Proof of Claim Violated Discharge Injunction

A creditor violated the discharge injunction by filing a proof of claim in debtors’ Chapter 13 bankruptcy to collect a debt that had been discharged in a previous bankruptcy case. The Bankruptcy Code prohibits any act that has the effect of pressuring a debtor to repay a discharged debt, even if the means of pressuring the debtor are indirect. In this case, the proof of claim triggered an increase in projected plan payments the purpose of which was to pressure the debtors to repay the debt.

Green Tree was listed in the debtors’ first Chapter 13 bankruptcy case as an unsecured creditor. The case was later converted to Chapter 7, and Green Tree’s claim was discharged. Several years after receiving their discharge, the debtors filed a second Chapter 13 case in the same bankruptcy court. Although it was not listed as a creditor in the debtors’ second case, Green Tree filed a proof of claim to recover on the same claim it had sought to recover in the debtors’ first bankruptcy.

Claim Withdrawn

The debtors objected to Green Tree’s proof of claim and also filed an adversary proceeding against the creditor for violation of the discharge injunction. Green Tree then withdrew its proof of claim. According to Green Tree, the proof of claim was filed in error because an automated system failed to recognize that the debt had been discharged in the debtors’ previous bankruptcy case. The bankruptcy court determined that Green Tree violated the discharge injunction and awarded the debtors both compensatory damages for emotional distress and non-compensatory “sanctions” to “encourage” Green Tree to fix any defects in its automated systems. The district court affirmed.

Debtors “Pressured” to Pay

On appeal to the Eleventh Circuit, Green Tree argued that its proof of claim did not violate the discharge injunction because the claim was filed against the debtors’ estate, and Sec. 524(a)(2) only prohibits acts to collect against a debtor personally. Section 524(a)(2) prohibits any act to collect a discharged debt “as a personal liability against the debtor.” The Eleventh Circuit found the phrase, “as a personal liability against the debtor,” to be ambiguous because it could mean an act to collect directly against the debtor or an act to collect against a third party that ultimately forces the debtor to pay. The court turned to the legislative history of Sec. 524(a)(2) to resolve the ambiguity and determined that (1) Congress sought to “eliminate any doubt concerning the effect of the discharge as a total prohibition on debt collection efforts,” and, (2) to accomplish the legislative purpose of Sec. 524(a)(2), a debtor may not be pressured in any way, either directly or indirectly, to repay a discharged debt.

 

Green Tree contended that the Bankruptcy Code’s procedural protections against unenforceable proofs of claim, for example, a debtor’s ability to object to a proof of claim or a bankruptcy court’s oversight of proceedings, prevents the filing of a proof of claim from pressuring a debtor to repay a discharged debt. However, Green Tree’s proof of claim increased the debtors’ projected plan payments, and, therefore, the objective effect of its filing was to pressure the debtors to pay. Neither the debtors’ objection to the proof of claim nor any other procedural protection available in bankruptcy could eliminate that pressure. Green Tree’s proof of claim also challenged the finality of the earlier discharge order, and the Code’s procedural protections did not mitigate Congress’ overriding interest to “eliminate any doubt concerning the effect of the discharge as a total prohibition on debt collection efforts.”

Damages Vacated

Having determined that Green Tree violated the discharge injunction, the court of appeals turned to the damage awards. A bankruptcy court may award damages for emotional distress under Sec. 105 for violations of the discharge injunction. However, the court vacated the bankruptcy court’s award of compensatory damages because the debtors failed to clearly establish that they suffered significant emotional distress that was caused by Green Tree’s violation of the discharge injunction.

The court then considered the bankruptcy court’s award of non-compensatory damages. The bankruptcy court characterized the non-compensatory damages as “coercive sanctions,” which are typically used to stop an ongoing contempt. However, Green Tree withdrew its proof of claim and by doing so became compliant with the discharge injunction. The sanctions were imposed after Green Tree withdrew its proof of claim and, therefore, they were impermissibly punitive. As such, they too were vacated.

Green Point Credit, LLC v. McLean (In re McLean), No. 14-14002, 2015 U.S. App. LEXIS 12736 (11th Cir. July 23, 2015)

About the Author:

George Basharis, JD

George Basharis, J.D. is a practicing bankruptcy attorney in the Northern District of Illinois. He has represented dozens of individuals and small businesses in federal bankruptcy proceedings and related matters. George also advises the CINgroup on a variety of aspects regarding bankruptcy law. He has authored books, white papers, customer newsletters and conducted speaking engagements regarding bankruptcy.