ROBERT H. JACOBVITZ, Bankruptcy Judge.
THIS MATTER is before the Court on the Plaintiffs' Motion for Leave to File First Amended Complaint ("Motion to Amend Complaint") — Docket No. 13. Plaintiffs' original complaint asserted non-dischargeability claims against the Debtor, Jeane Marie Greiner (sometimes called "Debtor"), under 11 U.S.C. § 523(a)(4).
Plaintiffs seek to amend the Complaint to: 1) name Kery Greiner as a defendant; 2) amplify their existing non-dischargeability claims against Ms. Greiner; 3) add several state law claims against Debtor and Kery Greiner; 4) add a non-dischargeability claim against Debtor under § 523(a)(6); and 5) add a request for declaratory judgment under § 524(a)(3) determining that Plaintiffs' community claim is not subject to the discharge injunction against collection from community property acquired after the commencement of Debtor's bankruptcy case. Debtor opposes the Motion to Amend Complaint, asserting that the proposed amendments are time-barred and fail to satisfy the relation-back requirements for the Court to grant leave to amend under Fed.R.Civ.P. 15(c).
At a status conference held August 1, 2014, the Court requested the parties to brief the following issues: 1) whether Rule 15(c) is implicated in this adversary proceeding with respect to adding the non-debtor spouse as a defendant; 2) whether Plaintiffs must seek to name the non-debtor spouse as a defendant within the time limit for filing complaints objecting to the dischargeability of debts in Debtor's bankruptcy case in order to prosecute a non-dischargeability claim based on the wrongdoing of the non-debtor spouse; and 3) whether the timely filing of the Complaint against Debtor is sufficient for purposes of applying § 524. See Order Resulting from Status Conference — Docket No. 20. The supplemental briefing was completed September 29, 2014.
For the reasons explained more fully below, the Court will allow Plaintiffs to amend the Complaint to add a non-dischargeability claim against Debtor under an additional subsection of § 523(a); to amplify their existing claims against Debtor; to add state law causes of action; and to include a request for a declaratory judgment under § 524(a)(3) determining whether Plaintiffs' community claim is subject to the community property discharge injunction. By timely filing a non-dischargeability action against Debtor that included allegations of the non-debtor spouse's wrongdoing, Plaintiffs have satisfied the requirements of Rule 4007(c). Plaintiffs need not name Mr. Greiner as a defendant in this adversary proceeding within the time specified in that Rule in order to obtain a determination of whether after-acquired community property is subject to § 524(a)(3)'s discharge injunction.
Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code on November 14, 2013. See Case No. 7-13-13698 JL — Docket No. 1. Plaintiffs commenced this adversary proceeding on February 5, 2014. See Complaint — Docket No. 1. The original Complaint objects to the discharge of a debt under § 523(a)(4) and contains the following allegations.
Kery Greiner owned a surveying company known as Diamondback Land Surveying Co., a New Mexico corporation ("Diamondback"). Complaint, ¶¶ 8 and 9. Debtor was Diamondback's bookkeeper. Complaint, ¶ 6.c. With Debtor's knowledge and approval, Diamondback sold all of its assets to Blackham, Roman, Gunaji & Associates, Inc. Complaint, ¶¶ 9 and 13. After the sale, Kery Greiner became an employee, officer and director of Blackham, Roman, Gunaji & Associates, Inc., and the corporation changed its name to Blackham, Roman, Greiner & Associates, Inc. ("BRG"). Complaint, ¶ 10. Kery Greiner specifically promised he would provide his surveying services exclusively through BRG. Complaint, ¶ 11. After the sale, Kery Greiner, with Debtor's assistance, secretly continued to perform more than $1 million of surveying services for Diamondback, and issued invoices to practically all of their former clients through Diamondback. Complaint, ¶¶ 21 and 22. In 2009, BRG employed Debtor as its bookkeeper. Complaint, ¶ 20. While employed as BRG's bookkeeper, Debtor sent numerous emails from her BRG work email to surveying clients instructing them to pay Diamondback, not BRG. Complaint, ¶ 24.
Before the commencement of the Ms. Greiner's bankruptcy case, Plaintiffs filed a lawsuit against Jeane Greiner, Kery Greiner and Diamondback in the Third Judicial District Court as Case No. CV-2012-2930. A copy of that state court complaint ("State Court Complaint") is attached as Exhibit H to the original Complaint filed in this adversary proceeding. The State Court Complaint asserted claims for breach of contract, breach of fiduciary duty, conversion, tortious interference with prospective contractual relations, prima facie tort, negligent supervision, aiding and abetting a breach of fiduciary duty and fraudulent misrepresentation. See Complaint, ¶ 26.
The discovery completion deadline in this adversary proceeding was June 24, 2014. See Order Resulting from Scheduling Conference — Docket No. 8. On April 4, 2014, the Debtor filed a Motion to Dismiss under Rule 12(b)(6) ("Motion to Dismiss"). Plaintiffs filed their Motion to Amend Complaint shortly after the completion of the briefing on the Motion to Dismiss. The parties agreed to stay discovery pending disposition of the Motion to Dismiss. See Stipulated Order Granting Unopposed Motion to Stay Discovery — Docket No. 15. The Court decided to defer its ruling on the Motion to Dismiss until after ruling on the Motion to Amend Complaint. As a result, discovery is still stayed. The docket reflects than none of the parties have taken any discovery.
Rule 15, made applicable to adversary proceedings by Rule 7015, governs amendments to complaints. Leave to amend should be freely given when justice requires. See Fed.R.Civ.P. 15(a)(2)("[t]he court should freely give leave when justice so requires."). However, Rule 15 will not permit a plaintiff to add a claim otherwise barred by an applicable statute of limitations unless the original pleading sufficiently put the opposing party on notice of the claims in the amendment such that the new claim relates back to the claims raised in the original pleading. See Fed.R.Civ.P. 15(c); 6A Charles Alan Wright, Arthur R. Miller & Mary Kay Kane,
With one exception not applicable here, whether a proposed claim against an existing party to the action relates back to the original complaint "depends on the existence of a common `core of operative facts' uniting the original and newly asserted claims." Mayle v. Felix, 545 U.S. 644, 659, 125 S.Ct. 2562, 2572, 162 L.Ed.2d 582 (2005)(quoting Clipper Exxpress v. Rocky Mountain Motor Tariff Bureau, Inc., 680 F.2d 1240, 1259, n.29 (9
Plaintiffs' original Complaint included a non-dischargeability claim under § 523(a)(4). With respect to Debtor, the proposed amended complaint adds the following claims under the Bankruptcy Code: 1) a claim objecting to the dischargeability of debt under § 523(a)(6); and 2) a request for declaratory judgment determining that under 11 U.S.C. § 524(a)(3) Debtor is not entitled to a discharge injunction that protects community property of either spouse acquired after commencement of Debtor's bankruptcy case. Debtor contends that the proposed amended complaint against her does not share a common core of operative facts with the original Complaint. She asserts that the original Complaint sets forth a very a limited set of factual allegations that describe only Mr. Greiner's alleged wrongful conduct, but not hers. The Court disagrees.
The original Complaint includes allegations that Debtor knew and approved of Diamondback's sale of all of its assets to BRG and of Mr. Greiner's obligation to perform surveying services exclusively through BRG; that Debtor assisted her husband in secretly continuing to perform more than $1 million of surveying services for Diamondback after the sale; and that while employed as BRG's bookkeeper, Debtor sent numerous emails from her BRG work email to surveying clients instructing them to pay Diamondback, not BRG. Additional factual details are contained in the State Court Complaint attached as an exhibit to the original Complaint filed in this adversary proceeding. The additional counts contained in the proposed amended complaint are predicated on these same set of operative facts, with some amplification. The original Complaint gave the Debtor fair notice of the conduct, transactions, and occurrences that form the basis of Plaintiffs' new claim under § 523(a)(6).
In addition, the original Complaint alleged a core of operative facts based on conduct of both Debtor and her non-debtor spouse that sufficiently placed Debtor on notice of the conduct, transactions, and occurrences that form the basis of Plaintiffs' new request for declaratory judgment under § 524(a)(3) determining whether Plaintiffs' claim is excepted from the community property discharge injunction. The factual allegations of wrongdoing by Mr. Greiner in the original Complaint are the same facts that form the basis of Plaintiffs' request for declaratory judgment under § 524(a)(3).
Plaintiffs have satisfied the requirements of Rule 15(c)(1)(b) for the claims against Debtor under § 523(a)(6) and § 524(a)(3) contained in the proposed amended complaint to relate back to the date of filing of the original Complaint. Plaintiffs may also amplify the factual allegations supporting their existing claims against Debtor asserted in the original Complaint. Debtor has not asserted that she will be prejudiced by amendment of the Complaint. Discovery is stayed pending the Court's ruling on the Motion to Dismiss, and none of the parties has yet engaged in discovery.
Sections 524(a)(1) and (2) impose a discharge injunction that protects the debtor's interests in property from creditors' efforts to collect a discharged debt as a personal liability of the debtor. Section 524(a)(3) goes further. Where only one spouse is a debtor, that section imposes a discharge injunction that protects not only the community property interests of the debtor but also those of the non-debtor spouse arising after commencement of the debtor's bankruptcy case.
11 U.S.C. § 524(a)(3).
A "community claim" is a "claim that arose before the commencement of the case concerning the debtor for which property of the kind specified in section 541(a)(2) or this title is liable, whether or not there is any such property at the time of the commencement of the case." 11 U.S.C. § 101(7). Property specified in § 541(a)(2) includes, with certain limitations, "[a]ll interests of the debtor and debtor's spouse in community property as of the commencement of the case" that is liable for an allowable claim against the debtor or an allowable claim against the debtor and the debtor's spouse. 11 U.S.C. § 541(a)(2)(B).
Under New Mexico community property law, the community property of both spouses is liable for a community debt. See N.M.S.A. 1978 § 40-3-9(B) (defining "community debt" as "a debt contracted or incurred by either or both spouses during marriage which is not a separate debt."). A creditor can collect a community debt from the community property interests of both spouses regardless of which spouse incurred the debt. Id.; N.M.S.A. 1978 § 40-3-11(A)("Community debts shall be satisfied first from all community property . . ."). As a result, if only one spouse files a bankruptcy case and receives a discharge, without the community property discharge injunction, the creditor could still collect the debt from the community property interests of both spouses based solely on the personal liability of the non-debtor spouse. See In re Strickland, 153 B.R. 909, 911 (Bankr.D.N.M. 1995)(explaining that the non-debtor spouse remains liable following the entry of the debtor's discharge; the community property discharge injunction reduces "the sources against which the debt may be enforced")(citation omitted). The community property discharge injunction changes this result.
Under § 524(a)(3), if a community claim against the debtor is discharged, the discharge injunction is effective against the after-acquired community property interests of both the debtor and non-debtor spouse, even though only one spouse filed a bankruptcy case and received a discharge. See Midi Music Center, Inc. v. Smith (In re Smith), 140 B.R. 904, 907 (Bankr.D.N.M. 1992)(explaining that the entry of the discharge in the debtor's bankruptcy case "prohibits creditors from proceeding against community property acquired after the petition was filed, even as against the non-debtor spouse.")(citations omitted). See also First Louisiana Bus. and Indus. Dev. Corp. v. Dyson (In re Dyson), 277 B.R. 84, 93 (Bankr.M.D.La. 2002)("Section 524(a)(3) . . . extend[s] the protections afforded the debtor under § 524(a)(1) and (2) to the debtor's non-filing spouse's interest in the post-petition community as well."); In re Kimmel, 378 B.R. 630, 636 (9
Section 524(a)(3) contains two exceptions. First, the section makes it clear that if a debtor is denied a discharge of a debt, there is no discharge injunction applicable to after-acquired community property interests of either spouse relative to collection of the debt. See 11 U.S.C. § 524(a)(3); Dyson, 277 B.R. at 96 (explaining that, under § 524(a)(3), once a claim excepted from the debtor's discharge, the community property discharge injunction is inapplicable). Second, even if the debtor is granted a discharge of a debt, the discharge injunction does not protect after-acquired community property interests of either spouse relative to collection of the debt where the debt would have been excepted from discharge in a hypothetical bankruptcy case
The purpose of the community property discharge injunction is to protect the debtor's fresh start. See Dyson, 277 B.R. at 93 ("§ 524(a)(3) is a Congressional embodiment of the determination that in community property states . . . the debtor's fresh start should include the continuation of the financial community . . .").
Debtor contends that the Court may not determine under § 524(a)(3) whether the debt allegedly owed Plaintiffs would have been discharged in a hypothetical case filed by her spouse unless her spouse is joined as a defendant in this adversary proceeding. Debtor contends further that it is too late to join her spouse under the time limit imposed by Rule 4007(c). The Court disagrees.
Plaintiffs commenced this adversary proceeding against Debtor within the time required by Rule 4007(c). That Rule provides that "a complaint to determine the dischargeability of a debt under §523(c) shall be filed no later than 60 days after the first date set for the meeting of creditors under §341(a)." Fed.R.Bankr.P. 4007(c). The 60-day period in Debtor's case ended on February 18, 20014. Plaintiffs commenced this adversary proceeding on February 5, 2014.
If the Court denies Debtor a discharge of the debt allegedly owed Plaintiffs under § 523(a), then the discharge injunction will not protect after-acquired community property of either Debtor or her spouse. See 11 U.S.C. § 524(a)(3); Dyson, 277 B.R. at 96 (explaining that once the claim is excepted from the debtor's discharge under § 523, "no further analysis is necessary; the claim is excepted from the general effect of § 524(a)(3)."). However, if the Court determines that the debt should be discharged, the discharge injunction will protect the after-acquired community property of both spouses unless the Court determines that the debt would not have been discharged in the non-debtor spouse's hypothetical case filed on the date Debtor's case was commenced.
Plaintiffs first sought to add Debtor's spouse as a defendant in this adversary proceeding on June 27, 2014, more than four months after time limit specified in Rule 4007(c). There is support for Debtor's position that it is too late for Plaintiffs to add Debtor's spouse as a defendant for purposes of conducting the hypothetical non-dischargeability inquiry under § 524(a)(3). In Strickland, the bankruptcy court found that "for a creditor to properly object to a community property discharge accorded nonfiling spouses in community property states, the creditor must proceed against the nonfiling spouse in a hypothetical case involving the nonfiling spouse, if only one spouse has filed." Strickland, 153 B.R. at 912 (citing Smith, 140 B.R. at 909-910). Strickland further held that "[i]t is the duty of scheduled creditors to object to the hypothetical discharge of the nondebtor spouse, within the time limits set by the bankruptcy code." Id. (citing In re Karber, 25 B.R. 9, 12, (Bankr.N.D.Tex. 1982)). Similarly, Collier on Bankruptcy observes that the alleged wrongdoer non-debtor spouse must "always be made a party to the dischargeability action" and that "complaints to determine the nondischargeability of an . . . obligation of the nondebtor spouse in a hypothetical case commenced by such spouse must be filed within the time period set forth in Federal Rule of Bankruptcy Procedure 4007(c)." 4 Collier on Bankruptcy ¶ 524.02[3][c] (Alan N. Resnick and Henry J. Sommer, eds., 16
The Court agrees that creditors must act diligently to escape the reach of the community property discharge injunction that protects the community property of both spouses even when only one spouse files a bankruptcy case. The Court also agrees that creditors must file a complaint against the debtor within the Rule 4007(c) time limit to invoke the exception to the community property discharge injunction based on the non-dischargeability of debt in a hypothetical case of the non-debtor spouse. See Kimmel, 378 B.R. at 637 ("The failure by creditors to raise nondischageability and discharge objection issues in a timely manner in the case of the debtor spouse allow the community discharge to be effected.")(emphasis added). The Court is not persuaded, however, that the Rule 4007(c) time limit applies to joinder of the non-debtor spouse.
A close reading of §§ 523(c) and 524(a)(3) together with Rule 4007(c) reveals that the filing of a non-dischargeability complaint against only the debtor within the time specified in Rule 4007(c), seeking a determination that the non-debtor spouse would not have been granted a discharge of a debt in the hypothetical case, is all that is required. Rule 4007(c), by its terms, applies only to "a complaint to determine the dischargeability of a debt under § 523(c)." Actions under § 524(a) are actions to determine the extent of the community property discharge injunction, not to determine the dischargeability of a debt. Read in isolation, Rule 4007(c) does not apply to actions under § 524(a). However, § 524(a)(3), in turn, instructs that actions to determine the extent of the community property discharge injunction based on whether the debt would have been excepted from discharge in the non-debtor spouse's hypothetical case should be "determined in accordance with the provisions of sections 523(c) and 523(d) of this title."
Notwithstanding Rule 4007(c)'s applicability, nothing in § 524(a)(3) requires a creditor to name both the debtor and the non-debtor spouse when seeking a determination that the community property discharge injunction does not protect the debtor due to the alleged wrongdoing of the non-debtor spouse. Section 524(a)(3) is intended and designed to protect the debtor's financial fresh start after discharge,
As a practical matter, it makes sense for a creditor to name the non-debtor spouse as a co-defendant in an action under § 524(a)(3) to bind the non-debtor spouse to the court's findings if he or she files a separate bankruptcy case. Further, some courts have held that due process requires joinder of the non-debtor spouse at least where relief is sought based on that spouses' alleged wrongdoing.
Because the time bar imposed by Rule 4007(c) does not apply to the joinder of Mr. Greiner as a defendant, Plaintiffs need not comply with the relation back requirements of Rule 15(c)(1)(C) to join Mr. Greiner as a defendant. Instead, Plaintiffs may join Mr. Greiner as a defendant under the general amendment provisions of Rule 15(a).
The proposed amended complaint adds the following state law causes of action arising from the same transactions and occurrences described in the original Complaint: 1) a breach of contract claim against Kery Greiner; 2) a breach of fiduciary duty claim against Kery Greiner; 3) a conversion claim against Debtor and Kery Greiner; 4) a claim against Debtor and Kery Greiner for tortious interference with prospective contractual relations; 5) prima facie tort; 6) civil conspiracy; 7) a claim against Kery Greiner for negligent supervision; 8) a claim against Debtor for aiding and abetting a breach of fiduciary duty; and 9) a claim of fraudulent misrepresentation against Kery Greiner. Debtor has not objected to the Motion to Amend Complaint on the ground that all or some of these new claims do not state a claim upon which relief could be granted, thereby making amendment futile. As result, the Court will not address that issue, but will allow Plaintiffs to amend the Complaint to add these claims.
The core of operative facts alleged in the original Complaint are the same core facts that form the basis of Plaintiffs' proposed additional claim against Debtor under an additional subsection of § 523(a). Those same set of facts also form the basis of Plaintiffs' declaratory judgment action under § 524(a)(3). Plaintiffs' proposed amended complaint against Debtor therefore relates back to the filing of the original Complaint. Debtor will not be prejudiced by the proposed amendment.
A plaintiff must assert a request for declaratory judgment under § 524(a)(3) against the debtor within the time limit imposed by Rule 4007(c) to obtain a determination of whether the debt is non-dischargeable in a hypothetical case filed by the non-debtor spouse. But because § 524(a)(3) does not require a plaintiff to name the non-debtor spouse as a defendant to such action, the 60-day period under Rule 4007(c) does not bar a plaintiff from adding the request for declaratory judgment under § 524(a)(3) based on the hypothetical discharge of the debt, provided the facts alleged in the original complaint are sufficient to put the debtor on notice of the alleged wrongdoing of the non-debtor spouse that forms the basis of the plaintiff's claim. A prudent creditor holding an allowable community claim will name both the debtor and the non-debtor spouse when requesting a determination that the community property discharge injunction does not apply when relief is predicated on conduct of the non-debtor spouse. Where, as here, Plaintiffs filed a complaint objecting to discharge of a debt alleging the same core of operative facts upon which their proposed amended complaint seeks a determination that the community property discharge injunction does not apply, Plaintiffs will be permitted to amend the Complaint to join the non-filing spouse. The state law causes of action in the proposed amended complaint likewise arise from the same set of facts alleged in the original Complaint.
Based on the foregoing, the Court will grant the Motion to Amend Complaint. Plaintiffs are permitted in their amendment to amplify their existing allegations against Debtor, to add a non-dischargeability claim under § 523(a)(6), to add their request for declaratory judgment under § 524(a)(3), and to add state law causes of action. Mr. Greiner may also be joined as a defendant. The Court's grant of leave to amend is without prejudice to Plaintiffs filing a further motion to dismiss for reasons other than that the claims are time barred. Because the Court will allow Plaintiffs to amend their Complaint, the pending Motion to Dismiss is moot. The Court will deny that motion without prejudice.
Unless otherwise noted, all statutory references in this decision will be to the Bankruptcy Code, codified in Title 11 of the United States Code.