Memorandum of Decision Re: Violation of Discharge Injunction

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Judge's Decisions
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re LAZAR MAKSIC,                                                                              No. 98-10469      Debtor(s). ______________________________________/
Memorandum of Decision
     Debtor Lazar Maksic filed a Chapter 7 petition on February 13, 1998, duly scheduling Marie Kurpiel as a creditor.(1) Incredibly, Kurpiel did not file a complaint to determine the dischargeability of her claim against Maksic even though she had a state court action for fraud pending at the time. Maksic received his bankruptcy discharge on July 23, 1998, and the case was closed on September 22, 1998.      On October 15, 1998, Kurpiel filed a motion to reopen the case in order that the court might "grant relief from the automatic stay so that [she] can proceed with the state court action." In an extended colloquy on the record on November 13, 1998, the court noted that the application made no sense, as the automatic stay had terminated by operation of law when the case closed. 11 U.S.C. § 362(c)(2)(A); In re Aldrich, 34 B.R. 776, 780 (9th Cir. BAP 1983). The court tried to tactfully suggest to her attorney, Robert Knox, that he did not have the expertise necessary to ethically represent Kurpiel in the matter. The court expressly told Knox from the bench that "[t]here is a thorny issue of law here," and "If you turn out to be wrong, you could be subject to sanctions for violating the permanent injunction . . . . I do know it is my job to enforce the permanent injunction, so that you are in a risky position." The court urged Knox to associate knowledgeable counsel.      Despite the court's admonishment, Knox continued to prosecute the state court action. Maksic's motion for contempt is now before the court.      Section 524(a)(2) of the Bankruptcy Code provides, in pertinent part, that a bankruptcy discharge        operates as an injunction against the . . . continuation of an action . . .        to collect, recover or offset any such debt as a personal liability of the        debtor . . . .      Kurpiel argues that the discharge does not apply to her because after the bankruptcy she amended her complaint to seek only a constructive trust. This is not exactly true, as the complaint also seeks "further relief as this Court deems proper." The gist of the complaint is that Kurpiel gave Maksic $32,000.00 in return for a tenancy in common with Maskic in real property, but by breach of contract and fraud she only got a joint tenancy.      It is clear that Kurpiel has confused her claim to a constructive trust with other relief which may be appropriate. A constructive trust is a remedy used by courts to correct a wrong. It is a remedy for a claim based on a debtor-creditor relationship. In re Golden Triangle Capital, Inc., 171 B.R. 79 (9th Cir. BAP 1994); In re Advent Management Corp., 178 B.R. 480, 486 (9th Cir.BAP 1995). It is entirely inchoate prior to its imposition. In re Markair, Inc., 172 B.R. 638, 642 (9th Cir.BAP 1994). The concept of a constructive trust is fundamentally at odds with bankruptcy goals, and may not be used to circumvent express provisions of the Bankruptcy Code. In re Omegas Group, Inc., 16 F.2d 1443, 1452 (6th Cir. 1994).      As noted in Golden Triangle, supra, a constructive trust is a remedy arising out of a debtor-creditor relationship. By neglecting to file an action to determine that her claim against Maksic was nondischargeable, Kurpiel has allowed the debtor-creditor relationship to become history.(2) She is not entitled to a constructive trust, and her continuation of her state court action was a violation of the discharge injunction.(3) Because the remedy she sought to impose is based on a debtor-creditor relationship, the action was still one to create a "personal liability" notwithstanding her attempt to limit satisfaction to Maksic's property. Once a debt has been discharged, an unsecured creditor can pursue no remedy arising out of the debt.      In conclusion, the court finds that Kurpiel willfully violated the bankruptcy discharge by continuing to prosecute her state court action and by seeking a constructive trust, a remedy available only pursuant to a debtor-creditor relationship, after the discharge.      The court further finds that the prayer for "other relief," sought after the discharge, further and separately was a willful violation of the discharge. Such a prayer left the debtor with no choice except to appear and defend the state court action even if he conceded Kurpiel's rights in the property.      Pursuant to the foregoing findings and conclusions, the court finds Kurpiel and her attorney, Robert Knox, in contempt. They may not further prosecute the state court action in its present form. It may be prosecuted only to seek remedies not dependent on a debtor-creditor relationship. It may not seek a monetary award of any kind, nor may it seek "other relief" over and above a simple determination of ownership rights.      Further, the court orders Kurpiel and Knox to pay Maksic the sum of $3,000.00, both as a punitive measure and to compensate Maksic for attorneys' fees incurred in dealing with their actions. Provided, however, that the sanction shall be reduced to $2,000.00 if, within 20 days of the date of this decision, Kurpiel provides Maksic's counsel with proof that she has retained the services of an experienced bankruptcy attorney and paid such attorney at least $1,000.00.      Counsel for Maksic shall submit an appropriate form of order.
Dated: April 30, 1999                                                                              ____________________________                                                                                                                      Alan Jaroslovsky                                                                                                                      United States Bankruptcy Judge
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1. Kurpiel's attorney, Robert Knox, was also scheduled and given notice of the bankruptcy.

2. The sole bankruptcy authority cited by Kurpiel, In re Goldberg, 168 B.R. 382 (9th Cir. BAP 1994), is easily distinguished. In that case, the creditor filed a dischargeability action and the debtor-creditor relationship had not terminated.

3. By allowing the debtor-creditor relationship to terminate, Kurpiel has forfeited any claim to a remedy based on such a relationship. The court notes that there are some sorts of trusts, such as resulting trusts, which are not based on debtor-creditor relationships and therefore may be prosecuted without violating the discharge injunction. See In re Golden Triangle Capital, Inc, 171 B.R. at 82. Perhaps this is what Kurpiel had in mind. If so, she may still have a remedy notwithstanding her seemingly fatal failure to file a timely dischargeability a