Opinion
Case No. 96-14560-SSM, Adversary Proceeding No. 96-1285
December 23, 1996
Andrew G. Wilson, II, Esquire, Annapolis, MD, of Counsel for the plaintiffs
Thomas Chappell Aldridge, Jr., Esquire, Alexandria, VA, of Counsel for the debtor
MEMORANDUM OPINION AND ORDER
Before the court is the plaintiffs' motion for default judgment. Because the underlying complaint seeks relief that is, in part, unavailable in the case of a corporate debtor, and because it appears that the present action was brought in order to satisfy one of the statutory requirements for compensation from the Virginia Real Estate Transaction Recovery Fund, some discussion is appropriate in order to make clear the basis of the court's ruling.
The debtor, Arem Corporation ("Arem"), filed a voluntary petition under chapter 7 of the Bankruptcy Code in this Court on August 22, 1996. On October 8, 1996, the chapter 7 trustee filed a report of no distribution stating that there were no assets available from which to pay the claims of creditors. In the meantime, on September 22, 1996, the plaintiffs, James J. and Diane K. Ackerman, filed the complaint that is presently before the court. The complaint alleges that Arem, a licensed real estate brokerage, converted a security deposit and rents from a property that Arem was managing for the plaintiffs at 8604 Terrace View Court, Manassas, Virginia. The complaint seeks a money judgment for $2,589.60 and a determination that such judgment is nondischargeable under § 523(a)(4), Bankruptcy Code, 11 U.S.C. § 523(a)(4). No answer or other pleading has been filed by the debtor.
The court initially had some concern with service of the summons and complaint. A more fundamental problem, however, is that § 523(a) dischargeability relief is simply not available where the debtor is a corporation. Section 523(a) is the carve-out to the general rule of § 727(b), Bankruptcy Code, that a chapter 7 discharge discharges a debtor from "all" prepetition debts. Under § 727(a)(1), however, only an individual debtor may receive a discharge in chapter 7. Other types of entities (corporations, partnerships, etc.) do not receive discharges in chapter 7. Accordingly, a creditor is theoretically free, after the administration of the bankruptcy case is complete, to pursue litigation against a corporate chapter 7 debtor on account of a pre-petition debt. As a practical matter, however, corporations rarely if ever engage in business or acquire new assets after a chapter 7 filing. Accordingly, chapter 7 normally brings to an end any realistic hope of recovering a pre-petition liability directly from a corporate debtor.
Service of a summons and a complaint on the debtor in an adversary proceeding may be made by mailing copies to the debtor, at the address shown on the petition, and, if the debtor is represented by an attorney, to that attorney. The certificate of service in this case reflects service by first-class mail upon the debtor at the address shown in the petition. The attorney who was served (Martin Mooradian), however, is not the attorney currently representing the debtor (Thomas Chappell Aldridge, Jr.). See Order Substituting Counsel for the Debtor dated Oct. 22, 1996. Mr. Mooradian was, however, still counsel of record at the time the complaint and summons were served, and both counsel share the same office address. Accordingly, the court concludes that service of process is proper.
§ 523. Exceptions to discharge.
(a) A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt
* * *
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;
(emphasis added).
§ 727. Discharge.
(a) The court shall grant the debtor a discharge unless
(1) the debtor is not an individual;
In this case, however, it seems likely that the plaintiffs are looking to a different source for the payment of their claim. Under the Virginia Real Estate Transaction Recovery Act, Va. Code Ann. § 54.1-2112 et seq., claims may be paid by the Director of the Virginia Department of Professional and Occupational Regulation out of the Real Estate Transaction Recovery Fund where the claimant as been
awarded a final judgment in any court of competent jurisdiction in the Commonwealth of Virginia . . . for improper or dishonest conduct . . ., and the improper or dishonest conduct occurred during a period when the individual or entity was a regulant and occurred in connection with a transaction involving the sale, lease, or management of real property by the regulant acting in the capacity of a real estate broker or real estate salesperson. . . .
Va. Code Ann. § 54.1-2114(A). One of the conditions of recovery from the Fund is the following:
If the judgment debtor has filed bankruptcy, the claimant shall file with the proper bankruptcy court a complaint under 11 U.S.C. § 523(a) and obtain an order determining dischargeability of the debt.
Va. Code Ann. § 54.1-2114(A)(8).
In the present case, it is clear that the plaintiffs' claim against Arem is not dischargeable not, however, because it falls within any of the exceptions under § 523(a), Bankruptcy Code, but because under § 727(a)(1), Bankruptcy Code, none of Arem's debts are discharged. Accordingly, the court will enter a judgment determining that the liability is not discharged. The motion presently before the court also seeks entry of a money judgment for the sums the debtor collected but failed to turn over to the plaintiffs. There is no question that in the context of a dischargeability action, a bankruptcy court in order to avoid a multiplicity of suits and to provide complete relief has jurisdiction to enter a money judgment as to the amount excepted from discharge. Harris v. U.S. Fire Ins. Co., 162 B.R. 466 (E.D. Va. 1994). While the court has some concern over the propriety of entering a money judgment in a case where § 523 does not apply, no rule, statute, or reported case appears to prohibit the entry of a money judgment in connection with a determination under § 727 that a debtor is not entitled to a discharge. Before the court may enter a money judgment, however, it is necessary for the plaintiffs to comply with Fed.R.Civ.P. 55(b)(1), which is made applicable to adversary proceedings by F.R.Bankr.P. 7055, by submitting an affidavit of the amount due.
The affidavit should be signed by the plaintiffs, not by the plaintiffs' attorney.
ORDER
For the foregoing reasons it is
ORDERED:
1. Judgment is entered in favor of the plaintiffs by default determining that the liability of the debtor to the plaintiffs is not dischargeable in this chapter 7 case.
2. Plaintiffs shall, within 10 days, submit an affidavit setting forth the amounts due to them from the debtor.
3. The clerk shall mail a copy of this memorandum opinion and order to counsel for the plaintiffs, counsel for the debtor, and the chapter 7 trustee.