.S. Mail, as required by the Federal Rules of 18 Bankruptcy Procedure.22 See Fed. R. Bankr. P. 7004 & 9014. Moreover, 19 Appellants filed proofs of claim and various motions in Shelton’s bankruptcy 20 case and, thereby, submitted to the bankruptcy court’s jurisdiction.23 21 Accordingly, this Court concludes that the bankruptcy court had 22 jurisdiction over the underlying proceeding. [25] 26 20 See Appellants’ Opening Brief [ECF No. 23] 10:1–13:12 & 25:13–29:6. 21 See id. at 25:13–27:9. [27] 22 See Appendix 196–198. 1 B. The Bankruptcy Court Did Not Abuse Its Discretion When It 2 Imposed Civil Contempt Sanctions Against Appellants for Violating 3 the Discharge Injunction 4 Under § 727, subject to certain exceptions, a discharge in a chapter 7 case: 5 [D]ischarges the debtor from all debts that arose before the date of 6 the order for relief under this chapter, and any liability on a claim that 7 is determined under section 502 of this title as if such claim had 8 arisen before the commencement of the case, whether or not a proof 9 of claim based on any such debt or liability is filed under section 501 10 of this title, and whether or not a claim based on any such debt or 11 liability is allowed under section 502 of this title. [12] 11 U.S.C. § 727 (b). The Bankruptcy Code further prescribes the effect of 13 discharge and provides: 14 (a) A discharge in a case under this title— 15 * * * 16 (2) operates as an injunction against the commencement or 17 continuation of an action, the employment of process, or an 18 act, to collect, recover or offset any such debt as a personal 19 liability of the debtor, whether or not discharge of such debt is 20 waived. [21] 11 U.S.C. § 524 (a)(2). Under § 105(a), a bankruptcy court is authorized to 22 “issue any order, process, or judgment that is necessary or appropriate to carry 23 out the provisions” of the Bankruptcy Code. Accordingly, courts uniformly 24 recognize that “[c]ivil contempt, imposed under the court’s section 105 powers, 25 is the normal sanction for violation of the discharge injunction.” COLLIER ON 26 BANKRUPTCY ¶ 524.02(2)(c) & n.54 (16th ed. 2021) (citing cases); see also Walls, [27] 276 F.3d at 507 . “[C]ompensatory civil contempt allows an aggrieved debtor to 1 compliance with the discharge injunction.” Walls, 276 F.3d at 507 ; see also 2 Pertuso v. Ford Motor Credit Co., 233 F.3d 417, 423 (6th Cir. 2000); Cox v. Zale 3 Delaware, Inc., 239 F.3d 910, 917 (7th Cir. 2001) (action for violation of § 524 4 can be raised only through contempt). 5 Here, Appellants appear to contend that the pre-petition debt for 6 attorneys’ fees and costs that Shelton owed to them in connection with the State 7 Court Action was not discharged due to actual fraud under §§ 523(a)(2)(A) and 8 523(a)(4).24 Appellants assert various arguments regarding the alleged fraud and 9 appear to ask this Court to rule on that issue.25 However, the record reflects 10 that, in the first instance, Appellants failed to seek a determination of non11 dischargeability, which is a prerequisite under the Bankruptcy Code. 12 “An action to determine whether a particular debt is excepted from a 13 debtor’s discharge—i.e., a ‘dischargeability determination’—may be instituted 14 either by the debtor or by any creditor.” COLLIER ON BANKRUPTCY ¶ 523.04. 15 “The procedure for dischargeability proceedings is governed by Federal Rules 16 of Bankruptcy Procedure 7001 and 7003, which provide that such an action is an 17 adversary proceeding that must be initiated by the filing of a complaint.” Id. In 18 cases under Chapter 7, a complaint to determine the dischargeability of debts 19 under §§ 523(a)(2) and (a)(4) “must be filed within 60 days after the date first 20 set for the meeting of creditors under section 341(a).” 21 Fed. R. Bankr. P. 4007(c). In the absence of a finding of non-dischargeability, 22 the debtor is discharged from a debt of the kind specified in §§ 523(a)(2) and 23 (a)(4). See 11 U.S.C. § 523 (c)(1). 24 Here, Appellants never sought, by adversary proceeding or otherwise, a 25 determination that the debt allegedly owed by Shelton was non-dischargeable [27] 24 See Appellants’ Opening Brief 29:7–31:21. 1|| under § 523(a)(2). Appellants failed to do so notwithstanding the fact that they 2|| had notice of, and actively participated in, Shelton’s bankruptcy case.”° 3|| Therefore, pursuant to § 523(c)(1), the debt at issue was discharged, and, 4|| pursuant to § 524(a)(2), the discharge injunction barred Appellants from 5|| pursuing the collection of that debt. Accordingly, the bankruptcy court did not 6|| err when if found that Appellants’ actions post-discharge to collect upon the 7\| discharged debt violated the discharge injunction.”” For the same reasons, the &|| bankruptcy court had authority under § 105(a) to impose civil contempt 9|| sanctions against Appellants for violation of the discharge injunction. See Walls, 10 || 276 F.3d at 507 . 11 VII. CONCLUSION 12 For the foregoing reasons, the Court AFFIRMS the order of the 13|| bankruptcy court. 14 IT IS SO ORDERED. MHA 16 || Dated: October 18, 2021 . 17 NITED SFA TES DISTRICT JUDGE [26] 26 See Appendix 250-252, 258-261, 263-280, 282-283, 285-286, & 288-289. 28 7 See id. at 3:1-15.