Three Cases of Discharge Injunction Violations

Posted by NCBRC - April 7, 2014

Three recent cases involve sanctions for violation of the discharge injunction by a creditor filing suit in state court over a debt discharged in bankruptcy. King v. Williams (In re King), No. 12-3701 (8th Cir. March 5, 2014); In re Gracia, No. 13-1373 (B.A.P. 9th Cir. April 4, 2014); In re Hopkins, No. 09-5835 (Bankr. S.D. Ia. April 1, 2014).

In King, the bankruptcy court found that a post-petition loan was neither an effective reaffirmation agreement nor an entirely new loan. In February, 2010, Debtor, King, filed for chapter 13 bankruptcy. He did not include his debt owed to creditor, Williams, in his bankruptcy, agreeing instead to continue payments toward the debt outside bankruptcy. In April, 2010, King converted to chapter 7, again without including Williams’ claim though he continued to make payments on the loan. One week after conversion, Williams and King entered into a new loan agreement for $81,000 (the April loan) following their practice of incorporating and replacing prior debt with the new, larger, debt. King obtained his discharge in November, 2010.

In March, 2011, King sought to reopen the case and list the debt on the April loan. Williams objected claiming the April loan constituted a reaffirmation of pre-petition debt. The court granted the motion to reopen and discharged the $76,200 that remained on the debt. It found that there was no reaffirmation because the April agreement was not submitted to the court as required by section 524(c). “An agreement seeking to reaffirm pre-discharge debt and incorporate it into a new post-discharge debt is only enforceable if numerous requirements are met, including receipt of a bankruptcy court’s express approval of the agreement. See 11 U.S.C. § 524(c). King and Williams did not submit their agreement to the bankruptcy court. King’s bankruptcy was closed in November of 2010.”

Later, Williams, through his attorney Wyse, sought judgment in state court for the April loan as well as two post-discharge loans. King moved to reopen his bankruptcy, seeking sanctions for violation of the discharge injunction. The bankruptcy court found that because the April loan incorporated the pre-petition debt and Williams failed to offer evidence of what portion of the loan was new, the entire debt had been discharged in bankruptcy. The court also rejected Williams’ argument that the April loan did not incorporate pre-petition debt, but was an entirely new obligation. The consistent prior practice of the parties rendered this argument incredible. The court sanctioned Williams and his attorney for King’s legal fees and ordered them to dismiss the state court action seeking to recover on the April debts.  (The court rescinded its order to dismiss cases involving two other debts which King stipulated were post-discharge).

The Bankruptcy Appellate Panel for the Eighth Circuit affirmed, No. 12-6014 (Oct. 9, 2012), and Williams and Wyse appealed to the Eighth Circuit. Because Williams failed to satisfy the requirements for reaffirmation with respect to the April loan, the issue on appeal centered on the bankruptcy court’s factual findings that the April loan represented pre-petition debt plus an unknown amount of new debt. Though the bankruptcy court was apparently ready to permit Williams to pursue the portion of the April loan that represented new debt, Williams failed to offer evidence of how the April debt was apportioned. The Eighth Circuit deferred to the bankruptcy court’s factual findings and resolution of conflicting testimony and found no error.

King opinion

In In re Gracia, No. 13-1373 (B.A.P. 9th Cir. April 4, 2014), the debtor, Gracia, filed a chapter 7 bankruptcy petition on November 9, 2009. He did not list his creditor, Banegas, on his schedules. He received a discharge on March 11, 2010.

On October 7, 2010, Banegas filed suit in state court alleging fraud in connection with the pre-petition loan. Gracia reopened his bankruptcy in January, 2011, to add Banegas as a creditor and that case was closed in March, 2011. On October 26, 2012, Gracia sought to reopen his bankruptcy case and get a temporary restraining order to halt the state court proceedings and to hold Banegas and his attorney in contempt for violation of the injunction arising from entry of the discharge order in the bankruptcy case.

Banegas responded that the state case involved post-discharge debts evidenced by bounced checks Gracia gave him. The court ordered Banegas to amend his complaint to make a distinction between pre- and post-discharge debt. A first amended complaint failed to correct the violation of the discharge injunction, but a second amendment was approved by the bankruptcy court to go forward in the state court. The court then turned to the appropriate disposition of the prior discharge injunction violation. The court awarded attorney fees for willful violation of the discharge injunction but did not award fees for the costs of the state court action.

On appeal the bankruptcy appellate panel addressed the issue of whether Banegas’s violation of the discharge injunction was willful. Citing Espinosa v. United Student Aid Funds, Inc., 553 F.3d 1193, 1205 n.7 (9th Cir. 2008), aff’d, 559 U.S. 260 (2010) and In re Nash, 464 B.R. 874 (B.A.P. 9th Cir. 2012), the court found that willfulness requires a finding that the party knew of the application of the injunction and intended to take the actions that violated that injunction. Subjective intent is not a factor. The moving party has the burden of showing willful violation by clear and convincing evidence. “If a bankruptcy court finds that a party has willfully violated the discharge injunction, it may award a debtor actual damages, punitive damages, and attorney’s fees and costs.”

The BAP found that the facts of the case supported the bankruptcy court’s finding that Banegas’s state court complaint was an attempt to collect a pre-petition debt that had been discharged. He persisted in this effort even upon direction from the bankruptcy court to amend the complaint to remove all reference to the pre-petition debt. The BAP deferred to the bankruptcy court’s factual findings as to the meaning of the state court complaints and the creditor’s explanation of them. To the extent that the conduct of the creditor and his attorney occurred after the bankruptcy court issued an order to amend the state court complaint to remove any reference to a pre-petition debt and they failed to do so, they met the two prongs of the Nash test for discharge injunction violation.

Gracia opinion

In re Hopkins, No. 09-5835 (Bankr. S.D. Ia. April 1, 2014), also involved a series of loans and informal understandings between debtor and creditor. The Hopkins, a married couple, filed for bankruptcy and listed the loan they had taken out with Ms. Hopkins’ employer, Harding, a personal injury attorney. They made several assurances to Harding that they would continue paying on the loan despite the bankruptcy. Eventually, however, they stopped paying on the loan and received a discharge. Harding later filed a pro se lawsuit in state court. The Hopkins sought sanctions for discharge violation in the bankruptcy court.

The bankruptcy court agreed that Harding’s conduct was sanctionable. His reliance on a 1970 case for the argument that the Hopkins had reaffirmed their debt by verbal agreement and continued payments, was inappropriate in light of the 1978 enactment of section 524(c). See also In re Martin, 474 B.R. 789 (B.A. P. 6th Cir. 2012) (voluntary post-petition payments on a pre-petition debt do not reaffirm debt where requirements of section 524(c) are not met).

The state court filings failed to mention the bankruptcy case in what the court deemed an overt attempt to avoid early dismissal of the state court case. In addition, the state court pleadings were gratuitously upsetting to Diane Hopkins, who learned of the seriousness of her brother’s stage 4 cancer through Harding’s factual allegations despite its irrelevance to the case.

The bankruptcy court awarded $1,500.00 in actual damages related to lost wages and emotional distress, attorney’s fees in the amount of $9,000.00, and punitive damages based on Harding’s “calculated disregard of section 524 and a shocking disrespect for the Bankruptcy Code” in the amount of $10,000.00.

Hopkins opinion

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