National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

Discharge Injunction

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Fourth Circuit Affirms Post-Discharge Protections: Koontz Decision Preserves FDCPA Rights for Bankruptcy Debtors

In a major victory for consumer bankruptcy debtors and their advocates, the U.S. Court of Appeals for the Fourth Circuit reversed a troubling lower court decision in Koontz v. SN Servicing Corporation, holding that a mortgage servicer’s post-discharge collection efforts could still be subject to the Fair Debt Collection Practices Act (FDCPA), even where the debtor’s personal liability had been extinguished. This opinion affirms that a debtor’s in rem obligations after discharge are still “debts” under the FDCPA—and that debtors remain “consumers” protected by its provisions.

This result is due in no small part to the strong advocacy of the National Association of Consumer Bankruptcy Attorneys (NACBA), the National Consumer Bankruptcy Rights Center (NCBRC), and the National Consumer Law Center (NCLC), who filed a powerful joint amicus brief in support of the debtor, John Koontz.

The Legal Issue: Can a Discharged Debtor Still Owe a “Debt”?

After Koontz received a Chapter 7 discharge, SN Servicing Corporation (SNSC) sent him two letters asserting late fees and refusing to apply a payment—despite the discharge. The district court dismissed Koontz’s FDCPA and West Virginia Consumer Credit and Protection Act (WVCCPA) claims, reasoning that post-discharge, Koontz no longer had a “debt” and therefore no statutory protection.

The Fourth Circuit firmly rejected that view.

Citing Johnson v. Home State Bank, the court held that a discharged mortgage debt remains an enforceable obligation, albeit only through in rem remedies like foreclosure. Thus, Koontz was still a “consumer” obligated to pay a “debt” under 15 U.S.C. § 1692a(3)-(5), and SNSC’s letters constituted “collection activity.”

Amici’s Role: Correcting the Record and Reframing the Law

The joint amicus brief filed by NACBA, NCBRC, and NCLC was pivotal. The brief:

  1. Clarified the effect of a bankruptcy discharge:
    Drawing heavily from Johnson, the amici explained that discharge eliminates personal liability but not the obligation itself. The mortgage lender retains rights against the property, and the borrower retains an obligation to pay to avoid foreclosure.
  2. Refuted the “no personal liability, no debt” fallacy:
    The lower court had erroneously concluded that without personal liability, there is no “debt.” The brief dissected this error, showing how such logic would gut consumer protection statutes, including the FDCPA, Truth in Lending Act, and Fair Credit Reporting Act.
  3. Highlighted § 524(j) of the Bankruptcy Code:
    Congress explicitly preserved a creditor’s ability to collect post-discharge payments “in lieu of pursuit of in rem relief.” But, as amici argued, nothing in § 524(j) authorizes deceptive or unfair conduct—FDCPA standards still apply.
  4. Emphasized real-world impact:
    Many debtors like Koontz attempt to keep their homes post-bankruptcy. The lower court’s decision would have undermined that goal by stripping them of protections when they try to pay—essentially penalizing them for compliance.
  5. Explained broad statutory context:
    The amici reviewed other statutes and jurisprudence, showing a consensus that non-recourse or in rem debts are still subject to consumer protection laws. They warned that allowing the district court’s reasoning to stand would sow confusion and injustice across consumer finance law.

Why This Matters for Debtors and Their Counsel

The Fourth Circuit’s decision is more than just a statutory interpretation victory—it’s a win for real people trying to rebuild after bankruptcy:

  • Preserves essential consumer protections post-discharge.
  • Recognizes ongoing obligations and vulnerability of debtors seeking to retain homes.
  • Ensures mortgage servicers must comply with the FDCPA, even if they’re only pursuing in rem remedies.
  • Empowers consumer attorneys to challenge improper fees, misapplied payments, or coercive letters.

In a time when mortgage servicers increasingly push the envelope in post-discharge collections, Koontz provides a much-needed check—and clear precedent that the FDCPA still applies.

The Advocacy Behind the Win

This case once again demonstrates the indispensable role of systemic advocacy. By joining forces, NACBA, NCBRC, and NCLC ensured that the Fourth Circuit understood the broader legal, policy, and practical implications. As their brief argued:

“The implications of the lower court’s error are severe for consumer bankruptcy debtors… The ruling effectively strips discharged debtors of important statutory protections against debt collection abuses… This error of law should be reversed.”

Their voices made a difference—not just for John Koontz, but for thousands of future debtors navigating life after bankruptcy.

Looking Ahead

With the case remanded, Koontz can pursue his FDCPA § 1692f and state law claims. But the bigger picture is already clear: debtors remain consumers, and their rights do not vanish with a discharge.

This decision, and the amicus advocacy behind it, will resonate in courts across the country as consumer advocates continue to push back against unfair post-bankruptcy collection practices.

In re Koontz opinion

Amici brief of NCBRC, NACBA and NCLC

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Ninth Circuit Holds that SSA Cannot Automatically Recoup Overpaid Benefits from a Bankrupt Beneficiary

The Ninth Circuit has issued a significant ruling in In re Cooper, reversing the Bankruptcy Appellate Panel’s (BAP) decision that allowed the Social Security Administration (SSA) to recoup overpaid Social Security Disability Insurance (SSDI) benefits from a debtor who had received a bankruptcy discharge. The court’s decision strengthens the protections afforded to debtors under the Bankruptcy Code by ensuring that the SSA cannot automatically sidestep the discharge injunction through the doctrine of equitable recoupment.

Background

Darrin Lenald Cooper, an SSDI beneficiary, filed for Chapter 7 bankruptcy and received a discharge of his debts in 2020. Before his bankruptcy filing, SSA had mistakenly overpaid Cooper’s benefits due to an administrative error. However, neither Cooper nor SSA realized this mistake at the time of the bankruptcy proceedings. Two years after his discharge, SSA attempted to recover the overpayment by reducing Cooper’s monthly SSDI benefits.

Cooper moved to hold SSA in contempt for violating the discharge injunction, but the bankruptcy court ruled in favor of SSA, allowing the agency to recoup the overpayment. The BAP affirmed the bankruptcy court’s decision, reasoning that Cooper’s entitlement to SSDI benefits and the overpayment were logically related under the equitable recoupment doctrine. Cooper then appealed to the Ninth Circuit.

The Ninth Circuit’s Ruling

The Ninth Circuit reversed the BAP’s decision, rejecting SSA’s argument that it had an automatic right to recoupment. The court clarified that the logical relationship test, which determines whether obligations arise from the same transaction or occurrence, must include an equitable analysis in the bankruptcy context.

Key points from the ruling include:

  • Recoupment is not automatic: The court emphasized that the doctrine of equitable recoupment does not grant creditors an unfettered right to recover discharged debts. Courts must consider the fundamental purpose of the Bankruptcy Code, which is to provide a fresh start for honest but unfortunate debtors.
  • SSA’s own error: The overpayment resulted from SSA’s mistake, and Cooper had engaged in no malfeasance. The court held that allowing SSA to recoup under these circumstances would be inequitable and inconsistent with the protections of bankruptcy law.
  • Protecting Social Security benefits: The ruling aligns with the purpose of both the Social Security Act and the Bankruptcy Code in shielding SSDI benefits from creditors post-bankruptcy. The court reinforced that SSA, like any other creditor, is subject to the discharge injunction.

Implications for Debtors and Consumer Bankruptcy Practitioners

This decision is a crucial victory for consumer bankruptcy debtors, ensuring that SSA cannot unilaterally decide to recoup pre-bankruptcy overpayments from post-bankruptcy benefits. The ruling will likely influence how SSA handles overpayment cases in bankruptcy and may lead to a reevaluation of its internal policies.

For bankruptcy practitioners, this case underscores the importance of challenging improper recoupment claims and advocating for debtors’ rights under the Bankruptcy Code. It also reinforces the need to scrutinize government agencies’ claims in bankruptcy proceedings to ensure they do not overreach.

NACBA and NCBRC’s Role

The National Association of Consumer Bankruptcy Attorneys (NACBA) and the National Consumer Bankruptcy Rights Center (NCBRC) played a vital role in this case. Both organizations submitted an amici brief, authored by NCBRC Board member Tom Mayer of Kramer Levin Naftalis & Frankel LLP, arguing against SSA’s overreach. Mayer also participated in oral argument before the Ninth Circuit, helping to secure this important win for consumer debtors.

This ruling sets an essential precedent for protecting the rights of bankruptcy debtors against improper government recoupment efforts and ensuring that the fresh start promised by the Bankruptcy Code remains intact.

In re Cooper 9th Circuit Opinion

In re Cooper – Amici Brief

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4th Circuit Considers Whether the FDCPA Protects Discharged Debtors From Improper Collection

The 4th Circuit Court is considering an appeal from the District Court for the Northern District of West Virginia which dismissed the Debtor’s FDCPA complaint due to lack of standing since his debt was discharged in a prior chapter 7 bankruptcy.

Facts

John Koontz entered into a mortgage loan with CitiFinancial, which was later serviced by SN Servicing Corporation (SNSC) and then by Land Home Financial Services (LHFS). After Koontz received a Chapter 7 bankruptcy discharge in 2017, he continued to make voluntary payments on the loan. He alleged that SNSC and LHFS charged excessive late fees and failed to respond to his requests for information.

Analysis

The district court analyzed whether Koontz had standing to pursue claims under the FDCPA and WVCCPA, given his bankruptcy discharge. Under the FDCPA, the court determined that Koontz was not obligated or allegedly obligated to pay the debt because the bankruptcy discharge extinguished his personal liability. The court referenced the Fourth Circuit’s decision in Lovegrove v. Ocwen Home Loans Servicing, LLC, where post-discharge mortgage statements containing disclaimers were not considered attempts to collect a debt. The court concluded that SNSC’s and LHFS’s communications, which included similar disclaimers, were not attempts to collect a debt under the FDCPA.

For the WVCCPA claims, the court held that Koontz was not a “consumer” as defined by the statute because his personal obligation to pay the mortgage debt was discharged in bankruptcy. The court referenced its previous decision in Fabian v. Home Loan Center, Inc., which held that a discharged debtor is not a “consumer” under the WVCCPA and therefore lacks standing to bring claims under the Act. The court rejected Koontz’s reliance on other federal court cases, noting that many involved phone calls rather than written correspondence and did not alter the applicability of Fabian.

The court dismissed Koontz’s claims, reaffirming that a bankruptcy discharge eliminates personal liability for the debt, thereby negating standing under the FDCPA and WVCCPA. The court emphasized the importance of clear and unequivocal disclaimers in post-discharge communications to avoid violating debt collection laws.

NCBRC along with the National Association of Consumer Bankruptcy Attorneys and the National Consumer Law Center filed a brief in support of the Debtor.

Amici Brief in Support of Appellant – Koontz vs SN Servicing

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The Supreme Court Holds That the Bankruptcy Code Does Not Authorize a Nondebtor Discharge Without the Consent of the Claimants

Holding

On June 27, 2024, the Supreme Court in a 5-4 decision in Harrington v Purdue Pharma, Case No. 23-124 (2024) held that the Bankruptcy Code does not authorize a release and injunction that, as part of a Chapter 11 reorganization plan, effectively discharges claims against nondebtors without the consent of affected claimants.

Facts

Purdue Pharma, owned by the Sackler family, faced numerous lawsuits due to its role in the opioid crisis. The Sacklers withdrew approximately $11 billion from Purdue before the company filed for Chapter 11 bankruptcy in 2019.  As part of Purdue’s reorganization plan, the Sacklers proposed to return $4.3 billion to the bankruptcy estate in exchange for a judicial order releasing them from all opioid-related claims.

Analysis

The Court’s analysis focused on whether the bankruptcy code allows a court to discharge claims against nondebtors without the consent of the claimants. The Court examined Section 1123(b) of the bankruptcy code, which addresses the contents of a Chapter 11 reorganization plan. The court ruled that Section 1123(b)(6), which allows a chapter 11 plan to “include any other appropriate provision not inconsistent with the applicable provisions of this title” does not allow the plan to discharge the debts of a nondebtor without the consent of the affected nondebtor claimants.

The Court applied the ejusdem generis canon, interpreting the catchall provision in Section 1123(b)(6) in light of its surrounding context. The specific paragraphs of Section 1123(b) allow a plan to include provisions related to the debtor’s claims and property, but they do not extend to discharging claims against third parties without consent. The catchall does not grant bankruptcy courts the authority to discharge nondebtors’ liabilities without affected claimants’ consent.

The Court also noted that the Bankruptcy Code generally reserves discharge benefits for the debtor who places virtually all its assets on the table, and it specifically limits discharge for claims based on fraud or willful and malicious injury. The Sackler discharge sought to extinguish a broad range of claims, including fraud and wrongful death, without the Sacklers placing all their assets on the table, thus exceeding what the code permits for debtor.

Furthermore, the Court emphasized that historical bankruptcy practice has consistently reserved discharge benefits for debtors who fully surrender their property. The Court found no precedent for extending discharge benefits to nondebtors without consent, reinforcing the conclusion that the current bankruptcy code does not authorize such releases.

NCBRC Note: The language in Section 1123(b)(6) is almost identical to the language found in Section 1322(b)(11) (“the plan may – include any other appropriate provision not inconsistent with this title”).

GORSUCH, J., delivered the opinion of the Court, in which THOMAS, ALITO, BARRETT, and JACKSON, JJ., joined. KAVANAUGH, J., filed a dissenting opinion, in which ROBERTS, C. J., and SOTOMAYOR and KAGAN, JJ., joined.

Harrington v Purdue Pharma – SCOTUS June 27 2024

Tips

  1. Ensure that any proposed release in a bankruptcy reorganization plan aligns strictly with the provisions of the bankruptcy code, particularly focusing on the debtor’s rights and responsibilities.
  2. Be aware that the bankruptcy code does not support nonconsensual releases for nondebtors, especially for claims involving fraud, willful injury, or wrongful death.
  3. Consider alternative legal strategies for resolving claims against nondebtors, such as negotiating consensual releases that comply with the requirements and limitations of the Bankruptcy Code.

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The Ninth Circuit Considers Whether the Social Security Administration Can Recoup Overpayments Without Violating the Discharge Injunction

In In re Cooper, Case No. 24-1084 (9th Cir. 2024) the Ninth Circuit is determining whether the Ninth Circuit B.A.P. erred when it held that the Social Security Administration (SSA) could recoup an overpayment of Social Security Disability Insurance (SSDI) benefits from Darrin Cooper’s ongoing SSDI payments, without violating the discharge injunction in bankruptcy.

Darrin Cooper was overpaid SSDI benefits due to an administrative error, receiving $73,112.90 more than he was entitled to because the SSA did not account for his concurrent workers’ compensation benefits. After filing for Chapter 7 bankruptcy and receiving a discharge, Cooper discovered the overpayment and the SSA began deducting the overpaid amount from his ongoing SSDI payments.

The B.A.P.’s legal analysis focused on the equitable doctrine of recoupment, which allows a creditor to offset a debtor’s claim with a counterclaim arising from the same transaction. The court applied the “logical relationship test” to determine whether the overpayment and ongoing SSDI payments arose from the same transaction. The court found that both the overpayment and the ongoing payments stemmed from Cooper’s entitlement to SSDI benefits, establishing a strong logical relationship. Therefore, the SSA’s actions did not violate the discharge injunction. The court distinguished this case from others where recoupment was denied, such as in In re Madigan, by emphasizing that Cooper’s SSDI payments did not involve separate disability periods or different reimbursement agreements. Instead, Cooper’s ongoing SSDI entitlement and the overpayment were part of a continuous disability claim, thereby satisfying the same transaction requirement. The court also noted that Cooper did not seek available remedies under the Social Security Act, such as requesting a waiver or appealing the overpayment decision, which could have addressed his financial concerns.

Both NCBRC and NACBA submitted an amicus brief in support of the Debtor.

In re Cooper – Appellants Brief

In re Cooper – NCBRC-NACBA Amicus Brief

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The Supreme Court Rules Native American Tribes Do Not Have Sovereign Immunity From The Bankruptcy Code.

On June 15, 2023, the court ruled that Native American tribes are subject to the automatic stay and discharge injunction of the Bankruptcy Code.

“We conclude that the Bankruptcy Code unequivocally abrogates the sovereign immunity of any and every government that possesses the power to assert such immunity.  Federally recognized tribes undeniably fit that description; therefore, the Code’s abrogation provision plainly applies to them as well.”

In an 8-1 decision (J. Gorsuch dissenting) in Lac DU Flambeau Band of Lake Superior Chippewa Indians v. Coughlin, No. 22-227, 2023 U.S. LEXIS 2544 (June 15, 2023), the court held that the term “governmental unit” found in 11 U.S.C. § 101(27) includes Native American tribes.  As such, Native American tribes are included in the waiver of sovereign immunity under 11 U.S.C. § 106.

NACBA and NCBRC submitted an amici curiae brief in support of the Debtor along with Legal Aid Chicago and the Hon. Judith Fitzgerald, Hon. Joan Feeney, Hon. Phillip Shefferly, Hon. Eugene Wedoff, Hon. Steven Rhodes and the Hon. Carol Kenner.  The brief was submitted by Daniel J. Bussel of KTBS Law LLP and G. Eric Brunstad, Jr. of Dechert LLP.

Factual and Procedural Background

The creditor, federally recognized Tribe Lac du Flambeau Band of Lake Superior Chippewa Indians (the Band) through its wholly owned business entity, Lendgreen, lent the Debtor, Brian Coughlin, $1,100 in the form of a high-interest, short-term loan.

Coughlin filed for Chapter 13 bankruptcy before he fully repaid the loan. Lendgreen continued its efforts to collect on his debt, even after it was reminded of the pending bankruptcy petition.

Coughlin eventually filed a motion in Bankruptcy Court, seeking to have the stay enforced against Lendgreen, its parent corporations, and the Band (collectively, petitioners). Coughlin also sought damages for emotional distress, along with costs and attorney’s fees.

The Band moved to dismiss. They argued that the Bankruptcy Court lacked subject-matter jurisdiction over Coughlin’s enforcement proceeding, as the Band and its subsidiaries enjoyed tribal sovereign immunity from suit. The Bankruptcy Court agreed; it held that the suit had to be dismissed because the Bankruptcy Code did not clearly express Congress’s intent to abrogate tribal sovereign immunity.

In a divided opinion, the Court of Appeals for the First Circuit reversed, concluding that the Bankruptcy Code unequivocally strips tribes of their immunity. In re Coughlin, 33 F. 4th 600, 603-604 (2022). In so holding, the First Circuit deepened a split among the Courts of Appeals on this question. Compare Krystal Energy Co. v. Navajo Nation, 357 F. 3d 1055, 1061 (CA9 2004) (holding that the Bankruptcy Code abrogates tribal sovereign immunity), with In re Greektown Holdings, LLC, 917 F. 3d 451, 460-461 (CA6 2019) (concluding the reverse).

Analysis

“Petitioner Lac du Flambeau Band of Lake Superior Chippewa Indians (the Band) is a federally recognized Indian tribe. One of the Bands businesses, Lendgreen, extended respondent Brian Coughlin a payday loan. Shortly after receiving the loan, Coughlin filed for Chapter 13 bankruptcy, triggering an automatic stay under the Bankruptcy Code against further collection efforts by his creditors. But Lendgreen allegedly continued attempting to collect Coughlin’s debt. Coughlin filed a motion in the Bankruptcy Court to enforce the automatic stay and recover damages. The Bankruptcy Court dismissed the suit on tribal sovereign immunity grounds. The First Circuit reversed, concluding that the Code unequivocally strips tribes of their immunity. 33 F. 4th 600, 603.

“As an initial matter, the definition of governmental unit exudes comprehensiveness from beginning to end. Congress has rattled off a long list of governments that vary in geographic location, size, and nature. 101(27) (including municipalities, districts, Territories, Commonwealths, States, the United States, and foreign states). The provision then proceeds to capture subdivisions and components of every government within that list. Ibid. (accounting for any department, agency, or instrumentality of the United States …, a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state). And it concludes with a broad catchall phrase, sweeping in other foreign or domestic government[s]. Ibid….

“The pairing of foreign with domestic is of a piece with those other common expressions. For instance, if someone asks you to identify car manufacturers, foreign or domestic, your task is to name any manufacturers that come to mind, without particular regard to where exactly the cars are made or the location of the company’s headquarters. Similarly, at the start of each Congress, a cadre of newly elected officials solemnly swear to support and defend the Constitution of the United States against all enemies, foreign and domestic. 5 U. S. C. 3331. That oath which each Member of Congress who enacted the Bankruptcy Code took indisputably pertains to enemies anywhere in the world. Accordingly, we find that, by coupling foreign and domestic together, and placing the pair at the end of an extensive list, Congress unmistakably intended to cover all governments in 101(27)s definition, whatever their location, nature, or type.

“It is also significant that the abrogation of sovereign immunity in 106(a) plainly applies to all governmental unit[s] as defined by 101(27). Congress did not cherry-pick certain governments from 101(27)’s capacious lists and only abrogated immunity with respect toSection those it had so selected. Nor did Congress suggest that, for purposes of 106(a)s abrogation of sovereign immunity, some types of governments should be treated differently than others. Instead, Congress categorically abrogated the sovereign immunity of any governmental unit that might attempt to assert it. …

“Reading the statute to carve out a subset of governments from the definition of governmental unit, as petitioners view of the statute would require, risks upending the policy choices that the Code embodies in this regard. That is, despite the fact that the Code generally subjects all creditors (including governmental units) to certain overarching requirements, under petitioners reading, some government creditors would be immune from key enforcement proceedings while others would face penalties for their noncompliance. And while the Code is finely tuned to accommodate essential governmental functions (like tax administration and regulation) as a general matter, petitioners would have us find that certain governments are excluded from those provisions reach, notwithstanding the fact that they engage in tax and regulatory activities too. There is no indication that Congress meant to categorically exclude certain governments from these provisions enforcement mechanisms and exceptions, let alone in such an anomalous manner. Cf. Law v. Siegel, 571 U. S. 415, 424 (2014) (declining to read into the Code an exception Congress did not include in its meticulous and carefully calibrated scheme). …

“Putting the pieces together, our analysis of the question whether the Code abrogates the sovereign immunity of federally recognized tribes is remarkably straightforward. The Code unequivocally abrogates the sovereign immunity of all governments, categorically. Tribes are indisputably governments. Therefore, 106(a) unmistakably abrogates their sovereign immunity too. …

Conclusion

“We find that the First Circuit correctly concluded that the Bankruptcy Code unambiguously abrogates tribal sovereign immunity. Therefore, the decision below is affirmed.”

In re Coughlin

Coughlin NACBA Amicus SCt March 2023

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Debtor Misled Lender as to Discharge of Debt

The debtor’s conduct gave the lender reason to believe that the debt owed to him was not discharged, so the bankruptcy court did not err in finding that the lender’s continued collection efforts lacked the requisite scienter to support a contempt sanction for violation of the discharge injunction. Bernhard v. Kull (In re Bernhard), No. 22-854 (E.D. Pa. Feb. 3, 2023).

When his business began to suffer financially, the debtor borrowed $60,000 from a childhood friend. He made sporadic efforts to pay the debt, but at one point he told the lender he might have to file for bankruptcy. He assured the lender that if he did file, he would not include the debt in his bankruptcy. When the debtor finally did file for Chapter 7 bankruptcy, he did not list the debt in his schedules, inform the trustee or the court of the debt, or inform the lender of the bankruptcy. The lender therefore didn’t learn of the bankruptcy until the debtor received his discharge. Over a year after discharge, the debtor executed a new promissory note to the lender and made more payments on the debt.

At some point, however, the lender grew impatient with the slow progress on repayment and filed suit in state court. The debtor returned to the bankruptcy court and filed an adversary proceeding against the lender and his attorneys seeking a finding of contempt for violation of the discharge injunction. The bankruptcy court found that the debt had been discharged and that the defendants violated the discharge injunction. But the court declined to hold the defendants in contempt finding that they lacked the requisite scienter.

The only issues raised in the debtor’s appeal to the district court related to the bankruptcy court’s findings that 1) the lenders had no notice of the bankruptcy case until it was too late to seek a finding that the debt was nondischargeable, 2) that the defendants lacked the requisite scienter to justify a contempt order, and 3) that the debtor was not entitled to any relief other than a declaration that the debt was discharged.

The court set out the requirements for establishing contempt for a discharge violation: “(1) a discharge order has been entered (discharging the applicable debt); (2) the creditor had notice of the discharge order; (3) collection efforts continued regardless; and (4) there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.”

Here the court took into consideration the long-term friendship between the parties, the debtor’s efforts to repay the loan including executing a post-discharge promissory note and making payments, and the debtor’s failure to tell the lender that he had filed for bankruptcy. The court found no error in the bankruptcy court’s finding that the defendants were unaware of the debtor’s bankruptcy filing until it was too late to file objections. In addition, the court found that the debtor indicated through word and action that he intended to repay the debt even after he received his discharge. All of these things gave the lender a reasonable basis to believe that the debt was not discharged and that he was within his rights to pursue repayment.

The court thus concluded that the bankruptcy court did not commit clear error in finding no basis for a contempt order against the defendants, nor did it err in finding that the only relief to which the debtor was entitled was an order declaring the $60,000 debt discharged.

The debtor has filed an appeal to the Third Circuit, case no. 23-1358.

Bernhard ED Pa Feb 2023

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Punitive Damages for Stay Violation Were Excessive

The punitive damages awarded by the bankruptcy court were unconstitutionally excessive where they were seven times greater than actual damages and the bankruptcy court increased the damages on remand because it found the lender’s success at the BAP level would eliminate a substantial disincentive to engage in the conduct establishing the automatic stay violation. Rushmore Loan Mgmt Serv., LLC v. Moon, No. 22-1126 (D. Nev. Feb. 6, 2023).

When the debtors, Adnette Gunnels-Moon and Willie Moon, filed for chapter 13 bankruptcy, they listed Rushmore as a mortgage creditor on a loan in Adnette Gunnels-Moon’s name only, but gave the wrong address for Rushmore. For that reason, Rushmore was unaware of the bankruptcy and continued to dun the debtors for monthly mortgage payments. At one point when Rushmore called Willie Moon, he told Rushmore that he and Adnette had filed for bankruptcy. The debtors obtained their discharge in 2016. But Rushmore, apparently adhering to an unwritten policy of not accepting bankruptcy notification from a third party, continued its collection activity through the bankruptcy and after discharge.

The debtors reopened their bankruptcy to seek contempt sanctions against Rushmore for violation of the automatic stay and the discharge order. The bankruptcy court found in favor of the debtors on the automatic stay claim and awarded $742.10 representing the costs of reopening the bankruptcy. It also awarded $100,000 in emotional distress damages to Willie, and $200,000 in punitive damages. The court found no discharge injunction violation because it was unclear when Rushmore became aware of the discharge. The court also awarded $56,150 in attorney’s fees, $10,857.94 in costs, and an additional $3,500 in supplemental fees.

The parties filed cross-appeals. The debtors sought to reverse the bankruptcy court’s denial of the discharge injunction claim and its refusal to award certain fees, and Rushmore sought to reverse the damages award to Willie. Rushmore did not challenge the bankruptcy court’s finding that it violated the automatic stay as to Adnette, and did not seek to overturn the $742.10 in damages based on that claim.

The BAP reversed the $100,000 award to Willie, finding Rushmore did not violate the automatic stay as to him, affirmed the finding that punitive damages were warranted but remanded for reconsideration as to the amount, and affirmed the finding that Rushmore did not violate the discharge injunction. The BAP also remanded for reconsideration of the fee awards.

On remand, the bankruptcy court awarded $67,007.94 in fees and costs and $3,500 in supplemental fees. It increased the punitive damage award to $500,000. It awarded an additional $14,827 for Adnette’s defense of Rushmore’s adversary complaint, $70,415.95 to Adnette in appellate fees related to the first fee decision, and $45,235.82 in appellate fees for the contempt decision appeal, for a total appellate fee award of $115,651.77.

The court began its analysis with Rushmore’s challenge to the attorney’s fee awards noting that the goal of section 362(k) is to return debtors to their status as it was before the automatic stay violation. Rushmore argued that the bankruptcy court should have separated out the fees attributable to litigation of the discharge injunction and deducted those fees from the total fee award on the automatic stay claim.

The district court found the bankruptcy court satisfied the BAP’s instructions by explaining that the litigation of the automatic stay violation was inextricably intertwined with the discharge violation litigation and therefore the fees were inseparable.

The district court also found that the failure of Willie’s claims did not require the court to reduce the fees based on litigation of those claims because the evidence supporting them also either supported the automatic stay claims, or were relevant to the egregiousness of Rushmore’s conduct. The court observed that, although a bankruptcy court is required to award fees causally linked to a stay violation, it may approximate. “The essential goal in shifting fees is to do rough justice, not to achieve auditing perfection.”

The court also rejected Rushmore’s contention that the bankruptcy court should have reduced the punitive damage award based on the BAP’s instruction to revisit that award in light of its having reversed the court’s award of damages to Willie. In fact, the BAP merely instructed the bankruptcy to revisit the award. The bankruptcy court complied with that instruction.

Therefore, the court affirmed the award of $70,507.94 in attorney’s fees and supplemental fees to Adnette for prosecution of the original contempt proceedings.

The court next addressed the bankruptcy court’s award of fees to Adnette for litigation surrounding Rushmore’s adversary complaint. The bankruptcy court originally declined to award those fees, but did so after the BAP remanded with instructions to revisit the issue. At that time, the bankruptcy court determined that Rushmore’s complaint sought to dismiss the automatic stay claim. Therefore, the bankruptcy court concluded that Adnette’s defense of Rushmore’s complaint was part of her litigation in support of her automatic stay claim. The district court found no error in this conclusion and affirmed the $14,827 attorney fee award.

Rushmore challenged the bankruptcy court’s award of fees incurred in the appeals of the fee decision, the supplemental fee decision, and the adversary fee decision. Specifically, Rushmore contended that the bankruptcy court should have required Adnette’s attorney to specify the amount of time he spent on the issues Adnette prevailed on, and not award any fees for the time spent on Willie’s failed claim for discharge violation.

The district court found no error in the bankruptcy court’s attorney fee award. It held that the bankruptcy court did not apportion any fees to litigation of Willie’s claims. It also held that there was no clear distinction between the evidence supporting the discharge injunction and the automatic stay claims. The court upheld the award of Adnette’s full fees for defending the fee award on appeal.

As to the appellate fees related to the appeal of the contempt order, Rushmore argued that because the bankruptcy court reduced those fees after remand by 20%, Rushmore prevailed on that appeal and the debtors were not entitled to fee shifting. While the court did not entirely agree, it found that “[t]he bankruptcy court abused its discretion in failing to apportion fees for time spent on Willie’s unsuccessful appeal on the discharge injunction issue.” It found those fees both severable as a practical matter, and not related to the automatic stay violation. The court found that it could reasonably calculate the proper reduction, and it did so, reducing the total fee award based on the contempt order by 80%, to $11,308.96.

Rushmore next argued that the awards in general were disproportionate to the actual damages of $742.10 which Adnette incurred before Rushmore ceased its offending conduct.

The court disagreed. It found that section 362(k)’s deterrent effect is furthered by permitting the debtor to recover attorney’s fees for successfully litigating an automatic stay violation. In this case, Rushmore followed an unwritten and undisclosed policy of ignoring third party information regarding bankruptcy of its borrowers. Because it learned early on that Adnette was in bankruptcy but ignored that information without telling her that the information had to come from her to compel action, it needlessly perpetuated the automatic stay violation. The bankruptcy court took these facts into consideration and did not abuse its discretion in calculating appropriate damages.

Turning to the issue of punitive damages, the court noted that, on remand, the bankruptcy court increased the punitive damage award from $200,000 to $500,000. The bankruptcy court based its decision on the reprehensible nature of Rushmore’s position that it need not act on third party information of bankruptcy and its continued collection efforts. It was also persuaded that greater deterrent was needed because the BAP’s decision against Willie’s claims eliminated his ability to sue on his own behalf for Rushmore’s conduct.

Rushmore countered that the punitive award violated its due process rights by punishing it for prevailing on appeal as to Willie.

In reviewing a punitive damage award on constitutional challenge the court considered: “the degree of the defendant’s reprehensibility or culpability, the relationship between the penalty and the harm to the victim caused by the defendant’s actions, and the sanctions imposed in other cases for comparable misconduct.”

Based on these factors, the court agreed that the punitive damage award was unconstitutionally excessive. It found the award punished Rushmore for its conduct to Willie and others similarly situated rather than for any harm suffered by Adnette. It also found an award greater than a 4:1 ratio of punitive to actual damages requires both particularly egregious conduct, and relatively small actual damages. Here, though Adnette’s award of $742.10 was small, the entire fee award was not.

Having found that the bankruptcy court erred with respect to the punitive damages award, the court found that remanding with instructions to reconsider that award would merely consume more time and money in what was already an outsized case. Therefore it calculated punitive damages. It found that Rushmore’s appeals were not unreasonable and it’s conduct not malicious. There was no evidence that it extended to other borrowers. The court concluded that a 1.5 multiplier satisfied the principles of punishment and deterrence. It reduced the award of punitive damages to $128,002.41.

As the district court anticipated, Rushmore filed an appeal to the Ninth Circuit.

Gunnels-Moon D Nev Feb 2023

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Debt Collector Can’t Blame Debtor or FDCPA for Discharge Violation

A debt collector’s efforts to collect an unsecured judgment that had been discharged in bankruptcy violated the discharge injunction even though the debtor requested information about the debt. The statement sent to the debtor was explicitly designated an “attempt to collect a debt,” and the debt collector had sufficient information to alert it to the debtor’s bankruptcy discharge. Skaggs v. Gooch (In re Skaggs), No. 17-50941 (Bankr. W.D. Va. Jan. 19, 2023).

In 1988, Virginia Cellular One, Inc., obtained a judgment against the debtor on a contract liability. The debtor owned no real estate so the judgment was unsecured. The debtor filed for bankruptcy in 2017. In 2019, he received his discharge, including Virginia Cellular’s judgment. Months later, he inherited real property. When he attempted to sell the property, the title agency erroneously told him that he would have to pay the judgment. The debtor contacted the debt collection agency handling the debt, the defendants in this case, and they provided him with a payoff statement and a discounted payoff amount. The payoff statement stated that it was “an attempt to collect a debt.” The debtor then emailed the defendants informing them that the debt had been discharged in bankruptcy. There was continued correspondence between the debtor and the defendants concerning repayment of the debt until the debtor’s bankruptcy attorney stepped in and informed the title agency that the debt had been discharged. The sale of the property was then completed, and the defendants’ collection efforts stopped.

The bankruptcy court found that the defendants’ collection efforts violated the discharge injunction and held a separate hearing to determine the appropriate damages. The debtor sought $25,000 in attorney’s fees and an additional $2,000 in various other costs.

The court noted at the outset that the defendants’ conduct did not warrant punitive damages because they ceased collection efforts and there was therefore no need to coerce compliance with the discharge order. Turning to the question of remedial damages, the court took into consideration whether the defendants had acted in good faith, finding that a court may consider good faith when determining the amount of compensatory damages.

The court was unconvinced by the defendant’s contention that its conduct was compelled by the FDCPA. The court found the statement here was more than “information about the debt” but was an unequivocal effort to collect the debt. Furthermore, the defendants’ effort to pass the blame to the debtor for failing to provide additional information about his bankruptcy was unavailing because the debtor had alerted the defendants to his bankruptcy and the further information they sought was a matter of public record.

The court concluded that the defendants had not demonstrated good faith such that they were worthy of a reduction in the damages award.

The defendants next asked the court to limit the award to $910.00, the loss the debtor incurred before the sale of the property when the defendants ceased their collection efforts. The court declined. “In effect, the defendants argue that it is reasonable for a bankruptcy debtor to incur greater costs and expenses to obtain reimbursement than the actual reimbursement, in effect rendering an award of compensatory damages meaningless.” The court found the amount of the attorney’s fees was reasonable and ordered the defendants to pay $25,000.00.

Turning to the debtor’s request for an additional $2,000 for damages related to time away from work, transportation expenses to attend hearings and depositions, and emotional distress, the court declined to award those damages, finding the debtor had not provided sufficient evidence to support them. Concerning emotional distress, the court added that the Fourth Circuit does not permit such damages in civil contempt cases.

Skaggs Bankr WD Va Jan 2023