Classic Comfort Heating & Supply Co. v. Bates (In re Bates)

In re: BRIAN K. BATES, Debtor.

Classic Comfort Heating & Supply Co., Plaintiff, v. Brian K. Bates, Defendant.

Case No. 19-33971

Adv. No.20-3015

UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF OHIO WESTERN DIVISION

Entered: June 16, 2021

June 15, 2021

Chapter 7

Judge Humphrey

DECISION GRANTING IN PART PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT (DOC. 27) AND DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT (DOC. 25)

I. Procedural Background

Brian K. Bates filed a petition for relief under Chapter 7 of the Bankruptcy Code. Estate Doc. 1. Creditor Classic Comfort Heating & Supply, LLC ("Classic Comfort") commenced a timely adversary proceeding seeking an order denying Bates his discharge pursuant to 11 U.S.C. § 727(a)(2) and (4)(A), and finding any debt owed to Classic Comfort non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A) and (C), to which Bates timely answered. Docs. 1 and 4.

The United States Trustee (the "UST") commenced a separate adversary proceeding seeking to deny Bates his discharge. Doc. 1 - Adv. No 20-3036. Bates and the UST later entered into a stipulation and agreed order through which Bates waived his discharge pursuant to 11 U.S.C. § 727(a)(10).¹ Estate Doc. 29.

Classic Comfort has filed a proof of claim [8-1] in the amount of $20,495.57. The Chapter 7 Trustee's most recent interim report, filed on January 26, 2021, indicates that he is pursuing "possible preferential transfers." (Estate Doc. 31). Nevertheless, it does not appear that the bankruptcy estate currently has any funds. Id.

Classic Comfort has moved for summary judgment, seeking a finding it is owed a debt in the amount of $20,495.57, and that this debt is non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). Doc 27 at 20. Based upon his waiver of discharge, Bates also has moved for summary judgment, or, in the alternative, dismissal of the complaint. Doc. 25. Bates did not contest the proposed factual findings of Classic Comfort as to the liquidation of the asserted debt.

In the Darke County (Ohio) Court of Common Pleas, Case No. 20-CV-00200, Classic Comfort is also litigating the same transaction at issue in this adversary proceeding. Bates Affidavitat ¶ 7 (Doc. 29). Classic Comfort filed the state court complaint on April 29, 2020, six days after this adversary proceeding was filed. Bates Affidavit (Exhibit B). In the state court action, Classic Comfort alleges breach of contract, unjust enrichment, and fraudulent inducement against Bates' apparent girlfriend, Sandra Miller ("Miller"). Id. Bates has taken the position in this adversary proceeding that the only party to any contract with Classic Comfort was Miller. Doc. 7 at 3.

Bates argues in his summary judgment filing that the dischargeability complaint is "simply unnecessary" because he has waived his discharge, and will stipulate that any debt in question is non-dischargeable. Doc. 25 at 6. However, Bates has not agreed to stipulate that he owes a debt to Classic Comfort and the amount of any such debt - only that if he owes a debt, it is nondischargeable as a result of his waiver of his discharge. Classic Comfort argues that since Bates has not agreed he owes Classic Comfort a pre-petition debt, and such a debt is a pre-condition of a finding of non-dischargeability, this court has jurisdiction to determine this adversary proceeding, and particularly, whether a debt exists and, if so, the amount of the debt.

II. Summary Judgment Standard

Federal Rule of Civil Procedure 56(a), made applicable to this adversary proceeding through Federal Rule of Bankruptcy Procedure 7056, sets forth the standard to address the parties' filings. It states, in part, that a court must grant summary judgment to the moving party "if the movant shows that there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). All inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986). Once the moving party has met its burden, the non-moving party must put forth specific facts showing a genuine need for a trial. Id. at 588.

III. Subject Matter Jurisdiction, Constitutional Authority, and Mootness

Although these summary judgment motions come to this court in an unusual procedural posture, some legal principles are clear, at least in the Sixth Circuit. The bankruptcy court has jurisdiction to determine the dischargeability of a debt, and dischargeability actions are core proceedings of the bankruptcy court. 28 U.S.C §§ 1334 and 157(b)(2)(I). Indeed, dischargeability complaints based on fraud, which include 11 U.S.C. § 523(a)(2), (4) or (6), are exclusively for the bankruptcy court to determine. 11 U.S.C. § 523(c); Schafer v. Rapp (In re Rapp), 375 B.R. 421, 430 (Bankr. S.D. Ohio 2007) (citing Dollar Corp. v. Zebedee (In re Dollar Corp.), 25 F.3d 1320, 1325 (6th Cir. 1994)). Bankruptcy courts also have jurisdiction to liquidate a debt as part of a non-dischargeability proceeding. Longo v. McLaren (In re McLaren), 3 F.3d 958, 966 (6th Cir. 1993). In addition, bankruptcy courts have constitutional authority to liquidate a debt when determining dischargeability and may enter final judgment on such debt. Hart v. S. Heritage Bank (In re Hart), 564 Fed. Appx. 773, 777 (6th Cir. 2014). Also, it is a fundamental principle that a dischargeability proceeding requires the creditor to show a debt is owed by the debtor. Weidle Corp. v. Leist (In re Leist), 398 B.R. 595, 601 (Bankr. S.D. Ohio 2008); Lawson v. Conley (In re Conley), 482 B.R. 192, 207 (Bankr. S.D. Ohio 2012). Although a bankruptcy court may liquidate a debt in a non-dischargeability proceeding, the court is not required to do so. Leonard v. RDLG, LLC (In re Leonard), 644 Fed. Appx. 612, 620 (6th Cir. 2016) (citing Hart, 564 Fed. Appx. at 776)).

In addition, subject matter jurisdiction, at least in most circumstances, is established at the time an adversary proceeding is commenced. Holmes Fin. Assocs., Inc. v. Resolution Trust Corp., 33 F.3d 561, 565 (6th Cir. 1994) ("Ordinarily, the subject matter jurisdiction of a court is tested as of the time the action is filed and subsequent changes will not operate to divest a court of its jurisdiction once it has been properly evoked."); Spradlin v. Pikeville Energy Group, LLC, CivilNo. 12-111-ART, 2012 WL 6706188, at *5 (E.D. Ky. Dec. 26, 2012) (similar, citing Holmes). "Like most general principles, this one is susceptible to exceptions[.]" Newman Green, Inc. v. Alfonso-Larrain, 490 U.S. 826, 830 (1989). Bates conceded in his answer the court had jurisdiction. Compare Doc. 1 at ¶ 1, and Doc. 4 at ¶ 1.

One exception is a case in which a court has jurisdiction can become moot. League of Women Voters of Ohio v. Brunner, 548 F.3d 463, 473 (6th Cir. 2008). A case is moot "when the issues presented are no longer 'live' or the parties lack a legally cognizable interest in the outcome." Brunner, 548 F.3d at 473 (quoting L.A. County v. Davis, 440 U.S. 625, 631 (1979)). Mootness concerns the requirement that a "case or controversy" exists. Brunner, 548 F.3d at 473. In re Hake, 398 B.R. 892, 899 (B.A.P. 6th Cir. 2008) (similar). Mootness can be raised at any time because it is "a jurisdictional requirement[.]" Brunner, 548 F.3d at 473.

The question before the court is a narrow one. When an individual debtor is no longer eligible for a statutory discharge, can the court liquidate a disputed debt in a dischargeability proceeding? If Bates conceded the debt in question, the parties agree that this adversary proceeding would be moot.

The relevant case law is, unsurprisingly, limited. In Markwood Invs. Ltd. v. Neves (In re Neves), 500 B.R. 651 (Bankr. S.D. Fla. 2013), the debtor waived his discharge, and, as in this adversary proceeding, a creditor was pursuing a dischargeability proceeding, including the liquidation of the underlying debt. The debtor suggested that the court no longer had jurisdiction after the discharge was waived. Id. at 660. The court disagreed:

The determination [of] whether a claim is non-dischargeable is a core matter. Thus, the filing of this adversary proceeding invoked this Court's core jurisdiction. And, the Debtor admitted, indeed, affirmatively alleged, that this Court's jurisdiction over the entire dispute was core, in his original answer. "It has long been the rule that bankruptcy courts sit as courts of equity ... and once a court sitting in equity has jurisdiction over the parties to a controversy brought before it,the court can decide all disputed matters and decree complete relief." In re Porges, 44 F.3d at 165 (citations omitted); In re Riebesell, 586 F.3d at 793; In re Hallahan, 936 F.2d at 1508; In re Beck Indus., 605 F.2d 624, 634 (2d Cir.1979); Abramowitz v. Palmer, 999 F.2d 1274, 1279 (8th Cir.1993); cf. Alexander v. Hillman, 296 U.S. 222, 242, 56 S.Ct. 204, 80 L.Ed. 192 (1935) (equity receivership case emphasizing the general rule of courts of equity that "having jurisdiction of the parties to controversies brought before them, they will decide all matters in dispute and decree complete relief"). Because liquidation of a claim is, most times, integral to the determination of non-dischargeability of that claim, as well as determination of the debtor-creditor relationship in the bankruptcy case, the liquidation of the claim is tied to the core jurisdiction of the bankruptcy court as well because the dispute and its complete resolution invoke the court's equitable jurisdiction. See Dragisic v. Boricich, 464 B.R. 335 (Bankr.N.D.Ill.2011); In re Carroll, 464 B.R. 293 (Bankr.N.D.Tex.2011); see also Stern, 131 S.Ct. at 2618 (the bankruptcy court's jurisdiction extends to actions that "would necessarily be resolved in the claims allowance process").

The Debtor counters that this Court's core jurisdiction is no longer implicated because once the discharge was waived, and the Claim

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