TERRY L. MYERS, Chief Bankruptcy Judge.
Debtor Kristin Dudley ("Dudley") and James Jewett ("Jewett") were divorced on August 1, 2014. Thereafter, Dudley engaged attorney Jeffrey A. Strother ("Strother") to seek a modification of the judgment and decree of divorce.
("Paragraph 5").
On December 18, 2015, a few weeks after the Amended Judgment was entered, Dudley filed a chapter 7 bankruptcy petition.
Dudley's bankruptcy case was closed on November 9, 2016, but she reopened her case in order to file a motion for sanctions against Strother for his attempts to intervene in the divorce case, arguing that his conduct violated her discharge injunction. Doc. No. 53 ("Motion"). Strother objected to the Motion. Doc. No. 56. At a hearing on February 21, 2017, the parties presented evidence and argument and the matter was taken under advisement. Doc. No. 60.
Dudley argues Strother violated the discharge injunction by seeking to enforce Paragraph 5 of the Amended Judgment, and she seeks damages in the nature of contempt. Strother claims he did not violate the discharge injunction because he was only attempting to enforce the provision against Jewitt, not Dudley. While acknowledging that her discharge injunction does not protect third parties like Jewett from liability on debts, see § 524(e), Dudley argues Strother's state court actions were an indirect attempt to collect from her because the provision upon which Strother relied would require Dudley to obtain a loan from Jewett's company, secure that obligation, use the loan funds to pay Strother, and be obligated to repay Jewett on the loan.
A threshold issue, raised by Strother in a conclusory manner, is whether Dudley's claim of discharge violation is barred by a state court ruling and the doctrine of res judicata. See Doc. No. 56 at 9-11. Generally, res judicata (now more properly characterized as claim preclusion) "prohibits lawsuits on `any claims that were raised or could have been raised' in a prior action." In re Nicholas, 556 B.R. 465, 473-74 (Bankr. D. Idaho 2016) (quoting Stewart v. U.S. Bancorp, 297 F.3d 953, 956 (9th Cir. 2002)). Under the doctrine of claim preclusion, a final judgment forecloses "successive litigation of the very same claim, whether or not the relitigation of the claim raises the same issues as the earlier suit." Taylor v. Sturgell, 553 U.S. 880, 892 (2008).
The preclusive effect of a state court judgment is determined by the preclusion rules of the state in which the judgment was issued. 28 U.S.C. § 1738; Gayden v. Nourbakhsh (In re Nourbakhsh), 67 F.3d 798, 800 (9th Cir. 1995). Idaho law applies here and provides that for claim preclusion to bar a subsequent action there are three requirements: (1) same parties; (2) same claim; and (3) final judgment on the merits. Andrus v. Nicholson, 186 P.3d 630, 634 (Idaho 2008); Ticor Title Co. v. Stanion, II, 157 P.3d 613, 618 (Idaho 2007). "The burden of proof for res judicata is on the party asserting the affirmative defense and it must prove all of the essential elements by a preponderance of the evidence." Kootenai Elec. Coop., Inc. v. Lamar Corp., 219 P.3d 440, 444 (Idaho 2009).
Based on the record (including the parties' state court filings that were introduced as exhibits), the Court finds that the same parties are involved here as were before the state court, i.e., Dudley and Strother. In addition, the issue now before the Court—whether Strother's efforts to intervene and enforce the amended judgment of divorce against Jewett violated Dudley's discharge injunction—was ultimately raised and heard below. That came about in the following fashion.
Dudley (along with Jewett) filed a "renewed motion" to amend the Amended Judgment. Ex. 203. A few days later, Strother filed a motion and an amended motion to intervene. Exs. 204, 205. These matters were resolved by the state court's August 5, 2016 order. Ex. 201. That order made two rulings. First, the state court found no good cause to amend and denied Dudley's motion. Second, the state court found that its first ruling rendered Strother's motion to intervene moot and thus denied it as well. Id. at 4-7.
The August 5 order did not address the question of discharge violation. In it, the state court did note that Strother had received stay relief in order to allow him to pursue Jewett. That court further stated that "All parties agree that Strother is precluded from pursuing Dudley for the attorney fees referenced in paragraph 5 of the Amended Judgment because the fees were discharged in bankruptcy." Id. at 4.
In opposing Strother's attempts at intervention, Dudley argued prior to the August 5 order that intervention would be "futile" on the grounds that 1) Dudley's obligation to pay attorneys' fees was discharged and 2) the loan obligation of Jewett and his company was a rejected executory contract. Ex. 207, 208. Dudley did not raise a claim that Strother's intervention motions violated her discharge injunction, though Dudley's state court submissions requested—in general terms and without reference to any discharge violation—an award of her attorneys' fees and costs incurred in responding to the intervention request.
However, following the state court's August ruling, another motion to intervene was filed by Strother in September 2016. Ex. 209. In Dudley's October memorandum in response, Ex. 211, she argued:
Id. at 5-6 (citing Walls v. Wells Fargo Bank, N.A., 276 F.3d 502 (9th Cir. 2002)).
Following an October 2016 hearing, the state court ruled from the bench, but an order was not entered until February 10, 2017. Ex. 213 (the "Order").
Id. at 1-2 (emphasis added).
The third and remaining issue is whether there was a final judgment on the merits. The state court unambiguously denied Dudley's motion for contempt based on alleged violations of the discharge injunction. However, "[f]or claim preclusion to apply, the prior judgment must be a valid final judgment rendered on the merits." Andrus, 186 P.3d at 634 (emphasis added).
E. Idaho Agric. Credit Ass'n v. Neibaur, 987 P.2d 314, 320-21 (Idaho 1999) (citing C.J.S. Judgment § 728 (1997)).
Here, it is unclear whether the state court judgment was "on the merits." The state court denied Strother's motion to intervene and Dudley's request that Strother be found in contempt for violation of the bankruptcy discharge injunction "for reasons stated on the record." Because Strother has failed to provide the Court a copy of the transcript, the Court cannot determine whether the state court's decision was "based on the ultimate fact or state of facts disclosed by the pleadings or evidence." Thus, Strother has not met his burden of proving there was a final judgment on the merits, and the third requirement is unmet.
Strother bore the burden of proof on the claim preclusion argument and has failed to meet that burden. The Court concludes Dudley's claim is not barred by res judicata. However, as explained below, the fact that Dudley's claim is not barred by res judicata does not affect the outcome.
A violation under § 524(a) is sanctioned through the bankruptcy court's § 105(a) contempt powers. Renwick v. Bennett (In re Bennett), 298 F.3d 1059, 1069 (9th Cir. 2002); Walls, 276 F.3d at 507. To justify sanctions, the debtor must prove (1) that the offending creditor knew the discharge injunction was applicable and (2) that the creditor intended the actions which violated the injunction. Bennett, 298 F.3d at 1069. The Ninth Circuit Bankruptcy Appellate Panel recently explained the movant's burden:
Emmert v. Taggart (In re Taggart), 548 B.R. 275, 288 (9th Cir. BAP 2016) (citations omitted).
Dudley met her burden under the first prong. Strother testified at the hearing that he was aware of the discharge injunction and he knew the injunction applied to his claim against Dudley. And, as noted, the state court in the August 2016 order, Ex. 201, expressly noted the parties' stipulation to that effect.
The remaining question is whether Dudley met her burden under the second prong. Strother clearly intended to file motions to intervene and preserve his conceived rights as a third-party beneficiary under Paragraph 5 of the Amended Judgment.
Strother argues that under Idaho law he had a right to enforce Paragraph 5 against Jewett because Strother is a third-party beneficiary of the Amended Judgment.
In Strother's motions to intervene, he attached proposed complaints in intervention should his motion be granted. Exs. 205, 209. In each complaint he noted his prior "demand upon Jewett to pay the $27,726.00." Id. at 3, ¶¶ 8, 11. He then prayed for "an order denying the joint [Dudley-Jewett] motion for modification of the amended judgment and ordering petitioner Jewett to cause JLJ, Inc., to tender, forthwith, the $27,726.00 concerned by paragraph 5 of the amended judgment together with prejudgment interest at the rate of 12% per annum from December 31, 2015, until the money is paid" plus award Strother costs and fees. Id. at 4-5.
Paragraph 5 required Jewett to cause JLJ, Inc. to make a loan to Dudley. While the loan advanced was to be by check jointly payable to Dudley and Strother, Dudley was responsible for securing it and repaying it. Ex. 200 at ¶ 5-6. Though inartful, the proposed complaints in intervention suggest a demand for an order that Jewett (or JLJ, Inc.) tender the funds to Strother directly. Whether Strother could so modify the Jewett-Dudley contractual language, of which he claimed to be third-party beneficiary, is decidedly unclear.
Dudley's approach assumes that any state court ruling granting intervention would necessarily violate her discharge. But intervention could conceivably be allowed without validating Strother's suggested complaint. If Strother were somehow successful at the end of the day in persuading the state court to order Jewett (or JLJ, Inc.) to pay Strother directly, Dudley would not be harmed nor her discharge violated. Recall, when resolving Strother's stay lift request, Dudley expressly stipulated to the entry of an order that:
Order, Doc. No. 38
Dudley thus invited the process that ensued. True, Strother was limited by the stay relief order, and by Dudley's discharge, to pursue only Jewett. Seeking to intervene, and to assert a complaint to require Jewett to tender $27,726.00 (Jewett having previously rejected Strother's demand that he pay that amount), is what Dudley—and the stipulated order—allowed. The record is muddied by the manner in which relief was requested, which had overtones of seeking to require JLJ, Inc. to make the "loan" or otherwise to visit some liability on Dudley. The record certainly leaves questions open as to how, or even if, Strother could effect relief against Jewett without impacting Dudley.
But, the burden here was on Dudley to establish by "distinct, clear, and convincing evidence" that an act of discharge violation occurred and was willful. Taggart, 548 B.R. at 288. Though a violation appears to be suggested since it is hard to credit Strother's contention that Jewett had direct liability to him, the record remains equivocal. After Dudley facilitated the state court process through her stipulation for stay relief, she raised several arguments of futility, executory contract, and other defenses. But only toward the end did she argue discharge violation. Ultimately, for some reason that the parties failed to make clear to this Court, the state court rejected that contention. Though Dudley was able to again assert that contention here, based on the unavailabiltiy of res judicata, she has failed to meet her burden to sustain it.
On the record provided and for the foregoing reasons, the Court holds that Dudley's motion for sanctions, Doc. No. 53, is not barred by the doctrine of claim preclusion, but that she has failed to meet her burden of establishing a discharge violation occurred and sanctions against Strother are justified. The motion will therefore be denied.
