Lowery v. Minh-Vu Hoang

Friedman, J. The United States Constitution provides that: The Congress shall have [p]ower [t]o ... establish ... uniform [l]aws on the subject of [b]ankruptcies throughout the United States. U.S. Const., art. I § 8, cl. 4. Despite this seemingly clear grant of power, it took Congress a long while to establish federal bankruptcy law, and longer still for it to establish a permanent bankruptcy law that preempted existing state insolvency laws.

Thus, there were long stretches during the 19th century in which Maryland had its own insolvency law that operated alongside, or even instead of, federal bankruptcy law. State insolvency laws were finally preempted in 1898 1 but Maryland's version remained dormant, on the books, until 1975 when it was deleted. 2 One provision of the old state insolvency law, however, survived: a provision that tolls causes of action against a debtor during insolvency proceedings: If a debtor files a petition in insolvency which is later dismissed , the time between the filing and the dismissal is not included in determining whether a claim against the debtor is barred by the statute of limitations. Md. Code, Cts. & Jud. Proc.

("CJ") § 5-202 (emphasis added). 3 Despite the fact that CJ § 5-202 was designed for application to the old state insolvency procedure (and still uses its terminology), the Court of Appeals has instructed us to apply it to current federal bankruptcy cases. Ali v. CIT Tech. Fin. Servs ., 416 Md. 249 , 6 A.3d 890 (2010).

Thus, in Ali , the Court of Appeals held that a "petition in insolvency," as that term is used in CJ § 5-202, must be read to include a modern bankruptcy petition, and held that state claims are preserved by operation of CJ § 5-202 while a debtor is engaged in the federal bankruptcy process. 4 Id. at 270-71 , 6 A.3d 890 . This case follows Ali , but requires us to determine the meaning of the words "dismissed" and "dismissal" as they appear in CJ § 5-202. Lowery proposes a broad interpretation, which would include any termination of a bankruptcy proceeding, not just dismissals. And because every bankruptcy must end, he argues, this statute tolls every creditor claim when a debtor enters bankruptcy, until the bankruptcy ends.

Hoang, by contrast, advocates for a narrower reading that would limit "dismissed" and "dismissal" in CJ § 5-202 to only cases that are "dismissed" in modern federal bankruptcy practice, meaning dismissed under 11 U.S.C. § 707 (a) (providing for dismissal of a Chapter 7 bankruptcy), § 1112(b)(1) (providing for dismissal of a Chapter 11 bankruptcy), or § 1307(b) (providing for dismissal of a Chapter 13 bankruptcy). We will select an intermediate course. FACTS There are three specific facts necessary to understand this case: (1) Hoang incurred a debt to Lowery in 2002; (2) Hoang filed for bankruptcy in 2005 and was denied a discharge; and (3) Hoang received $ 87,000 in 2016 out of which Lowery seeks to be paid for the 2002 debt. We explain the details of each below.

A. The 2002 Debt On April 11, 2002, the Circuit Court for Montgomery County entered a default judgment in favor of Lowery against Hoang for $ 16,987. Lowery has yet to collect on that judgment. With interest, Lowery's judgment totaled over $ 41,000 by July of 2016. A money judgment in Maryland expires after 12 years, unless it is renewed before it expires.

CJ § 5-102(a)(3) (establishing the limitations period). 5 All parties agree that Lowery did not renew that judgment within the 12-year period. Thus, the 2002 debt has been extinguished if it was not somehow extended. B. Hoang's Bankruptcy Hoang petitioned for Chapter 11 bankruptcy protection on May 10, 2005 and the bankruptcy court issued an automatic stay. See 11 U.S.C. § 362 (a) (authorizing an automatic stay).

A bankruptcy trustee was appointed to administer Hoang's bankruptcy estate. For reasons that don't concern us, Hoang's bankruptcy was converted into a Chapter 7 bankruptcy on October 28, 2005. Hoang behaved badly and hid assets from the trustee. 6 As a result, on March 22, 2006, the Bankruptcy Court issued an Order denying Hoang a discharge and lifting the automatic stay. See 11 U.S.C. § 727 (authorizing denial of discharge); In re Packer , 520 B.R. 520 , 533 (Bankr.

E.D.Tex. 2014) ("The denial of a debtor's discharge is akin to financial capital punishment. It is reserved for the most egregious misconduct by a debtor.") (Cleaned up). Thus, Hoang's bankruptcy case remains open: the bankruptcy trustee has not yet finished marshalling her assets and distributing the proceeds to her creditors. We are informed that this process may still take years.

C. The 2016 Recovery In April of 2016, Hoang recovered $ 87,000 in the settlement of an unrelated real estate dispute. Pursuant to a deal struck with her bankruptcy trustee, half of the settlement, $ 43,500, went to the trustee for the benefit of her creditors and half went to Hoang's lawyer. Lowery learned of the settlement, however, and served a writ of garnishment in the amount of $ 41,294.31 (the amount of the original 2002 judgment plus interest). D. Subsequent Procedural History Hoang moved to quash the writ of garnishment arguing that, as described above, Lowery's judgment was more than 12 years old and had expired pursuant to the 12-year statute of limitations in CJ § 5-102(a)(3).

Lowery responded that his time for collecting the judgment had been extended by operation of CJ § 5-202. The circuit court agreed with Hoang, finding that CJ § 5-202 did not toll the limitations period on Lowery's judgment. Lowery appealed. ANALYSIS The question that we must consider then is what the legislature intended when it adopted (and repeatedly readopted) the precursor to what is now CJ § 5-202.

If it meant the words "dismissed" and "dismissal" to mean what they mean in modern bankruptcy law, then Hoang's bankruptcy has not been dismissed and may never be dismissed. If so, Lowery must watch and wait. If Hoang's bankruptcy is ever dismissed, then he may resurrect his claim. Alternatively, if the legislature intended the words "dismissed" and "dismissal" to have a broader meaning, then perhaps "dismissal" also includes other resolutions of bankruptcy proceedings.

Our use of the traditional methods of statutory interpretation is inconclusive. Although the Court in Ali discussed the meaning of dismissal as used in CJ § 5-202, it did not settle on a conclusive meaning and did not reach a result that decides this case. 7 We have reviewed the remaining legislative history 8 (of which there is little), as well as contemporaneous general dictionaries, 9 contemporaneous legal dictionaries, 10 and contemporaneous legal practice manuals 11 -only to have emerged as uncertain as when we began. Fortunately, however, we think a functional method of statutory interpretation provides a historically accurate and correct interpretation. As we understand it, under traditional Maryland insolvency practice, the debtor's nonexempt assets would be gathered and turned over to a trustee and eventually, the creditors. 1805 Acts, ch. 110, §§ 3-5.

In exchange, the debtor would receive a discharge of debts and a fresh start. 1805 Acts, ch. 110, § 13. Of course, not all insolvencies reached this successful conclusion. See e.g. 1805 Acts, ch. 110, § 9 (precluding debtors who are convicted of deceiving their creditors from benefiting from the insolvency laws). The predecessor to CJ § 5-202 was adopted to ensure that creditors, whose debtors failed in obtaining a discharge, wouldn't be worse off for cooperating in the process.

Thus, if an insolvency was successful, the creditors got the debtor's available assets. 1805 Acts, ch. 110, § 7. If the insolvency was unsuccessful, the creditors' claims were preserved and everyone was restored to their prepetition status. Operationally, this was accomplished by CJ § 5-202 extending the statute of limitations for the period during which the debtor was pursuing insolvency up until the court determined that it was unsuccessful. In modern bankruptcy, the vast majority of proceedings end in one of the same two ways that insolvency proceedings ended 200 years ago.

A successful bankruptcy today results in a closure, by which the debtor's estate is fully administered for the benefit of the creditors. 11 U.S.C. § 350 (a) ("After an estate is fully administered and the court has discharged the trustee, the court shall close the case."). The creditors recover what they can and the debtor receives a discharge and a fresh start. Alternatively, bankruptcy cases can end unsuccessfully, in a dismissal. 11 U.S.C. § 707 (a) (providing for dismissal of a Chapter 7 bankruptcy), § 1112(b)(1) (providing for dismissal of a Chapter 11 bankruptcy), or § 1307(b) (providing for dismissal of a Chapter 13 bankruptcy). A bankruptcy can be dismissed for a host of reasons, including failure to pay certain fees and material default of the confirmed repayment plan. 11 U.S.C. § 1307 (c) (listing what constitutes "cause" for dismissing or converting a case).

If the bankruptcy case is dismissed, the debtor does not receive a discharge, but instead the automatic stay is dissolved and dismissal "restores the assets and parties to their prepetition status, as if the case had never been filed." In re Woodhaven, Ltd. , 139 B.R. 745 , 748 (Bankr. N.D. Ala. 1992). Modern bankruptcy law, however, also permits a third possible outcome: 12 a denial of discharge. This is a rare occurrence, 13 reserved for the most misbehaving debtors.

In re Packer , 520 B.R. at 533 . The effect of a denial of discharge is really the worst of both worlds for the debtor: the debtor remains in bankruptcy and his or her assets continue to be administered for the benefit of the creditors. BANKRUPTCY CODE MANUAL , § 727:8 ("If a debtor is denied a discharge under § 727(a), the debtor remains liable for all unpaid obligations. Moreover, the assets that the nondischarged debtor may acquire in the future are also subject to the claims of creditors.").

But a debtor who is denied a discharge will never obtain a discharge in their case or a fresh start. In re Olivier , 819 F.2d 550 , 552 (5th Cir. 1987) (explaining that a violation of 11 U.S.C. § 727 "entirely bars discharge"). As we said before, however, the denial of discharge did not exist in Maryland insolvency law. Lowery's solution is that every outcome in bankruptcy-successful or unsuccessful-ought to receive the benefit of the tolling provided by CJ § 5-202.

This theory is obviously wrong. The state legislature in 1815 only extended the benefit of tolling to creditors when the debtor's insolvency was unsuccessful. We won't extend the benefit to a situation that the legislature clearly intended to exclude: a successful bankruptcy. Hoang's solution is that dismissal in 1815 meant exactly the same as what dismissal means today.

She argues that because her bankruptcy hasn't been dismissed, her creditors are not entitled to the benefit of tolling. This seems wrong too. The legislature wouldn't have intended for the worst debtors to be treated better than merely unsuccessful debtors, like those whose cases are dismissed for failing to pay the correct fees or failing to file correct information with the court within 15 days. 11 U.S.C. § 707 (a). We think that the solution is obvious.

The legislature, in enacting CJ § 5-202, intended to hold creditors unharmed by preserving their otherwise time-barred claims while participating in an unsuccessful bankruptcy. That benefit was not necessary and