Law Firm and Counsel Joint and Severally Liable for D/C Injunction Violation

Posted by NCBRC - June 15, 2021

A creditor law firm and one of its individual attorneys may be held in contempt on a joint and several liability basis for violation of the discharge injunction when the lawyer fails to cease a garnishment action and return collected wages upon learning of the debtor’s discharge in bankruptcy. Ragone v. Stefanik & Christie, LLC, No. 20-8013 (B.A.P. 6th Cir. May 13, 2021).

Pizza Pan Elyria, LLC, obtained a state court judgment against the debtor. After the debtor filed for chapter 7 bankruptcy, Pizza Pan assigned the judgment to the law firm of Stefanik & Christie (the Firm). The bankruptcy court closed the case without discharge and John Christie, a member of the Firm, filed a notice of garnishment against the debtor on behalf of the Firm. The bankruptcy court reopened the debtor’s bankruptcy case and he obtained a discharge in June, 2015.

The Firm through its counsel, Mr. Christie, continued the garnishment action despite notification by the debtor’s attorney of the discharge. The debtor filed an “Emergency Motion to Stay Disbursements and Terminate the Wage Garnishment” in the state court, and the Firm moved to reopen the debtor’s bankruptcy and revoke his discharge. Meanwhile, the state court granted the debtor’s emergency motion in July, 2016, and terminated the garnishment action. After some procedural delays, the Firm ultimately discontinued pursuit of its motion to revoke discharge in the bankruptcy court.

One year later, the debtor filed a motion to reopen and for sanctions. The debtor argued that by failing to end the garnishment action and to turn over the garnished funds, the Firm and its counsel, Mr. Christie, violated the discharge injunction. After trial, the bankruptcy court found the Firm and Mr. Christie in contempt and held them jointly and severally liable for damages. They appealed to the bankruptcy appellate panel for the Sixth Circuit.

Citing Taggart v. Lorenzen, __ U.S. __, 139 S. Ct. 1795 (2019), the BAP found that, while the discharge injunction does not create a private right of action, a party may be held in contempt if the debtor can show with clear and convincing evidence that its conduct violated the injunction and there was no reasonable basis for believing the conduct might be lawful. Under the current circumstances, the court stated, “when a creditor learns of a debtor’s discharge and has ‘no objectively reasonable basis for concluding that’ its ongoing wage garnishment activity would not violate the discharge injunction, then there is no ‘fair ground of doubt’ to support the belief that the creditor can continue to garnish the debtor’s wages or retain improperly garnished funds.”

The panel turned to the bankruptcy court’s conclusion that the Firm and Mr. Christie had no reasonable basis for believing their conduct was lawful, citing the facts that “(1) Christie is a licensed attorney who engages in collections work; (2) Christie had access to the advice of experienced bankruptcy attorneys in this case; (3) Christie continued to litigate the Garnishment Action for months after learning of Ragone’s discharge; (4) Christie took months to investigate Wentz’s claim that Ragone had received a discharge when a simple search of the court’s publicly accessible records would have confirmed such a fact; and (5) at the time of the trial in the bankruptcy court, the Appellants still had not returned the funds that were improperly garnished post-discharge to Ragone.” The panel upheld the bankruptcy court’s finding of contempt.

The panel also found that the bankruptcy court did not err in imposing joint and several liability on Mr. Christie and the Firm to disgorge $4,275.39 in wrongfully-garnished wages. The panel found that Mr. Christie’s liability was not based simply on his membership in the Firm, but was based on his actions as counsel for the creditor and the personal benefit he stood to gain from the debtor’s bankruptcy estate.

As to the award of damages, the panel found that a court has broad discretion to determine an appropriate sanction, including awarding all improperly garnished wages not limited to those garnished after the creditor became aware of the discharge.

The court affirmed.

Concurring in part and dissenting in part, Judge Dales argued that, while it was proper to hold the Firm in contempt, the court erred in holding Mr. Christie jointly and severally liable. Judge Dales pointed to a lack of evidence that, as an employee of the Firm, Mr. Christie personally received any of the funds that were improperly withheld by the Firm. Nor was there any evidence to support a finding that Mr. Christie was the alter ego of the Firm. Judge Dales cautioned that the majority opinion could run counter to the recent case of City of Chicago v. Fulton, __ U.S. __, 141 S. Ct. 585 (2021), where the Supreme Court held that mere retention of funds is not an “act” within the dictionary definition of the word.

Ragone 6th BAP May 2021

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