Proof of Claim Violates Discharge Injunction

An Alabama district court upheld a sanction award for violation of the discharge injunction based on the creditor’s filing a proof of claim in a subsequent bankruptcy. McLean v. Greenpoint Credit (In re McLean), No. 13-925 (M.D. Ala. Sept. 4, 2014). The creditor, Greenpoint Credit and Green Tree Servicing (Green Tree), was an unsecured creditor for a deficiency judgment on the debtor’s mobile home in the debtors’ first chapter 7 bankruptcy. Two and a half years after the debtors obtained a discharge in that case, they filed a chapter 13 bankruptcy. Green Tree filed a proof of claim based on the same deficiency judgment that had been discharged in the earlier case. After their plan was confirmed, the debtors filed an adversary proceeding objecting to the proof of claim and seeking actual damages for emotional distress, legal fees, and punitive damages.

The bankruptcy court sustained the objection and held a trial on the adversary complaint. Mr. McLean testified that he was a war veteran with PTSD and that when Green Tree filed its proof of claim the resulting increase in plan payments meant certain failure of the plan and loss of the debtors’ house and possessions. This exacerbated Mr. McLean’s PTSD symptoms. A representative from Green Tree testified that the proof of claim was filed as a result of a company computer error. The bankruptcy court awarded actual damages in the amount of $25,000.00, attorney’s fees in the amount of $18,355.16, and a $50,000.00 “coercive” sanction.

On appeal, the district court began with the premise that both legislative history and case law, Crawford v. LVNV Funding, LLC, __ F.3d __, 2014 WL 3361226 (11th Cir. July 10, 2014), support the bankruptcy court’s finding that a proof of claim is an attempt to collect a debt under the expansive language of section 524(a)(2).

In its defense, Green Tree sought refuge in “computer error,” arguing that a willful violation of the discharge injunction cannot be based on a mistake. The court was unpersuaded. Willfulness is relevant to whether a bankruptcy court will award damages under its contempt powers under section 105(a) and may be found when the creditor (1) had knowledge of the discharge injunction; and (2) intended the actions that violated the injunction. The court found that subjective intent is irrelevant and “computer error” is no defense to an accusation of willfulness; a creditor is responsible for the operation of its computers.

Green Tree’s res judicata defense was equally unavailing. Green Tree argued that because the debtors objected to the proof of claim after the plan had been confirmed their objection and the adversary proceeding were barred. While a confirmed plan is intended to be binding, it does not tie the bankruptcy court’s hands. Citing Sys. & Servs. Techs., Inc. v. Davis (In re Davis), 314 F.3d 567, 570 (11th Cir. 2002), the court found that a confirmed plan may be modified pursuant to section 1329, and a claim may be disallowed after the parties have litigated the issues pursuant to section 502.

Turning to the damage award, the court found broad power under section 105 to support the bankruptcy court’s actions. The court rejected Green Tree’s argument that the damage award based on Mr. McLean’s emotional reaction to the proof of claim was erroneous because a reasonable person would not have suffered those damages. Under the standard set forth in Dawson v. Washington Mutual Bank, F.A. (In re Dawson), 390 F.3d 1139 (9th Cir. 2004), the debtor need only show actual damage based on the emotional upset and a causal connection between those damages and the discharge violation. Applying this standard, the court stated: “The McLeans’ emotional harm naturally and directly followed Green Tree’s filing of a proof of claim on a discharged debt, and it is a reasonably foreseeable result in a chapter 13 bankruptcy.”

As to the $50,000.00 award, the court found that the sanction was justified by Green Tree’s savvy with respect to debt collection but its inability to apply that same savvy to halting collection on a discharged debt. The court discussed the different effects of a fixed punitive sanction, and a per diem coercive sanction award. Where the bankruptcy court had called the award a “coercive” sanction, the issue was whether a coercive sanction could be a fixed amount or whether that sanction was impermissibly punitive as argued by Green Tree.

The court found that section 105 was broad enough to permit a fixed coercive sanction “as necessary or appropriate to encourage future compliance with the Bankruptcy Court’s orders.” Furthermore, even if the award was a “coercive” sanction, section 105(a) allows a punitive award under appropriate circumstances. The court went on to address five factors relevant to the exercise of discretion in awarding punitive damages: “(1) the nature of the defendant’s conduct; (2) the nature and extent of the harm to plaintiff[;] (3) the defendant’s ability to pay; (4) the motives of the defendant; and (5) any provocation by the debtor.” The court found that the evidence supported the finding that, while Green Tree’s conduct may not have been intentional, its conduct manifested “reckless disregard.” The fact that their computer system was such that errors of the type committed in this case were likely to occur in other cases and that Green Tree had not attempted to correct the problem at the time of the trial, justified the award. As an amount that was double the actual damages, the award of $50,000.00 was not excessive.

McLean D.Ala opinion