Wednesday, May 8, 2002
Bankruptcy Court Has Exclusive Jurisdiction to Determine Adequacy of Notice to Creditor, Ninth Circuit Rules
By a MetNews Staff Writer
A debtor convicted of molesting his stepson is entitled to reopen his bankruptcy proceeding to seek protection from a state court suit by the victim, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
A Superior Court judge, a bankruptcy judge, and the Bankruptcy Appellate Panel were all wrong in concluding that the state court had jurisdiction to determine whether Jason Rutz’s claim against Lon McGhan was discharged in bankruptcy, Judge Raymond Fisher wrote for the Ninth Circuit.
McGhan pled guilty in 1991 to committing a lewd act upon Rutz in 1989, when Rutz was 12 years old. A short time after the plea, McGhan filed for bankruptcy.
Rutz was listed as a creditor, having a “Potential Civil Action for Personal Injury; Amount Unknown.” Notice of the filing was sent to Rutz’s mother, who was also listed as a creditor since McGhan potentially owed her child support.
After reaching the age of majority, Rutz filed suit against McGhan based on the events that led to the guilty plea. McGhan moved to block the suit on the ground that the debt had been discharged in bankruptcy.
The trial judge ruled that the notice to his mother was inadequate to put Rutz on notice, rejecting the defense argument that only the bankruptcy court could decide whether the state court had jurisdiction over the suit. The judge cited Sec. 523(a)(3) of the Bankruptcy Code, which gives state courts concurrent jurisdiction to determine whether an action on an unscheduled or unlisted debt has been discharged.
The code provides that such debts are discharged only when the creditor had “notice or actual knowledge” of the proceedings early enough to file a proof of claim.
McGhan then moved to reopen the bankruptcy proceeding so that he could seek an injunction against further proceedings in the state court. The bankruptcy judge denied the motion, and the BAP affirmed.
But Fisher, writing for the Ninth Circuit, said the lower courts erred in applying Sec. 523(a)(3).
That section is inapplicable, the appellate jurist explained, because Rutz was listed as a creditor. The section that does apply, Fisher said, is Sec. 523(c)(1), which deals with the adequacy of notice to a listed creditor.
Jurisdiction to decide issues under the latter provision, Fisher added, lies exclusively with the bankruptcy court. It was an abuse of discretion for the bankruptcy judge to decline to reopen the proceedings in order to decide the question, Fisher declared.
Fisher cautioned that the appellate panel was not telling the bankruptcy judge what position to take on the merits. But he noted that the Seventh Circuit held in a similar case that a mother’s conflicting claim rendered notice to her inadequate as to her minor son, and that if Rutz did not receive adequate notice, his claim is probably non-dischargeable since it is for “willfully and malicious injury.”
Judge M. Margaret McKeown and Senior U.S. District Judge David W. Hagen of Nevada, sitting by designation, joined in the opinion.
The case is In re McGhan, 99-56956.
Copyright 2002, Metropolitan News Company