Memorandum Decision re Conservator Entitled to Notice of Bankruptcy
Original Filed March 29, 1999
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.
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.
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.
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.
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.
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
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