It seems like violations of the discharge injunction get much less publicity than violations of the automatic stay. Perhaps that is because by the time a discharge is entered the creditor has received the message. When there is a violation the Eleventh Circuit has a good body of law on the issue and I happen to have a stack of these opinions due to a pending case.
When a Bankruptcy petition is filed it operates as a stay of virtually all efforts to collect a debt from a debtor or obtain possession or control over property of a debtor. A party may violate the stay even without the intent of doing so and actions taken in violation of the stay are usually void. In a typical individual case, the automatic stay expires with the entry of an Order of Discharge. Pursuant to 11 U.S.C. §524, the Discharge Order acts as an injunction against actions to collect a discharged debt.
If a creditor attempts to collect a discharged debt, it is generally viewed as a violation of the discharge injunction of §524 and contempt of the Discharge Order. The Bankruptcy Court that entered the Order has jurisdiction to enforce its orders and determine whether the creditor should be held in contempt. There is a higher burden in proving a violation of the discharge injunction than proving a violation of the automatic stay. In Taggart v. Lorenzen, 139 S.Ct 1795, 204 L.Ed.2d 129 (2019), the U.S. Supreme Court held that the standard for civil contempt is where there is “no fair ground of doubt as to the wrongfulness of the conduct.” This is an objective standard. A party’s subjective belief they were not violating the injunction may not protect a party from sanctions when the belief was objectively unreasonable. In In re McLean, 794 F.3d 1313, 1322 (11th Cir. 2015), the court similarly held 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…”
Most of the reported cases involve conduct that is easily determined to be a violation – threatening or filing legal action, garnishment of bank accounts, or placing a lien on the debtor’s property. In McLean, the creditor violated the discharge injunction by filing a proof of claim in a Bankruptcy case for a debt that had been discharged in a previous case.
If the court determines that a creditor is in contempt, the next issue is damages. It is typical for the court to award attorneys fees for addressing the underlying contemptuous conduct and pursuing the contempt motion in Bankruptcy Court. The court can also award other “compensatory sanctions for actual damages that a debtor incurs as a result of the creditor’s violation,” including emotional distress damages that bear a causal connection with the violation. McLean, 994 F.3d at 1313, 1325-26. Courts can also impose “coercive sanctions” to bring an end to ongoing contempt and punitive sanctions for offenses already completed. “Because punitive sanctions are for offenses already completed, they take on the character of criminal punishment and render the contempt criminal in nature.” McLean, 994 F.3d at 1324.
In January 2024, a 34-page opinion was entered in the Middle District of Florida addressing all of these issues. In re McIntosh, 2024 WL 140236, Case. No. 02-25039-smg (January 12, 2024) ( click for .pdf). The creditor (assignee) garnished a bank account to the tune of $21,000.00 for a debt that had been discharged twenty years earlier. Even after being notified of the prior case and discharge, the creditor filed a motion for final judgment in the garnishment action. Having lost all the funds in her account, the debtor was unable to provide her daughter with a prom dress, senior class ring, class trip and a pre-paid trip to Chicago to celebrate her graduation. She had trouble paying other bills and did not know if she could hire lawyers to try to get her money back. The Court found the creditors conduct to have been “reckless, reprehensible and egregious.” The Court awarded $10,000.00 for emotional distress and $33,124.62 in attorneys fees, in addition to getting her $21,000.00 back. In addition, the Court found that the violation met the standard of “criminal in nature” described in McLean and imposed punitive damages of $21,562.31.
In McLean, for filing a proof of claim for a previously discharged debt, the Bankruptcy Court actual damages in the amount of $25,000, attorney fees in the amount of $18,355.16, and a sanction in the amount of $50,000. The award of punitive damages was reversed and remanded because the lower courts did not follow the appropriate standard. The docket reflects that the dispute was resolved soon thereafter, which was probably a good call for the creditor. These are a couple of cases involving egregious conduct (even filing a proof of claim). Of course, there are cases in which a court found that sending a letter or statement was either not a violation or not one that was sanctionable.
Scott Riddle’s practice focuses on bankruptcy and reorganization. Scott has represented businesses and other parties in Bankruptcy cases for over 30 years. You can contact Scott at 404-815-0164 or scott@scottriddlelaw.com. For more information, click here.