A terse, nonprecedential opinion from a circuit court takes on significance when it upholds a lower court decision on the cutting edge of the bankruptcy discharge.
So it was with a two-page, Ninth Circuit per curiam opinion on November 26 upholding a decision by Bankruptcy Judge Christopher M. Klein, who was writing for the Ninth Circuit Bankruptcy Appellate Panel about “the fringes of the bankruptcy discharge injunction” and the meaning of “personal liability of the debtor” in Section 524(a).
The Trust
In 1980, a mother created a revocable family trust to be distributed on her death in equal shares to her three children. The trust permitted the mother to designate lifetime transfers for deduction from the beneficiary’s share of the final estate.
In 2004, the daughter borrowed $75,000 from her mother, evidenced by a note. The daughter received a discharge in 2009 in her no-asset chapter 7 case. In other words, the daughter’s $75,000 debt to her mother was discharged.
Three years later, the mother designated the $75,000 as a lifetime transfer to be deducted from the daughter’s share of the estate. The mother died in 2017.
The daughter objected to the trust trustee’s final report to the state probate court, but the probate court ruled that the mother had intended for the $75,000 lifetime transfer to be treated as an advance on the daughter’s share of the trust.
After losing in probate court, the daughter reopened her 2009 bankruptcy and claimed that the $75,000 had been discharged, but the bankruptcy judge said there was no “debt” to be discharged. The daughter appealed but lost again in Judge Klein’s BAP decision on February 22, 2021. See Mellem v. Mellem (In re Mellem), 625 B.R. 172 (B.A.P. 9th Cir. Feb. 22, 2021). To read ABI’s report, click here.
No Debt Was Being Collected
Upholding the bankruptcy court, Judge Klein said that the outcome turned on “the scope of the protection afforded by the bankruptcy discharge.” Id. at 181. He said that the discharge injunction prohibits an effort at collecting a “personal liability of the debtor.” Id. at 175.
Looking to California probate law, Judge Klein said that treating the $75,000 lifetime gift as an advance “does not amount to collecting a debt ‘as a personal liability’ of the debtor within the meaning of § 524(a)(2).” Id. at 182.
Judge Klein also reflected on the consequences of a ruling to the contrary. It “would amount to ruling that the discharge of a debt in bankruptcy forever bars a testator or settlor of a trust from adjusting a legacy or distribution.” It would also “stretch the concept of ‘personal liability of the debtor’ beyond reasonable bounds and stray into the realm of testamentary dispositions.” Id. at 183.
Judge Klein therefore upheld the bankruptcy court’s decision that the trustee’s actions in the probate court did not amount to collecting a debt. The daughter appealed to the circuit.
The Circuit Affirms
The appeals court heard oral argument on November 18 and handed down its per curiam opinion eight days later.
In its two-paragraph opinion, the Ninth Circuit said that an “advance on an inheritance does not constitute such a personal liability.”
“The BAP, therefore, correctly recognized that an advance is not a loan that can be discharged in bankruptcy proceedings,” the Ninth Circuit said in affirming.
A terse, nonprecedential opinion from a circuit court takes on significance when it upholds a lower court decision on the cutting edge of the bankruptcy discharge.
So it was with a two-page, Ninth Circuit per curiam opinion on November 26 upholding a decision by Bankruptcy Judge Christopher M. Klein, who was writing for the Ninth Circuit Bankruptcy Appellate Panel about “the fringes of the bankruptcy discharge injunction” and the meaning of “personal liability of the debtor” in Section 524(a).