The bankruptcy court’s contempt order against a student loan servicer requiring it to pay off the entire amount of the debtor’s student loan was punitive rather than compensatory or coercive and, therefore, the award exceeded the court’s civil contempt power. Great Lakes Educ. Loan Serv. Inc. v. Leary, No. 20-8050 (S.D.N.Y. June 22, 2021). [Read more…] about Sanction Against Student Loan Servicer Exceeded Court’s Civil Contempt Power
Sanctions Against Student Loan Servicer
A student loan servicing company’s failure, over the course of five years, to respond to an adversary complaint and multiple court orders, justified a finding of contempt and sanctions against the servicer requiring it to pay off the debtor’s student loans to the DOE in the amount of $354,629.62, and pay damages to the debtor in the amount of $24,000. Leary v. Great Lakes Educational Loan Services, No. 15-11583, Adv. Proc. No. 15-1295 (Bankr. S.D.N.Y. Sept. 8, 2020).
Dischargeability of Sanctions Against Attorney
State law discovery sanctions owed to a non-governmental entity for compensatory purposes do not fall under section 523(a)(7)’s exception to discharge for fines or penalties, and are therefore dischargeable. Costs related to the State Bar’s disciplinary actions are owed to a governmental agency, are punitive rather than compensatory in nature, and are therefore excepted from discharge. Where the debtor’s law license suspension was contingent upon her paying nondischargeable costs, the suspension was not discriminatory in violation of section 525(b). Albert-Sheridan v. State Bar of Calif., No. 19-60023 (9th Cir. June 10, 2020). [Read more…] about Dischargeability of Sanctions Against Attorney
UpRight Law Not Entirely Upright
The bankruptcy court did not abuse its discretion in imposing sanctions for violation of section 526(a) against UpRight law firm for statements in its Attorney Disclosures which were prohibited by an earlier settlement agreement and were therefore misleading. Law Solutions of Chicago, LLC v. Corbett, No. 19-11405 (11th Cir. Aug. 31, 2020). [Read more…] about UpRight Law Not Entirely Upright
7th Circuit Rules Creditor Should be Held in Contempt for Jailing Discharged Debtor but No Contempt for Creditor’s Counsel
On August 13, 2019, the Seventh Circuit Court of Appeals reversed in part and affirmed in part the lower courts. On appeal, NACBA board member Tara Twomey submitted an amicus brief on behalf of the National Consumer Bankruptcy Rights Center (NCBRC) supporting the Debtor.
The facts underlying the case started in 2001. Jacqueline M. Sterling (“Debtor”) was sued in state court for approximately $520.00 in membership fees owed to Southlake Nautilus Health & Racquet Club (“Creditor”). The Creditor was represented by the law firm Austgen, Kuiper & Associates (“Creditor’s Counsel”). After obtaining a judgment in 2002, the Creditor’s Counsel filed a “proceeding supplemental” in state court to collect on the judgment. The Debtor did not appear at the collection hearings and ultimately the state court issued a “body attachment” (bench warrant) against Debtor to show cause for violating the court’s orders.
In 2010, the Debtor filed for bankruptcy protection and listed the Creditor but not the Creditor’s Counsel. The Debtor obtained a discharge. The Creditor was notified of the discharge but did not forward the discharge to the Creditor’s Counsel. Creditor’s Counsel did not know the discharge order.
In 2011, the Debtor had a flat tire and was assisted by the local police. The police discovered the bench warrant and the Debtor was arrested and held in jail for two days.
Subsequently, the Debtor sued the Creditor and Creditor’s Counsel in Bankruptcy Court for violation of the discharge injunction found in Section 524 of the Bankruptcy Code.
The Bankruptcy Court ruled in favor of the Creditor and Creditor’s Counsel. The Bankruptcy Court found the Debtor had failed to prove that the Creditor’s Counsel knew of the discharge when it continued collection proceedings. Further, the Creditor didn’t violate the discharge injunction because it was unaware of the status of the case against the Debtor, and that it didn’t direct Creditor’s Counsel to take any particular actions. The ruling was affirmed by the District Court.
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SCOTUS Adopts No Fair Ground of Doubt Standard for Discharge Order Violation
In a unanimous decision, the Supreme Court held that “a court may hold a creditor in civil contempt for violating a discharge order if there is no fair ground of doubt as to whether the order barred the creditor’s conduct.” Taggart v. Lorenzen, No. 18-489, 587 U. S. ___ (June 3, 2019).
Chapter 7 debtor, Bradley Taggart, was involved in pre-petition litigation in state court at the time he filed for bankruptcy. After he obtained his discharge, Sherwood, an opposing party in the state court litigation, obtained a judgment against him. Sherwood then sought attorney’s fees, and the state court awarded those fees notwithstanding Ninth Circuit precedent making clear that the post-petition attorney’s fees were discharged along with Taggart’s other debts. The bankruptcy court found that Sherwood was aware of the discharge and intended the act that violated it and, under that standard, it held Sherwood in contempt of the discharge order. The bankruptcy appellate panel reversed the sanction award and the Ninth Circuit affirmed, holding that Sherwood could not be held in contempt in light of its good faith belief that its conduct did not violate the discharge injunction regardless of whether that belief was reasonable. [Read more…] about SCOTUS Adopts No Fair Ground of Doubt Standard for Discharge Order Violation
Ambush at State Trial Costs Creditor and Her Counsel over $200,000 for Discharge Injunction Violation
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.
Attorney Fee Award Upheld Against Student Loan Servicer
The district court found that the bankruptcy court did not abuse its discretion in holding the student loan servicer in contempt for failing to apply the student debtor’s payments outside the plan in accordance with pre-petition payments as required by the debtor’s confirmed chapter 13 plan. Penn. Higher Educ. Assistance Agency v. Berry, No. 18-444 (D. S.C. March 5, 2019).
Berry had student loans issued by the Department of Education (DOE) and administered by the Pennsylvania Higher Education Assistance Agency (PHEAA). She was paying off her loans under an Income-Driven Repayment plan (IDR) and a Public Service Loan Forgiveness (PSLF) program. In her chapter 13 bankruptcy, her confirmed amended plan provided for continued payments on her student loan debts outside the plan with those payments being applied exactly as before thereby allowing her to continue to benefit from the IDR and PSLF. The PHEAA, however, put the loans into administrative forbearance under which it applied the payments to principal and interest. Ms. Berry filed a Motion to Enforce seeking sanctions in the amount of $22,317.30, representing the attorney fees she incurred pursuing proper application of the payments. The DOE eventually settled its portion of the action for $6,000 and Ms. Berry sought the remaining amount from PHEAA. The bankruptcy court granted Ms. Berry’s entire attorney fee request consisting of $22,317.30 of which, after the DOE’s $6,000 settlement, the PHEAA owed $16,317.30.
On appeal, the district court began with PHEAA’s defense that it was limited in its authority by its servicing contract with the DOE. The court found that the bankruptcy court did not commit clear error in its application of law or in its findings of fact when it concluded that PHEAA had a contractual obligation to deal with borrower’s complaints and to bring unresolved problems to the attention of the DOE. In this case, it did neither.
The district court turned to the bankruptcy court’s conclusion that bad faith was not necessary to imposition of sanctions under section 105(a), reciting the necessary elements of contempt as: “(1) The existence of a valid decree of which the alleged contemnor had actual or constructive knowledge; (2) . . . that the decree was in the movant’s ‘favor’; (3) . . . that the alleged contemnor by its conduct violated the terms of the decree, and had knowledge (at least constructive knowledge) of such violations; and (4) . . . that [the] movant suffered harm as a result.” Here, even if PHEAA lacked authority to treat Ms. Berry’s payments as provided for in her plan, the bankruptcy court did not err in finding that it could not simply ignore the confirmed plan. At the very least, it should have sought guidance from the DOE, or objected to the plan.
Along the same lines, PHEAA argued that the bankruptcy court abused its discretion by holding it in contempt where its conduct was governed by its contract with the DOE and was therefore not willful. The court found that the bankruptcy court’s authority to impose sanctions under section 105(a) did not require a finding of willfulness.
The court found that the bankruptcy court correctly based its decision on its broad authority to craft a remedy based on the particular circumstances of a given case and that, here, the bankruptcy court was persuaded by PHEAA’s failure to make any attempt to either comply with the debtor’s plan or seek guidance from the DOE. This finding was not an abuse of discretion.
Finally, the district court affirmed the bankruptcy court’s allocation of sanctions as having been based on the debtor’s efforts to obtain compliance from PHEAA.
Bankruptcy Court Says Call First Before Seeking Attorney’s Fees
The Bankruptcy Court for the Eastern District of Michigan recently ruled whether a creditor must pay attorney’s fees to the objecting party when the creditor filed a claim with deficient information. In re Ball, No. 17-22574 (Bankr. E.D.MI. Jan. 22, 2019).
The issue was brought before the court by the chapter 13 trustee. A creditor, Financial Edge Credit Union (FECU), was owed a debt for overdraft charges which was an open-end consumer debt. FECU filed a deficient proof of claim that only attached a copy of the deposit account contract and did not include the last payment date or the date of the debtor’s last transaction.
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