Original Filed
March 29, 1999
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re
No.3-86-03556TDM
Chapter 7
ROBERT ANTHONY OGLE,
Debtor.
___________________________________/
ROBERT ANTHONY OGLE,
Plaintiff,
A.P. No. 96-3374DM
vs.
JOHN MICHAEL SOBRATO, Conservator
of the Estate of Ann Sobrato,
Defendant.
___________________________________/
MEMORANDUM DECISION
This is an adversary proceeding which was brought by the debtor,
Robert Anthony Ogle ("Debtor"), in which he invokes his 1992
discharge as the basis for a permanent injunction to prevent the
prosecution of an action filed against him in the San Mateo
County Superior Court ("the state court action") by the
defendant, John Michael Sobrato ("Defendant"), conservator of the
Estate of Ann Sobrato ("Conservatee" or "Ms. Sobrato"). There
are currently two matters before the court. One is a motion to
amend, filed by the Debtor in which he seeks to amend his
complaint to include allegations that the claims made against him
in the state court action were discharged in 1992. The other is
a motion for summary judgment filed by the Defendant in which he
seeks an order that the claims in the state court action were
excepted from discharge under 11 U.S.C. §§ 523(a)(3)(A) and (B)(1)
because his predecessors were unscheduled creditors who had
neither formal notice, nor actual knowledge of the Debtor's
bankruptcy in time to file a nondischargeability complaint and a
creditor's claim.(2)
A hearing on both motions was held on February 12, 1999. Dek
Ketchum, Esq. and Jenny D. Smith, Esq. appeared on behalf of the
Debtor; James H. Seymour, Esq. appeared on behalf of the
Defendant. Having considered the motions, all papers filed
herein in support and in opposition to them, and the arguments of
counsel, for the reasons that follow, the Defendant's contentions
concerning the fraud claims will be sustained.
The court will reserve ruling on the Debtor's motion to amend
until it decides whether Lawrence P. Johnston, the Defendant's
predecessor conservator ("the Defendant's predecessor"), had
actual knowledge of Debtor's bankruptcy in time to file a
creditor's claim with respect to the nonfraud claims before the
July 20, 1990 bar date for such claims. If so, the nonfraud claims in the
state court action were discharged.
The only potential evidence before the court on this issue consists communications involving the
attorneys for the Conservatee and Defendant's precedessor. These communications
(correspondence and notes) are now sealed in chambers until the parties can brief the issue of
whether the attorney-client privilege is applicable to such communications. If these
communications do not show that the Defendant's predecessor had actual knowledge of the
bankruptcy in time to file a claim, or if the privilege applies and the communications cannot be
examined absent a waiver of privilege, then the court will deny the Debtor's motion to amend and
deny injunctive relief against Defendant, permitting him to proceed with the state court action.
This is necessary because as between the Debtor and the Defendant, it will be as though this
bankruptcy never occurred. However, if the communications are not privileged and show that the
Defendant's predecessor did have actual knowledge in time to file a creditor's claim for the
nonfraud claims, then the court will exercise its discretion to hear the fraud claims(3) in this court
and will permanently enjoin prosecution of the nonfraud claims. By doing so it will necessarily
be rejecting Defendant's contentions that the commencement of this adversary proceeding was an
improper attempt by Debtor to obtain the benefit of removing the state court action to this court
beyond the time to do so.
II. Facts
A. The State Court Action
In July 1996, Defendant filed the state court action. In the
action the Defendant seeks recovery from the Debtor for money
paid by Ms. Sobrato to four individuals named the O'Donnells, and
their partnership, Parallax Investments II (collectively "the
O'Donnells"). This money was paid to the O'Donnells pursuant to
an agreement ("the undertaking") by which Ms. Sobrato agreed to
guarantee payment of a judgment that was entered against the
Debtor in another state court suit filed against him by the
O'Donnells.
The state court complaint alleges causes of action against the
Debtor for: (1) fraudulent procurement of the undertaking by
affirmatively misrepresenting its nature; (2) fraudulent
procurement of the undertaking by concealing its nature and
taking undue advantage of the Conservatee's impaired mental
capacity; and (3) reimbursement of sums paid and costs incurred
by a surety pursuant to California Civil Code section 2847.
Presumably, the facts underlying the fraud counts in the state
court action would be used by the Defendant in this court to
support a claim of nondischargeability of the fraud claims under
§§ 523(a)2, 4 or 6, as necessary under § 523(a)(3)(B).
The Debtor did not answer the complaint in the state court
action, but instead brought this adversary proceeding to enjoin
its prosecution on the grounds that any claims asserted in the
state court action were discharged in the Debtor's bankruptcy
1992.
B. The Conservatorship
On October 24, 1986, a voluntary petition for the appointment of
a conservator of the estate of Ms. Sobrato was filed in the San
Mateo Superior Court. On or around the same date, John A.
Sobrato (the "original conservator") was appointed temporary
conservator of Ms. Sobrato's estate. On November 17, 1986, this
appointment was made permanent. The conservatorship of
Ms. Sobrato's estate has existed continuously from the date that
the Defendant was appointed as the temporary conservator until
the present. Defendant's predecessor replaced the original
conservator on March 29, 1990 and Defendant's predecessor was
replaced by Defendant in April, 1992.
The order of conservatorship authorized the conservator to
independently exercise certain powers, and to prosecute and/or
defend five legal actions that were pending against the
Conservatee as well as " . . . any other legal action commenced
during the conservatorship . . . ." The order also expressly
authorized the conservator to employ attorneys, and any other
persons necessary to protect the Conservatee's interest in the
legal matters. The order expressly reserved to Ms. Sobrato the
power to manage certain of her assets. The order did not mention
the Debtor, the O'Donnells or the undertaking. Nor did it
specifically mention who was to manage any bankruptcy matters in
which Ms. Sobrato may have an interest.
On November 19, 1986, the Debtor and his wife filed a voluntary
Chapter 7 bankruptcy in this court. The Debtor's initial
bankruptcy schedules did not include Ms. Sobrato, the original
conservator, Defendant or the Defendant's predecessor. On April
1, 1987, the Debtor filed amended schedules which listed Ms.
Sobrato, but not the original conservator, Defendant or
Defendant's predecessor. The deadline for filing
nondischargeability actions was set for April 20, 1987. Because
the case was originally a no asset case, no bar date was set for
the filing of creditors' claims. Assets were eventually brought
into the bankruptcy estate and thereafter the court set a July
20, 1990 bar date for creditors' claims. Neither the original
conservator, Defendant, the Defendant's predecessor, nor Ms.
Sobrato filed a nondischargeability complaint, nor did they file
a creditor's claim. A discharge was granted in 1992.
In December, 1986 and January, 1987, well before the April 20,
1987 bar date, the Debtor contends that Ms. Sobrato obtained
actual knowledge of the Debtor's bankruptcy through a series of
conversations with, and a letter from, him in which he advised
her of his bankruptcy.(4) However, it is conceded by Debtor that
the original conservator, Defendant and Defendant's predecessor
had no actual knowledge of the Debtor's bankruptcy before the
April 20, 1987 bar date.
III. Issue
The only issue disposed of by this Memorandum Decision is whether, as a matter of law, actual
knowledge by the Conservatee, Ms. Sobrato, is relevant in determining if a " . . . creditor had
notice or actual knowledge . . . " of the Debtor's bankruptcy case under § 523(a)(3)(B) before the
April 20, 1987 bar date for nondischargeability actions.
IV. Discussion
Under § 523(a)(3)(B) unscheduled debts of the kind specified in §
523(a)(2), (4) and (6) are generally excepted from discharge if
not scheduled in time to permit a timely request for a
determination of nondischargeability. However, § 523(a)(3)(B)
contains an exception which applies in those cases where, despite
being unscheduled, a creditor had notice or actual knowledge of
the case in time to file such a request. If this exception
applies, then any unscheduled debts of the kind listed above are
discharged.
Debtor focuses on the phrase "actual knowledge". He contends
that the state court action must be enjoined and the fraud and
the nonfraud claims determined to have been discharged because
the Conservatee had actual knowledge of the his bankruptcy well
before this date.(5) In support of his position he relies on the
communications he says occurred between him and the Conservatee
in December, 1996 and January, 1997.
The Defendant focuses on the term "creditor". He contends that
any actual knowledge by the Conservatee is irrelevant in
determining whether a creditor had actual knowledge of the
bankruptcy case because, by virtue of the conservatorship, the
conservator, not the Conservatee, was the creditor who must have
had actual knowledge of the case before the § 523(a)(3)(B)
exception applies.
The court agrees with the Defendant's characterization of the
issue in this case. The question is whether the Conservatee or
the conservator is the creditor whose actual knowledge is
critical. The answer depends on the effect of the
conservatorship on the Conservatee's status as a creditor under
the Bankruptcy Code.
§ 101 (10)(A) defines a creditor as an
"entity that has a claim against the debtor that arose at the
time of or before the order for relief concerning the debtor . .
. " (emphasis added).
An "entity" is defined in § 101(15) as a
"person, estate, trust, governmental unit, and United States
trustee." (emphasis added).
The conservatorship in this case is over Ms. Sobrato's estate.
An estate is an entity under § 101(15). If the conservatorship is
the entity that has a claim against the Debtor, then it is a
creditor under § 101(10)(A), and the conservator, must have had
actual knowledge of the case under § 523(a)(3)(B).
Sections 101(5)(A) and (B) generally define a claim as any right
to payment, or an equitable remedy for breach of performance if
the breach gives rise to a right to payment. The Bankruptcy Code
is silent, however, on the issue of who has a claim when a state
court orders a conservatorship over the estate of party who had
contracted with a Debtor prior to the Debtor's bankruptcy. "When
the Bankruptcy Code is silent, and no uniform bankruptcy rule is
required, the rights of the parties are governed by the
underlying nonbankruptcy law." Klein v. Deicas (In re Klein),
137 B.R. 51, 54 (Bankr. S.D. Cal. 1992) citing, Butner v. United
States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136
(1979). Accordingly, the court looks to California
Conservatorship law.(6)
Cal.Prob.Code § 1872 states that:
"(a) Except as otherwise provided in this article, the
appointment of a conservator of the estate is an adjudication
that the conservatee lacks the legal capacity to enter into or
make any transaction that binds or obligates the conservatorship
estate." (emphasis added).
Cal.Prob.Code § 1870 gives a very broad definition of
transaction. That section provides as follows.
"As used in this article, unless the context otherwise requires,
transaction includes, but is not limited to, making a contract,
sale, transfer, or conveyance, incurring a debt or encumbering
property, delegating a power, and waiving a right."
The parties have not cited, nor has the court found California
case law directly on point. However O'Brien v. Dudenhoeffer, 16
Cal.App.4th 327, 335, 19 Cal.Rptr.2d 826, 831 (1993), cited by
the Defendant, is instructive. In that case the court held that
an order appointing a temporary conservatorship was an
adjudication that the conservatee lacked capacity to give away
her property. Id. at 335. While the precise holding of this
case (power and authority in a temporary conservatorship) is
inapplicable here, the court gave a detailed summary of the
statutory history of California conservatorship law and the
interrelationship between Cal.Prob.Code §§ 1872 and 1870. The
court eventually reasoned that giving away property was a
transaction which, because of the conservatorship, the
conservatee lacked the capacity to carry out.
The court finds in this case that the order of conservatorship
read in conjunction with Cal.Prob.Code § 1872, supports the
conclusion that the Conservatee lacked the capacity to file a
nondischargeability complaint, regardless of whether she had
actual knowledge of the Debtor's bankruptcy and regardless of the
fact that the commencement of the conservatorship was a voluntary
act by Ms. Sobrato. Filing a nondischargeability complaint is a
transaction that would either bind or obligate the
conservatorship estate. Because of this incapacity only the
conservator would be the person who could complete this
transaction. Therefore, he was the creditor as that term is
defined in the Bankruptcy Code and, as such, under § 523(a)(3)(B)
he must have had notice or actual knowledge of the Debtor's
bankruptcy in time to file a nondischargeability complaint. The
court also finds that because the term transaction under Cal.Prob.Code § 1870 includes waiving a
right, once the original conservator was appointed, the Conservatee also lacked the capacity to
waive any rights she may have had with respect to the Debtor's bankruptcy, or the undertaking.
Moreover, the order of conservatorship also supports this
conclusion. The conservatorship did not encompass the entire
estate of the Conservatee, but it did give the Conservator the
power to " . . . pay, collect, compromise, arbitrate, or
otherwise adjust claims, debts, or demands upon . . ." the
conservatorship. It also gave the conservator the power to hire
attorneys. In addition, the estate included five specific causes
of action as well as the authority to prosecute or defend " . . .
any other legal action commenced during the conservatorship . . .
."
While it is true that five items were specifically excluded
from the conservatorship estate,(7) these items, unlike those
delegated to the conservator, are not related to prosecuting or
defending legal actions. Except for the management of the Menlo
Park apartment house, the items reserved to Ms. Sobrato appear to
be personal, nonbusiness matters. There is nothing to suggest
that she, instead of the conservator, would be responsible for
legal matters such as those that eventually occurred in the state
court involving the O'Donnells and the Debtor. Thus, consistent
with the conservatorship order, any nondischargeability actions
were within the conservatorship estate such that the conservator
would be responsible for their prosecution. Accordingly, he was
the creditor entitled to notice.
The court is mindful of the Debtor's contention that allowing the
Defendant to prosecute the fraud claims after the bar date in
this case would offend the "fresh start" policy of the Bankruptcy
Code. However, given that the Debtor will still have an
opportunity to defeat such claims, and the State of California's
interest in protecting those who are in need of a
conservatorship, the court finds that, on balance, the Defendant
must prevail at this point.
V. Conclusion
In accordance with the above, the court is prepared to grant
Defendant's motion for summary judgment, in part. Before
entering an order to that effect, however, the remaining issues
concerning the nonfraud claims and the claim of privilege must be
resolved. To that end the court will conduct a status
conference on April 16, 1999 at 11:00 a.m. Counsel should not file any
additional papers before the conference. If the scheduled date and time are inconvenient, counsel
may contact Ms. Virginia Belli (415-268-2323) to set a different time and date for the conference.
Dated: March 29, 1999
______________________________
Dennis Montali
United States Bankruptcy Judge
1. Unless otherwise indicated, all statutory section references are to the Bankruptcy Code, 11
U.S.C. §§ 101 et seq.
2. The aspect of Defendant's motion dealt with in this Memorandum Decision is based on §
523(a)(3)(B), those claims in the state court action that, if proved, would have been excepted
from discharge under either §§ 523(a)(2), (4) or (6). In this decision these claims will be referred
to as the "fraud" claims.
The remaining claim(s) in the state court action are for reimbursement of sums paid and costs
incurred by a surety pursuant to Cal.Civ.Code § 2847, and will be referred to as the "nonfraud"
claims. These are claims that are nondischargeable under § 523(a)(3)(A) unless the unscheduled
creditor had knowledge of Debtor's bankruptcy in time to file a proof of claim.
3. Defendant still must prove those fraud claims.
4. For purposes of this decision the court will assume that these communications actually
occurred. The court notes that Defendant maintains that these communications never took place.
In view of the decision reached here, whether or not they took place is irrelevant.
5. If Conservatee's knowledge is sufficient to discharge the fraud
claims, it follows that such knowledge would also be sufficient
to discharge the nonfraud claims.
6. The California Guardianship-Conservator statutes are found in division 4 of the Probate Code,
§ 1400 et seq.
7. These items were: (1) a Bank of America commercial bank account (2) a savings account at
the same bank; (2) a Merrill Lynch securities account; (4) a Menlo Park, California, apartment
house; and (5) an Atherton, California, resid
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