The discharge injunction does not prohibit a lienholder from seeking value for release of its lien so long as, under the specific facts of the case, its conduct is not an improper attempt to coerce repayment of the discharged debt. Bentley v. OneMain Financial Group, No. 19-8026 (B.A.P. 6th Cir. July 8, 2020). [Read more…] about Lienholder May Seek Value for Post-Discharge Release of Lien
Arbitration Clause Not Enforced in Discharge Violation Case
In the absence of an intervening legislative or Supreme Court directive, the Second Circuit followed its precedent, finding that a debtor could not be compelled to arbitrate his contempt motion for violation of the discharge injunction. Belton v. GE Capital Retail Bank, No. 19-648 (2d Cir. June 16, 2020) (consolidated with Bruce v. Citicorp Inc., No. 19-655). [Read more…] about Arbitration Clause Not Enforced in Discharge Violation Case
Failure to Disclose Employment is not a Statement under 523(a)(2)(A)
Failure to report a change in employment status is not a “statement respecting financial condition” within the meaning of Section 523(a)(2)(A) and, therefore, a debt based on overpayment of public assistance benefits made in reliance on the non-disclosure is nondischargeable. State of Oregon v. Mcharo, No. 19-1010 (B.A.P. 9th Cir. Jan. 9, 2020).
When applying for public assistance benefits, Blake Mcharo and his wife signed DHS0415R, averring that they would inform the DHS of any change in their eligibility status. After signing the application and receiving Temporary Assistance for Needy Families (TANF) benefits, Mr. Mcharo found employment. Neither he nor his wife informed the DHS of his employment.
In the Mcharo’s Chapter 7 bankruptcy, the DHS filed a claim for the amount it had overpaid in TANF benefits after Mr. Mcharo was employed. The DHS also sought an order that the debt was non-dischargeable under 523(a)(2)(A). The bankruptcy court issued a default judgment against Ms. Mcharo but declined to do the same against Mr. Mcharo, finding that his failure to report his employment was an unwritten statement respecting financial condition falling outside the purview of either section 523(a)(2)(A) or (B). The State of Oregon appealed to the Ninth Circuit Bankruptcy Appellate Panel. [Read more…] about Failure to Disclose Employment is not a Statement under 523(a)(2)(A)
District Court Refuses to Dismiss FCRA Class Action Lawsuit For Negligent Incorrect Credit Reporting On Discharged Student Loan Subtitle: Court finds CRA’s failure to have a procedure in place to distinguish which student loans are discharged is negligence.
Before filing for bankruptcy, the Debtor incurred a student loan (ultimately held by Navient) to attend the Reformed Theological Seminary. The seminary was not a Title IV-accredited institution.
The Debtor filed for bankruptcy, listed this loan, and received an order of discharge. Both Navient and Experian Information Solutions LLC. (“Experian”) Received notice of the discharge order. Experian prepared the Debtor’s credit report and described the Navient Loan as “account charged off,” with an outstanding balance and a past due balance.
On April 29, 2019, the Debtor filed a Complaint against Experian in the District Court for the Southern District of New York, alleging violations of the Fair Credit Reporting Act (“FCRA”) found at 15 U.S.C. § 1681 et seq and the New York Fair Credit Reporting Act (“NY FCRA”), which has similar provisions. The Debtor claimed that Experian negligently (Count I) and intentionally (Count II) violated 15 U.S.C. § 1681e(b) and the companion New York statutes (Counts III and IV).
15 U.S.C. § 1681e(b) states
Whenever a consumer reporting agency prepares a consumer report it shall follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates.
The Complaint pled that Experian prepared Debtor’s credit report with an inaccuracy in that Debtor’s debt with Navient should have been reported as discharged in his bankruptcy. This is because the loan was for a non-Title IV school and therefore was not subject to the exceptions to discharge found at 11 U.S.C. § 523(a)(8)(B).
Experian filed a motion to dismiss. Experian first argued that the Complaint pled only a dispute about the legal effect of the discharge, not a factual inaccuracy. The Court disagreed.
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Bankruptcy Court May Not Enforce Discharge Order from Other District
On direct interlocutory appeal, the Fifth Circuit found that courts may not use their contempt powers to enforce discharge orders issued by other courts outside their judicial districts. The court also held that the private student loans at issue were not subject to section 523(a)(8)(A)(ii)’s nondischargeability provision because that provision applies only to educational benefits where, as in the case of grants or scholarships, the obligation to repay is conditional. Crocker v. Navient Solutions LLC, No. 18-20254 (5th Cir. Oct. 22, 2019). [Read more…] about Bankruptcy Court May Not Enforce Discharge Order from Other District
Court Has Discretion to Deny Arbitration in Discharge Injunction Case
The Fifth Circuit found that the test it established in In re Nat’l Gypsum Co., 118 F.3d 1059, 1069 (5th Cir. 1997), was still good law notwithstanding the intervening case of Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018), and that, under National Gypsum, the bankruptcy properly exercised its discretion to deny the creditor’s motion to compel arbitration in an action alleging discharge injunction violation. Henry v. Educ. Fin. Serv., No 18-20809 (5th Cir. Oct. 17, 2019).
NCBRC, NACBA and Professor Jay Westbrook provided an amicus brief, authored by NACBA member Allan Gropper, in support of the debtor in this case.
Stephanie Henry filed for chapter 13 bankruptcy ten years after entering into a student loan contract with Wells Fargo’s predecessor. After she successfully completed her five-year plan, Wells Fargo sent her a letter containing language to the effect that it was attempting to collect the remaining debt on the loan. Ms. Henry filed an adversary proceeding alleging violation of the discharge injunction. Wells Fargo moved to compel arbitration in accordance with a clause in the lending agreement under which Ms. Henry agreed to have any complaint “arising under or relating to” the debt settled by arbitration. The bankruptcy court denied Wells Fargo’s motion to compel arbitration on the basis that the cause of action did not arise under or relate to the student loan contract. The court certified the case for interlocutory appeal directly to the Fifth Circuit. [Read more…] about Court Has Discretion to Deny Arbitration in Discharge Injunction Case
Arbitration Clause Does Not Constrain Court’s Contempt Power
Finding that “[w]ords in a consumer agreement cannot deprive the bankruptcy court of the inherent power to enforce compliance with an injunction,” the district court found an arbitration clause in a consumer contract did not constrain the court’s contempt powers. Verizon Wireless Personal Communications, LP v. Bateman, No. 14-5369, Adv. Proc. No. 18-1394 (M.D. Fla. Sept. 24, 2019).
Christopher Bateman filed for chapter 7 bankruptcy listing Verizon as an unsecured creditor. Verizon did not acknowledge or take part in the bankruptcy in any way. Five months after Mr. Bateman obtained his discharge, Verizon sent him a letter attempting to collect the discharged debt. Mr. Bateman moved the court to hold Verizon in contempt for violation of the discharge injunction. In response, Verizon moved to compel arbitration, invoking its Customer Agreement with Mr. Bateman which provided that any dispute which “in any way relates to or arises out of” the agreement is subject to arbitration. The bankruptcy court found that its power to enforce its order was not subject to the terms of Mr. Bateman’s Customer Agreement with Verizon. [Read more…] about Arbitration Clause Does Not Constrain Court’s Contempt Power
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
Rejection of Unexpired Lease Equals Pre-Petition Breach of Lease Agreement
Under section 365(g), rejection of an unexpired lease is treated as breach of the lease contract not termination of the lease. Therefore, the lessor’s claim against the debtors for rent based on post-petition, post-rejection occupancy of the leased property was part of the pre-petition breach and was discharged in the debtors’ chapter 7 bankruptcy. In re Roberson, No. 17-8041 (B.A.P. 6th Cir. May 30, 2019) (unpublished).
Joi and Anthony Roberson defaulted on their lease midway through their lease term. When the lessor, GCB Properties III, Ltd., initiated eviction proceedings, they filed for chapter 7 bankruptcy listing the defaulted rent as one of their debts. Neither the trustee nor the Robersons assumed the unexpired lease and the Robersons received their discharge. During the pendency of their bankruptcy case, GCB continued to try to evict them and the Robersons obtained a judgment against GCB for violation of the automatic stay. After discharge, GCB attempted to collect the rent for the months the Robersons lived in the property from the date of the statutory rejection of the lease through the date the Robersons moved out of the property. Furthermore, GCB applied the judgment against it as set-off against unpaid rent. The bankruptcy court found that the rental default up through the time the Robersons vacated the property was discharged in their bankruptcy and therefore the lessor was not entitled to set-off.
GCB appealed to the Bankruptcy Appellate Panel for the Sixth Circuit.
It was undisputed that, by operation of section 365(d)(1), the unexpired lease was automatically rejected 60 days post-petition when neither the Robersons nor the chapter 7 trustee assumed it. The issue was what effect that rejection had on the ongoing unpaid rent as the Robersons continued to occupy the property. Relying on the recent case of Mission Prod. Holdings, Inc. v. Tempnology, LLC, No. 17–1657, 587 U.S. ___, ___ S. Ct. ___, 2019 WL 2166392, at *9 (U.S. May 20, 2019), the BAP found that, under the express language of section 365(g)(1), rejection of the unexpired lease was tantamount to a breach of the rental agreement. Section 502(g)(1) provides that a claim based on a rejected unexpired lease agreement shall be allowed or disallowed “the same as if such claim had arisen before the date of the filing of the petition.” Section 727(b) includes in chapter 7 discharge any claim arising prior to the date of the petition. In Miller v. Chateau Cmtys, Inc. (In re Miller), 282 F.3d 874 (6th Cir. 2002), the Sixth Circuit found that when an expired lease is rejected, debt based on post-petition, post-rejection rent is considered part of the pre-petition breach and is therefore included in the discharge.
The BAP was unpersuaded by GCB’s argument that, once the lease was rejected, any unpaid rent due after that point was no longer a continuation of a pre-petition breach of the lease agreement, but was a new debt based on termination of the lease and the debtors’ status as holdover tenants under Ohio law. The BAP found that because both section 365(g)(1) and the holding in Mission teach that rejection of the lease is not the equivalent of termination but is deemed a breach of the lease agreement, the debtors did not become holdover tenants. While a landlord may take steps in accordance with the lease agreement or with Ohio landlord tenant law to terminate the lease upon breach, GCB did not do so in this case.
In conclusion, the panel offered the following caution: “The Panel cannot overstate the narrow gauge of this opinion, which is premised solely upon the conclusion that rejection of an unexpired lease under § 365(g) creates a breach of the lease, not a termination. Because GCB relied exclusively on its contrary view, the Panel finds no error in the bankruptcy court’s ruling.”
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