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).
Chapter 7 debtor, Miranda Renfrow, was the owner of the ophthalmology practice, Envision Medical & Surgical Eye Care, P.C. (Envision), when she purchased the ongoing practice, furniture, and obsolete equipment of Associated Ophthalmology of Tulsa, Inc. (AO), owned by the Joe C. Cole Revocable Trust (Trust), for $100,000, financed by a promissory note and security interest in assets. The combined practice, however, quickly became overwhelmed with debt and Ms. Renfrow was unable to keep up with the payments on the loan.
Courtney Grogan, on behalf of the Trust filed suit in state court alleging breach of contract and unjust enrichment. Ms. Grogan was represented by Clark Phipps of the AHN law firm in the state action. With this and other litigation hanging over her head, and with a practice that was not sustainable, Ms. Renfrow returned leased equipment, referred her patients to other physicians, and closed the office. She then filed for chapter 7 bankruptcy listing Grogan as a creditor with a contingent claim. Phipps conducted a Rule 2004 hearing to inquire into the financial aspects of the closure of Ms. Renfrow’s practice. Ms. Renfrow received her discharge in June, 2017, including discharge of all of Grogan’s claims against her personally. Grogan did not object to discharge.
The field of combat then returned to state court with Phipps and Grogan, recognizing that Envision was judgment-proof, strategizing on how to continue their pursuit of Ms. Renfrow personally despite the bankruptcy discharge. Grogan filed a second amended petition in state court retaining the two earlier claims and adding a claim for post-petition fraudulent transfer of funds from Envision to Ms. Renfrow in violation of Oklahoma’s Uniform Fraudulent Transfer Act. The amended petition retained the language seeking money recovery from Ms. Renfrow personally. When Ms. Renfrow’s counsel asked Phipps to withdraw the two claims relating to pre-discharge debts, Phipps replied that it would be “procedurally awkward” to do so, and assured Ms. Renfrow’s counsel and the court that his client would not be seeking to recover discharged debts from Ms. Renfrow personally. After some back and forth, Phipps ultimately dismissed the non-UFTA claims.
The UFTA claim was ostensibly based on Ms. Renfrow’s intercept of funds coming in on Envision’s $76,000 in accounts receivable. However, Envision had collected only $3,500 of the accounts receivable and, of that amount, Ms. Renfrow withdrew only $3,155.
Because the state court action sought to recover personally from Ms. Renfrow, her bankruptcy counsel filed an adversary complaint alleging violation of the discharge injunction.
In keeping with his pre-trial statements, Phipps conducted the UFTA trial in state court as if seeking recovery of post-discharge transfers. It was only during closing argument that Phipps, for the first time and over objection by Ms. Renfrow’s counsel, argued that his client was owed amounts assertedly representing the value of the goodwill, furniture and equipment (both of which Grogan had declined to take pre-trial) from the sale of AO. Phipps asked the jury to award a total of $120,000. The jury found Ms. Renfrow personally liable for $89,500. Ms. Renfrow’s appeal of that verdict is currently pending.
The bankruptcy court, in a lengthy opinion, made no secret of its disdain for Phipps’s and Grogan’s conduct in the state venue. “Grogan and AHN aimed to deny Renfrow the benefit of her discharge by abusing the judicial system through harassment, concealment, misrepresentation, and trial by ambush,” and, further, the court found that “[t]he UFTA claim was, indeed, a ruse to collect discharged debt.”
The court concluded that, by operation of section 524(a)(1) of the Code, the state court judgment was void. The court specified that, as the enjoined party, Grogan bore the risk of violating the discharge injunction. Ms. Renfrow had no duty to anticipate the violation and raise it at trial. (The issue of who bears the risk of violation was discussed in the recent argument before the Supreme Court in Taggart v. Lorenzen, No. 18-489).
The court turned to Phipps and Grogan’s defenses.
Rooker-Feldman:
The court found that the Rooker-Feldman doctrine was inapplicable as the adversary complaint in bankruptcy was filed concurrently with the state case, and federal jurisdiction was not cut off upon state court judgment. Furthermore, the adversary complaint was not an ersatz appeal of the state court judgment but addressed purely bankruptcy issues. The state court judgment was currently on appeal in the state court and, therefore, there was no final judgment in state court.
Renfrow’s Limited Options:
Phipps and Grogan argued that Ms. Renfrow had three choices in addressing the issue of discharge violation. First, she could have removed the entire state case to bankruptcy court. Second, she could have reopened her bankruptcy seeking a determination of dischargeability. Third, she could have asserted discharge as a defense in the state court action. The creditor argued that Ms. Renfrow chose the third option and had to live with the consequences.
The bankruptcy court disagreed. Ms. Renfrow had a fourth option. She could do exactly what she did and file an adversary proceeding in the bankruptcy court concurrently with the state action. Moreover, her options were not mutually exclusive. She could, and did, raise discharge as a defense in the state action.
Issue Preclusion:
The court was unpersuaded by the creditor’s assertion of issue preclusion based on the state court judgment. It found the doctrine inapplicable because the state court judgment was on appeal and, therefore, not final. In addition, Ms. Renfrow did not have a full and fair opportunity to litigate the issue as she and her counsel were blindsided at trial by assertion of the claims during closing argument.
Grogan’s Liability:
Finally, Ms. Grogan asserted that she should not be liable for the actions of her counsel. The court was unimpressed. For a discharge injunction violation, the actor need only know of the discharge and intend the conduct that violated it. She need not intend to violate the injunction. Additionally, agency law applies to attorney client relationships to make Ms. Grogan liable for the actions of Mr. Phipps. The court also noted that both Ms. Grogan and Mr. Phipps specifically discussed tactics for circumventing the discharge order.
Having concluded that the state trial was a sham intended to collect a discharged debt, and that the state court judgment against Ms. Renfrow was void the court turned to her damages.
Emotional Distress:
The court found that “Defendants acted egregiously, vindictively, deceptively, and in knowing or reckless disregard for Renfrow’s discharge.” Based on the egregious nature of Phipps and Grogan’s conduct, the court found that Ms. Renfrow established “significant emotional harm.” It awarded $50,000 in recompense.
Fees and Expenses:
The state court action cost Ms. Renfrow $17,306 and the bankruptcy action cost her $37,561 for a total of $54,867. The court awarded the full amount.
Punitive Damages:
The court found Phipps and Grogan acted with malice and deceit, exploiting Ms. Renfrow’s financial and emotional vulnerability. The court was also offended by Phipps’s trial tactic of belittling Ms. Renfrow’s bankruptcy case as an assault not just on Ms. Renfrow, but on the bankruptcy process itself . Moreover, Mr. Phipps was a sophisticated actor. The court awarded $100,000 in punitive damages.
For Jim Haller’s extensive discussion of this case go here.
Renfrow Bankr ND Okl April 2019
Tags: Sanctions, discharge injunction
