Memorandum of Points and Authorities-Collect Discharged Debt

[SBD]

Supporting Contention That Debtor Is Entitled to Sanctions Against Creditor for Attempt to Collect Discharged Debt [11 U.S.C. § 524]

_________________'s [name of creditor] ATTEMPT TO COLLECT THIS DEBT AMOUNTS TO CIVIL CONTEMPT AND ENTITLES _________________ [name of debtor] TO MONETARY SANCTIONS.

Civil contempt is an appropriate sanction for a creditor's violation of the implicit injunction resulting from the order of discharge, when the creditor attempts to collect a discharged debt. [such contempt may arise from the creditor's use of criminal process to aid in or coerce the collection of a discharged debt.] A creditor who is guilty of violating that injunction may be required to pay the debtor an amount equal to the debtor's costs of defending any action on the discharged debt and of seeking relief in the bankruptcy court, as well as reasonable attorney's fees, and in egregious cases, additional monetary sanctions (In re Myers (Bankr. E.D. Va. 1982) 18 B.R. 362, 363-364, 6 Collier Bankr. Cas. 2d 347; In re Whitaker (Bankr. M.D. Tenn. 1982) 16 B.R. 917, 923, 5 Collier Bankr. Cas. 2d 1566).

The debtors in In re Myers (Bankr. E.D. Va. 1982) 18 B.R. 362, 6 Collier Bankr. Cas. 2d 347 reopened their case after discharge to seek an injunction and contempt against a finance company, holder of a claim on a debt that had been discharged. Although the debt was secured by a nonpossessory, nonpurchase-money lien on household furniture, which could have been avoided by the debtors under 11 U.S.C. § 522(f), the debtors had not sought to avoid the lien during the pendency of the case. The bankruptcy court noted that a case may be reopened after discharge to allow filing of a complaint to avoid a lien (18 B.R. 362, 362). The finance company had commenced a state court action for possession of the property, or, alternatively, its value. Of special concern to the court was the fact that the finance company had checked not the ''actual value of the items'' blank of the state action but the one marked ''amount due under a written contract of sale,'' and entered there $ 3,389.10, which the court referred to as a grossly exaggerated figure (representing the value of the property at the time the loan was made) agreed to by the debtors at the time the loan was granted. Even more scandalous, the bankruptcy court noted, was the representation of debtor's counsel that this was a practice the creditor had followed in other cases (18 B.R. 362, 363).

The bankruptcy court found that the finance company had willfully violated the stay and was in contempt. The fact that the state court action was nonsuited did not alter matters. The court said the abuse could not be washed away after the hand had been caught in the proverbial cookie jar (18 B.R. 362, 363). The court noted that the finance company was a sophisticated creditor and knows better. A discharge order is not to be thwarted. The bankruptcy courts mean for their discharge orders to be honored, and they will not be unless the point is emphasized, which the court found it would be by imposition of $ 10,000 in sanctions and an injunction against pursuing any action for money related to the bankruptcy case (18 B.R. 362, 363-364).

After discussing its authority to enjoin the criminal prosecution, the bankruptcy court held that the creditors had failed to comply with the discharge order and that civil contempt was an appropriate sanction for such noncompliance. The bankruptcy court also required the creditor to pay the debtor's cost of defending the criminal action and pursuing the adversary proceeding in bankruptcy court, including reasonable attorney's fees, noting that the $ 250 limit of former Fed. R. Bankr. P., Rule 920(a)(3)[see now Fed. R. Bankr. P., Rule 9020 (no limit)] did not apply because that rule governed only punitive sanctions (16 B.R. 917, 923 n.9).

The bankruptcy court in In re Rhyne (Bankr. E.D. Pa. 1986) 59 B.R. 276, 14 Collier Bankr. Cas. 2d 778 struck a state court judgment, found the creditor's law firm in contempt, and required it to pay debtor's attorney's fees after the firm obtained a judgment against the debtor based on a wrongful death claim that had been discharged. The court said that not every case is appropriate for contempt or sanctions. The creditor was not found to be in contempt because he lacked the requisite intent (59 B.R. 276, 278-279).

The bankruptcy court in In re Conti (Bankr. E.D. Va. 1985) 50 B.R. 142, 12 Collier Bankr. Cas. 2d 1472 found the IRS to be in civil contempt for violation of 11 U.S.C. § 524(a)(2) by sending past due notices to the debtor regarding a discharged tax liability for 1977. The court said that the IRS's claim of sovereign immunity was expressly waived by the provisions of 11 U.S.C. § 106©(50 B.R. 142, 145-146). The court held that the burden of inconvenience for the IRS to segregate discharged accounts from others did not excuse its failure to do so (50 B.R. 142, 146). The court awarded $ 750 as attorney's fees and damages, but refused to award punitive damages (50 B.R. 142, 147). The court also allowed the IRS to offset against the discharged debt a refund owing to the debtor for a pre-petition year (1982), even though no refund was sought until 1984, a year after discharge. The court reasoned that the 11 U.S.C. § 524(a)(2) prohibition against offset has to be construed in light of 11 U.S.C. § 553 and refers only to post-petition debts; a pre-petition debt owed by a discharged creditor may be offset against a discharged debt (50 B.R. 142, 147-150).

The bankruptcy court in In re Olson (Bankr. N.D. Iowa 1984) 38 B.R. 515, 10 Collier Bankr. Cas. 2d 864, found a medical clinic to be in violation of 11 U.S.C. §§ 362 and 524 for refusing to treat the debtor until the debtor paid a discharged pre-petition account. The fact that a representative of the clinic testified that ''nonpays'' were refused treatment until outstanding bills were paid whether or not the ''nonpay'' had filed bankruptcy provided the requisite intent and willfulness for imposition of sanctions. The court stayed imposition of sanctions or damages for 20 days during which time the parties were to present a stipulation regarding sanctions or damages (38 B.R. 515, 518-519).

The credit union creditor in In re Holland (Bankr. N.D. Ind. 1982) 21 B.R. 681, 6 Collier Bankr. Cas. 2d 1307 received money from the debtor under a pre-petition payroll deduction agreement to be applied in payment of a loan it had made to the debtor. The loan was scheduled; the creditor received notice of the filing of the bankruptcy and of the discharge. After discharge, the debtor executed and forwarded to his employer a request to stop the payroll deductions, but the creditor union refused to return the payments it had received after the date of the filing of the petition. The debtor had not made a ''stop deduction request'' earlier, he testified, because he had not understood that it was necessary. Contrary to credit union practice, he had not been given the appropriate form when he visited the credit union to inform it of the bankruptcy and to request the cessation of the deduction. The credit union maintained that since the debtor had not initiated a stop deduction request, the post-petition payments were voluntary and it could keep them. The bankruptcy court found the creditor to have violated both the stay of 11 U.S.C. § 362(a)(6) and the permanent injunction of 11 U.S.C. § 524(a)(2) and to be in contempt. The creditor was required to return the post-petition payments to the debtor, with interest at the rate those sums would have earned in the debtor's creditor union share account and to pay the debtor's costs and reasonable attorney's fees (21 B.R. 681, 684, 688-689).

The debtor in In re Goodman (Bankr. Ore. 1983) 34 B.R. 23 had given his landlord two bad checks of $ 700 each. The rental arrearages covering that period were listed and discharged in bankruptcy. The creditor requested criminal prosecution during the pendency of the bankruptcy case, in violation of the stay order of 11 U.S.C. § 362(a)(6), and had the debtor arrested on bad check charges after discharge, although by that time one check had been paid and sufficient funds to cover the other had been tendered. The bankruptcy court was unconvinced by the creditor's testimony that he was confused and had made bookkeeping errors at the time he demanded the debtor's arrest. The court noted its authority to require the creditor to pay the debtor's attorney's fees and out-of-pocket costs as sanctions for civil contempt, and said that those sanctions did not preempt an award of general or punitive damages in a private action arising out of misuse of process. The bankruptcy court imposed sanctions of $ 3,500 (34 B.R. 23, 24-25).

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THE JUDGMENT THAT PLAINTIFF SEEKS TO ENFORCE ESTABLISHED DEFENDANT'S PERSONAL LIABILITY WITH RESPECT TO A DEBT THAT WAS DISCHARGED IN BANKRUPTCY, AND THE JUDGMENT IS TO THAT EXTENT VOID. ALL ATTEMPTS TO COLLECT THAT DEBT, INCLUDING BY ENFORCEMENT OF THAT JUDGMENT, ARE PERMANENTLY ENJOINED BY OPERATION OF LAW.

A discharge in a bankruptcy case voids any judgment obtained before, during, or after the bankruptcy, to the extent that the judgment is a determination of the personal liability of the debtor with respect to any discharged debt _________________ [add, if appropriate:, whether or not discharge of the debt was waived, expressly or by conduct]. The discharge operates as an injunction against the commencement or continuation of an action, the employment of process, or any other act, to collect, recover, or offset any discharged debt as a personal liability of the debtor _________________ [add, if appropriate:, whether or not discharge of the debt was waived] ( 11 U.S.C. § 524(a)(1), (2); Lone Star Security & Video, Inc. v. Gurrola (In re Gurrola) (9th Cir. BAP 2005) 328 B.R. 158, 164; Mathews Cadillac, Inc. v. Phoenix of Hartford Ins. Co. (1979) 90 Cal. App. 3d 393, 396-397, 153 Cal. Rptr. 267).

B. Injunction of Collection Attempts or State Court Proceeding. If a creditor institutes a state court action, or otherwise attempts to collect a discharged debt, the bankruptcy court can enjoin the _________________ [state court _________________ (action or proceeding) or collection attempts] (In re Whitaker (Bankr. M.D. Tenn. 1982) 16 B.R. 917, 920-921, 5 Collier Bankr. Cas. 2d 1566).

A discharge granted to a debtor in bankruptcy operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover from, or offset against, community property of the debtor and the debtor's spouse of the kind specified in Section 541(a)(2) of Title 11 of the United States Code that is acquired after the commencement of the case, on account of any allowable community claim, except a community claim that is excepted from discharge under Section 523, 1228(a)(1), or 1328(a)(1) of Title 11 of the United States Code, or that would be so excepted, determined in accordance with Section 523© and (d) of Title 11 of the United States Code, in a case concerning the debtor's spouse commenced on the date of the filing of the petition in the case concerning the debtor, whether or not discharge of the debt based on the community claim is waived ( 11 U.S.C. § 524(a)(3)).

In Lone Star Security & Video, Inc. v. Gurrola (In re Gurrola) (9th Cir. BAP 2005) 328 B.R. 158, a homeowner sued a business, charging breach of a contract for installation and monitoring of a home alarm system. While the action was pending, the homeowner filed a Chapter 7 petition. The contract lawsuit was properly listed in a schedule, but the defendant company inadvertently was omitted from the list of creditors, and consequently the company never received notice of the bankruptcy proceeding. Although the homeowner did not further prosecute the action, in due course the company filed a counterclaim to collect sums allegedly due under the contract, which the homeowner had withheld. The court, being unaware of the bankruptcy proceeding, subsequently entered a default judgment against the homeowner on the counterclaim. After learning about the bankruptcy proceeding, the company took the position that the homeowner had waived his right to rely on the bankruptcy discharge, and the company persisted in efforts to enforce the judgment. Eventually the bankruptcy court was drawn into the controversy through the present adversary proceeding by the company, and that court ruled that the homeowner could not be estopped to assert his discharge. The company appealed.

The bankruptcy appellate panel affirmed and stated that as a matter of plain English, the language of 11 U.S.C. § 524(a)(1) is both unambiguous and absolute as to questions of effect, time, and waiver. The status of a judgment as void implies that it is a judgment that may be disregarded as a nullity and cannot be enforced. Such a judgment is subject to collateral attack whenever and wherever it might be invoked. The phrase ''at any time obtained'' plainly means that judgments voided by the discharge include judgments obtained before, during, and after the bankruptcy. The phrase ''whether or not discharge of such debt is waived'' similarly nullifies all putative waivers of specific debts and appears to encompass both express waivers and waivers by conduct (328 B.R. 158, 164). The court gave a thorough review of cases and legislation, starting in the nineteenth century, to show how the current statutory policy evolved. Before 1970, the bankruptcy discharge was merely an affirmative defense that was waived if not timely asserted in subsequent litigation. Creditors could flout the discharge by suing and hoping that the defense was not timely raised. However, a major purpose of the Bankruptcy Act enacted in 1970 (which created the predecessor of the current statute) was to change the discharge from being an affirmative defense to being an absolute defense (328 B.R. 158, 165-170).

Mathews Cadillac, Inc. v. Phoenix of Hartford Ins. Co. (1979) 90 Cal. App. 3d 393, 153 Cal. Rptr. 267 is discussed in § 30.40[3][c].

Counsel should note that there is some authority that the prohibition in 11 U.S.C. § 524(a)(2) against setoff only applies to post-petition debts and that a mutual pre-petition debt owed by a creditor may be offset against a discharged pre-petition debt [seeIn re Conti (Bankr. E.D. Va. 1985) 50 B.R. 142, 149, 12 Collier Bankr. Cas. 2d 1472; see § 30.41[4][a]].

A bank can place a temporary administrative hold on a debtor's account without creating an impermissible ''setoff'' that violates the automatic stay provisions of 11 U.S.C. § 362(a)(7)[Citizens Bank of Maryland v. Strumpf (1995) 516 U.S. 16, 19-20, 116 S. Ct. 286, 133 L. Ed. 2d 258].

Injunction of Collection Attempts or State Court Proceeding

In re Whitaker (Bankr. M.D. Tenn. 1982) 16 B.R. 917, 5 Collier Bankr. Cas. 2d 1566, was an adversary proceeding in the bankruptcy court commenced by the debtor after discharge to enjoin a creditor and a district attorney from continuation of a criminal proceeding arising out of a bad check given by the debtor to the creditor. The creditor was scheduled in the debtor's bankruptcy, but did not request a determination of dischargeability of the debt. The creditor argued that the charge was grounded in fraud. The bankruptcy court concluded without discussion that the dischargeability of the claim was determined in the bankruptcy court (16 B.R. 917, 921 n.4), and determined that it had authority under 11 U.S.C. § 105(a), which provides that it may issue any order necessary or appropriate to carry out the provisions of Title 11, to issue temporary and permanent injunctions (16 B.R. 917, 920-921). Even though this case arose during the transition period (October 1, 1979 through March 31, 1984) during which a bankruptcy court could not enjoin another court, the creditor and the district attorney were the entities enjoined (16 B.R. 917, 920, 920 n.2, 921-923).

The bankruptcy court cited legislative history of 11 U.S.C. § 524(a)(2) to the effect that the changes made by the 1978 amendments were to ensure that the debtor would not be pressured ''in any way'' (16 B.R. 917, 921). Because the district attorney had offered to drop the charges if the debtor would make restitution to the creditor, the bankruptcy court concluded that the primary purpose of the criminal prosecution was to recover a dischargeable debt. That being the case, the bankruptcy court found that the issuance of the injunction was necessary to effectuate the judgment of discharge (16 B.R. 917, 922).

Plaintiff in Mathews Cadillac, Inc. v. Phoenix of Hartford Ins. Co. (1979) 90 Cal. App. 3d 393, 153 Cal. Rptr. 267 sought to recover damages for construction defects from the construction company and its insurer. The construction company did not answer and its default was taken, although no judgment was entered against it. The construction company had obtained a discharge in bankruptcy, although it had not listed plaintiff as a creditor. More than five years after the complaint was filed, the insurer moved for dismissal under former Code Civ. Proc. § 581a©. The motion was granted and a judgment of dismissal was entered. Plaintiff appealed.

The court of appeal affirmed. The court of appeal reviewed the legislative history and the effect of the 1970 amendments to the Bankruptcy Act, setting forth the provisions added as former 11 U.S.C. § 32(f), which have been carried forward as 11 U.S.C. § 524(a)(1), (2). The court noted that the primary reason for the amendment was so that a discharged debtor would no longer have to plead the discharge as an affirmative defense in a state court action. Any judgment obtained in violation of the discharge order and injunction is void as a determination of personal liability of the bankrupt, though valid liens can still be enforced against the discharged debtor's property (90 Cal. App. 3d 393, 396-397, 397 n.4). The court continued by stating that judgment could be entered against the discharged debtor, but that the state court would then be required to enter a perpetual stay of execution in favor of the discharged debtor. Such a judgment would be necessary in order to fix the liability of the insurer (90 Cal. App. 3d 393, 397-398). Regarding the failure to list the plaintiff as a creditor in the bankruptcy, the court said that was further reason to support the dismissal (90 Cal. App. 3d 393, 399). The implication was that dischargeability should have been raised by the plaintiff in the state court action.