All too often, after a debtor receives his or her discharge in bankruptcy and after the case has been closed, a creditor whose debt has been discharged does something which may appear to constitute an effort to collect that debt. This may range from the sending of an informational account statement by the mortgagee on a home surrendered in the bankruptcy, filing a proof of claim in a subsequent bankruptcy case, to filing of a lawsuit to collect the discharged debt.
The standard response to such creditor action is for the former debtor to initially move under Section 350(b) of the Bankruptcy Code to reopen a closed case based on a violation of the terms of his or her discharge. Under the miscellaneous Fee Schedule issued pursuant to 28 U.S.C. 1930, the court may not collect a fee for the reopening of the case.
The procedural rub comes once the case has been reopened. It has been common for many debtors’ attorneys to file an adversary proceeding against the creditor seeking damages for violation of the discharge injunction. Some, on the other hand, file a motion for contempt and the matter proceeds as a contested matter under the provisions of Bankruptcy Rules 9014 and 9020. While the issue of the proper form of action has not garnered a great deal of attention, as a bankruptcy judge for 26 years, it got my attention every time I reviewed my report of pending adversary proceedings and saw a substantial number of actions for discharge violations. While the vast majority of these cases settled, due to the procedures to be followed in adversary proceedings, they took much more time (and attorney’s fees) to reach conclusion than in motion practice.
While some courts, notably the Second Circuit in Kalikow v. Solow (In re Kalikow), 602 F.3d 82 (2d Cir. 2010) have held that it is permissible to bring an enforcement action by motion, until recently, only the Ninth Circuit in Barrientos v. Wells Fargo Bank, N.A. 633 F3d 1186 (9th Cir. 2011) has mandated parties to proceed by motion. Those courts in Florida which have addressed the issue directly have, in essence, said “no harm, no foul” in allowing discharge violations to be prosecuted via adversary proceedings instead of by motion. Thus, in In Re Wynne, 422 B.R. 763 (Bankr. M.D. Fla. 2010), the court denied the defendant’s motion to dismiss an adversary complaint for a discharge violation holding that as long as the debtor alleged the essential elements of contempt, the matter could proceed.
Likewise, in Atkinson v, Green Tree Servicing LLC (In Re Atkinson), Adv. No. 12-05025-KKS, (Bankr. N.D. Fla. December 18, 2012), the court denied the defendants’ motion to dismiss the adversary proceeding on the ground that relief could only be sought by motion. The court acknowledged that action could have been initiated by motion, but that in an adversary proceeding, parties receive due process and are provided procedural safeguards that may not be provided under motion practice.
Without being asked to do so, the Eleventh Circuit recently put this issue to rest in Green Point Credit LLC v. McLean (In Re McLean), Case No. 14-14002, 2015 WL 4480920, at *1 (11th Cir. July 23, 2015), in considering an appeal of a judgment awarding sanctions in an adversary proceeding for violation of the discharge injunction. After discussing jurisdictional issues and the proper measure of the sanctions which the court could impose, the court remanded the case for further proceedings to revisit the sanctions award.
After concluding that the case should be remanded, the court stated “We conclude with an observation that the form of the instant action was improper and should be modified on remand.” Id. at *9. The court went on to discuss the difference between adversary proceedings under Bankruptcy Rule 7001 and contested matters noting that the differences do bear on the rights of the litigants. Contested matters under Rule 9014 are subject to less elaborate procedures than are adversary proceedings and the burden of proof for a finding of civil contempt is clear and convincing evidence as opposed to the preponderance of the evidence standard typical in civil actions. Although the form of action was defective, the court noted that the defect was not jurisdictional. On remand, the court directed the district court to instruct the bankruptcy court to convert the adversary proceedings to a contested matter.
Any confusion which may have existed regarding how to proceed has now been cleared up by the Eleventh Circuit’s instructions in McLean. While contempt actions should proceed by motion, this does not mean that the protocol safeguards provided in the rules governing adversary proceedings are absent. Rule 9014 directs that unless otherwise ordered by the court, many of the rules for adversary proceedings under Part VII also apply in contested matters, and the court may direct that one or more of the other rules shall apply. Thus, without losing any of the protections of the adversary rules, the use of the more streamlined procedures will result in speedier and less expensive resolutions of discharge violations; and happier clients on both sides.