A First Circuit opinion vividly shows why damages are far more difficult to obtain in bankruptcy court for violating the discharge injunction than through a lawsuit alleging transgression of the federal Fair Debt Collection Practices Act.
Establishing a claim for violation of Section 524 alone invokes an objective test in the First Circuit, were an FDCPA claim implicates the unsophisticated consumer test. When a Section 524 claim stands alone without being raised in an FDCPA suit, the Boston-based appeals court says there is no liability if the creditor does not explicitly demand payment, even if the debtor subjectively feels coerced into paying a discharged debt.
The case involved a couple who got a chapter 7 discharge of their personal liability on a home mortgage. To keep the home, they signed a mortgage modification agreement after bankruptcy allowing them to retain the home if they continued making payments. The modification agreement did not rekindle personal liability on the mortgage.
Later, they stopped making payments, surrendered the home, and allowed the lender to foreclose.
The lender sent the couple the required IRS Form 1099A telling them they “may have reportable income or loss” resulting from foreclosure. The form incorrectly checked a box saying the couple were personally liable on the debt.
The debtor’s lawyer contacted the lender and demanded revocation or correction of the form. The Dec. 14 opinion by Circuit Judge O. Rogeriee Thompson says that the lender “did not revoke the form and claims they are accurate.”
Contending that the IRS form and other actions by the lender made them feel coerced into paying discharged debt to avoid tax liability, the debtors reopened their bankruptcy. They sued the lender for violating the Section 524(a) discharge injunction, emphasizing the false information in the form about their personal liability for the mortgage debt.
The bankruptcy court dismissed on motion for summary judgment. The district court affirmed, as did the First Circuit.
For the circuit court, Judge Thompson said that a claim for violation of Section 524(a) must show that the creditor improperly coerced or harassed the debtor. The test is objective, so the “debtor’s subjective feeling of coercion is not enough,” her opinion says.
Despite the debtors’ subjective feelings, sending the form was not in violation of Section 524(a) because it was “not a collection attempt” and did not indicate that the debtors owed “any money to anyone,” Judge Thompson said.
Checking the box on the form saying that the debtors had personal liability did not change the result. Judge Thompson said that the form was informational, made no demand for payment, and threatened no action.
Unlike the failure to correct a credit report, which can be actionable, the opinion says that the incorrect statement about the debtor’s personal liability did not give rise to liability because “there were no consequences and no attempt to collect a debt.”
Although the appeals court said that the form doubtless caused the debtors “stress and concern” and necessitated retaining a lawyer who told them they had no tax liability, the opinion says that their “subjective feeling of coercion [was] not enough” because they did not present “evidence that the forms were objectively coercive.”
Depending on how the Supreme Court decides Midland Funding LLC v. Johnson, to be argued Jan. 17, the debtors might have had more success suing under the FDCPA. Although some courts have held that the Bankruptcy Code precludes FDCPA claims, the Second Circuit, for example, allows debtors to make FDCPA claims for discharge violations even though a debtor before discharge cannot sue for an automatic stay violation under the FDCPA. To read an ABI discussion of Midland Funding, click here.