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Jacobs v. Brain Power America Inc.

United States District Court, D. Nevada

March 2, 2017

Debra Leigh Jacobs, Appellant
v.
Brain Power America, Inc., Appellee Bankruptcy No. BK-04-19619-GS

          ORDER AFFIRMING BANKRUPTCY COURT DECISION

          Jennifer A. Dorsey United States District Judge.

         In 2002, Brain Power America, Inc. obtained a judgment against Debra Jacobs and a lien on her home. A couple years later, Jacobs filed for bankruptcy-but for some reason she did not include Brain Power's judgment or the lien in her filing, so it was not part of the bankruptcy court's discharge order. Brain Power's judgment and lien has thus remained on Jacobs's home ever since, and over the last decade, Brain Power occasionally renewed it to account for accruing interest.

         In 2014, Jacobs finally moved to reopen her bankruptcy case to address Brain Power's lien. Instead of simply seeking to avoid the lien under the applicable bankruptcy code provision, Jacobs moved to hold Brain Power in contempt. She reasoned that Brain Power's renewal of its judgment and lien amounted to an enforcement action against her, which violated the automatic bankruptcy stay and the bankruptcy court's discharge order. Brain Power then moved for sanctions, arguing that Jacobs's contempt motion was frivolous. Cooler heads prevailed: the bankruptcy court found that Brain Power was not in contempt but that the lien should nevertheless be avoided. The court also denied Brain Power's motion for sanctions.

         The parties appeal each of these determinations, but I affirm the bankruptcy court across the board. First, the bankruptcy court did not abuse its discretion in finding that Brain Power was not in contempt. Brain Power's renewal of its preexisting judgment and lien did not amount to an enforcement action that violated the stay or discharge order. And even if it technically did, Jacobs did not show that Brain Power knew that the stay or discharge order applied to its judgment, which is required for contempt. Nor did the bankruptcy court abuse its discretion in declining to impose sanctions on Jacobs for filing her contempt motion; at least some authority supported her position, and there is no evidence that Jacobs filed the motion in bad faith. Finally, the bankruptcy court was within its discretion to hold that Brain Power's lien was avoidable given that Jacobs's home was clearly exempt under Nevada's homestead law.

         Background

         Brain Power obtained a judgment against Jacobs in 2002 and recorded it, perfecting a lien on her home.[1] The next year, Jacobs filed a declaration selecting this same house as her homestead-exempted home under Nevada law.[2] The year after that, Jacobs filed for Chapter 13 bankruptcy Jacobs's bankruptcy case would stay open for four more years, until December 2008 when she received her discharge order.[3]

         During all of this time, Brain Power's judgment and lien remained on Jacobs's home, and Brain Power renewed it twice: once in 2008 while Jacobs's bankruptcy case was ongoing, and again in 2014 long after the discharge order was entered.[4] Finally, in 2014 Jacobs moved to reopen her bankruptcy and hold Brain Power in contempt for renewing its judgment.[5] Brain Power moved for sanctions under Bankruptcy Rule 9011, arguing that Jacobs's motion was frivolous.

         The bankruptcy court denied Jacobs's motion to hold Brain Power in contempt, reasoning that Brain Power did not violate the stay or discharge order by merely renewing a judgment.[6] The court also denied Brain Power's motion for sanctions because adequate law supported Jacobs's motion.[7] But the court nevertheless reopened Jacobs's bankruptcy so she could move to avoid her lien. She did so, and the court granted her motion because Jacobs's home was clearly homesteaded and thus protected from Brain Power's lien.[8]

         Discussion

         A. Standard of Review

         I review the bankruptcy court's decision for abuse of discretion and apply a two-part test.[9] I consider de novo whether the court applied the correct legal standard.[10] But I review the bankruptcy court's findings of fact for clear error.[11] A fact finding is only clearly erroneous "if it was without adequate evidentiary support or was induced by an erroneous view of the law."[12] I "may not simply substitute [my] view" for that of the bankruptcy court.[13] Finally, I may affirm on any basis supported by the record.[14]

         B. The bankruptcy court did not abuse its discretion in holding that Brain Power was not in contempt.

         Jacobs argues that Brain Power violated the bankruptcy court's automatic stay when it renewed its judgment and lien against her home.[15] Jacobs concludes that the bankruptcy court thus abused its discretion by not holding Brain Power in contempt.[16]

         To obtain a contempt order, Jacobs had to show not only that Brain Power technically violated the stay, she also has to show by clear and convincing evidence that Brain Power "knew the [stay] was applicable and intended the actions" that violated it.[17]

         First, the bankruptcy court was right to hold that Brain Power's renewal did not even violate the stay. The automatic stay is a creature of the bankruptcy code. It prevents a creditor from "creat[ing], perfect[ing], or enforc[ing]" a lien, and it prohibits a creditor from "enforcement" efforts against the debtor.[18] What is notably missing is a prohibition on renewing an existing judgment.[19]At heart, the automatic stay is about maintaining the status quo, and renewing an existing judgment does just that. With the exception of an outlier or two, courts generally hold that renewing a judgment does not violate a stay, and I join them.[20]

         Second, even if Brain Power technically violated the stay or order, Jacobs did not show that Brain Power acted willfully. A party should be held in contempt only when it actually knows that a court order applies to it and violates that order regardless.[21] Jacobs did not prove, by clear and convincing evidence, that Brain Power even knew that the stay or discharge order existed, much less that it applied to its judgment. Jacobs offers a tenuous theory that Brain Power was imputed with knowledge of the bankruptcy because its counsel knew of it, but that is not enough.[22] And even if Brain Power had imputed knowledge of Jacobs's bankruptcy, that does not mean that Brain Power knew the stay or discharge order applied to its judgment renewal (particularly given that Jacobs never made any move to include Brain Power's judgment in her bankruptcy case).[23]

         In short, the bankruptcy court had many reasons to decline to hold Brain Power in contempt, so I affirm its decision on this point.

         C. The bankruptcy court did not abuse its discretion in denying ...


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