# Keena, II v. Zhiry

> United States Bankruptcy Court, E.D. California · March 14, 2023

URL: https://www.frixlaw.com/law-library/cases/10455221

## Case

- **Court:** United States Bankruptcy Court, E.D. California
- **Decided:** March 14, 2023
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

1 POSTED ON WEBSITE
2 NOT FOR PUBLICATION
3
4 UNITED STATES BANKRUPTCY COURT
5 EASTERN DISTRICT OF CALIFORNIA
6
7 In re: Case No. 21-22759-A-7

8 NADIA ZHIRY,

9
10 Debtor.
11

12 GERARD F. KEENA II, RECEIVER, Adv. No. 22-2011-A

13 Plaintiff, MEMORANDUM

14 V.

15 NADIA ZHIRY,

16 Defendant.
17

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Argued and submitted on March 8, 2023
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at Sacramento, California
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Honorable Fredrick E. Clement, Bankruptcy Judge Presiding
21

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Appearances: Kirk Rimmer for plaintiff Gerald F. Keena
II; Peter G. Macaluso for defendant Nadia
23
Zhiry
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25

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1 11 United States Code 523(a)(7) excepts from discharge a debt
2 “for a fine, penalty, or forfeiture” that is “payable to and for the
3 benefit of a governmental unit.” The state court appointed plaintiff
4 Keena receiver over defendant Zhiry’s property, which is a public
5 nuisance. California law allows Keena is entitled to recover from
6 Zhiry fees for services rendered and costs incurred. Is Keena
7 entitled to except his debt from discharge?
8 I. FACTS
9 Nadia Zhiry (“Zhiry”) owns real property located at 1039 and 1049
10 Claire Avenue, Sacramento. Apparently, the property is dilapidated.
11 So much so that the city deemed it a public nuisance.
12 The City of Sacramento brought suit against Zhiry in Sacramento
13 County Superior Court. City of Sacramento v. Zhiry, No. 34-2017-
14 00208154 (Sacramento County Superior Court 2017). Zhiry stipulated to
15 judgment and a permanent injunction. When she failed to address
16 and/or rectify the problem, the City of Sacramento sought the
17 appointment of a receiver, Cal. Health & Safety Code § 17980.7(c), and
18 the Superior Court appointed Gerald F. Keena.
19 Keena commenced work to clean up Zhiry’s properties, but before
20 he could complete his task, Zhiry filed a Chapter 7 bankruptcy. Doing
21 so ousted Keena from his duties. But it did not do so before he
22 incurred fees and costs (including attorney’s fees) of $87,217. Keena
23 would like those back.
24 II. PROCEDURE
25 This is an action to determine the dischargeability of a
26 particular debt, i.e., Keena’s fees and costs incurred in the
27 abatement of a public nuisance on Zhiry’s real property. Compare Fed.
1 any debt”) with Rule 4007(b) (“actions to perfects rights as to 11
2 U.S.C. § 523(a)(2),(a)(4),(a)(6)). Keena contends that as a receiver,
3 authorized by provisions of California’s Health and Safety Code and
4 appointed by the state court, he is entitled to except from discharge
5 Zhiry’s debts to him for cleanup of her property as they are excepted
6 from discharge as a “fine, penalty, or forfeiture” that is “payable to
7 and for the benefit of a governmental unit.” Zhiry admits the
8 underlying facts but denies that her debt to Keena qualifies for
9 exception under 523(a)(7).
10 III. JURISDICTION
11 This court has jurisdiction. 28 U.S.C. §§ 1334(a)-(b), 157(b);
12 see also General Order No. 182 of the Eastern District of California.
13 Jurisdiction is core. 28 U.S.C. § 157(b)(2)(I). All parties have
14 consented to entry of final orders and judgments. 28 U.S.C. §
15 157(b)(3); Wellness Int’l Network, Ltd. v. Sharif, 135 S.Ct. 1932,
16 1945-46 (2015); Scheduling Order 2.0, ECF No. 12.
17 IV. LAW
18 A. Section 523(a)(7)
19 In most instances, Chapter 7 debtors are entitled to the
20 forgiveness—in bankruptcy parlance, discharge--of their pre-petition
21 debts. 11 U.S.C. 727. Some debts are excepted from discharge. 11
22 U.S.C. 523(a). Of those debts that are excepted, some are excepted
23 from discharge as a matter of law, e.g., 11 U.S.C. § 523(a)(5)
24 (domestic support obligations) and other debts are excepted only if a
25 creditor files a timely adversary proceeding and proves the existence
26 of specified bad acts. 11 U.S.C. § 523(a)(2) (fraud).
27 In some instances, knowing whether the debt held by the creditor
1 11 U.S.C. § 523(a)(3)(A) (unscheduled debts are excepted from
2 discharge “unless such [unscheduled creditor had notice or actual
3 knowledge of the case”), is difficult. The penalties for guessing
4 incorrectly and then attempting to collect a discharged debt are
5 severe. In re Roth, 935 F.3d 1270, 1275 (11th Cir. 2019) (contempt);
6 Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, 507 (9th Cir. 2002)
7 (same).
8 Mercifully, the rules provide creditors, who are uncertain as to
9 the applicability of the discharge as to their particular debt, a
10 mechanism to resolve the question prior to seeking to collect a debt.
11 Rule 4007(a) provides: “A debtor or any creditor may file a complaint
12 to obtain a determination of the dischargeability of any debt.” Fed.
13 R. Bankr. P. 4007(a). Such an action may be filed “at any time.”
14 Fed. R. Bankr. P. 4007(b).
15 Section 523(a)(7) is a debt excepted as a matter of law; it is a
16 deceptively simple appearing provision. It provides:
17 A discharge under section 727, 1141, 11921
1228(a), 1228(b), or 1328(b) of this title does
18 not discharge an individual debtor from any debt—
19 ...
20 to the extent such debt is for a fine, penalty,
or forfeiture payable to and for the benefit of a
21 governmental unit, and is not compensation for
actual pecuniary loss, other than a tax penalty--
22
(A) relating to a tax of a kind not specified in
23 paragraph (1) of this subsection; or
24 (B) imposed with respect to a transaction or
event that occurred before three years before the
25 date of the filing of the petition.
26 11 U.S.C. 523(a)(7).
27 Section 523(a)(7) has four elements: “[t]he debt must (1) be a
1 (3) be payable for the benefit of a governmental unit, and (4) not be
2 compensation for actual pecuniary loss.” In re McDowell, 415 B.R.
3 612, 617 (Bankr. S.D. Fla. 2008), cited with approval by Medina v.
4 Vander Poel, 523 B.R. 820, 824 (E.D. Cal. 2015).
5 “Governmental unit” is a defined term: “The term “governmental
6 unit” means United States; State; Commonwealth; District; Territory;
7 municipality; foreign state; department, agency, or instrumentality of
8 the United States (but not a United States trustee while serving as a
9 trustee in a case under this title), a State, a Commonwealth, a
10 District, a Territory, a municipality, or a foreign state; or other
11 foreign or domestic government.” 11 U.S.C. § 101(27).
12 Courts have struggled with the application of § 523(a)(7) where
13 the plaintiff who seeks to enforce a debt is not the governmental unit
14 itself, but a third-party purporting to act on the government’s behalf
15 and with its blessing. Medina v. Vander Poel, 523 B.R. 820 (E.D. Cal.
16 2015) (qui tam plaintiff’s enforcing state labor law penalties); In re
17 Stevens, 184 B.R. 584 (Bankr. D. Idaho 1995) (collection agent acting
18 on behalf of the county was entitled to enforce parking and traffic
19 fines); In re Sanders, 589 B.R. 874, 880 n. 4 (Bankr. W.D. Wash. 2018)
20 (collection agency); contra, In re Dickerson, 510 B.R. 289, 301
21 (Bankr. D. Idaho 2014) (debt collector).
22 B. State Court Receivers
23 Public entities, e.g., cities and counties, regularly address
24 distressed real estate by virtue of the nuisance laws. A public
25 entity has three avenues to address a public nuisance: (1) criminal
26 proceedings; (2) a civil action (including the appointment of a
27 receiver); and (3) abatement proceedings. Cal. Civ. Code. § 3491; 6
California Real Estate
1 (4th ed. December 2022).
2 If a public entity brings a civil action, after judgment, it may
3 seek the appointment of a receiver. Cal. Health & Safety Code §
4 17980.7(c); City & Cnty. of San Francisco v. Daley, 16 Cal. App. 4th
5 734, 744-745 (1993). The rights and duties of a receiver are
6 specified by law. Cal. Health & Safety Code § 17980.7. The receiver
7 has the right to remediate the nuisance. Cal. Health & Safety Code §
8 17980.7(c)(4). In exchange, the receiver is entitled to “fees,
9 commissions, and necessary expenses.” Cal. Health & Safety Code §
10 17980.7(c)(5). Those fees and expenses may be secured by a lien
11 against the subject property, Cal. Health & Safety Code §
12 17980.7(a)(4)(G), and may be surcharged the owner of the property.
13 Cal. Health & Safety Code § 17980.7(c)(15).
14 V. DISCUSSION
15 Because Keena is unable to satisfy other portions of the statute,
16 the court need not decide whether a receiver, acting on behalf of a
17 governmental unit, may avail itself of the protections of § 523(a)(7).
18 A. Issue Preclusion
19 Issue preclusion applies to actions to except a debt from
20 discharge under 11 U.S.C. § 523. In re Comer, 723 F.2d 737, 740 (9th
21 Cir. 1984). Because the underlying judgment was rendered in federal
22 court, federal common law provides the contours of issue preclusion.
23 Taylor v. Sturgell, 553 U.S. 880, 891 (2008). The party asserting its
24 applicability has the burden of proving each of its elements. Id. at
25 907; Garity v. APWU Nat'l Labor Org., 828 F.3d 848, 855 (9th Cir.
26 2016). “Reasonable doubts about what was decided in a prior judgment
27 are resolved against applying issue preclusion.” In re Frye, No.
1 2008), citing Lopez v. Emergency Serv. Restoration, Inc. (In re
2 Lopez), 367 B.R. 99, 107–08 (9th Cir. BAP 2007).
3 The elements of federal issue preclusion are well-known:
4 (1) the issue at stake was identical in both
proceedings; (2) the issue was actually litigated
5 and decided in the prior proceedings; (3) there
was a full and fair opportunity to litigate the
6 issue; and (4) the issue was necessary to decide
the merits.
7
Janjua v. Neufeld, 933 F.3d 1061, 1065 (9th Cir. 2019), citing
8
Oyeniran v. Holder, 672 F.3d 800, 806 (9th Cir. 2012), as amended (May
9
3, 2012); see also Howard v. City of Coos Bay, 871 F.3d 1032, 1041
10
(9th Cir. 2017).
11
Keena points to a stipulated judgment of non-dischargeability in
12
the amount of $58,500 under § 523(a)(7) between City of Sacramento and
13
defendant Zhiry in a related adversary proceeding. Stipulation &
14
Judgment, The City of Sacramento v. Zhiry, No. 22-2013 (Bankr. E.D.
15
Cal. 2022), ECF Nos. 22-23.1 There are two problems. First, the
16
plaintiff has not proven, and probably cannot prove, issue
17
identicality. Here, the receiver seeks to recover statutorily
18
authorized fees and costs. Cal. Healthy & Safety Code §
19
17980.7(c)(5). The City of Sacramento sought to except a debt as a
20
penalty, 11 U.S.C. § 523(a)(7), but it did not seek to recover
21
receiver’s fees and costs. Therefore, identity of issues does not
22
exist.
23
Second, there is an insufficient showing that the issue was
24
actually litigated:
25
Ordinarily, stipulated or consent judgments are
26 not entitled to preclusive effect because there
was no actual litigation. In re Berr, 172 B.R. at
27
1 The court takes judicial notice of the Stipulation for Entry of
1 306. However, the actual litigation requirement
may be satisfied when there is substantial
2 participation in an adversary contest in which
the party is afforded a reasonable opportunity to
3 defend himself on the merits but chooses not to
do so. In re Daily, 47 F.3d 365, 368 (9th
4 Cir.1995).
5 In re Bowen, 198 B.R. 551, 556 (B.A.P. 9th Cir. 1996).
6 Here, there is no showing of substantial participation. For
7 these reasons, there has been an insufficient showing as to the
8 applicability of issue preclusion or at least reasonable doubt as to
9 its applicability exits.
10 B. On the Merits
11 1. Fines, Penalties and Forfeitures
12
The debt must be penal, not compensatory. In re Scheer, 819 F.3d
13
1206, 1211 (9th Cir. 2016) (refund of attorney’s fees); Matter of
14
Towners, 162 F.3d 952, 953 (7th Cir. 1998) (investigative costs for
15 civil fraud discharged).
16
In re Schaffer, 515 F.3d 424 (5th Cir.2008), the court considered
17 an adversary proceeding very similar to this one. There, the
18 Louisiana State Board of Dentistry brought a disciplinary action
19 against a dentist. After a hearing, the Board of Dentistry found that
20 the dentist had “acted contrary to prevailing acceptable dental
21 standards and exhibited dental incompetence.” p. 426. After revoking
22 the dentist’s license, it assessed costs against him in the amount of
23 $217,852. Those costs were for expenses of the investigation,
24 attorneys’ fees, and costs of hotel, as well as meals, of committee
25 members during the license revocation hearing. The dentist filed
26 Chapter 7 bankruptcy and an adversary proceeding, apparently under
27 Rule 4007(a), followed. The bankruptcy court held the costs
nondischargeable, 11 U.S.C. § 523(a)(7), and the District Court
1 affirmed. The Fifth Circuit reversed, holding that investigative
2 costs were compensatory, not punitive. It stated:
3 Yet there is a crucial distinction. The parish
court, in entering the Board's order revoking
4 Schaffer's license and assessing costs, did not
order restitution to the Board or to anyone else.
5 It ordered the payment of costs for the expenses
of the civil administrative proceeding—the hotel
6 and meal expenses of the committee appointed by
the Board to hear Schaffer's case, among other
7 expenses. The costs assessed are, at their core,
“compensation for actual pecuniary loss”—in this
8 case, the losses to the Board caused by the cost
of the proceeding. It does not appear to us,
9 looking to the language of the Louisiana statute
and the Board's order, that the Board assessed
10 costs “to promote law enforcement by deterrence
as well as by compensation.” Rather, it assessed
11 costs to repay some of the Boards' expenses
incurred in the proceeding, such as those listed
12 in the statute—stenographers' and attorneys' and
investigative fees, as well as the daily expenses
13 of the members of the committee appointed by the
Board to hear this matter.
14
Id. at 433 (emphasis added).
15
This case is no different than Schaffer. The fees and costs were
16
authorized by California Health & Safety Code § 17980.7(c)(5), which
17
authorized the receiver to recover “fees” and “necessary expenses.”
18
There is no indication that the state legislature intended these fees
19
and costs to be anything other than paying the receiver for the
20
necessary costs of doing business.
21
While argument might be interposed that the City of Sacramento
22
benefits by shifting the costs of remediation to the landowner that,
23
alone, does not make these fees and costs penal in nature. Moreover,
24
the Kelly line of cases, excepting restitution from discharge under 11
25
U.S.C. § 523(a)(7), has been limited to criminal proceedings. Kelly
26
v. Robinson, 479 U.S. 36 (1986). So, fees and costs due Keena cannot
27
be justified as a restitution paid to a third party.
1 Finally, aside from the ipse dixit assertion, the fees and costs
2 “are to be considered a fine, penalty, or forfeiture,” Pl. Trial Br.
3 5:17-1, ECF No. 29, the plaintiffs have not directed this court to any
4 authority for the proposition that § 17980.7(c)(5) is anything other
5 than compensatory.
6 2. To and for the Benefit of a Governmental Unit
7 Finally, the debt must be “to and for the benefit” of the
8 government. 11 U.S.C. § 523(a)(7); Matter of Towers, 162 F.3d 952,
9 955 (7th Cir. 1998) (penalty payable to the Attorney General of
10 Illinois but “for the benefit of the victims” of the defendant’s fraud
11 was insufficient).
12 One particular case is instructive. Hughes v. Sanders, 469 F.3d
13 475 (6th Cir. 2006). There, Sanders (an attorney) represented Hughes
14 in an employment action against Ford Motor Company, apparently
15 unsuccessfully. Hughes then sued Sanders for malpractice; after
16 Sanders violated numerous court orders, the District Court struck his
17 answer and entered his default. The default judgment was for $894,316
18 for lost wages and interest; $143,602 for attorneys fees and costs in
19 the underlying case; and $25,873 for attorney’s fees and costs in the
20 malpractice case. Sanders filed a Chapter 7 bankruptcy and Hughes
21 brought an action under § 523(a)(7). Sanders moved to dismiss the
22 complaint in the adversary proceeding. Fed. R. Bankr. P. 12(b)(6).
23 The District Court dismissed the adversary proceeding and the Sixth
24 Circuit affirmed the dismissal, finding it was payable to Hughes and
25 was compensatory in nature. The court stated:
26 Under the plain language of 11 U.S.C. §
523(a)(7), Hughes cannot prevail unless he can
27 show both that the penalty owed by Sanders is
payable to and for the benefit of a governmental
It is undisputed
1 that the penalty is payable to Hughes. And it is
undisputed that the judgment is for an amount
2 calculated to compensate Hughes for damages,
attorney's fees and costs claimed in and arising
3 out of the malpractice action. He therefore has
not stated and cannot state a claim for which
4 relief can be granted.
5 Id. at 479 (emphasis added).
6 Even if Keena could show that his own fees and expenses are
7 penal, rather than compensatory, the fact that they are paid directly
8 to him and for his ultimate benefit defeats any rights under §
9 523 (a) (7).
10 CONCLUSION
11 For each of the reasons set forth herein, judgment shall be for
12 defendant Nadia Zhiry.
Dated: March 14, 2023
4 MSS
Fredrick E. Clement
16 United States Bankruptcy Judge
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1 Instructions to Clerk of Court

2 Service List - Not Part of Order/Judgment

3 The Clerk of Court is instructed to send the Order/Judgment or other court generated
document transmitted herewith to the parties below. The Clerk of Court will send the document
4 via the BNC or, if checked ____, via the U.S. mail.

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6 Attorneys for the Plaintiff(s) Attorneys for the Defendant(s)

7 Bankruptcy Trustee (if appointed in the case) Office of the U.S. Trustee
Robert T. Matsui United States Courthouse
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501 I Street, Room 7-500
9 Sacramento, CA 95814
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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10455221. Public record. Not legal advice.