Judge: Serena R. Murillo, Case: 19STCV36676, Date: 2022-09-12 Tentative Ruling
Case Number: 19STCV36676 Hearing Date: September 12, 2022 Dept: 29
Valerie Valdez v. Grill Concepts,
Inc. et al.
Motion to Proceed with State Court
Action for the Sole Purpose to Recover from Defendant’s Insurer filed by
Plaintiff Valerie Valdez
TENTATIVE
Plaintiff Valerie
Valdez’s motion to proceed with this state court action for the sole purpose to
recover from Defendant’s insurer is GRANTED.
Legal
Standard
The Bankruptcy Code provides that a discharge of a debtor
“(1) voids any judgment at any time obtained, to the extent that such judgment
is a determination of the personal liability of the debtor with respect to any
debt discharged . . .; [and] (2) operates as an injunction against the
commencement or continuation of an action, the employment of process, or an
act, to collect, recover or offset any such debt as a personal liability of the
debtor . . . .” (11 U.S.C. § 524(a).) However,
the “discharge of a debt of the debtor does not affect the liability of any
other entity on, or the property of any other entity for, such debt.” (Id., § 524(e).)
Discussion
Plaintiff moves for an order to
allow her to proceed with this state court action for the sole purpose to
recover from Defendant’s insurance policy after Defendant’s discharge from the
bankruptcy court.
On April 28, 2021, Defendant filed
Voluntary Petitions under Chapter 11. (Green Decl.; Exh. A to Exh. 1) On April
30, 2021, Defendant filed and served a Notice of Stay in Proceedings
(Bankruptcy). (Id., ¶ 4; Exh. 1)
On October 5, 2021, Plaintiff’s
counsel signed a stipulation between Defendant/Debtor and Plaintiff to modify
the stay in order to allow Plaintiff to prosecute this state court action
solely for the purposes of liquidating the claim in order to pursue any
available insurance coverage, provided that such recovery is not made from the
assets or properties of any of the related parties of the bankruptcy action and
would not result in any cost to Defendant or any of the released parties. (Id.,
¶ 5.) Bankruptcy counsel for Defendant signed the stipulation on November 12,
2021 and subsequently filed it with the bankruptcy court on November 15, 2021.
(Id., Exh. 2.)
On October 22, 2021, the Bankruptcy Court
confirmed the Debtors’ Joint Plan of Reorganization, which discharged the
Debtors’ pre-effective date claims.
In November 2021, Plaintiff’s counsel’s
office was served with the Notice of Entry of the Confirmation Order which
reiterated that the Bankruptcy Court issued a discharge injunction: “Paragraph
13 of the Confirmation Order contains an injunction that provides as follows:
13. Injunction. The satisfaction, releases, and discharge pursuant to the Plan
shall also act as an injunction against any Person commencing or continuing any
action, employment of process, or act to collect or recover any Claim or cause
of action against the Debtors or the Reorganized Debtors and are satisfied,
released, or discharged under the Plan to the fullest extent authorized or
provided by the Bankruptcy Code, including, without limitation, to the extent
provided for or authorized by sections 524 and 1141 thereof.” (Id., Exh. 5.)
The parties’ stipulation to modify
the stay to allow Plaintiff to prosecute this state court action against
Defendant’s insurer was denied by the Bankruptcy Court. (Id., 8; Exh.
4.) The order denying the stipulation stated the court issued an order
confirming Second Amended Joint Plan of Reorganization and Defendant/Debtor
were discharged effective November 8, 2021. As a result, the automatic stay
terminated and is no longer in effect. The order denying the stipulation
further stated, “Because the automatic stay has already terminated, the Court
cannot approve the Stipulation purporting to modify the automatic stay,” and “If
the parties file a stipulation that modifies the discharge injunction described
in paragraph 13 of the Confirmation Order, the Court will consider approval of
such stipulation.” (Id.)
Plaintiff argues that the discharge injunction does not
preclude Plaintiff from proceeding with this state court action when pursued
solely to recover from Defendant’s insurance.
In Forsyth v. Jones (1997) 57 Cal. App. 4th
776, 780-81, the court of appeal held that “Section 524 permits an action
against a discharged debtor to fix the liability of the debtor’s
insurers.” (Forsyth v. Jones (1997) 57 Cal. App. 4th
776, 782.) The Forsyth explained: “‘Together, the language of [U.S.C. section 524(a) and
section 524(e)] reveals that Congress sought to free the debtor of his personal
obligations while ensuring that no one else reaps a similar benefit.’
Thus, it is clear that, following discharge, a plaintiff or other creditor may
not seek to hold the debtor personally liable for any debt, but may proceed
against either a co-debtor or a surety or guarantor who guaranteed the debtor's
payment of that debt.” (Forsyth v. Jones (1997) 57 Cal. App. 4th
776, 780-81 (citations omitted).) “’Most courts have held that the scope
of a section 524(a) injunction does not affect the liability of liability
insurers and does not prevent establishing their liability by proceeding
against a discharged debtor.’” (Id. at 781 (citation
omitted).)
Here, the Court
finds that under Forsyth, Plaintiff may proceed with this state court
action against Defendant solely to fix the liability of Defendant’s insurers. As to whether the
plaintiff should seek relief in federal court from the section 524 injunction
by seeking a modification of the injunction, the court in Forsyth held
that “there is no need to seek relief from an injunction which does not extend
to the action in which you wish to engage. Subdivision (a) of section 524 does not enjoin an action against a
discharged debtor when pursued
solely to recover from the debtor's insurer. (Id.)
In Opposition, Defendant argues that
Plaintiff has failed to execute a stipulation modifying the discharge
injunction, even though Defendant offered Plaintiff the opportunity to do so.
Defendant argues Plaintiff’s moving pleadings fail to identify any case law
which permits Plaintiff to proceed against a carrier without relief from the
bankruptcy court first. Defendant then broadly argues pursuant to the Supremacy
Clause, this court is bound by federal bankruptcy law and the orders of the
federal bankruptcy court. Then, Defendant argues, allowing plaintiff to proceed
with claims against Defendant that have been discharged by a bankruptcy court
would violate the Supremacy Clause of the United States Constitution as it would
constitute a violation of the discharge injunction.
However, as
discussed above, Plaintiff relies on Forsyth, which expressly held that
section 524 (the discharge statute) permits an action against a discharged
debtor to fix the liability of the debtor’s insurers. This is
precisely what Plaintiff is seeking to do here. As Plaintiff is pursuing the
claim to recover from Defendant’s insurer, the discharge injunction is not
violated. (Forsyth v. Jones, 57 Cal. App. 4th at 782.) As more support, Plaintiff relies
on the opinion of the Ninth Circuit Bankruptcy Appellate Panel in Patronite
v. Beeney (In re Beeney) 142 B.R. 360, 363 (9th Cir. BAP 1992),
which held that reopening the bankruptcy case was unnecessary to pursue a
lawsuit because the discharge injunction
did not bar victim from pursuing postdischarge lawsuit solely to determine
debtor's liability for an accident so that the victim could collect damages
under the debtor's insurance policy.
Moreover, nowhere
in the bankruptcy court’s order denying the stipulation does it say that
obtaining a stipulation modifying the discharge was the only course of action
for Plaintiff to proceed in this case. As such, there has been no violation of
the bankruptcy court’s order either.
Conclusion
Accordingly,
Plaintiff’s motion to proceed with this state court action for the sole purpose
to recover from Defendant’s insurer is GRANTED.