Mellem v. Mellem (In re Mellem), BAP No. CC-20-1174-KTG

625 B.R. 172

IN RE: Lisa Gay MELLEM, Debtor.

Lisa Gay Mellem, Appellant,

v.Carl J. Mellem, Successor Trustee of the Dorothy B. Mellem Revocable Trust, Appellee.

BAP No. CC-20-1174-KTG

Bk. No. 8:09-bk-18441-ES

United States Bankruptcy Appellate Panel of the Ninth Circuit.

FEBRUARY 22, 2021

pro se.

Before: KLEIN,¹ TAYLOR, and GAN, Bankruptcy Judges.

KLEIN, Bankruptcy Judge:

We venture to the fringes of the bankruptcy discharge injunction in this probate dispute to explore the meaning of "personal liability of the debtor" in 11 U.S.C. § 524(a).

Here, the debtor contends that the chapter 7¹ discharge of a $75,000 debt to her mother prevented the mother from thereafter reducing her legacy by $75,000. A probate court ruling that the deceased mother's intention was to treat $75,000 as an advance on an inheritance, prompted the daughter to return to the bankruptcy court, alleging contempt of discharge. The bankruptcy court ruled there was no "debt" being collected "as a personal liability of the debtor;" hence, no contempt.

We agree and AFFIRM because a bankruptcy discharge does not constrain an individual's ability to make a testamentary disposition. We publish to clarify the scope of the § 524 discharge injunction.

FACTS

Appellant Lisa Mellem is a self-represented discharged chapter 7 debtor who has been a member of the California Bar since 2003.

Lisa's mother, Dorothy, who died in 2017, created a revocable family trust in 1980 (hereafter "Trust") into which she transferred all her assets as an estate planning device. The beneficiaries included her three children (Lisa, Carl, and Richard). Lisa's brother, Carl Mellem, is trustee of the now-irrevocable Trust.

In 2004, Lisa executed a promissory note in favor of her mother for $75,000 ("$75,000 Note") on account of inter vivos (or "lifetime") transfers.

In 2009, Lisa filed a chapter 7 bankruptcy case, receiving a discharge in a no-asset case in which no deadline to file claims was fixed. She scheduled about $248,000 in unsecured debt but did not schedule the $75,000 Note to her mother.²

Lisa excuses her omission by saying her mother had told her that she did not have to repay the $75,000 Note, which she took to mean that it was forgiven. Now she contends the debt existed but was discharged.

Dorothy amended the Trust in 2012 to provide for each of her children to receive a 30% final distribution from the Trust and 10% to another person.

The Trust permits Dorothy to designate lifetime transfers that she wanted applied to an individual beneficiary's share of her final estate. In two holographic memoranda dated in 2012 and in 2013, Dorothy listed lifetime transfers of $75,000 and $10,000 with respect Lisa and Richard.

Carl took over as successor trustee in 2014. Dorothy died in August 2017. Attorney Edward Goldkuhl represents Carl in Probate Court.

On April 5, 2018, Carl sent to Lisa and Richard a status report projecting their respective Trust distributions: Carl, $172,920; Richard, $162,920 (=$172,920-10,000); and Lisa, $97,920 (=$172,920-75,000).

He explained the differences in distributions as accounting for lifetime advances of $75,000 to Lisa and $10,000 to Richard.

Lisa objected to the $75,000 reduction from her share. She said Dorothy forgave the $75,000 Note. Later, she interposed her bankruptcy discharge, contending that the $75,000 Note was an unscheduled "debt" that was discharged as a matter of law.³

Lisa's objection led Carl, as trustee represented by Goldkuhl, to file in Probate Court⁴ a petition denoted a Request for Instructions as permitted by California Probate Code § 17200. The petition sought a determination that $75,000 and $10,000 should be deducted from Lisa's and Richard's residual shares of the Trust based on Dorothy's intent. The petition was filed June 25, 2018, with hearing set for September 28, 2018.

Carl provided declaration testimony and documentary evidence that Dorothy made writings that she kept in the same place and in the same manner as she kept her trust documents, including holographic notations dated October 15, 2012, and June 26, 2013, specifying $75,000 and $10,000 for Lisa and Richard, respectively.⁵ Carl asserted that these handwritings, among other evidence, reflected Dorothy's intent that the referenced lifetime transfers be treated as advances on the transferees' residual share of the Trust as provided for in Cal. Probate Code § 21135.⁶

Lisa did not file written opposition, despite having had nearly three months of notice of the hearing. Nor was she present at the appointed hearing time on September 28, 2018. The Probate Court granted Carl's petition, determining that Dorothy intended that $75,000 and $10,000 in lifetime transfers to Lisa and Richard be accounted as advances on their residual shares of the Trust.

Lisa thereafter tried to persuade the Probate Court that her bankruptcy discharge warranted reconsideration and revision of its order.⁷ The Probate Court was not persuaded.

Resorting to bankruptcy court, Lisa obtained an order reopening her chapter 7 case and requested an order of contempt. The court thereupon ordered Carl and Goldkuhl to show cause why they should not be held in contempt for violation of the discharge injunction.

Upon considering the responses to the show cause order, the judge, without otherwise explaining herself, observed that bankruptcy courts are not appellate courts empowered to overturn Probate Court decisions, ruled that there was no "debt," and denied Lisa's contempt motion. Lisa's motion to reconsider under Civil Rules 59(e) and 60(b), incorporated by Rules 9023 and 9024, was also denied.

This appeal ensued.

JURISDICTION

The bankruptcy court had subject-matter jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(O). Civil enforcement of the discharge injunction of 11 U.S.C. § 524(a)(2) is a core proceeding that a bankruptcy court may hear and determine. We have jurisdiction under 28 U.S.C. § 158.

ISSUES

1. Does the bankruptcy discharge injunction of 11 U.S.C. § 524(a)(2) forbid a testator or settlor of a family trust from reducing a legacy to the discharged debtor?

2. Did the bankruptcy court abuse its discretion by refusing to find contempt and refusing to reconsider its ruling?

STANDARDS OF REVIEW

The scope of the bankruptcy discharge injunction is a mixed question of law and fact to be reviewed either de novo or for clear error, depending upon whether questions of law or questions of fact predominate. U.S. Bank Nat'l Ass'n ex rel CWCapital Asset Mgmt. LLC v. Vill. at Lakeridge, LLC , ––– U.S. ––––, 138 S.Ct. 960, 967-68, 200 L.Ed.2d 218 (2018). As questions of law predominate in this instance, review is de novo.

If the discharge injunction is violated, the bankruptcy court's decision regarding contempt sanctions is reviewed for abuse of discretion. Knupfer v. Lindblade ( In re Dyer ) , 322 F.3d 1178, 1191 (9th Cir. 2003) ; Freeman v. Nationstar Mortg. LLC ( In re Freeman ) , 608 B.R. 228, 233 (9th Cir. BAP 2019).

Denial of a motion for relief under Civil Rules 59 and 60 is reviewed for abuse of discretion. Hansen v. Moore ( In re Hansen ) , 368 B.R. 868, 875 (9th Cir. BAP 2007) ; United Student Funds, Inc. v. Wylie ( In re Wylie ) , 349 B.R. 204, 208 (9th Cir. BAP 2006).

A bankruptcy court abuses discretion if it applies the wrong legal standard or makes factual findings that are illogical, implausible, or without support in the record.

TrafficSchool.com, Inc. v. Edriver Inc. , 653 F.3d 820, 832 (9th Cir. 2011) ; United States v. Hinkson , 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc).

DISCUSSION

As this appeal is from a bankruptcy court's ruling that contempt was not appropriate because the discharge injunction did not forbid the challenged conduct, we begin with basic bankruptcy-related contempt principles before describing pertinent state law and drilling down on the scope of the bankruptcy discharge.

I

Bankruptcy contempt principles subdivide into law and procedure.

A

A bankruptcy court may hold a creditor in contempt for violation of the discharge injunction if "there is no objectively reasonable basis for concluding that the creditor's conduct might be lawful under the discharge order." Taggart v. Lorenzen , ––– U.S. ––––, 139 S. Ct. 1795, 1801, 204 L.Ed.2d 129 (2019).

Subjective good or bad faith is not controlling. While subjective bad faith is not necessary to impose civil contempt sanctions, it sometimes may be sufficient to impose contempt sanctions. Id., at 1802.

Conversely, a contemnor's subjective good faith will not prevent a civil contempt finding when no objectively reasonable basis is present, but good faith may be considered in determining the extent of sanctions to be imposed. Freeman , 608 B.R. at 234 (citing Taggart , 139 S. Ct. at 1802 ); In re LeGrand , 612 B.R. 604, 613 (Bankr. E.D. Cal. 2020) (same).

The Taggart refinements of the civil contempt standard in the bankruptcy discharge context did not otherwise alter a movant's threshold burden of going forward. The moving party still must show at the outset that the alleged contemnor: (1) knew the discharge injunction applied; and (2) intended the actions that violated the injunction. Ocwen Loan Servicing, LLC v. Marino ( In re Marino ) , 577 B.R. 772, 782-83 (9th Cir. BAP 2017), aff'd in part & appeal dismissed in part , 949 F.3d 483 (9th Cir. 2020) (citing Zilog, Inc. v. Corning ( In re Zilog, Inc. ) , 450 F.3d 996, 1007 (9th Cir. 2006) ).

If the movant establishes the threshold elements, the burden of going forward then shifts to the responding party to show that it was impossible comply with the discharge order. Id. at 783.

The ultimate burden of persuasion remains on the movant to show, per Taggart , no objectively reasonable basis for concluding that the alleged contemnor's conduct might be lawful under the discharge order.

B

Rule 9020 prescribes that a motion for an order of contempt made by a party in interest or the United States trustee qualifies as a contested matter under Rule 9014. Fed. R. Bnkr. P. 9014 & 9020.

In contrast, an...