Tuesday, May 05, 2009

Court Clears the Way for Simultantaneous Causes of Action Based on Discharge Violation

Nature abhors a vacuum. When Congress restricted access to bankruptcy in 2005, many debtor’s lawyers became plaintiff’s lawyers, filing suit over automatic stay and discharge violations which might have been allowed to pass in an earlier time. Not only are debtor’s lawyers suing more often, they are also asserting more causes of action as illustrated by a recent opinion from the Western District of Texas. Eastman v. Baker Recovery Services, Adv. No. 08-5055 (Bankr. W.D. Tex. 4/17/09).

Eastman shows a common fact pattern. A debtor filed a no asset case and failed to schedule a creditor. The unscheduled creditor later filed suit. The debtor did not answer the suit, but did inform the creditor of the discharge. The creditor took a default judgment. Several years later, after the debtor moved to reopen her bankruptcy case, the creditor finally had the judgment vacated. The debtor then filed an adversary proceeding for violation of the discharge after the judgment had been vacated. However, the debtor not only filed suit for violation of the discharge, but for violation of the Fair Debt Collection Practices Act, the Texas Debt Collection Practices Act, the Texas Deceptive Trade Practices Act and “tortiously engaged in practices that rise to the intentional infliction of emotional distress” (whatever that means).

This case shows a pattern of escalating failures which is not that unusual. The debtor blundered by not listing the creditor. However, because the case was a no-asset case, the debt was still subject to discharge. The creditor’s initial action to file suit in violation of the discharge was innocent because the creditor did not have notice of the bankruptcy case. The debtor blundered a second time when it did not answer the state court lawsuit. The creditor blundered when it took a judgment after being informed of the discharge. The debtor showed a curious indifference to her own rights when she waited for over a year to remedy the discharge violation. The creditor showed a cavalier disregard for its own liability when it waited until after the debtor had moved to reopen the bankruptcy case before it got around to vacating the judgment.

This case raises two issues 1) Can the same violation of the discharge give rise to multiple causes of action? and 2) Does the Bankruptcy Court have jurisdiction to hear all of them? Judge Clark answered yes to both questions.

There is currently a split between courts as to whether a discharge violation is also actionable under the FDCPA and other statutes. The Ninth Circuit holds that the bankruptcy discharge preempts other laws so that a plaintiff may not assert both causes of action. Walls v. Wells Fargo Bank, N.A., 276 F.3d 502 (9th Cir. 2002). On the other hand, the Seventh Circuit holds that one federal statute cannot preempt another and that implied repeal of another federal statute should not be done on less than imperative grounds. Randolph v. IMBS, Inc., 368. F.3d 726 (7th Cir. 2004). Judge Clark sided with the Seventh Circuit, finding that both federal causes of action could be asserted simultaneously. However, he went one step further and found that the state causes of action were not preempted either.

However, what is really interesting about this opinion is that Judge Clark also ruled that he had jurisdiction to consider all of the claims in one action. In doing so, he disagreed with Judge Clark. In Mahoney v. Washington Mutual , Judge Clark dismissed state law claims which arose from the same facts as an alleged discharge violation because they did not have any conceivable effect on the bankruptcy estate. In so ruling, Judge Clark followed the test for “related to” jurisdiction which has long been followed in the Fifth Circuit.

So, why did Judge Clark disagree with Judge Clark? The difference was an intervening Fifth Circuit decision. In Matter of Morrison, 555 F.3d 473 (5th Cir. 2009), the Fifth Circuit upheld a decision by a bankruptcy court which held a debt to be nondischargeable and entered a money judgment on the claim. The Fifth Circuit found that judicial efficiency should not require a creditor obtaining a finding of nondischargeability to file a separate action to obtain a judgment on the claim. Judge Clark found that the same logic applied in this situation as well. He said:

A similar rationale warrants a similar exercise of jurisdiction here. The action for violation of the discharge injunction is a core proceeding, one that arises under a provision of title 11. (citation omitted). The selfsame facts make out a case for violation of the FDCPA. There would be no judicial efficiency in requiring the beneficiary of a judgment finding the defendant liable for violating the discharge injunction to pursue a separate lawsuit in state or federal court in order to secure a money judgment against the defendant. (citation omitted). Thus, the court concludes, under the reasoning of Morrison, that it has the requisite subject matter jurisdiction to entertain the FDCPA cause of action.

Eastman, at 8.

If Judge Clark is correct, “related to” jurisdiction has substantially expanded in the Fifth Circuit. If a Bankruptcy Court has jurisdiction over a claim, then it also has jurisdiction over other claims arising from the same facts in the name of judicial efficiency. This conclusion is somewhat of a two-edged sword. On the one hand, it expands the Bankruptcy Court’s jurisdiction to include what would be known as supplemental jurisdiction for an Article III Court. However, it also undermines the ability of a plaintiff to pursue separate bankruptcy and state court claims arising from the same facts on the ground that the bankruptcy court lacked jurisdiction to hear the non-bankruptcy claims.


Patches said...

What about collateral estoppel?

Steve Sather said...

If both claims are brought in the same action, then collateral estoppel would not apply, since there would be no prior decision. However, the plaintiff would have to decide which recovery to claim.

GotDebt said...

Any effect Colonial Surety v. Weizman in the 1st Circuit has on the proposition that an unlisted debt in a no asset chapter 7 is discharged? The 1st Circuit more or less refuses to follow the 9th in Beezley.