Court Opinion

ID: 2648384
Source: CourtListenerOpinion
Date Created: 2014-01-07 19:36:43.654653+00
Date Added: 2024-06-11T12:57:57.602173
License: Public Domain

UNPUBLISHED

                    UNITED STATES COURT OF APPEALS
                        FOR THE FOURTH CIRCUIT

                                No. 12-2526

In Re:    CHRISTOPHER J. FINA; CARLY ELIZABETH FINA,

                  Debtors.

----------------------------

RONALD BRADLEY;      TERRI     LEE   BRADLEY;    WILLIAM   A.   ERHART;
M. RYAN MADISON,

                  Plaintiffs – Appellants,

            v.

CHRISTOPHER J. FINA,

                  Defendant – Appellee,

            and

CARLY ELIZABETH FINA,

                  Defendant.

Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria. Gerald Bruce Lee, District
Judge; Theresa C. Buchanan, Magistrate Judge.   (1:12-cv-00660-
GBL-TCB; 10-13678-RGM)

Argued:    October 31, 2013                     Decided:   January 7, 2014

Before GREGORY, SHEDD, and KEENAN, Circuit Judges.

Affirmed by unpublished per curiam opinion.
Kevin Jerome Funk, DURRETTECRUMP PLC, Richmond, Virginia, for
Appellants.   Richard George Hall, Annandale, Virginia, for
Appellee.

Unpublished opinions are not binding precedent in this circuit.

                                2
PER CURIAM:

       This     case     involves      the       appellants’    violation     of     a

bankruptcy court’s discharge injunction.                    The bankruptcy court

imposed       contempt    sanctions     against      the    appellants,     and    the

district       court   upheld    the   decision.           Finding   no   error,    we

affirm.

                                         I.

       The matter originated with a 2006 agreement between Ronald

and    Terri    Bradley    and   Christopher        Fina.      Fina,   operating     a

construction business under the name Fina Homes and Remodeling,

agreed to perform work on the Bradleys’ home.                   Shortly after the

work    began,     a     city    inspector        discovered    defects     in     the

construction and issued a stop work order on the project.                        After

attempts to resolve the situation failed, the Bradleys filed a

lawsuit in Minnesota state court against Fina and his father,

James Edward Fina, alleging several state law claims.                         Fina’s

father was named as a party because he was identified as an

owner/licensee of Fina Homes and Remodeling.

       The Bradleys served James Fina with the complaint but were

unable to locate the younger Fina.                 On September 3, 2009, after

James Fina failed to answer the complaint, the Minnesota court

entered a default judgment against him in the amount of $40,865.

                                             3
      The     Bradleys       then      discovered       that     James    Fina       was    not   a

viable source of recovery and began contemplating whether they

were entitled to relief under the Minnesota Contractors Recovery

Fund (“MCRF” or “Fund”).                  Created by Minnesota law, the MCRF is

designed      to    provide        up     to    $50,000     to    homeowners          who     have

suffered a loss caused by a licensed contractor’s failure to

adequately         complete       a     construction        project.             Minn.       Stat.

§ 326B.89, subd. 4.               As a prerequisite to recovering from the

Fund,    homeowners         must       obtain     a    court     judgment       against       each

licensed      member       of    the    contracting       company.            Id.    § 326B.89,

subd.    6.          The        statute        notes    that      homeowners         may      seek

compensation regardless of whether the final judgment against

the   contractor          has    been    discharged       by    order     of    a    bankruptcy

court.      Id.      The Fund does not guarantee full payment of any

claim    and       does    not      cover       attorneys       fees     or    costs.          Id.

Instructions from the Minnesota Department of Commerce, which

administers         the     program,         advise      that     in     cases       where     the

contractor has filed for bankruptcy, the applicant “will need to

petition the Judge of the Bankruptcy Court to lift the automatic

stay and explain that your lawsuit is solely for the purpose of

obtaining      restitution            from     the     Recovery    Fund        and    that     you

understand that you will not be able to collect the judgment

from the contractor directly.”

                                                 4
       The Bradleys hired an attorney, appellant M. Ryan Madison,

to assist them in their efforts to collect under the MCRF.                               They

filed an application with the Fund based on the default judgment

they had previously obtained against James Fina.                           However, the

state denied the Bradleys’ application because of their failure

to also obtain a judgment against Christopher Fina.                        Id.

       In the meantime, Christopher Fina filed a petition under

Chapter 7 of the United States Bankruptcy Code in the Eastern

District of Virginia.             As creditors, the Bradleys were notified

of the action, and they ceased efforts to collect against Fina

in    light    of    the    automatic     stay    provisions       of   the    bankruptcy

petition.       On August 19, 2010, the Bradleys received notice that

Fina’s debt to them had been discharged pursuant to an approved

bankruptcy plan.

       Aware    of    the    discharge,     Madison      contacted       the       Minnesota

Attorney General’s office for advice on whether he could still

pursue relief under the MCRF.                    Madison was advised to include

language       in    an    amended   complaint         indicating       that       the   sole

purpose of the action was to obtain a judgment against Fina in

order to seek recovery under the Fund.                  Id.

       On     October       12,   2010,    the     Bradleys        filed      an     amended

complaint in Minnesota state court against the Finas.                              It sought

monetary damages totaling $58,377.50, as well as attorney’s fees

and    costs.        However,     paragraph      six    of   the   amended         complaint

                                            5
stated that:         “[t]his lawsuit is being filed solely for purposes

of    collecting       from   the   [MCRF]       pursuant      to    Minnesota     Statute

§ 326B.89.”

       Fina retained new counsel in Minnesota to defend the suit

and   filed     an   answer.        Paragraph      two    of    the    answer      admitted

paragraphs one through eight of the Bradleys’ amended complaint,

including the stipulation that the suit was brought solely for

purposes of collecting under the MCRF.

       After the Bradleys hired appellant William Erhart to serve

as additional counsel, the parties engaged in settlement talks.

A tentative agreement was reached wherein Fina would allow the

Bradleys to obtain a default judgment against him in the amount

of $50,000 in order to enable them to pursue relief from the

Fund.     In exchange, the Bradleys would drop Fina’s father from

the     lawsuit.        Erhart      then   received       a     letter      from    Fina’s

Minnesota counsel stating that the viability of the settlement

was in question due to objections from Fina’s bankruptcy counsel

in Virginia.

       Upon    Fina’s     petition,    the       bankruptcy         court   reopened    the

case, issued a show cause order against the appellants, and set

the   matter     for    trial.       The   issue     at     trial     was   whether     the

Bradleys and their counsel acted in contempt of the bankruptcy

court’s       discharge       injunction     when     they      filed       the    amended

complaint.

                                             6
          At the close of trial, the bankruptcy court ruled against

the appellants.             The court found that they willfully violated

the       discharge     injunction      because,         despite       the     self-imposed

limitation        in   paragraph      six    of    the   complaint,           the   Minnesota

lawsuit subjected Fina to personal liability and imperiled his

right      to    an    economic    fresh     start.        The        court    ordered       the

appellants to pay Fina $31,192.98, which included his attorney’s

fees and costs, as well as $4,000 for lost wages, lost vacation

pay, and pain and suffering.                  The district court affirmed the

decision of the bankruptcy court in all respects except for the

pain and suffering damages.

          After the bankruptcy court issued its decision, it granted

a motion allowing the Bradleys to continue pursuing their claim

against         Fina   in   Minnesota       state    court       so    that     they       might

eventually        collect     under    the    MCRF.        The    order       granting       the

motion       contained       several    stipulations,            including          that    the

Bradleys not seek to hold Fina personally liable for any amount.

                                             II.

          Section 524(a)(2) of the Bankruptcy Code provides that a

discharge in bankruptcy “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      of    the    debtor   . . . .”               11   U.S.C.

                                              7
§ 524(a)(2).      Section 105 authorizes a bankruptcy court to hold

a party in civil contempt for violating an order of the court,

including a discharge order.                See In re Barbour, 77 B.R. 530,

532 (Bankr. E.D. N.C. 1987).               Most courts to have considered the

issue of contempt sanctions in this context have settled on a

two-part      test,   which     we   adopt:           (1)    whether          the    creditor

violated   the    injunction,        and    (2)      whether       he    or    she    did    so

willfully.      See, e.g., In re Bennett, 298 F.3d 1059, 1069 (9th

Cir. 2002); In re Hardy, 97 F.3d 1384, 1390 (11th Cir. 1996); In

re Cherry, 247 B.R. 176, 187-88 (Bankr. E.D. Va. 2000).

       As the language of § 524(a)(2) makes clear, a violation

occurs when the debtor is exposed to personal liability.                                    The

willfulness prong requires only that the acts taken in violation

of the injunction be intentional.                    In other words, a good faith

mistake is generally not a valid defense.                      See In re Stempf, 37
F.3d 155, 159 (4th Cir. 1994) (evaluating willfulness in context

of an automatic stay violation and stating “[t]o constitute a

willful act, the creditor need not act with specific intent but

must   only    commit   an    intentional            act    with    knowledge         of    the

automatic stay.”); In re Cherry, 247 B.R. at 187 (“In a civil

contempt proceeding, the state of mind with which the contemnor

violated a court order is irrelevant and therefore good faith,

or   the   absence    of   an    intent         to    violate      the    order,       is    no

defense.”).

                                            8
       The appellants argue that the stipulation in paragraph six

of   the   amended   complaint,     which    states   that    the   lawsuit    was

filed solely for purposes of collecting from the MCRF, indicates

that the suit did not expose Fina to personal liability and

therefore did not violate the discharge order.                  The appellants

also   contend   that   Fina’s      answer    admitting      paragraph   six   is

dispositive because it shows that both parties understood the

suit not to affect Fina personally.

       We disagree, holding that the courts below did not clearly

err in determining that the amended complaint exposed Fina to

the potential for personal liability on his discharged debt.

Mort Ranta v. Gorman, 721 F.3d 241, 250 (4th Cir. 2013) (stating

standard of review).        First, the lawsuit sought a legal ruling

that Fina was responsible for the loss suffered by the Bradleys

–- the very same claim which gave rise to the discharged debt.

On its face, then, the lawsuit was an attempt to hold Fina

accountable for the underlying debt, despite the limitation in

paragraph six.

       More importantly, the amended complaint sought damages in

excess of the $50,000 statutory cap available under the MCRF.

The Bradleys requested specific monetary damages of $58,377.50,

as well as attorney’s fees and costs, which are expressly not

available    under    the   MCRF.       Thus,    even     assuming    that     the

appellants’ intent at the time of filing the suit was only to

                                       9
collect from the Fund, if the Minnesota state court had entered

judgment   in   the   amount    requested      in   the   amended   complaint,

nothing but the appellants’ good word would prevent them from

later using the judgment to collect the additional sums from

Fina.    At the very least, Fina would have an excess judgment

amount hanging over his head for the indefinite future. *

     The   purpose     behind    the        discharge     injunction   is   “to

eliminate any doubt concerning the effect of the discharge as a

total prohibition on debt collection effort, and to ensure that

once a debt is discharged, the debtor will not be pressured in

any way to repay it.”      In re Cherry, 247 B.R. at 182 (internal

quotation marks omitted).       The evidence in this case shows that,

in contrast, Fina was justifiably concerned that his discharged

debt remained a source of potential liability for him, at least

insofar as he might feel obligated to continue to defend himself

from future collection efforts.             We are thus satisfied that the

courts below did not clearly err in ruling that the amended

complaint exposed Fina to personal liability in violation of the

discharge injunction.

     *
       The district court also correctly noted the legitimate
concern that Fina’s credit rating might suffer from an entry of
judgment against him, further imperiling his right to a fresh
economic start guaranteed by 11 U.S.C. § 524.

                                       10
     As to the second element of a contempt claim, the courts

below also rightly held that the appellants’ violation of the

discharge injunction was willful.                   As stated, the appellants’

intentions and their apparent attempts to comply with the law

are irrelevant.       There is no dispute that the Bradleys and their

counsel were aware of the injunction at the time they filed the

amended complaint.          This is sufficient to establish that the

violation was willful.            See In re Stempf, 37 F.3d at 159; In re

Hardy, 97 F.3d at 1390 (“[T]he focus of the court’s inquiry in

civil contempt proceedings is not on the subjective beliefs or

intent of the alleged contemnors in complying with the order,

but whether in fact their conduct complied with the order at

issue.”) (quoting Howard Johnson Co. v. Khimani, 892 F.2d 1512,

1516 (11th Cir. 1990)).

     Our decision does not mean that the Bradleys were without a

means to recover from the Fund once Fina filed his bankruptcy

petition.       The   Bradleys      could    have    requested    leave    from    the

bankruptcy court prior to filing the amended complaint.                           This

would    have   enabled     the    bankruptcy    court    to   determine     at    the

outset    whether     the    amended    complaint        sought    to     hold    Fina

personally liable for any of the discharged debt, as well as

given the court the opportunity to impose limiting conditions

designed to protect Fina from post-judgment issues that might

negatively affect his rights.               Indeed, the Bradleys, albeit too

                                        11
late to save them here, eventually did this, and the bankruptcy

court allowed them to continue their efforts to recover from the

Fund.     Such a step also accords with guidance from the Minnesota

Department of Commerce advising MCRF applicants to petition the

bankruptcy court before filing suit.

      We also note that we are not persuaded by the appellants’

attempts to analogize this case with those that have allowed

suits nominally brought against debtors but only for the purpose

of collecting on a third-party insurer’s contractual obligation

on   an   underlying   debt.        This    rule   derives     from   11    U.S.C.

§ 524(e), which provides that “discharge of a debt of the debtor

does not affect the liability of any other entity on, or the

property of any other entity for, such debt.”                  As is the case

with the MCRF, creditors are often required to obtain a judgment

against the debtor before collecting from an insurer.                      However,

this case differs in that there is no “liability of any other

entity on . . . [the] debt.”               Unlike an insurer, the MCRF is

under no obligation, contractual or otherwise, to recompense the

Bradleys.     Therefore, § 524(e) simply does not apply in this

case.

      Additionally,    the   fact    that    the   MCRF   is   not    an   insurer

relegated the cost of defending the lawsuit entirely to Fina.

Ordinarily,    an   insurance   company       is   obligated     to   defend    an

insured debtor, or at least will have an interest in doing so in

                                       12
order to avoid a default judgment.                         Here, however, the absence

of   a    third-party        insurer       meant       that     Fina   had    to    defend     the

lawsuit himself.             This came at a financial cost that interfered

with     his    right       to   a    fresh      economic       start.       See    In    re   Gas

Transmission Corp., 219 B.R. 716 (S.D. W. Va. 1998) (holding

that a tort victim could not proceed against a debtor solely for

the purpose of recovering from the debtor’s insurer where the

debtor would be liable for defense of the suit).

         In    sum,    we   are      not   persuaded       to    accept      the   appellants’

argument        that     creditors         may     bypass       the    bankruptcy        court’s

discharge        injunction          without       first      requesting       that      court’s

permission.           As the bankruptcy judge noted in this case, he is

routinely        asked      to    consider       such    modifications         to     discharge

injunctions, and he routinely grants them.                               The proper course

for the appellants was to first seek leave of the bankruptcy

court before pursuing a judgment against the debtor.

                                                 III.

         For    the    reasons       stated,      we    affirm     the    district       court’s

judgment upholding the bankruptcy court’s decision.

                                                                                         AFFIRMED

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