UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
|DO NOT PUBLISH
This case disposition has no value as precedent and is not intended for publication. Any publication, either in print or electronically, is contrary to the intent and wishes of the court.
TERRYL LOFRANO, No. 98-10991
v. A.P. No. 98-1173
TERRYL LOFRANO, et al.,
Memorandum of Decision
The complaint in this matter is a 19-page hodgepodge of allegations centering around $200,000.00
held in a bank account and another $50,000.00 paid out of the account before Chapter 11 bankruptcy
proceedings were commenced. The debtor and some 15 nondebtors are named defendants Now
before the court is the motion of some defendants to dismiss the complaint and assess sanctions for
violation of the automatic stay. The court will grant the motion with leave to amend, and issues this
decision to extricate all parties from the procedural morass created by the plaintiffs.
Pursuant to FRBP 7001, certain disputes arising during bankruptcy proceedings must be resolved by adversary proceeding rather than motion. These matters are those determined to be of sufficiently serious impact to require the due process protections available in a federal lawsuit. It is not a violation of the automatic stay to file an adversary proceeding in bankruptcy court pursuant toFRBP 7001. In re North Coast Village, Ltd.
, 135 B.R. 641 (9th Cir.BAP 1992). However, that rule does not create any rights. An adversary proceeding cannot be used to circumvent any of the provision of the Bankruptcy Code. Id
., at 644. Plaintiffs' complaint has not been drafted with this principle in mind.
A debtor cannot be sued for money on a prepetition obligation. Such an action is nothing more than a claim. As such, it can only be made by the filing of a proof of claim pursuant to section 501 of the Bankruptcy Code and FRBP 3002(a) ("An unsecured creditor . . must file a proof of claim . .."). An adversary proceeding seeking monetary damages is nothing more than a procedurally improper attempt to file a proof of claim. As the court in North Coast Village
[A]n adversary proceeding against the debtor seeking
to recover on a pre-petition dischargeable claim . . .
could . . . be dismissed and sanctions could be
awarded . . . because the claim should have been
asserted through the claims allowance process.
135 B.R. at 644.
The complaint here seeks damages against the debtor. To the extent plaintiffs seek money
from the estate, the only proper avenue for them is the filing of a proof of claim. To the extent they
seek a nondischargeable judgment against the debtor personally, their remedy is to file an adversary
proceeding contesting dischargeability of the debt. Plaintiffs' claims for money against the debtor will
accordingly be dismissed, without prejudice to the filing of either a proof of claim or a
nondischargeability action, or both.
The complaint seeks monetary damages against nondebtor entities. Not only is the court's
jurisdiction over these entities questionable, but they might be entitled to jury trials which this court is
not interested in undertaking, since they do not involve the estate. Accordingly, the court will abstain
from hearing those issues pursuant to 28 U.S.C. § 1334(c)(1). All such claims will be dismissed,
without prejudice to proceedings in other courts.
The complaint seeks to impose a constructive trust on funds paid to Sonoma Valley Bank. Since
this claim does not appear to impact the bankruptcy estate, the court will abstain from hearing this
claim as well.
The complaint is vaguely drafted as to the $200,000.00. To the extent that plaintiffs claim that
this money belongs to them, they have raised an issue under sections 541(a)(1) and 541(d) of the
Bankruptcy Code which this court must resolve as a core matter pursuant to 28 USC section
157(b)(2).(1) In re United Marine Shipbuilding, Inc
., 198 B.R. 970, 975 (Bkrtcy.W.D.Wash.1996); In re
, 97 B.R. 937, 940 (Bkrtcy.N.D.Ill.1989). Plaintiffs may name nondebtors as defendants in
such a claim, but only for the purpose of determining their rights in the funds.
To the extent plaintiffs admit that the bankruptcy estate owns the funds but that this court
should impose a constructive trust on them, such a claim may also be made. However, plaintiffs are
reminded that imposition of a constructive trust is rare in bankruptcy court, as it would prefer one
creditor over others. Bankruptcy policy is generally not served by creating trusts which eat up an
estate, leaving little or nothing for other creditors. U.S. v. Randall
, 401 U.S. 513, 517 (1971); In re
North American Coin & Currency, Ltd.
, 767 F.2d 1573, 1575 (9th
To summarize, the only proper issue raised in this adversary proceeding is ownership of the
$200,000.00. All other matters may be raised only by proof of claim or dischargeability proceeding as
to the debtor or by action in another court as to nondebtors. No sanctions will be assessed unless
further improper claims are made.
Counsel for moving defendants shall submit an appropriate form of order.
Dated: October 28, 1998 ____________________________
United States Bankruptcy Judge
1. For an appellate case dealing with a creditor's claim to funds held in a bank account in the
debtor's name, see In re Foam Systems Co.
, 92 B.R. 406 (9th