* Of the Third Circuit, sitting by designation.



# Un ited Sta tes C our t of A pp eals

For the First C ircuit

No. 03-1102 IN RE: JOHN J. DIAMOND, III, Debtor, JOHN J. DIAMOND, III, Plaintiff, Appellant,

v. PREMIER CAPITAL, INC. and RANDALL L. PRATT, Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE [Hon. Paul J. Barbadoro, U.S. District Judge ]
Before Torruella, Circuit Judge , Stapleton, * Senior Circuit Judge , and Howard, Circuit Judge . Terrie Harman , with whom Watson, Bosen, Harman, V enci & Lemire, PAand Elizabeth Cazden , were on brief, for appellant. James S. LaMontagne , with whom Sheehan Phinney Bass + Green , was on brief, for appellee Randall L. Pratt. Michael S. Askenaizer , with whom Law Office of Michael S. Askenaizer, PLLC , was on brief, for appellee Premier Capital, Inc.

October 9, 2003-2- TORRUELLA, Circuit Judge . John J. Diamond, III, debtor andplaintiff below, appeals the district court's affirmance of the bankruptcycourt's dismissal of his complaint for failure to state
a claim. After careful review, we reverse the district court's dismissal and remand for further proceedings. I. Background Diamond, a seventeen year veteran of the rea l es tate industry, filed a voluntary Chapter 13 bankruptcy petition in October 2000 that he later converted to a Chapter 7 proceeding. One unsecured creditor, Premier Capital, Inc. ("Premier"), filed an adversaryproceeding to deny Diamond a dischar ge pursuant to 11 U.S.C. § 727 on th e basis that Diamond had concealed assets and made false oaths.

While negotiating a settlement in the discharge proceeding, Premier's attorney, Randall Pratt, allegedly told Diamond's attorney that if the dischargeability issue was not resolvedin Premier's favor, he would take action at the New Hampshire Real Est ate Commission to revoke Diamond's real estate broker's license. Diamond agreed to Premier's proposed settlement, but the bankruptcy court rejected the settlement and denied Premier's complaint on all grounds.

Diamond filed a bankruptcy court complaint against both Premier and Pratt alleging that Pratt's statement was an improper attempt to collect, assess, or recover a debt by using coercive-3-

negotiation tactics in violation of the Bankruptcy Code's ("Code") automatic stay. See 11 U.S.C. § 362(a) (2000 ). Diamon d sought actual damages, costs, attorney's fees, and punitive damages.

Premier and Pratt moved to dismiss the complaint on the grounds that Diamond failed to state a claim upon which relief couldbe granted. The bankruptcy court refused to construe Pratt's statement as a violation of the automatic st ay, holding that "lawyers have to be free t o -- I c an't say use every tactic, but
use tactics within bounds to tr y to negot iate the best deal for their client." Accepting as true the facts alleged in Diamond's complaint, the bankruptcy court concluded Pratt's statement did not "go over the line" and dismissed the complaint. Diamond appealed to the district court, which affirmed the dismissal. He now appeals the dismissal to this Court. II. Analysis Diamondargues that Premier's statement that it woul d seek revocation of his real estate license, which occurred during negotiations to settle the adversary proceeding regarding discharge, co nst ituted coercive tactics in violation of the automatic stay provision of the Bankruptcy Code. According to Diamon d, the district court erred in dismissing his complaint on the basis that the statement could not be considered coercive. We reviewthe dismissal for failure to state a claim de novo, assuming the truth of all well-pleaded material facts and indulging all1 Although Diamond's brief presents arguments that th e Court

shouldadop t a per se rule that negotiations about discharge violate the automatic stay, we do not believe this is a matter in disput e. At or al arguments and indeed in parts of his brief, Diamond's attorn ey clearly stated that negotiations about a discharge are allowed if such negotiations are not coercive. Thus, Diamond and Premier agree on this issue. -4- reasonable inference s i n favor of Diamond. Arrudav. Sears, Roebuck & Co. , 310 F.3d 13, 18 (1st Cir. 2002). A. Settlement Negotiations Concerning Denial of Discharge

We begin with the issue of whether negotiations regarding
a § 727 challenge to discharge are ever permissible, or if such negotiations should be considered a per se violation of the automatic stay. 1

"The automatic stay is one of the fundamental protections that the Bankruptcy Code affords to debtors." Jamo v. Katahdin F ederal Credit Union ( In re Jamo ), 283 F.3d 392, 398 (1st Cir . 2002). Under 11 U.S.C. § 362(a) (6), the f iling of a bankruptcy petition operates as an automatic stay of "any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case." Section 727 is a specific exemption from the automatic stay to allow for a challenge to discharge.

Whether settlement negotiations pertaining to a challenge to discharge violate the automatic stay is an issue of first impression in this Court. Recently, however, we held that, "while the automatic stay is in effect, a creditor may engag e in postpetition negotiations pertaining to a bankruptcy-related2 Since the proposed settlement was rejected and Diamond

ultimatelyprevailed in the discharge proceeding, we need not consider the merits of the settlement itself. The only issue here is whether the allegedstatement could constitute an impermissible negotiation tactic. -5- reaffirmation agreement so long as the creditor does not engage in coercive or harassing tactics." Jamo , 283 F.3d at 399. We agree with the parties that it makes sense to extend the Jamo rule and adopt the majority approach allo w ing settlement negotiations in § 727 discharge proceedings. See generallyTerrence L. Michael and Michael R. Pacewicz, Settling Objections to Discharge in Bankruptcy Cases: An Unsettling Look at Very Unsettled Law , 37 Tulsa L. Rev. 637 (2002) (reviewing the appr oaches to the settlement of § 727 proceedings and indicating that the majority of cour ts a llow settlement on a case-by-case basis). Absent controversyon the point, we need not belabor the issue. B. Coerciveness of the Threat

Havingagreed with the parties that negotiations regardingdischarge are not per se violations of the automatic stay, we turn to the settlement negotiations in this case to determine whether Premier's statement regarding Diamond's real estate license could have constituted impermis sibl e "coercion or harassment." Jamo , 283 F.3d at 399. 2 A 12(b)(6) dismiss al would be appropriate only if "it appears beyond doubt that the plaintiff
can prove no set of facts in support of his claim which would entitle him to relief." Medina-Claudio v. Rodríguez-Mateo , 292-6-

F.3d31, 34 (1st Cir . 2 002) (internal quotation and citation omitted). In evaluatingthe coerciveness of a statement made in the
co urse o f negotiations, this Court has not enunciated a specific test, but does look at the immediateness of any threatened action and the context in which a statement is made. See Jamo , 283 F.3d at 402 (citing In re Brown , 851 F.2d 81, 86 (3d Cir. 1988)) (consideringcreditor's re fere nces to foreclosure in context and decidingthey we re n ot coercive because, rather than signaling "immediate action," theyindicated that foreclosure was not "on the [creditor's] agenda").

Here, Premier's alleged statement could "reasonably be deemedtantamount to a threat" of immediate action against Diamond. Jamo , 283 F.3d at 402. Premier's statement placed Diamond between
a rock and a hard place. If he prevailed in the § 727 proceeding,
as he ulti matelydid, he would face an administrative proceeding and quite possibly the revocation of his real estate license, the
so urce of his livelihood. If Premier prevailed in the § 7 2 7 proceeding, then Diamond would suffer because he would not obtain
a discharge of his debts. Thus, Diamond would lose either way. In this situation, where an unsecured creditor's statement functionally forces the debtor to treat a professional license as3 In Jamo , the Court acknowledged that "a Chapter 7 debtor is not

inoculatedagainst the necessity for making hard choices" and that "[b]ankruptcy, as life itself, is a series of tradeoffs." Id. at 400. The Jamo Court also noted that "reaffirmation agreements are consensual, and a debtor always has the option of walking away from an unattractive proposal." Id. A debtor can either reaffirm his secureddebt and keep the collateral or surrender the collat eral andreceive complete debt relief. Although it may appear at first blushthat Diamond would face a similar dilemma, we note that Diamond's real estate license was not collateral for the unsecured debt to Premier. Thus, Premier cannot put him in a position where his license would be the functional equivalent to collateral, such that he would choose to either keep it and repay his debt to Premier or surrender it in exchange for a discharge.

4 The fact that the st atement wa s made once may in fact weigh in favor of coerciveness. If settlement occurred soon thereafter -- somethingthat is unclear on this undeveloped record -- then it was perhaps such a coercive statement that it only needed to be communicated once. -7- coll ateral, a dismissal on the pleadings is unacceptable because the statement could be found to be coercive by a trier of fact. 3

Premier presents several arguments against the stat ement's coerciveness, but we find none of them convincing. First, Premier argues that the statement, which was a one-time communication, 4 did not threaten immediate act ion because it was conditionedon the outcome of the adversary proceeding. We cannot agree. Filing of the administrative proceeding to have Diamond's license revoked at the time of the statement likely would have violatedthe automatic stay, thus making truly instantaneous action to that effect risky if not impossible. See 11 U.S.C. § 362(a)(1) (barringinitiation of "administrative or other proceeding against the debtor" once bankruptcypetition has been filed). In light of5 Premier relies on the New Hampshire Rules of Profession a l

Conduct ("New Hampshire Rules") in its argument that Diamond had to allege lack of a good faith basis, and urges this Court to turn to th e Rules as authority for what constitutes coercive behavi or . Althoughthe district court's order referred to the NH Rules and -8- the procedural block to an immediate filing of revocation proceedings, the statement threatened action that was as immediate
as possible, and sufficiently imminent to be potentially coercive.

Second, Premier argues that the communication could not be considered coercive because it occurred between counsel during
an administrative proceeding, not reaffirmation. The fact that the statement was made by Premier's attorney to Diamond's attorneydoes not detract from its coerciveness. In Jamo , the statements at issue were also between counsel, but the Jamo Co urt d id not find this fact relevant to the coerciveness determination. Id. at 402. Similarly, we do not find it determinative that the statement was made to Diamond's counsel rather than to Diamond himself, particularly where counsel swiftly communicated the threat to his client. Although we doubt Pre mier 's proposition that statements made in an adversary context should be given greater leniency, we leave that issue for the district court's consideration on remand.

Finally, Premier would have us find that it was unreasonable for Diamond to perceive the threat as coe rcive, and further that Diamond's complaint is insufficient because it failed to allege Premier lacked a good faith basis for a complaint to the Real Estate Commission. 5 If the threat was an empty one -- inthe American Bar Association's Model Rules of Professional Conduct

("Model Rules"), it did so only as an illustration of what reasonable people might view as coerc ive. No authority is presentedto support use of the New Hampshire Rule s or the Model Rules as the guideposts for determining if a statement made during settlement negotiations is coercive. We need not decide here if such an approach should be adopted in cases involving alleged violations of the automatic stay. -9- other words if it lacked a goodfaith basis -- we do not think that Premier would have made it at all. Further, Premier cannot have it both ways, arguing it had a good faith basis for making the threat while simultaneously claiming that the threat was an empty one.

We conclude that the alleged statement could be found coercive, and Diamo nd could i ndeed prove a set of facts -- that Premier made the statement and that it coerced Diamond to settle -- that would entitle him to relief. We note, however, that because Diamondwould have had to defend against the § 727 discharge proceedingregardless of the statement's coerciveness, his damages
are unclear. The remedy iss ue is one the district court should examine more closely on remand. III. Conclusion For the foregoing reasons, we reverse the dismissal of Di amond' s complaint and remand to the district court for further proceedings consistent with this opinion.

Reversed and remanded .