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In re Brown

United States Bankruptcy Appellate Panel of the Ninth Circuit

September 3, 2019

In re: CHARLES STUART BROWN and HOLLY ANN BROWN, Debtors.
v.
QUANTUM3 GROUP LLC; MOMA FUNDING LLC, Appellees. CHARLES STUART BROWN; HOLLY ANN BROWN, Appellants,

          Argued and Submitted on October 25, 2018 at Pasadena, California

          Appeal from the United States Bankruptcy Court for the Southern District of California Honorable Louise DeCarl Adler, Bankruptcy Judge, Presiding

          Michael G. Doan of Doan Law Firm argued for Appellants;

          Dennis Winters of Winters Law Firm argued for Appellees.

          Before: SPRAKER, FARIS, and LAFFERTY, Bankruptcy Judges.

          OPINION

          SPRAKER, BANKRUPTCY JUDGE

         INTRODUCTION

         Debtors Charles and Holly Brown appeal the overruling of their objection to creditor MOMA Funding LLC's unsecured proof of claim of $832.30. The Browns objected on the ground that the claim was barred by the applicable statute of limitations. They acknowledge that the statute of limitations had not run when they filed their bankruptcy case but contend that the claim is barred by the applicable statute of limitations because the applicable limitations period expired postpetition before the creditor filed its claim.

         We AFFIRM the order overruling the Browns' claim objection. We agree with the bankruptcy court's conclusion that the time to commence an action on the underlying claim has been continuously tolled by applicable state law since the filing of the Browns' bankruptcy. We publish because no prior published decision has determined whether the discharge injunction triggers the limitations period suspension provided for in the relevant California tolling statute - California Code of Civil Procedure ("C.C.P.") § 356.

         FACTS

         The controlling facts are not in dispute. In August 2012, the Browns commenced their bankruptcy case by filing a voluntary chapter 7[1] petition. Because of an apparent lack of assets, the bankruptcy court did not set a deadline to file proofs of claim, and its notice of the bankruptcy filing instructed creditors not to file proofs of claim.[2] The chapter 7 trustee promptly thereafter issued his final report stating that there were no assets to distribute. Within a matter of months, the Browns received their discharge, and the case was closed.

         In August 2017, roughly four and a half years after the case was closed, the Browns moved to reopen their case. According to the Browns, they recently discovered a potential prepetition personal injury or product liability cause of action. The bankruptcy court entered an order reopening the case, and a new chapter 7 trustee was appointed. The bankruptcy court then issued a notice advising creditors that assets for distribution had been found and set a claims bar date of December 26, 2017, for creditors to file proofs of claim.

         On October 2, 2017, Quantum3 Group LLC signed and filed a proof of claim on behalf of MOMA, as MOMA's agent.[3] MOMA asserted that it held a valid unsecured claim of $832.30. The Browns objected to MOMA's proof of claim as barred by the statute of limitations.[4] The Browns conceded that a four-year limitations period applied under California law, C.C.P. § 337, and that their bankruptcy case intervened before the limitations period expired. Citing C.C.P. § 356, the Browns also conceded that, under California law, the limitations period was tolled as long as the automatic stay prohibited MOMA from instituting a collection action on its claim.

         However, the Browns argued that, once they received their discharge and their bankruptcy case was closed, the automatic stay terminated. The Browns insisted that the limitations period resumed upon the closing of their case and ultimately expired on July 25, 2016. They further maintained that, unlike the automatic stay, the discharge injunction did not prohibit MOMA from suing them. The Browns contended that MOMA should have nominally sued them for the outstanding $832.30 balance solely for the purpose of preserving its rights before the statute of limitations expired. Therefore, they posited that the discharge injunction did not cause a further suspension of the limitations period. Consequently, because MOMA did not file its proof of claim until October 2017, the Browns reasoned that the claim was barred by the statute of limitations.

         In response to the Browns' claim objection, MOMA argued that the tolling provision provided by C.C.P. § 356 was broader in scope than the Browns admitted and was triggered by the Browns' discharge. MOMA pointed to the language of the statute, which provides for a suspension of the applicable limitations period whenever - and so long as - the commencement of an action is stayed by injunction or statutory prohibition. Additionally, MOMA rejected out of hand the Browns' assertion that the discharge injunction permitted MOMA to bring an action nominally naming the Browns as defendants solely for the purpose of preserving their claim.

         After holding a hearing on the claim objection, the bankruptcy court entered an order overruling the objection and allowing the claim. The bankruptcy court explained that, pursuant to C.C.P. § 356, the discharge injunction suspended the applicable limitations period. According to the court, the Browns' argument that the discharge injunction did not trigger C.C.P. § 356 was unsupported by any persuasive authority and was at odds with the plain language of the statute. The Browns timely appealed.

         JURISDICTION

         The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(B). We have jurisdiction under 28 U.S.C. § 158.

         ISSUES

1. Did the bankruptcy court err when it held that the Browns' discharge injunction tolled the applicable statute of limitations?
2. Did the bankruptcy court abuse its discretion by not holding an evidentiary hearing on the ...

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