POC Violates Discharge Injunction

Filing a proof of claim for a deficiency judgment that was discharged in a previous bankruptcy violates the discharge injunction. Green Point Credit v. McLean, No. 14-14002 (11th Cir. July 24, 2015). Green Point Credit, LLC and Green Tree Servicing LLC (Green Tree) filed a proof of claim for a debt that had been discharged in the McLean’s previous bankruptcy and the McLeans filed an adversary proceeding seeking damages for violation of the discharge injunction. Four days later, Green Tree, acknowledging that the claim had been filed in error, withdrew it. The bankruptcy court found that Green Tree violated the discharge injunction and awarded compensatory damages for the McLean’s emotional distress, attorney’s fees, and a “coercive” sanction. The district court affirmed.

On appeal, the circuit court began with the jurisdictional finding that because a court’s contempt power is intended to vindicate the court as an institution, the power to impose sanctions for a violation of the discharge injunction is not limited to the court that issued the discharge. Therefore any bankruptcy court in Middle District of Alabama, including the court below, was empowered to enforce the discharge injunction.

With respect to the substantive issue, section 524(a)(2) provides that a discharge “operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor.” The Eleventh Circuit found that the phrase “as a personal liability of the debtor” is ambiguous, and it turned to extrinsic indications of the intended meaning of the phrase. It found that “[l]egislative history demonstrates clearly that the purpose of the statute is to ‘eliminate any doubt concerning the effect of the discharge as a total prohibition on debt collection efforts.’ H.R. Rep. No. 95-595, at 365-66 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6321.” Based on this, the court held that “the test for whether a creditor violates the discharge injunction under 11 U.S.C. § 524(a)(2) is whether the objective effect of the creditor’s action is to pressure a debtor to repay a discharged debt, regardless of the legal entity against which the creditor files its claim.”

Green Tree argued that its proof of claim was not an attempt to recover from the debtors personally, but against the bankruptcy estate. Green Tree further maintained that the inherent protections of bankruptcy procedure, including the separate legal nature of the bankruptcy estate, the oversight of the bankruptcy court, and the debtor’s ability to object to a claim, render a proof of claim different from other attempts to collect a discharged debt. The court rejected these arguments finding that the discharge injunction prohibits any application of pressure on the debtor to repay the debt and, therefore, the forum is irrelevant.

The court was also not persuaded by Green Tree’s analogy with the automatic stay where courts have found that filing a proof of claim cannot violate the stay because the stay does not prohibit acts within the bankruptcy process. Crawford v. LVNV Funding, LLC, 758 F.3d 1254, 1257, 1261-62 (11th Cir. 2014), cert. denied, __ U.S. __, 135 S. Ct. 1844 (2015). The court differentiated between the automatic stay which suspends certain actions for the protection of both the debtor and other creditors, from discharge which puts a complete end to adjudication of claims. The court concluded that filing a proof of claim for a discharged debt seeks to recover on a debt from the debtor personally (albeit through payments to the estate), and is, therefore, a violation of the discharge injunction.

Having affirmed the district court with respect to liability, the court turned to the damage award. The bankruptcy court awarded $50,000 in non-compensatory “coercive” sanctions despite the fact that Green Tree withdrew its POC well before sanctions were ordered. The bankruptcy court explained that the sanctions were intended to pressure Green Tree to decline from similar conduct in unrelated cases. The district court found that it was unclear whether the sanction was punitive or coercive but held that it was appropriate in either case.

The circuit court disagreed. Coercive sanctions are intended to bring an end to the conduct being sanctioned. Punitive sanctions, on the other hand, serve to punish past behavior and do not require that the conduct be ongoing. Punitive damages, being criminal in nature, require a higher level of due process than civil sanctions. The Eleventh Circuit found that because the conduct had ceased, the sanctions were punitive and the “bankruptcy court erred by failing to afford Green Tree the due process that imposing such sanctions requires.” The court vacated and remanded with instructions to provide due process and to determine whether Green Tree’s conduct was sufficiently egregious to justify punitive damages.

The court also vacated the award for compensatory damages with instructions to apply the analysis set forth in Lodge v. Kondaur Capital Corp., 750 F.3d 1263, 1271 (11th Cir. 2014), under which debtors must clearly establish significant emotional distress caused by the discharge violation.

McLean 11th Cir. opinion