Paul P. Moushigian v. John R. Marderosian, et al

Filing 39

Judge F. Dennis Saylor, IV: MEMORANDUM AND ORDER entered. The orders of the Bankruptcy Court dated December 19, 2012, and January 2, 2013, finding that Moushigian had failed timely to file objections to the Marderosian's discharge and declining to reconsider its prior decision are AFFIRMED.(Cicolini, Pietro)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
_______________________________________
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PAUL P. MOUSHIGIAN,
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Appellant,
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v.
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JOHN R. MARDEROSIAN and
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ELIZABETH A. MARDEROSIAN,
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Debtors/Appellees.
_______________________________________)

Civil Action No.
13-10137-FDS
On appeal from
Bankruptcy Case No. 12-14076-WCH

MEMORANDUM AND ORDER ON APPEAL
SAYLOR, J.
This is an appeal by a creditor of certain orders issued by the United States Bankruptcy
Court. Appellant Paul P. Moushigian filed a lawsuit alleging fraud and embezzlement in
Massachusetts Superior Court against the debtors, John and Elizabeth Marderosian. The debtors
then filed a petition for bankruptcy. Moushigian then obtained relief from the automatic stay to
pursue the lawsuit. The debtors eventually received a discharge that did not make any exception
for the Moushigian lawsuit. When Moushigian sought an order “confirming” that the discharge
“had no effect on his claims,” the Bankruptcy Court denied relief on the ground that he had
failed to file a complaint objecting to the dischargeability of the debt.
Moushigian now appeals the Bankruptcy Court’s order and its denial of his motions for
reconsideration. Essentially, he contends that the grant of relief from the stay made it
unnecessary to file a complaint objecting to the dischargeability of the debt.
For the reasons set forth below, the orders of the Bankruptcy Court will be affirmed.

I.

Jurisdiction and Standard of Review
This Court has jurisdiction to hear appeals from final judgments, orders, and decrees of

the Bankruptcy Court pursuant to 28 U.S.C. § 158(a)(1). In reviewing the Bankruptcy Court's
decision, this Court functions as an appellate court and is authorized to “affirm, modify, or
reverse a bankruptcy judge’s [order] or remand with instructions for further proceedings.” Fed.
R. Bankr. P. 8013. The Bankruptcy Court's conclusions of law are reviewed de novo; its
findings of fact are reviewed for clear error; and its discretionary rulings are reviewed for abuse
of discretion. See Stornawaye Fin. Corp. v. Hill (In re Hill), 562 F.3d 29, 32 (1st Cir. 2009)
(citing In re Healthco Int’l, Inc., 132 F.3d 104, 107 (1st Cir. 1997); In re Gonic Realty Trust, 909
F.2d 624, 626 (1st Cir. 1990).
II.

Background
On December 3, 2010, Paul Moushigian filed a complaint in Barnstable County Superior

Court against John and Elizabeth Marderosian, Diane Harvey, and Lucy’s Boys, Inc. The
complaint alleged various state law claims, including embezzlement and fraud. (App. 42).
Moushigian contended that the defendants wrongfully took money for personal use from two
restaurants they jointly owned with him and failed to pay his salary. (App. 27-43). According to
Moushigian, the case proceeded into discovery, and the state court attached the real property of
John Marderosian up to $200,000. (App. 129; Appellant’s Br. at 3). When Moushigian deposed
John Marderosian in April 2012, Marderosian asserted his Fifth Amendment right against selfincrimination as to all questions. (Appellant’s Br. at 3).
On May 10, 2012, John and Elizabeth Marderosian filed for bankruptcy under Chapter 7
in the Bankruptcy Court for the District of Massachusetts. (App. 1). On May 16, 2012, the

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Superior Court issued an order staying the state case pending the bankruptcy proceedings. (App.
19, 44).
On July 25, 2012, Moushigian filed a “Motion By Creditor for Relief from Stay and
Related Relief” with the Bankruptcy Court. (App. 24). He requested that his “continued
prosecution of [his] claim in the Barnstable civil action be deemed sufficient to satisfy the
deadline established herein for commencement of an adversary proceedings for challenge to
dischargeability of any debt so established.” (App. 24). The motion also stated:
Moushigian proposes to seek a verdict or finding that one or both of the debtors
here is liable to Moushigian for fraud based on facts sufficient to avoid or prevent
bankruptcy discharge in this Court. If a verdict or judgment as to fraud is
obtained in the Barnstable civil action, Moushigian proposes to return to this
Court for further proceedings, as appropriate, to declare that the debt of one or
both of the debtors is not dischargeable pursuant to 11 U.S.C. 523(a)(4) as
described above and, without limitation, 11 U.S.C. 523(a)(2) . . . .
(App. 25). Moushigian concluded:
If this motion is denied, Moushigian in that event requests the August 6, 2012
deadline [for filing an adversary complaint] b[e] extended for ten business days
after the denial of this motion to permit Moushigian to file an adversary complaint
seeking to deny discharge of these debtors.
(App. 50).
On August 2, 2012, Moushigian filed a “Request for Expedited Determination and
Related Relief” with the Bankruptcy Court, seeking a ruling on his July 25, 2012 Motion. (App.
45). He stated that a decision on the earlier motion would “permit relief or in the alternative
extend the deadline for filing of a dischargeability complaint” and requested that the deadline be
extended ten days “from the grant or denial of this request.” (App. 45). Later that day, the
Bankruptcy Court denied that motion because it “state[d] no grounds,” adding:
To the extent Creditor Moushigian seeks an extension of the deadline in which to
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file a complaint objecting to the Debtor’s discharge of the dischargeability of
certain debts, it is extended to September 27, 2012. Any further request to extend
that deadline shall be made by a separate motion filed prior to the expiration of
the deadline.
(App. 70).
On August 21, 2012, the Bankruptcy Court ruled on Moushigian’s July 25, 2012 motion.
The ruling simply stated: “Relief from stay granted.” (App. 73).
Moushigian neither filed a dischargeability complaint nor moved for an extension of time
to file such a complaint by September 27, 2012.
The Bankruptcy Court, on December 5, 2012, issued a general notice of discharge for the
Marderosians. (App. 10, 101). The Marderosians sent notice of the discharge to the state court.
(App. 100).
On December 17, 2012, Moushigian filed a “Motion To Affirm Order Granting Relief of
Stay.” (App. 72). According to Moushigian, bankruptcy counsel for the Marderosians had
moved for sanctions against him in state court for continuing to prosecute the state case against
them after the Bankruptcy Court had issued a discharge. Moushigian sought an order
“confirming that the December 5, 2012 Order granting a general discharge under 11 USC § 727,
has no effect on that prior Order which allowed Moushigian to pursue his claims.” (App. 74,
97). Two days later, the Bankruptcy Court issued an order stating that its August 21, 2012 order
“granted relief from stay for purpose of continuing a civil action in the Barnstable Superior
Court” but “did not grant any other relief.” (App. 104). It added:
the Court had previously construed [the August 2 motion] as a request for an
extension of the deadline to file complaints objecting to the Debtors’ discharge or
the dischargeability of certain debts, and . . . entered an order granting a limited
extension of the deadline to September 27, 2012.

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(App. 104). Because “the movant failed to file a timely extension,” “the deadline expired,” and
“[n]o timely objections [were] filed, the Debtors received a discharge.” (App. 104).
In response, on December 27, 2012, Moushigian filed a motion for reconsideration of the
December 19 Order pursuant to the Bankruptcy Court’s equitable powers under 11 U.S.C. §
105(a). (App. 153-56). The Marderosians filed an objection to the motion on December 31,
contending that the motion did not allege new issues of law or fact or present new evidence.
(App. 157-58). Moushigian then filed a second motion for reconsideration, on January 2, 2013,
which the Bankruptcy Court denied under Fed. R. Bank. P. 4004(b) and 9006(b)(3). (App. 105).
That same day, the Bankruptcy Court granted the Marderosians’ November 20, 2012 motion to
avoid Moushigian’s $200,000 lien on their real property. (App. 106; see App. 119-134).
On January 17, 2013, Moushigian filed a notice of appeal.
III.

Analysis
In general, the filing of a bankruptcy petition automatically institutes a stay of all judicial

proceedings against the debtor or the debtor’s property. 11 U.S.C. § 362(a). However, a court
“shall grant relief” from the stay to a party in interest “for cause.” 11 U.S.C. § 362(d). “Cause”
may include allowing a creditor to continue state court litigation to determine nondischargeability of a debt based on fraud. See, e.g., In re Saunders, 103 B.R. 298, 299 (Bankr.
N.D. Fla. 1989). Appellant received such relief here pursuant to the August 21, 2012 Order that
stated, “Relief from stay granted.”
However, “requests for relief from an automatic stay do not commence an adversary
proceeding.” Advisory Committee Note to Fed. R. Bankr. P. 7001. And an adversary
proceeding is required “to recover money or property,” “to determine the validity, priority, or

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extent of a lien,” and “to determine the dischargeability of a debt.” Fed. R. Bankr. P. 7001.
“The differences between procedure in an adversary proceeding and a motion for relief from stay
are material.” In re TMT, Inc., 57 Bankr. Ct. Dec. 206 (Bankr. N.D. Ohio Mar. 20, 2013). An
adversary proceeding requires that a party file a complaint, pay filing fees, and serve a summons;
a relief from stay is a process by motion that does not determine substantive rights. See Fed. R.
Bankr. P. 4001; Fed. R. Bankr. P. 7001; Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 33
(1st Cir. 1994).
The fact that the debtors had notice that Moushigian contested the dischargeability of the
debt is only one component of a sufficient complaint. Because Moushigian’s July 25, 2012
motion failed to meet all of the procedural requirements, it did not qualify as a complaint
commencing an adversary proceeding, nor did it obviate the need for him to file a complaint.
Furthermore, by the plain terms of the order of the Bankruptcy Court on Moushigian’s motion,
the order did not grant the motion in full but only to the extent that it requested a relief from stay.
Moushigian’s request that his prosecution of the state case was sufficient to “satisfy the deadline
established herein for commencement of an adversary proceeding” was denied.
“If a creditor believes its claim is not dischargeable” under 11 U.S.C. § 523 because it is
based on fraud, embezzlement, larceny, or other specified grounds, then “the creditor must file a
Complaint to Determine Dischargeability in the bankruptcy court within 60 days after the first
date set for the § 341 meeting of creditors.” GINSBERG & MARTIN ON BANKR. § 12.12. See 11
U.S.C. § 523(c)(1); F.R.B.P. 4007(c); In re Eaton, 327 B.R. 79, 81 (Bankr. D.N.H. 2005).
Failure to meet that deadline, or to obtain an extension before the deadline expires, will result in
the discharge of the debt, regardless of the merits of the claim. GINSBERG & MARTIN ON BANKR.

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§ 12.12 (“It’s hard to overemphasize the importance of filing a complaint objecting to
dischargeability within the 60-day period if the creditor’s claim arises from the debtor's fraud,
false pretenses, misrepresentation, false financial statement, embezzlement, larceny, fraud or
defalcation in a fiduciary capacity, or willful and malicious injury.”). Here, the first § 341
meeting was scheduled for June 5, 2012, and the Bankruptcy Court originally set the deadline for
August 6, 2012. (App. 2-3). On August 2, 2012, the Bankruptcy Court extended the deadline
for Moushigian to file a complaint objecting to the debtors’ discharge of the dischargeability to
September 27, 2012, and directed him to seek any further extension prior to that date. (App. 70).
Moushigian neither filed a complaint nor sought an extension of the deadline, and on December
5, 2012, the Bankruptcy Court issued debtors a discharge. Accordingly, the Bankruptcy Court
properly concluded that Moushigian could not continue to proceed in the state court because any
debt had been discharged.
In addition, the Bankruptcy Court appropriately denied Moushigian’s motions for
reconsideration. The Bankruptcy Court has statutory equitable power to “issue any order,
process, or judgment that is necessary or appropriate to carry out the provisions of this title,” or
to “tak[e] any action or mak[e] any determination necessary or appropriate to enforce or
implement court orders or rules, or to prevent an abuse of process.” 11 U.S.C. § 105. See In re
Nosek, 544 F.3d 34, 43-44 (1st Cir. 2008) (“Section 105(a) of the Code provides the bankruptcy
court broad authority to “exercise its equitable powers—where ‘necessary’ or ‘appropriate’—to
facilitate the implementation of other Bankruptcy Code provisions.”) (internal citation and
quotation omitted). But that power “may be invoked only if, and to the extent that, the equitable
remedy dispensed by the court is necessary to preserve an identifiable right conferred elsewhere

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in the Bankruptcy Code.” In re Jamo, 283 F.3d 392, 403 (1st Cir. 2002) (citing Norwest Bank
Worthington v. Ahlers, 485 U.S. 197, 206 (1988)). It does not appear that the Bankruptcy Court
abused its discretion in declining to reconsider its prior ruling. See In re Weinstein, 164 F.3d
677, 686-87 (1st Cir. 1999); cf. Fed. R. Bankr. P. 4004(b) (limiting the time to object to
discharge); Fed. R. Bankr. P. 9006(b)(3) (permitting extensions of time to file objections to
discharge in specified circumstances). Accordingly, the Bankruptcy Court’s orders on the
motions to reconsider and the underlying “Motion for Affirmation” will be affirmed.
Finally, Moushigian challenges the Bankruptcy Court’s orders on constitutional grounds
because they effectively terminate his state-law claims in state court. (Appellant’s Br. at 16-20).
But the statutes and procedures of bankruptcy would have permitted Moushigian to pursue and
vindicate his rights under state law. It was not, in fact, a defect in the federal system of
bankruptcy that terminated his case, but instead his failure to comply with the rules. Moreover,
the core ability of the bankruptcy courts to discharge an individual’s debts, however incurred, if
a creditor fails to file a claim cannot seriously be questioned. See U.S. Constitution, art. I, § 8,
cl. 4; Wright v. Union Cent. Life Ins. Co., 304 U.S. 502, 517-18 (1938) (“[I]f Congress is acting
within its bankruptcy power, it may authorize the bankruptcy court to affect these property rights
[created and protected by state law], provided the limitations of the due process clause are
observed.”).
The relief from stay that Moushigian was granted was “not nugatory or inconsequential.”
(Appellant’s Brief at 13). But neither was it sufficient to commence an adversary proceeding to
determine dischargeability of a debt. It is entirely possible that Moushigian had a valid claim
against the debtors and that he is now without a remedy for their fraud and embezzlement.

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However, the rules of procedure are not meaningless, and litigants ignore them at their peril.
Moushigian was obliged to comply with them in order to exercise his rights, and neglected to do
so.
IV.

Conclusion
For the foregoing reasons, the orders of the Bankruptcy Court dated December 19, 2012,

and January 2, 2013, finding that Moushigian had failed timely to file objections to the
Marderosian’s discharge and declining to reconsider its prior decision are AFFIRMED.
So Ordered.

/s/ F. Dennis Saylor
F. Dennis Saylor IV
United States District Judge

Dated: October 7, 2013

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