Source: http://updates.mwbllp.com/2015/08/fyi-11th-cir-holds-filing-proof-of.html
Timestamp: 2019-09-16 04:24:08
Document Index: 462769834

Matched Legal Cases: ['§ 524', '§ 1105', '§ 524', '§ 362', '§ 524', '§ 524']

Financial Services Law Developments: FYI: 11th Cir Holds Filing Proof of Claim on Previously Discharged Debt Violates Discharge Injunction
FYI: 11th Cir Holds Filing Proof of Claim on Previously Discharged Debt Violates Discharge Injunction
A copy of the opinion is available at: http://media.ca11.uscourts.gov/opinions/pub/files/201414002.pdf
In 2012, the debtors filed second Chapter 13 case, in which the creditor and its servicer filed a proof of claim for the discharged debt. The debtors objected to the claim and filed an adversary proceeding, alleging that the creditor and its servicer violated 11 U.S.C. § 524(a)(2) of the Bankruptcy Code, which provides that a discharge order operates as an injunction against further collection efforts.
The bankruptcy court sustained the debtors' objection to the claim and, after a trial in the adversary proceeding, found that the discharge injunction was violated, awarding compensatory sanctions for the debtors' emotional distress and punitive sanctions designed to persuade the creditor and servicer to fix any defects in their automated systems in order to avoid future violations.
The district court, sitting in its appellate bankruptcy capacity, affirmed the bankruptcy court's judgment, reasoning that even though the creditor withdrew its proof of claim, the punitive sanctions were proper because the creditor acted with reckless disregard of the risk of violating the discharge injunction. The creditor appealed to the 11th Circuit.
On appeal, as a threshold issue, the Eleventh Circuit was concerned with and addressed sua sponte whether the bankruptcy court in the second bankruptcy case had jurisdiction to enforce the discharge injunction issued in the first bankruptcy case. The Appellate Court concluded that the bankruptcy court in the second action did have jurisdiction, even over a case with a different case number, because the bankruptcy court has inherent authority to punish contempt "as a means to protecting itself as an institution," not just to enforce a ruling in particular cases.
The Eleventh Circuit also pointed out that the bankruptcy court has statutory contempt power under 11 U.S.C. § 1105(a) to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of" the Bankruptcy Code.
Because the bankruptcy court had the power to enforce the discharge injunction in the first case, the Appellate Court held it also had jurisdiction to hear the motion for contempt in the debtors' second case for violating the injunction in the first case. Thus, the Eleventh Circuit concluded it had jurisdiction to hear the appeal.
Finding the statutory text ambiguous, the Eleventh Circuit analyzed the legislative history and, joining other Circuits that had considered the issue, concluded that because § 524(a)(2) was designed to broadly prevent any form of harassment of a debtor, and that an action by a creditor violates the discharge injunction if "the objective effect of the creditor's action is to pressure a debtor to repay a discharged debt, regardless of the legal entity against which the creditor files its claim."
The Appellate Court rejected the creditor's argument that the discharge injunction was not violated because the filing of the proof of claim was not an attempt to collect the debt personally against the debtors, but rather from the bankruptcy estate. The creditor also argued that, by analogy to the automatic stay in 11 U.S.C. § 362(a), although that section prohibits debt collection outside of bankruptcy, it does not prohibit the filing of a proof of claim to collect an unenforceable debt within the bankruptcy process.
Relying on its prior rulings about the broad scope of the discharge injunction and "persuasive authorities," the Eleventh Circuit concluded the creditor violated the discharge injunction, holding that "the test for whether a creditor violates the discharge injunction under 11 U.S.C. § 524(a)(2) is whether the objective effect of the creditor's action is to pressure a debtor to repay a discharged debt, regardless of the legal entity against which the creditor files its claim."
Importantly, the Appellate Court reasoned that the filing of the proof of claim was clearly an "act to collect, recover or offset [the discharged] debt as a personal liability" of the debtors because (a) the Eleventh Circuit had previously held that the filing of a proof of claim constitutes the first step in collecting a debt in bankruptcy, at least indirectly; and (b) the filing of the proof of claim triggered an increase in the debtors' Chapter 13 plan payments, which imposed the kind of pressure on the debtors that § 524(a)(2) was designed to prevent.