A Cautionary Tale About Injunctions

Many bankruptcies are prompted by foreclosure postings.   Often the debtor must weigh whether to seek an injunction vs. filing bankruptcy.   A recent Texas case makes the point that simply getting the court to grant an injunction is not enough.   Unless the procedures are strictly followed, the injunction may not be valid.   However, that does not mean that the path will be easy as one substitute trustee found out.   The case is In re Chaumette, 2014 Tex. App. LEXIS 13799 (Tex. App.--Houston[1st.Dist.], 2014, orig. proc.).   

Black Sigma, LLC sought a temporary injunction against Michael Robinson to prevent a trustee's sale of its property.   On August 22, 2011, the trial court heard the movant's evidence then cut the hearing short stating that he had a criminal docket to attend to.   The trial court stated that the movant had put on enough evidence.  The creditor protested that he had evidence to put on as well but was not allowed to do so.   The trial court entered a temporary injunction which read as follows:

The Court, having held a hearing and received evidence from Plaintiff requesting injunctive relief and argument of counsel, if any, is of the opinion that Plaintiff's application has merit and an injunction should be and is hereby GRANTED.

The Court finds:

1. Plaintiff has a probable right on final trial to the relief that it seeks;

2. Plaintiff will suffer irreparable injury for which he has no legal remedy if this injunction is not granted.

IT IS, THEREFORE, ORDERED that Michael P. Robinson, Defendant in this cause and any alternate trustee appointed by him, Robinson's agents, servants, employees, and attorneys and all persons in active concert or participation with him be temporarily and/or permanently enjoined from conducting a foreclosure sale as substitute trustees on September 6, 2011 or anytime during the pendency of this case or until further order of the Court[.] 

The trial court then set a hearing on September 19, 2011 to allow the creditor to present evidence to try to persuade the court to dissolve the injunction.    However, the substitute trustee proceeded with the sale anyway.    The creditor came back on September 19 and 22, 2011 and put on its evidence only to have the trial court reaffirm its original ruling.   The creditor then filed an interlocutory appeal.   During the interlocutory appeal, the debtor filed a Motion for Contempt and for Referral to the Trial Court to Enforce Temporary Injunction."

The trial court commenced civil and criminal contempt proceedings against David Chaumette, the substitute trustee.    On November 19, 2012, the trial court found Chaumette guilty of civil contempt.   The trial court ordered him confined in the Brazoria County jail until he "purges himself of contempt by executing and recording a document in form acceptable to the Court, vacating the said substitute trustee's deed, effective September 6, 2011."   Eleven months later, the substitute trustee filed a "Rescission of Foreclosure Sale" in the real property records.   However, the trial court did not find this document to be acceptable.   The court drafted its own document which the substitute trustee did not sign because he felt it was inaccurate.   

On November 8, 2013, the trial court issued a capias for the substitute trustee's arrest based on the November 19, 2012 contempt order.    The substitute trustee filed an application for writ of habeas corpus.   The Court of Appeals granted the writ because the contempt order did not clearly specify what the substitute trustee had to do to purge himself of contempt.

Having failed to sustain a civil contempt order, the trial court held a two day trial which resulted in a criminal contempt order providing for the substitute trustee to be incarcerated for 45 days.   The substitute trustee filed a second application for writ of habeas corpus.    

The Court of Appeals granted the second writ of habeas corpus on the basis that the court's temporary injunction was void and therefore unenforceable.    Under Texas Rule of Civil Procedure 683, an order for temporary injunction must "set forth the reasons for its issuance."   According to the Court:

"'[T]he obvious purpose of [Rule 683] is to adequately inform a party of what he is enjoined from doing and the reason why he is so enjoined.'" (citation omitted)(emphasis in original).

Opinion, p. 12.     The Court of Appeals found that the temporary injunction did not meet this standard.

Here, the only part of the September 1, 2011 temporary-injunction order that can be construed as setting forth the reasons for its issuance reads as follows: "The Court finds . . . Plaintiff will suffer irreparable injury for which he has no legal remedy if this injunction is not granted." A statement indicating only that a plaintiff will "suffer irreparable injury for which he has no legal remedy" if injunctive relief is not granted does not comply with the specificity requirements of Rule 683.

Opinion, pp. 12-13.   

Why did the trial court grant the temporary injunction?   Why didn't the plaintiff's lawyer put this in the order?   Why did the substitute trustee proceed with the foreclosure after the trial court entered a temporary injunction?     The opinion does not say and the reader is left to wonder.   

Thus, because the order did not specifically state the reasons it was being granted, it was void and the substitute trustee could not be held in either civil or criminal contempt.    However, it took the substitute trustee (who is a former president of the Houston Bar Association according to the Texas Lawyer) three years to clear his name.    This case seems to be a tragedy of errors with no clear winner.   However, it provides a good object lesson in why it is important to read the rules carefully and avoid taking shortcuts in drafting.   Just because a judge will sign an order does not make it valid. By the same token, ignoring an order simply because it is void isn't a real good idea either.  

Contempt Upheld for Injunction Not Yet Reduced to Writing

In one more chapter of the Gary Bradley bankruptcy, the Fifth Circuit Court of Appeals upheld a finding of contempt against the Lazarus Exempt Trust based upon conduct occurring between the court's oral pronouncement of an injunction and its reduction to writing. Matter of Gary Bradley, No. 08-50587 (5th Cir. 11/11/09).

When Gary Bradley filed bankruptcy, his trustee, Ronald Ingalls, sought to recover properties held by the Lazarus Exempt Trust. Prior to trial, the Court had issued an injunction preventing the Trust from dissipating assets held or controlled by the trust. This injunction expired at the conclusion of the trial. In order to avoid a gap period between expiration of the preliminary injunction and entry of a judgment, the Trustee, the IRS and the FDIC filed a Joint Motion to Maintain Status Quo Pending Final Ruling in Adversary Proceeding.

At the hearing on the motion, the attorney for the Lazarus Exempt Trust acknowledged that there were plans underway to dispose of certain property. The Court orally pronounced an injunction which was narrower than the one requested by the moving parties. The written order was not entered until 27 days later. Meanwhile, Bradley Beutel, the Trustee of the Lazarus Exempt Trust carried out a sale of property and disbursed the funds. He sought to have the Bankruptcy Court ratify the transfers, but the court denied the motion.

After that, the Bankruptcy Trustee sought to hold Beutel in contempt both personally and in his capacity as trustee. The Court made a finding of civil contempt and ordered Beutel and the Trust (which now had a new trustee) to repay $317,953.53. Beutel's personal liability was settled, leaving only the issue of the liability of the trust.

Tommy Thompson, the successor Trustee of the Lazarus Exempt Trust appealed, contending that he could not be held in contempt for violation of an oral injunction. The Fifth Circuit distinguished two Seventh Circuit cases in which oral pronouncements were deemed unenforceable on the basis that in those cases a written order was never entered. In contrast, in this case, a written order was entered in conformity with the oral ruling, the Trustee of the Trust was aware of the ruling and considered himself bound by it (as shown by his motion seeking ratification) and his conduct violated a central tenet of the ruling. As a result, the Court stated that:

The question we face is not whether the bankruptcy court acted properly to create an effective, appealable order. It is whether Beutel's manifestly improper actions can render him liable for contempt.

Opinion, p. 11.

The court stated that the first step was to consider whether the order was civil or criminal. The court found that the fact no imprisonment was involved was not dispositive. Instead, it noted that criminal contempt is intended to punish the contemnor and vindicate the authority of the court, while civil contempt is intended to compel compliance with an order or compensate another party for the contemnor's violation. Imprisonment can be used in connection with either civil or criminal contempt, the distinction being whether the imprisonment is for a fixed term or can be remitted based upon compliance with the court's order. Monetary sanctions can also constitute either civil or criminal contempt. If awarded to punish, they are criminal, while if awarded to compensate, then they are civil. In this case, the court found that the Bankruptcy Court's award constituted remedial civil contempt.

Ironically, the Court found that if the case had involved criminal contempt, it would have been clear that violation of an oral ruling would be permissible, since the federal criminal contempt statute includes violation of a court's "command." However, the question was closer in the civil contempt analysis. The elements of civil contempt are: "(1) that a court order was in effect, and (2) that the order required certain conduct by the respondent, and (3) that the respondent failed to comply with the court's order." Opinion, p. 14.

In conclusion the court stated:

We see no reason why the civil contempt power, as generally recognized in our courts, should not reach Beutel’s conduct. As discussed above, the power is broad and pragmatic, reaching where it must—consistent with prudent court management and due process—to prevent insults, oppression, and experimentation with disobedience of the law. Beutel’s shell game with the proceeds of Trust property is the type of conduct contempt targets, and there is no doubt that he received adequate notice and opportunity to be heard at all stages of the proceedings. His conduct had the effect of frustrating not only the injunction, but also the trial on the merits, by diverting funds from Trust entities that the bankruptcy court would later rule belonged to the bankruptcy estate. The district court found—not clearly erroneously—that Beutel intentionally avoided the injunction hearing because he intended to sell Trust assets and distribute the proceeds in a manner that he expected the court to prohibit. On top of this, the bankruptcy court provided clear notice of the commands that Beutel violated, and which the bankruptcy court later reduced to writing and entered. The bankruptcy court found—also not clearly erroneously—that Beutel knew about the “oral injunction” and considered himself bound. Nonetheless he consummated the transaction as planned and then falsely claimed he had not known about the court’s command. With proper procedures, this conduct could support a criminal contempt conviction. Thompson provides no reason why the result should be different merely because the contempt finding made Beutel
liable to the opposing party rather than imposing a fine payable to the court. We hold that the civil contempt power reaches Beutel’s conduct despite the fact that it occurred before the written injunction was in force.

Opinion, pp. 16-17.

While the Fifth Circuit's conclusion is unremarkable, it contains a good discussion of civil contempt. Indeed, it is unclear what the contempt proceeding gained the Bankruptcy Trustee. The Bankruptcy Court found that the assets disposed of were property of the estate. The contempt ruling merely required the trust to repay the value of assets of the bankruptcy court which it disposed of. It seems that the Trustee could have reached the same result without the necessity of a contempt proceeding.

Nevertheless, the opinion drives home the point that Bankruptcy Courts are federal courts and that their pronouncements--whether reduced to writing or not--should be taken seriously.

Judge Seeks Creditors' Attention With Discharge Violation Ruling

A Fort Worth bankruptcy judge sent an unmistakable message to Bank of America and a collection agency in a recent opinion on violation of the discharge: clean up your procedures or pay up. McClure v. Bank of America, Adv. No. 08-4000 (Bankr. N.D. Tex. 11/23/09).

What Happened

The debtors owned a business named Qualico. Like many entrepreneurs, they obtained financing through credit card accounts, which they personally guaranteed. When the business failed, both the company and its owners ended up in chapter 7. The McClures listed several debts owed to Bank of America in their schedules.

Shortly after the McClures received their personal discharge, Bank of America referred two of their accounts to a collection agency. Bank of America did not dispute knowing about the discharge and the opinion is silent as to any explanation for why discharged debts were referred to a collection agency. To compound the confusion, two different Bank of America debts were referred to two different collectors within the same firm.

Upon receiving the accounts, the collection agency, CFG, sought to do a bankruptcy scrub on the accounts. However, the information received from Bank of America was not very helpful. Placed in the social security number field was the tax ID number for the corporation. A search under this number did not turn up the corporation's bankruptcy and no search was done on the individual.

At the fatal moment before the first collection call was placed, Bank of America knew about the discharge, but the collection agency was blissfully ignorant.

The first collector was merely trying to collect upon the corporate account and was not aware that there was a guaranty. However, that did not stop him from telling the individual debtor that someone was headed to his house and that they would be filing suit against him that day. When the collector stopped to take a breath, the terrified debtor informed him of his bankruptcy, which was duly entered into the system. This stopped collection on account #1. However, it did not provide notice to the collector on account #2. He sent the debtor a letter and made a phone call, which no doubt unnerved the debtor who had already provided the agency with his bankruptcy information.

Who Violated the Discharge?

All of the collection activity which took place violated the discharge. However, to hold a creditor liable for contempt, there must be actual notice of the order being violated. Thus, under these facts, who committed a knowing violation: BOA, CFG, Collector #1 and/or Collector #2? Liability as to BOA was easy. They admitted knowledge of the discharge at the time that they referred the debts out for collection. Collector #1 did not know about the discharge at the time he made his threatening call. Neither did Collector #2. However, the collection agency committed a knowing violation when Collector #2 contacted the debtor even though the actual collector did not.

Here's how the court reached this conclusion. The court did not impute knowledge from the principal to the agent. Additionally, the court did not hold the collection agency liable for negligently performing the bankruptcy scrub. However, once Collector #1 received notice of the discharge, that put the agency on notice. Although Collector #2 could not be held liable for information which never reached him, the agency could be held liable for his unknowing actions. Thus, you have the paradox that neither collector knew about the discharge at the time he undertook the collection actions. However, once the entity knew about the discharge, it could not allow its employee to remain in the dark.

Damages

Damages are always a difficult issue in these cases. While attorney's fees are available, they are poor compensation to the debtor. Mental anguish is hard to prove. In this case, the debtor's doctor testified, but the court found the evidence to be inconclusive. (The court did, however, state that it did not "consider the line between being an aggressive agent and a bully to be so fine that CFG cannot service its clients without resort to such crude scare tactics"). However, the court did not stop there. It stated:

The McClures have, however, expended substantial time and effort in prosecuting this lawsuit. Without the willingness of aggrieved debtors to prosecute violations of the discharge injunction of section 524(a)(2), such violations would go unchecked by the court. The Code has as one of its underlying purposes providing a fresh start to a discharged debtor. (citation omitted). If violations of the discharge injunction go unpunished, creditors will lack the necessary incentive to avoid violating the law, and an underlying purpose of the Code will be undermined. In order to ensure that debtors are not hesitant to prosecute violations of the discharge injunction, they should be awarded actual damages to compensate them for the time and effort they have to expend in the process. In this case, the court awards the McClures $2,500.00 in actual damage for the time and effort they expended in proscuting this adversary proceeding, for which BOA and CFG will be jointly and severally liable.

Memorandum Opinion, pp. 12-13.

(The court also took pains to note that it had not been requested to assess damages under the Fair Debt Collection Practices Act and that such damages would not have been available in any event, since this was a business debt).

The Court also awarded $79,839.14 in attorney's fees. The defendants complained that the debtor's attorney was piling on. However, the court was quick to justify the large award, stating:

CFG and BOA questioned the high cost of attorney services based on want of harm to the McClures. First, the need to encourage enforcement of the discharge injunction counsels against too great parsimony in assessing fees. Second, the refusal of CFG to acknowledge error--and a pre-trial dispute between CFG and BOA over responsibility for the violation of the injunction--added to the cost of the attorneys. Had the two defendants accepted responsibility for their conduct early in this adversary proceeding, the cost of the McClures' counsel would have no doubt been much lower.

Memorandum Opinion, p. 13, n. 27.

However, the final relief awarded was the most interesting. The court awarded conditional sanctions payable to the registry of the court based on the defendants' apparent lack of concern with the law. The Court stated:

(T)he court finds that the actions of BOA and CFG in violating the discharge injunction were sufficiently egregious to warrant sanctions. By failing to adopt measures sufficient to prevent violations of the discharge injunction and then willfully violating the discharge injunction, BOA and CFG have demonstrated a lack of concern for the law. The injunction of section 524(a)(2) and that provided by section 362(a), which in the McClures' case the former replaced (citation omitted), are at the heart of bankruptcy protection. (citation omitted). It is only by reason of these provisions that the court is able to ensure debtors the interim protection promised by the filing of a petition and the true fresh start that a discharge is supposed to bring. To protect its own authority as well as to give debtors the relief Congress intended, a bankruptcy court must act promptly and firmly to stop conduct violative of section 362(a) or 524(a)(2) and to prevent future breach of those provisions. This is particularly important when, as is true of BOA and CFG, the entity violating the stay deals with millions of consumers, many of whom will be in bankruptcy cases; BOA's and CFG's procedures for ensuring compliance with the law must be seamless.

The court, therefore, concludes that it is both reasonable and necessary to sanction BOA and CFG in order to deter BOA and CFG from violating any discharge injunction in the future. See 11 U.S.C. Sec. 105(a).

The court hereby sanctions BOA in the amount of $100,000.00, payable to the registry of the court, and sanctions CFG in the amount of $50,000, also payable to the registry of the court. Each sanction will be suspended and need not be paid if, within 90 days of the entry of this memorandum opinion, by affidavit either the President or General Counsel of each company submits to the court new procedures his or her company has adopted to prevent future violations of any discharge injunction.

Memorandum Opinion, pp. 14-15.

The court's three-fold remedy addressed three different needs. First, the debtors received a small award to vindicate them for having to seek redress from the court. Debtors' counsel received a large award to compensate him for having to pursue the case. Judge Michael Lynn presides over large cases, such as Pilgrim's Pride, and is no doubt used to seeing large fee requests. When compared to the fees charged in mega-cases, the hard-working debtors attorneys' fees likely seemed quite reasonable. Finally, the court saved the largest award as an incentive to fix the problem. The court did not grant the debtor a windfall, but did not overlook the seriousness of the failure either. By ordering a payment to the registry of the court unless procedures were changed, the court took a stand on behalf of the integrity of the larger bankruptcy process and on behalf of other debtors who might be harmed in the future.

This opinion offers some practical advice to counsel defending parties accused of violating the discharge. If there is a clear-cut violation, as there was here, acknowledge liability promptly. The real battle will be over damages, which are difficult for the debtor to establish. A prompt offer of judgment may avoid a large award and an embarassing written opinion later. Further, when there has been a breakdown of procedures as happened here, the time to address those procedures is immediately. The opinion never answered the question of why Bank of America referred two discharged debts to a collection agency. The failure to answer this question may have informed the urgency of the court's insistence that "procedures for ensuring compliance with the law must be seamless."

Outrageous Creditor Behavior Leads to Small Damage Award

A debtor's suit against an abusive creditor seemed to have all the right elements: outrageous facts, creative legal theories and a sympathetic judge; but lacked just one thing, damages. Shane Eastman v. Baker Recovery Services, Adv. No. 08-5055 (Bankr. W.D. Tex. 10/15/09). The opinion can be found here.

The Facts

Based on the opinion from Bankruptcy Judge Leif Clark, the facts were pretty outrageous. A debtor filed a no-asset chapter 7 case and received a discharge. He inadvertently omitted a credit card that had been used by his ex-wife when they were still married. That account was sold to a debt buyer, who then filed suit against someone else named Shane Eastman in California. When the debt buyer realized that he had sued the wrong Shane, instead of dismissing his case, he had Texas Shane served with process in the California action.

At this point, the debtor's lawyer wrote to the creditor's lawyer and informed him that he was violating the discharge. The debtor, believing that his lawyer's letter had done the trick, did not answer. The debt buyer apparently didn't think the discharge applied to him, so he took a default judgment against the debtor in the California action without notice to the debtor.

The debtor learned about the judgment some time later when his security clearance with the Air Force was revoked. The debtor's lawyer demanded that the judgment be released. The creditor refused to do so unless he was paid $2,500 for his trouble. The debtor then had his bankruptcy case reopened. According to the judge, "It was the reopening of the case that finally motivated Baker to abandon his efforts to extort some payment out of Eastman in exchange for releasing the judgment." The use of the word "extort" gives some insight into the judge's view of the situation. The debtor got his security clearance back some five months after it had been revoked. However, during this period, he missed out on a potential opportunity for a career-advancing placement with a general.

The discouraged debtor believed that the episode had soured his chances for advancement in the Air Force and resigned several months later, some 11 years into his military career.

Creative Causes of Action

The creditor committed the following bad acts at a minimum:

1. He filed suit on a discharged debt;
2. He sued a consumer in a state where he did not reside;
3. He took a default judgment after being notified of the discharge; and
4. He demanded payment for releasing the judgment on the discharged debt.

These facts were pretty serious. Therefore, they justified more than just a simple action for violation of the discharge. The debtor's lawyer sued for violation of the discharge, violation of the Fair Debt Collection Practices Act, violation of the Texas Debt Collection Act, violation of the Texas Deceptive Trade Practices Act and tortious infliction of emotional distress.

The Bankruptcy Court allowed the debtor to proceed with all of these causes of action, finding that the bankruptcy discharge does not preempt other claims arising out of violation of the discharge.

The Court found liability on three out of five claims. With some understatement, the Court held that, "It is obvious to this Court that the Defendants violated Sec. 524(e) of the Bankruptcy Code." Although the Defendants claimed that the debtor was precluded from urging the discharge violation based on his failure to plead this as an affirmative defense in the California suit, the judge didn't buy it.

The Fair Debt Collection Practices Act prohibits a debt collector from making a "false, deceptive or misleading representation or means in connection with the collection of any debt." The Court followed Judge Easterbrook of the Seventh Circuit in ruling that "A demand for immediate payment while a debtor is in bankruptcy (or after the debtor's discharge) is 'false' in the sense that it asserts that money is due, although, because of the automatic stay (11 U.S.C. Sec. 362(a)) or the discharge injunction (11 U.S.C. Sec. 524), it is not." Thus, it was clear that the debt buyer and his lawyer had violated the FDCPA.

The Texas Debt Collection Act has a similar provision prohibiting the use of a "fraudulent, deceptive or misleading representation . . . misrepresenting the character, extent or amount of a consumer debt or misrepresenting the consumer debt's status in a judicial or governmental proceeding." The court found that filing suit on a discharged debt fell within this provision and thus found liability under the TDCA.

The TDCA also provides that a violation is considered to be a deceptive trade practice under the Texas Deceptive Trade Practice Act. However, to recover under the DTPA, a person must be a "consumer." Since the debtor never sought to acquire goods or services from the debt buyer, he did not qualify as a consumer under the DTPA and could not take advantage of that statute's remedies.

The court also found that the defendants were not liable for tortious infliction of emotional distress. To recover under this theory, the debtor would have needed to show that the defendant's actions were taken for the primary purpose of causing emotional distress. While the debt buyer's actions were outrageous, they were aimed at collecting the debt rather than inflicting emotional distress.

The Relief Granted

Having prevailed under three theories, the big question was what relief could be granted. The debtor sought to recover (i) actual damages, statutory damages and attorney's fees under the FDCPA; (ii) actual damages and costs and attorney's fees under the TDCA; (iii) economic damages and treble damages under the DTPA; and (iv) damages for the infliction of emotional distress. The debtor apparently did not seek damages for contempt for violation of the discharge injunction.

Because the court ruled against the plaintiff on the DTPA and tortious infliction of emotional distress, the best possible recovery for the plaintiff was under the FDCPA for statutory damages, actual damages and attorney's fees. The court awarded statutory damages of $1,000 as provided by the FDCPA and held that the debtor was entitled to recover attorney's fees. However, the court ruled that the debtor did not prove an entitlement to actual damages.

The debtor's primary theory of damages was that the judgment destroyed his Air Force career when his security clearance was withdrawn and he lost the opportunity to work for the general. The debtor presented evidence of what he would have earned if he had stayed with the Air Force and been promoted to Chief Master Sergeant. The court found that this fell within the category of "special damages," meaning damages that are of such an unusual nature that they would vary from individual to individual. In order to recover special damages, they must be specifically pled and may not be "too remote, uncertain, conjectural, speculative or contingent." This was a difficult burden for the debtor to meet. He acknowledged that promotion to Chief Master Sergeant was difficult to obtain. He also acknowledged that he did not apply for the position with the general because he was told not to bother. Because the debtor voluntarily left his position with the Air Force, it was impossible to tell whether he would have made Chief Master Sergeant and therefore impossible to award damages. He also failed to provide any evidence of his mental state as a result of the defendants' actions, so that he could not recover for emotional distress. Because these were the only items of damage pled, he was not able to recover for actual damages.

Final Lessons

This is a hard case. The creditor's actions were clearly outrageous. The judge was clearly offended. However, the only relief that the debtor received was the court's finding that the debt had in fact been discharged, $1,000 in statutory damages and reimbursement for his attorney's fees. Thus, his victory was more symbolic than substantial.

The defendants did not escape unharmed. They have the stigma of a finding from a federal judge that they violated the law. They also will have to pay both their own attorney's fees (which likely were substantial given that they hired a former bankruptcy judge to defend them) as well as the plaintiff's fees. However, it could have been much worse.

The bottom line is that good liability facts do not always translate into good damage facts. It seems unmistakably clear that loss of a security clearance would cloud a military career. But how does that translate into damages? In this case, the plaintiff had to prove what would have happened over nine years of a future military career that the plaintiff walked away from. Because there was no guaranty that he would have achieved his career goals with the Air Force, the damage theory did not work. There was clearly a lost opportunity. But how do you value a possibility? The harm was quite real to the debtor. However, the true damage of lost hopes and aspirations was too intangible to value.

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.