IN RE BLIVEN, (Bankr.E.D.Va. 1997)

Case No. 96-15758-SSMUnited States Bankruptcy Court, E.D. Virginia
February 26, 1997

Neil Spencer Welles, Esquire, Robert A. Ades Associates, P.C., Springfield, VA, of Counsel for the debtors

MEMORANDUM OPINION AND ORDER
STEPHEN MITCHELL, Bankruptcy Judge

A hearing was held in open court on February 24, 1997, on the “Motion to be Removed as a Creditor on [sic] the Case” filed on January 13, 1997, by Brenda P. Morris. At the conclusion of the hearing, the court ruled from the bench that the motion would be denied, since Ms. Morris did in fact hold a claim against the debtor and since it appeared that the movant’s real concern C her potential liability to the debtors on a $7,500 promissory note C was not properly before the court. The purpose of this memorandum opinion is to explain more fully, for the benefit of the parties, the reasons for the court’s ruling, particularly in the event a subsequent action is brought in a nonbankruptcy forum.

Facts
The debtors, Christopher B. Bliven and Jennifer L. Bliven, filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court on October 18, 1996. At that time they held legal title to a house located at 13211 Hawthorn Lane, Dale City, Virginia. Equitable ownership, however, lay with Brenda Morris, who was purchasing the house from the debtors under a contract for deed dated August 30, 1996. Under the contract for deed, Ms. Morris assumed the

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existing deed of trust held by Countrywide Mortgage Corporation and gave the debtors a $7,500 promissory note. The note included interest at 7.5% and was repayable in 60 monthly installments of $150.28.

The debtors listed the note on their schedules as having a market value of $7,500.00, but, for reasons that are far from clear, listed the value of their interest in the note as being worth only $150.00, which is the amount they claimed exempt on a homestead deed. They did list the amount of the monthly note payments as income on their schedule of current income. Ms. Morris was listed as an unsecured creditor in the amount of $101,232 based on “monies owed in contribution for assumable mortgage.” On November 26, 1996, an amended schedule of executory contracts was filed reflecting a “5 year real estate contract” with Ms. Morris.

Ms. Morris stated at the hearing that she believes the debtors misrepresented the condition of the property when they sold it to her. It was not clear from her statement at what point she became aware of the misrepresentations or when she first voiced her belief that she had been cheated. In any event, she did not file a complaint under § 523(c), Bankruptcy Code, to determine the dischargeability of any claim for fraud she might have against the debtors, and the time for filing such complaints expired on January 13, 1997. On January 24, 1997, the debtors were granted a discharge of their dischargeable debts.

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Discussion A.
For bankruptcy purposes, a “creditor” is defined as “[an] entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor.” § 101(10), Bankruptcy Code. A “claim” in turn is defined as a

(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.

§ 101(5), Bankruptcy Code. Given this definition, it is clear that Ms. Morris held a claim against the debtors at the time they filed their petition and was properly listed as a creditor. Under the contract for deed, she made payments to them not only on account of the $7,500 note but also on account of the existing first deed of trust. If they failed in turn to apply those payments to the deed of trust, Ms. Morris’s equitable interest in the property would have been wiped out when the lender foreclosed. Although it is not clear that “contribution” is the correct description of the resulting claim, it seems clear enough that Ms. Morris did hold a contingent claim against the debtors that would become fixed if the debtors defaulted on their obligation to pay the deed of trust. More importantly, once Ms. Morris knew, or should have known, of the fraud she now says was perpetrated on her, her right (assuming that there actually was fraud) either for damages or for the equitable remedy of rescission clearly fell within the definition of a bankruptcy “claim.” Accordingly, there was nothing improper in the debtors listing her as a creditor on their

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bankruptcy schedules. For that reason, the motion before the court C at least as it is articulated C must be denied.

B.
At bottom, though, it does not appear that this motion is really about being listed as a creditor. What Ms. Morris is actually complaining about is that, if she is listed as a creditor and her claims are discharged, she is (a) without a remedy for the fraud that she believes was practiced on her and (b) would remain liable to the debtors on account of the $7,500 note.

A chapter 7 discharge discharges an individual debtor from “all” prepetition debts except those specified in § 523(a), Bankruptcy Code. § 727(b) Bankruptcy Code. With respect to many of the categories of nondischargeable debts specified in § 523(a) C such as alimony and child support, certain taxes, debts not timely listed, damages arising from driving while intoxicated, and certain student loans C no particular action need be taken in the bankruptcy case to preserve the issue of nondischargeability, and state courts have concurrent jurisdiction with bankruptcy courts to determine whether the debt has been discharged. However, with respect to other categories of debts C those specified in “523(a)(2), (a)(4), (a)(6), and (a)(15), Bankruptcy Code C the rule is different. Only the bankruptcy court may make a determination of dischargeability, and even then only if a complaint seeking such determination is filed within 60 days of the first date set for the meeting of creditors. § 523(c), Bankruptcy Code; F.R.Bankr.P. 4007(c). The time may be extended, but only if the motion to extend is filed before the original time has expired. F.R.Bankr.P. 4007(c) and 9006(b)(3). Ms. Morris’s claim

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for fraud is a claim of the type described in” 523(a)(2), Bankruptcy Code,[1] and since a timely complaint was not filed to determine dischargeability, the claim has been discharged.[2] Under § 524(a)(2), Bankruptcy Code, the discharge operates as an injunction against “the commencement . . . of an action . . ., or any act, to collect, recover or offset any such debt as a personal liability of the debtor.” There is no question, therefore, that Ms. Morris is barred from bringing suit against the debtors for damages arising from the alleged fraud.

It is far from clear, however, that the discharge would necessarily bar a suit against the debtors the object of which was limited to cancellation of the note based on the alleged fraud, provided no affirmative recovery were sought. That thorny issue is not currently before the court, and the court expressly makes no ruling. It is clear, however, that § 553, Bankruptcy Code,

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expressly preserves a creditor’s right of setoff.[3] Although a discharged prepetition liability cannot be offset against sums to which the debtors become entitled postpetition, a discharged prepetition liability can be offset against sums owed to the debtor prepetition. In re Conti, 50 B.R. 142, 147-149 (Bankr. E.D. Va. 1985) (Shelley, J.). During the bankruptcy case itself, the exercise of the right of setoff is subject to the automatic stay, but once the automatic stay expires, a setoff, if otherwise proper, may be effected even though the debtor’s liability to the creditor has been discharged Id. In this respect, a right of setoff is similar to a lien or security interest. Just as liens, unless avoided, pass through bankruptcy and may be enforced in rem against the debtor’s property following discharge, Johnson v. Home State Bank, 501 U.S. 78, 81-83, 111 S.Ct. 2150, 2153, 115 L.Ed.2d 66 (1991), a right of setoff likewise survives the debtor’s discharge. Conti, 50 B.R. at 149. Thus, if Ms. Morris is sued by the debtors on the contract for deed or on the promissory note, she may, without violating the discharge injunction, assert her fraud claim as a setoff (up to the amount of the debtors’ claim against her) but may not seek an affirmative judgment.

At this point, however, there is no issue properly framed and before this court for determination. No suit has been filed by Ms. Morris against the debtors, no action has been filed by the debtors against Ms. Morris, and no setoff been attempted. Thus there is no occasion for

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the court to declare the rights of the parties. The issue of whether a valid right of setoff exists is determined by state law and may appropriately be determined by a state court if litigation is brought.

ORDER
It is, accordingly,

ORDERED:

1. The motion to be removed as a creditor is denied.

2. The clerk will mail a copy of this memorandum opinion and order to counsel for the debtors, to Brenda P. Morris, pro se, and to the chapter 7 trustee.