The creditor and her counsel were found liable for violation of the discharge injunction to the tune of over $200,000 after the creditor and her counsel blindsided the debtor during closing arguments in their state court litigation by grossly expanding the scope of the creditor’s claimed damages to encompass discharged debts. In re Renfrow, No. 17-1027 (Bankr. N.D. Okla. April 23, 2019). [Read more…] about Ambush at State Trial Costs Creditor and Her Counsel over $200,000 for Discharge Injunction Violation
SCOTUS Hears Arguments on Discharge Violation Sanctions
Addressing the reach of a bankruptcy court’s contempt powers in the context of a violation of the discharge injunction, the Supreme Court heard arguments on April 24, in the case of Taggart v. Lorenzen, No. 18-489.
Daniel Geyser appeared for the debtor, Bradley Taggart. Nicole Saharsky represented the creditor, Shelley Lorenzen, executor. Sopan Joshi, from the office of the Solicitor General, argued as amicus not in support of either party. NACBA submitted an amicus brief in support of reversal.
The controversy hinged on a state court finding that Mr. Taggart’s creditor could seek contractual attorney fees in the litigation before it, even though those fees would have been subject to the discharge order injunction had Mr. Taggart not “returned to the fray.” The bankruptcy court found that the “returned to the fray” doctrine did not apply and that the litigation violated the discharge injunction. It awarded sanctions, at least in part representing the debtor’s attorney’s fees. The Ninth Circuit ultimately reversed the sanctions stating broadly that a creditor acting in good faith cannot be held liable for discharge injunction violation even if that belief is unreasonable. Lorenzen v. Taggart (In re Taggart), 888 F.3d 438 (9th Cir. 2018).
At the outset, all the parties agreed that the Ninth Circuit rule was incorrect. The parties agreed that in the case of a discharge violation, even one made in good faith, the bankruptcy court may order the creditor to cease the violation and restore any property taken.
Where there was disagreement between parties was in the application of the bankruptcy court’s contempt powers. Calling contempt a severe remedy, several of the Justices appeared concerned at its application in the context of discharge injunction where the creditor’s conduct was based on a “fair ground of doubt.”
The debtor advocated for the bankruptcy court’s discretion under section 105(a) to make the determination as to the nature of the creditor’s conduct and whether it merits sanctions, including attorney’s fees. The creditor has a “safe harbor” in Rule 4007 which allows it to seek guidance on the question of dischargeability from the bankruptcy court.
The government advocated for a purely objective test as to the reasonableness of the creditor’s belief that the discharge injunction did not apply. In Justice Gorsuch’s questioning, it appeared that an objective reasonableness would prevail even in the absence of the creditor’s subjective reasonableness (i.e. where there existed good reason to believe the conduct non-violative but the creditor was unaware of that good reason and went forward nonetheless.)
The creditor advocated a similar “reasonable good faith belief,” test as the government (though with the subjective element intact) emphasizing the “chilling effect” of requiring a creditor to jump through the Rule 4007 hoop to have dischargeability determined in an action before the bankruptcy court.
One concern expressed by several Justices was the establishment of a strict liability standard which put the creditor in a position of being permitted to seek a ruling on dischargeability from the state court but not be able to rely on that ruling as a defense to discharge injunction violation if the state court was in error.
The question of who should bear the burden of harm echoed throughout the questioning. Justice Kavanaugh noted to Mr. Geyser that under tradition rules of injunction good faith is a defense. Mr. Geyser disagreed stating that traditionally, the burden of uncertainty falls on the person subject to the decree. In a similar vein, Justice Kagan asked Ms. Saharsky: “As between the victim of the violation and the person who, with all the good faith in the world, perpetrated the violation, why shouldn’t we look to the person who perpetrated the violation?”
Justice Roberts, while noting the long history of the American Rule against fee-shifting, posited the possibility that a bankruptcy court could award sanctions for contempt using the debtor’s attorney’s fees as a reasonable number for that award.
See the SCOTUS blog for further discussion of the argument here.
Bankruptcy Court Joins Minority, Grants Discharge, and Denies the Trustee’s Motion to Dismiss for Delinquent Post-Petition Mortgage Payments
On March 28, 2019, the Bankruptcy Court for the District of Arizona Denied the Trustee’s Motion to Dismiss based on the Debtors’ post-petition mortgage default. In doing so, she joined the minority position on this issue.
The Debtors filed their Chapter 13 bankruptcy on July 18, 2014. Their plan proposed to pay back mortgage arrears to their mortgage lender through plan payments to the trustee. The plan also indicated that they would make direct payments to the mortgage lender for future monthly mortgage payments. At the end of the plan, the mortgage lender filed a Response to the Trustee’s Notice of Final Cure for Prepetition Arrears on the Mortgage Claim, agreeing that the prepetition default was cured, but stating that the post-petition payments due on and after September 1, 2017, were delinquent. The Trustee then filed a motion to dismiss.
The court addressed the issue of whether payments on a mortgage paid directly to the mortgage holder and referenced in a chapter 13 plan are “payments under the plan” for purposes of 11 U.S.C. §1328(a) and if delinquent is a legitimate basis to dismiss the bankruptcy and deny a discharge.
Section 1328(a) states in pertinent part: “as soon as practicable after completion by the debtor of all payments under the plan,… the court shall grant the debtor a discharge of all debts provided for by the plan…” Similarly, 11 U.S.C. § 1307(c)(6) allows a trustee to move to dismiss for cause including “material default by the debtor concerning a term of a confirmed plan;…” As a result several Chapter 13 trustees file motions to dismiss if they discover that a debtor is delinquent in mortgage payments.
There are two schools of interpretation of “payments under the plan.”
To read more click here.
7th Circuit Reverses Bankruptcy Courts’ Uniform Rule to Keep Debtor’s Vehicle in Chapter 13 Post-Confirmation Estate
This opinion was based on the consolidated appeals of seven cases. Each of the seven debtors filed a petition for bankruptcy under Chapter 13 of the Bankruptcy Code in the Bankruptcy Court for the Northern District of Illinois. The uniform confirmation order in this district (in most cases) is that upon confirmation, the property of the estate remains property of the estate. City of Chi. v. Marshall, 281 F. Supp. 3d 702, 704 (N.D. Ill. 2017).
Thereafter, the debtors incurred fines as the registered owners of vehicles involved in parking or traffic violations of Chicago’s Municipal Code. In each bankruptcy case, the City of Chicago sought payment of the outstanding post-petition traffic fines as administrative expenses under § 503 of the Bankruptcy Code, which, under § 507(a), would give these claims priority status (second only to domestic support obligations), ahead of pre-petition creditors in the distribution of the assets of the bankruptcy estates. Id.
Six of the seven cases were heard before Bankruptcy Judge Barnes. Judge Barnes’s oral ruling rejected Chicago’s argument. “He found that the City’s attempt to collect post-petition fines as administrative expenses had “a dangerous irritative effect, which is that the debtor could continue even after the first administrative expense claim for the life of the plan to incur additional tickets and they could be added to the plan,” depleting the assets available to unsecured creditors. (Citation omitted.) Judge Barnes concluded that “the traditional set of circumstances holds true, which is the debtor remains responsible for these claims,” and that the City had the same collections options as any post-petition creditor: it could move for relief from the stay and pursue state court remedies, or it could seek dismissal of the bankruptcy case. (Citation omitted.)” Id. at 705.
The seventh case was heard by Judge Hollis. She also rejected Chicago’s argument in a written opinion, In re Haynes, 569 B.R. 733 (Bankr. N.D. Ill. 2017), finding that post-petition traffic tickets did not qualify as administrative expenses.
These cases were consolidated on appeal to the District Court for the Northern District of Illinois which affirmed the Bankruptcy Courts’ decisions. City of Chi. v. Marshall, 281 F. Supp. 3d 702 (N.D. Ill. 2017).
Click here to read more.
Sterling v. Southlake Nautilus Health and Racquett Club, Inc. , No. 18-2773 (7th Cir.)
Type: Amicus
Date: February 6, 2019
Description: Whether the bankruptcy court erred in ruling that a creditor and its law firm did not violate the discharge injunction when, after the Chapter 7 debtor’s discharge, she was arrested pursuant to a state court bench warrant that had been issued in supplemental collection proceedings against the debtor in state court.
Result: Pending
Bankruptcy Court holds Debtor is Entitled to Chapter 13 Discharge even if Co-Debtor is Delinquent on Post-Petition DSO Payments
A bankruptcy court recently reviewed the issue of whether a debtor can receive a discharge under § 1328 even if her co-debtor husband is delinquent on a post-petition DSO payment. The court examined the requirements for discharge using the plain language of § 1328(a).
In this case, the debtors, Mr. and Mrs. Hernandez, filed a joint Chapter 13 bankruptcy. At filing, neither owed a DSO. Approximately two years into their confirmed plan, Mr. Hernandez became liable for a DSO and subsequently fell behind in those payments. Both parties were aware of the DSO and neither reported the delinquency to their attorney nor the trustee.
After completion of the plan payments, Mrs. Hernandez moved for entry of discharge under 11 U.S.C. § 1328(a). The Trustee objected arguing Mrs. Hernandez was unjustly enriched and that failure to amend the plan demonstrates bad faith. No party disputed that all plan payments were made.
To read more and access the opinion click here
Eleventh Circuit Interprets Section 1328(a)’s “Provided for”
A mortgage paid outside the plan is not “provided for by the plan” for purposes of discharge of the debtor’s liability under section 1328(a). Dukes v. Suncoast Credit Union, No. 16-16513 (11th Cir. Dec. 6, 2018).
When she filed her bankruptcy petition, Chapter 13 debtor, Mildred Dukes, was current on two mortgages held by Suncoast Credit Union. Though she listed both mortgages in her schedules, the credit union filed a proof of claim only for the second mortgage. Her confirmed plan stated that the mortgages would be paid outside the plan. Ms. Dukes completed her plan payments and was granted discharge of all debts provided for by the plan. During the plan, however, Ms. Dukes defaulted on both mortgages. The credit union foreclosed on the property under the second mortgage and sought deficiency judgment against Ms. Dukes under the first mortgage. It moved to reopen her bankruptcy to obtain an order that her liability on the first mortgage was not discharged. The bankruptcy court found in favor of the credit union, and the district court affirmed. [Read more…] about Eleventh Circuit Interprets Section 1328(a)’s “Provided for”
Taggart v. Lorenzen, No. 18-489 (USSCt)
Type: Amicus
Date: November 15, 2018
Description: Whether creditor’s unreasonable belief that conduct did not violate discharge injunction precludes finding of contempt.
Result: Vacated and Remanded, June 3, 2019. On remand, affirmed, No. 16-35402 (9th Cir. Nov. 24, 2020).
Richardson v. Priderock Capital Partners, No. 18-1099 (4th Cir.)
Type: Amicus
Date: March 26, 2018
Description: Whether postpetition rent due under prepetition residential lease was postpetition debt discharged in pro se Chapter 7 debtor’s case.
Result: Pending
Anderson v. Credit One Bank, No. 16-2496 (2d Cir.)
Type: Amicus
Date: February 27, 2017
Description: Whether a predispute arbitration agreement strip a court of the inherent power of contempt to enforce its own orders.
Result: Affirmed and remanded, March 7, 2018.