FOR THE NORTHERN DISTRICT OF CALIFORNIA
DAVID HANSON, No. 1-88-01883
ROBERT E. SWEET, et al.,
v. A.P. No. 1-89-0028
Memorandum of Decision
Debtor David Hanson was the chief executive officer of a now-defunct mortgage company.
This dischargeability action, filed by 11 investors "on behalf of themselves and all others similarly
situated," alleges that the debtor participated in the issuance of deceptive investment solicitations
and conducted a "Ponzi" scheme, so that their claims should be excepted from discharge pursuant
to section 523(a)(2) of the Bankruptcy Code.
On March 14, 1989, the court set a date certain of September 20, 1989, for trial. Plaintiffs
delayed bringing the instant motion for class certification until July 24, 1989, and the motion was
not calendared until August 25. Thus, the court must now decide on class certification only three
weeks before trial.
While it is generally stated that bankruptcy is not supposed to be a haven for the dishonest
debtor, there are in fact conflicting policies behind the Bankruptcy Code. One policy is clearly to
keep dishonest persons from escaping civil liability for their dishonest acts; sections 523(a)(2), (4)
and (6) are designed to prevent that. However, another strong policy is the desire to give debtors
a fresh start. Where a debtor has given up all his nonexempt assets, huge nondischargeable
judgments may well benefit nobody. The creditors may throw good money after bad pursuing a
judgment which may never be collectible, and the judgments may keep a reformed debtor from
starting over again and becoming a productive member of society.
Congress has resolved this conflict in policies by giving creditors the right to have dishonestly
incurred claims excepted from discharge, but also creating significant procedural hurdles which
must be overcome before the right can be exercised. These hurdles include the requirement of
section 523(c) of the Code thatan action be commenced in bankruptcy court, and the provisions
of Bankruptcy Rule 4007(c) that allow a "window" of only a few weeks to file such an action.
The rules and applicable case law strictly construe these hurdles against the creditor, so that even
dishonestly incurred debts are discharged if there has not been exact compliance. In re Hill
Cir.1987) 811 F.2d 484.
The court is very concerned that the allowance of class dischargeability actions upsets the
balance created by Congress. Specifically, such actions require a liberal reading of section 523(c),
which has the effect of discharging even dishonest debts unless there has been a timely request to
determine 1 dischargeability filed by the creditor to
whom the debt is owed
. There is no provision which would allow for a creditor to seek
determination of the dischargeability of someone else's claim. Indeed, the law in this circuit is that
a nondischargeability action may not be maintained on another's claim. In re Beugen
1989) 99 B.R. 961.
A few bankruptcy courts have allowed class action dischargeability proceedings, generally
without considering the language of section 523(c). See, e.g., In re Roberts
W.D.Pa.1987) 81 B.R. 354; In re Schlater
(Bkrtcy.E.D.Mich.1984) 40 B.R. 594; Matter of
Wholesale Furniture Mart, Inc.
(Bkrtcy.W.D.Mo. 1982) 24 B.R. 240. Other courts have not
allowed class nondischargeability actions on technical or procedural grounds. See, e.g., In re
(Bkrtcy.N.D.N.Y.1988) 90 B.R. 588. Because these cases finessed what the court sees
here as the central issue, they are of limited assistance.
Section 523(c) has been specifically discussed in a few cases where a state has sought a
nondischargeable judgment on behalf of some of its citizens, without specifically calling it a class
action. See, e.g., In re Cannon
(8th Cir.1984) 741 F.2d 1139; In re DeFelice
(Bkrtcy.D.Conn.1987) 77 B.R. 376; In re Pierson
(Bkrtcy.D.Minn.1982) 17 B.R. 822. Only the
court in DeFelice
read section 523(c) so liberally as to allow dischargeability actions by proxy, and
that decision has been criticized to the extent it would allow a state to bring a dischargeability
action without a state law authorizing the state to sue for itself. In re Black
W.D.Fla.1989) 95 B.R. 819, 823.
The highest authority on class dischargeability actions in this circuit is In re Ross
1984) 37 B.R. 656. In that case, the Appellate Panel held only that a class created to pursue a
non-bankruptcy action does not remain a class for purposes of a subsequent dischargeability
action. It carefully avoided a ruling on the propriety of a class dischargeability action. 37 B.R.
After a full review of the relevant case law, the court is convinced that section 523(c) must be
read as prohibiting class nondischargeability actions. The highest decision, In re Cannon
, and the
highest decision in this circuit, In re Beugen
, both stand for the proposition that nobody has
standing to bring an action under 523(c) based on another's claim. If this results in some claims
being declared nondischargeable while other identical claims are discharged, this is nothing more
than Congress intended and is fully consistent with the policies behind the law.
Because the court rejects the notion of a class dischargeability action, it need not address
whether a class is certifiable here, or if the class certification request is timely. For the
foregoing reasons, the motion to certify the class will be denied. Counsel for the debtor shall
submit an appropriate form of order.
Dated: August 30, 1989 _______________________