Effects Of Bankruptcy Discharge

A debtor filed Chapter 7 bankruptcy petition through this Author, seeking to discharge secured and unsecured claims of creditors.

A Section 341(a) meeting of creditors (actually an examination under oath of the debtor by the appointed trustee, with creditors welcomed to attend, but not required to do so) was conducted by the bankruptcy trustee, attended by the debtor and this Author. All listed and scheduled creditors must receive at least 30 days' advanced notice of the creditors' meeting, under Bankruptcy Rule 4007(c).

After several months, the assigned Bankruptcy Judge issued a discharge order, discharging the debtor from all personal liability for any and all secured and unsecured claims listed in the bankruptcy petition schedules. Secured creditors can foreclose on the security interest or collateral in case of debtor's default.

Discharge Injunction Against Personal Liability Of Debtor:

The discharge order carries the discharge injunction of 11 U.S.C. §524(a)(2)-(3), "which operates against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any debt as a personal liability of the debtor, whether or not discharge of such debt is waived."

Indeed, the discharge injunction under aforesaid Bankruptcy Code section 524(a)(2)-(3) effectively prevents or terminates any collection action against the debtor that holds him personally liable, except for recourse against the security interest or collateral by a secured creditor.

State Court Cannot Modify Discharge Injunction Or Its Effects:

In McGhan v. Rutz (In re McGhan), 288 F3d 1172 (9th Cir. 2002), the Ninth Circuit held that "...the state court (where the civil action was filed to collect on the discharged debt) lacked authority to modify the bankruptcy court's orders discharging Rutz's claim and permanently enjoining Rutz from collecting on the debt."

Thus, the aforesaid discharge injunction is permanent and remains in effect indefinitely.

Moreover, the Ninth Circuit concluded that "it was an abuse of discretion for the bankruptcy court to decline to reopen McGhan's bankruptcy case..." (because it) was required to reopen the proceedings to protect its exclusive jurisdiction over the enforcement of its own orders."

Discharge Injunction Applied To Attachment Lien:

In a state action for collection against a client of this Author, the plaintiff jewelry company applied for ex parte and was granted a writ of attachment, attaching certain interests of the defendant, including her ownership interest in a condominium in Torrance, California.

After this Author had filed the defendant's answer to the complaint in the Superior Court action, the defendant decided to file Chapter 7 bankruptcy petition. She retained this Author to do so.

The filing of the Chapter 7 petition resulted in an automatic stay of the state action, pursuant to Bankruptcy Code section 362. Plaintiff, a listed and scheduled creditor, filed its motion for relief from automatic stay with the Bankruptcy Court. It was opposed by written Response by this Author, on behalf of the debtor in bankruptcy.

After oral arguments at the hearing on the motion for relief from automatic stay, Los Angeles Bankruptcy Judge Vincent P. Zurzolo denied the motion on December 11, 2008. So, Plaintiff was unable to lift the automatic stay and obtain a judgment in the state action.

On July 22, 2009, the Bankruptcy Court issued its order of discharge of debtor under 11 U.S.C. §727. The exception to the discharge is: "a creditor has a right to enforce a valid lien, such as a mortgage or security interest, against the debtor's property after the bankruptcy."

Attachment Lien Not Perfected By Judgment Before Discharge:

In Diamant v. Kasparian (In Re Southern California Plastics, Inc), 165 F.3d 1243, 1246 (9th Cir. 1999), the Ninth Circuit held that: "(a)ttachement liens are solely creatures of state statutory law...California law requires a judgment for perfection" (of an attachment lien).

It warned that: "(p)ermitting an allowance of claim (in the bankruptcy case) to substitute for a judgment perfecting an attachment lien undermines the rights and protections created by the California Legislature."

So, the failure of the Plaintiff discussed above to obtain a judgment in the state action to perfect its attachment lien before the discharge order of the Bankruptcy Court resulted in an unsecured claim discharged in the Chapter 7 bankruptcy petition.

State Court Declined To Apply Discharge Injunction And Proceeded With State Action:

This Author's first motion to dismiss the state action because of the discharge injunction was denied without prejudice by the Hon. Irving Shimer, who honestly stated at the hearing that he was not sure of his ruling. So, the state action proceeded to discovery despite the discharge order and permanent injunction.

But since the denial was without prejudice, this Author, on behalf of the defendant-debtor, filed her second motion to dismiss and argued that "(d)enial of a motion without prejudice impliedly invites the moving party to renew the motion at a later date, when he can correct the deficiency that led to the denial, citing Farber v. Bay View Terrace Homeowners Ass'n., 46 Cal. Rptr.3d. 425 (App. 4 Dist. 2006).

A new Los Angeles Superior Court Judge, the Hon. Michelle I. Rosenblatt, also declined to apply the discharge injunction of the Bankruptcy Code. And the state action for collection proceeded to judgment against the defendant-debtor already discharged in bankruptcy.

The consolation to the defendant-debtor who did not appeal the judgment, nor reopen the bankruptcy case is that: she is a retired widow over 65 years old and does not have sufficient equity in her ownership interest on the co-owned condominium, over and beyond her $150,000 homestead exemption from judgment execution.

Atty Roman P. Mosqueda is a graduate from Michigan Law School with both a Doctorate of Law and LLM. The Law Offices of Roman P. Mosqueda are a full service law firm that handles all types of cases such as divorce, immigration, bankruptcy, personal injury, and more. Call (213) 252 - 9481 for a free consultation today!

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