Order Form (01/2005) 

Name of Assigned Judge 

or Magistrate Judge 

CASE NUMBER 

CASE 

TITLE 

United States District Court, Northern District of Illinois 

Charles R. Norgle 

11 c 7974 

Sitting Judge if Other 

than Assigned Judge 

DATE 8/2/2012 

Jimmy J. Jernstad, et al. vs. Green Tree Servicing, LLC 

Motion to Compel Arbitration or, Alternatively, to Dismiss [6] is granted in part and denied in part. Count II is 

dismissed without prejudice. Defendant's motion to compel arbitration is denied. Defendant's motion to 

dismiss Count I remains under advisement. 

Docketing to mail notices. 

STATEMENT 

Before the Court is Defendant Green Tree Servicing LLC's ("Defendant") Motion to Compel 

Arbitration or, Alternatively, to Dismiss Plaintiffs Jimmy and Pamela Jernstad's (collectively, "Plaintiffs") 

Complaint. For the following reasons, the motion is granted in part and denied in part. 

On December 8, 2006, Plaintiffs obtained a home equity loan from Irwin Home Equity ("Irwin"), 

evidenced by a promissory note. The promissory note was secured by a mortgage on the property. In 

consideration of the mortgage loan, Plaintiffs and Irwin entered into an Arbitration Agreement, dated December 

8, 2006. On March 4, 2009, Plaintiffs entered into a loan modification agreement with Mortgage Electronic 

Registration Systems, Inc., as nominee for Irwin. The loan modification agreement provides that "[a]ll 

covenants, agreements, stipulations, and conditions in the Note ... shall be and remain in full force and effect, 

except as herein modified." Mem. in Supp. ofDef.'s Mot. to Compel Arbitration or, Alternatively, to Dismiss 

Ex. 3. On April27, 2009, Plaintiffs received notice that the servicing of their loan was being transferred to 

Defendant. On February 24, 2010, Plaintiffs filed for Chapter 7 bankruptcy (liquidation). Plaintiffs listed 

Defendant as a creditor on their petition. A Notice of Bankruptcy Case Commencement was electronically sent 

to Defendant. 

On June 1, 2010, the Bankruptcy Court ordered a discharge of Plaintiffs' debt pursuant to 11 U.S.C. 

§ 727. The Bankruptcy order includes the following information: "The discharge prohibits any attempt to 

collect from the debtor a debt that has been discharged .... However, a creditor may have the right to enforce a 

valid lien, such as a mortgage or security interest, against the debtor's property after the bankruptcy .... " The 

Discharge of Joint Debtors, In re Jernstad, No. 10-7335 (N.D. Ill. Bankr. June 1, 2010). In other words, 

Plaintiffs' Chapter 7 discharge extinguished their personal liability for any deficiency on the debt. Johnson v. 

Home State Bank, 501 U.S. 78, 82-83 (1991). Defendant's right to foreclose on the mortgage, however, 

survives the bankruptcy. Id. at 83. As such, Defendant's "right to payment" is its right to the proceeds from the 

sale of the property. Id. 

Plaintiffs allege that from March of2011 through November 1, 2011, they received not less than fifty11C7974 Jimmy J. Jemstad, et al. vs. Green Tree Servicing, LLC Page 1 of 2 
.. STATEMENT 

five calls from Defendant seeking payment of the discharged debt. On October 14, 2011 and October 20, 2011, 

Plaintiffs faxed a written request to Defendant asking it to stop calling. Plaintiffs allege that notwithstanding 

the requests, the calls continued. Plaintiffs further allege that Defendant not only called them, but called other 

members of their family. Plaintiffs' two-count Complaint avers that Defendant violated both the Fair Debt 

Collection Practices Act ("FDCP A") (Count I), and the discharge injunction issued by the Bankruptcy Court 

(Count II). 

As an initial matter, the Court notes that an order discharging a debtor from his debts "operates as an 

injunction against the commencement or continuation of an action, the employment of process, or an act, to 

collect, recover or offset any such debt as a personal liability ofthe debtor, whether or not discharge of such 

debt is waived." 11 U.S.C. § 524(a)(2). "[T]he sole remedy for a violation of§ 524 is a contempt action 

brought in the bankruptcy court that issued the order of discharge." Peeples v. Blatt, No. 00 C 7028, 2001 WL 

921731, at * 5 (N.D. Ill. Aug. 15, 2001) (citing Cox v. Zale Del., Inc., 23 9 F .3d 91 0, 917 (7th Cir. 2001) ). Thus, 

Count II, alleging a violation of the Bankruptcy Court's discharge injunction, is dismissed without prejudice. 

Plaintiffs may be able to reopen the bankruptcy proceeding to pursue this claim. See Cox, 239 F.3d at 917. 

Plaintiffs claim under the FDCP A, however, may proceed in this Court. See Randolph v. IMBS. Inc., 

368 F.3d 726, 728 (7th Cir. 2004). Defendant moves the Court to compel arbitration pursuant to the prebankruptcy Arbitration Agreement. In ruling on a motion to compel arbitration, the Court determines "whether 

the parties' grievance belongs in arbitration," but does not "rule on the potential merits of the underlying 

dispute between the parties." Lumbermens Mut. Cas. Co. v. Broadspire Mgmt. Servs., Inc., 623 F.3d 476, 480 

(7th Cir. 2010) (internal quotation marks and citation omitted). The Court evaluates: (1) whether there is a 

valid agreement to arbitrate the issues raised in the complaint; and (2) whether the scope of the arbitration 

agreement is broad enough to encompass the dispute. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 

Inc., 473 U.S. 614, 626-27 (1985); see also Janiga v. Ouestar Capital Corp., 615 F.3d 735, 741-42 (7th Cir. 

2010) (citations omitted). 

Defendant assumes, without citing to any authority, that the Arbitration Agreement survives the Chapter 

7 discharge. It has not escaped the Court's attention that Defendant is no stranger to this issue. See Green Tree 

Servicing. L.L.C. v. Fisher, 162 P.3d 944, 948 (Okla. App. Ct. 2007) (concluding that the arbitration clause in 

the promissory note and security agreement was unenforceable because "Green Tree's alleged attempt to 

improperly collect money ... that was no longer due ... occurred after the contractual relationship had been 

terminated by discharge in bankruptcy," and "the acts giving rise to the cause of action did not have their roots 

in the former contract, but in alleged behavior that occurred subsequent to the contract's termination"). But see 

Green Tree Servicing, LLC v. Brough, 930 N.E.2d 1238, 1242-43 (Ind. App. Ct. 2010) (concluding that the 

arbitration clause in the retail installment contract was not invalidated by the bankruptcy discharge). 

The Court finds that Plaintiffs' bankruptcy discharge rendered the parties' Arbitration Agreement 

unenforceable. "What is discharged is a claim to payment." Bethea v. Robert J. Adams & Assocs., 352 F.3d 

1125, 1128 (7th Cir. 2003). Indeed, "one of the central purposes of the Bankruptcy Code ... is to give debtors 

a fresh start." United States v. Johns, No. 11-3299,2012 WL 2899060, at *11 (7th Cir. July 17, 2012) 

(citations omitted). Necessarily then, the pre-bankruptcy Arbitration Agreement--entered into in consideration 

of the mortgage loan (outlining the borrower's promise to pay)-is unenforceable. Additionally, as Plaintiffs 

point out, the parties did not sign a reaffirmation agreement. See In reTurner, 156 F.3d 713, 718 (7th Cir. 

1998) ("A reaffirmation agreement is the only vehicle through which a dischargeable debt can survive a 

Chapter 7 discharge." (citation omitted)). Accordingly, the Court concludes that the Arbitration Agreement is 

not applicable to Plaintiffs' claim under the FDCP A. Defendant's motion to compel arbitration is therefore 

denied. Defendant's motion to dismiss Plaintiffs' claim under the FDCPA remains under advisement. 

IT IS SO ORDERED. 

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