In most of the country, creditors had been judged by an almost strict liability standard for violating the discharge injunction. A decision by Chief Bankruptcy Judge Scott W. Dales of Grand Rapids, Mich., demonstrates how the Supreme Court’s Taggart decision in June can let lenders off the hook for contempt even if the court believes the creditor was attempting to collect a discharged debt.
In Taggart, the Supreme Court held that a creditor cannot be in contempt of the discharge injunction if there was “an objectively reasonable basis for concluding that the creditor’s conduct might be lawful.” Taggart v. Lorenzen, 139 S. Ct. 1795, 1801 (June 3, 2019). For ABI’s report on Taggart, click here.
The October 30 decision by Judge Dales shows that the Supreme Court’s “objectively reasonable” standard is a creditor-friendly test that can subject debtors to attempted collection of discharged debts. Because a bankrupt’s prepetition retainer won’t cover legal fees for enforcing discharge, a debtor after Taggart who has no counsel may decide to pay a debt that no longer exists.
The Ambiguous Demand Letter
The debtor in Judge Dales’ case surrendered a car after filing a chapter 7 petition. The lender sold the car at auction. One week after the debtor received her discharge, the lender sent her a notice demanding that she pay a deficiency of some $8,700, a debt that had been discharged.
Judge Dales divided his opinion into two parts: (1) Did the deficiency notice violate the discharge injunction; and (2) if it did, was the lender in contempt under Taggart?
Although he said that the deficiency notice “equivocates, somewhat,” Judge Dales found a discharge violation. But because the lender proffered non-frivolous arguments defending its conduct, Judge Dales said the lender’s action was not contemptuous.
A Discharge Violation or Not?
The lender sent the same demand letter to borrowers who had filed bankruptcy and those who had not. The demand letter made what Judge Dales called an “equivocal demand.”
The demand letter said, “You remain liable to us for this deficiency, which you are required to pay in full” immediately. The demand was followed by a bankruptcy disclaimer, which said, in substance, that “if” you have filed bankruptcy, “we may be” barred from collecting the deficiency and “you may no longer be personally liable to us . . . .”
In bold letters, all capitalized, the demand letter ended with a notice, required by consumer protection law, that said, “This is an attempt to collect a debt.”
Judge Dales discounted the bankruptcy disclaimer, saying the lender was “well aware of the debtor’s bankruptcy.” He added that a “debtor who reads the last lines of the document could hardly conclude that the Deficiency Notice is not an attempt to collect a debt because the lender expressly states that it is.” [Emphasis in original.]
Finding that the deficiency notice “served no obviously lawful purpose, and was not simply informational,” Judge Dales held that the letter was an attempt to collect a discharged debt and thus violated the discharge injunction.
But There Was No Contempt
Judge Dales devoted most of his opinion to reciting the facts and deciding there was a discharge violation. In a page and a half, he ruled there was no contempt under Taggart.
Judge Dales found three reasons why there was a “fair ground of doubt” about violating the discharge injunction.
First, Judge Dales found “some . . . case law” in his district “holding that a proper bankruptcy disclaimer immunizes a creditor from a contempt citation.” Second, the lender sent the demand letter to the debtor and her counsel. Were it sent to the debtor alone, he said it “would have seemed more coercive and contemptuous.”
Third, Judge Dales said the lender sent only one demand letter. The court, he said, “has no appetite or authority for employing the contempt power in a game of ‘gotcha.’”
Although the lender had violated the discharge injunction, Judge Dales could not hold the lender in contempt because, he said, “there was — at the time [the lender] sent [the deficiency notice] — fair ground of doubt in our district as to whether sending the communication was lawful, given the disclaimer and context discussed above.”
Judge Dales Issues a Warning
Judge Dales said he could not find the lender “in contempt — at this time.” He said that using the same letter for bankrupts and nonbankrupts “is no longer suitable.” Lenders, he said, “should tailor their post-bankruptcy communications to fit the requirements of the particular case.”
In a footnote, Judge Dales said that his opinion should remove “most (if not all) doubt” in future cases on the question of whether a similar demand letter violates the discharge injunction.
Observations
Judge Dales seemed to be saying that a lender in his district may be found in contempt in the future for using a similar demand letter. However, his opinion is not binding authority elsewhere, not even in his own district.
Lenders may escape contempt citations until several courts around the country rule, like Judge Dale, that ambiguous demand letters do violate the discharge injunction.
On the other hand, some courts may take a tougher approach than Judge Dales and find a lender in contempt if the lender cannot show a demonstrably legitimate purpose for sending a similar letter to someone who received a discharge. Can there be a legitimate reason for telling a debtor the amount of a debt that was discharged, unless the notice says, in bold letters up front, “Do Not Pay This Debt”?
Cases such as this show how the Supreme Court has tilted the scale in favor of lenders. Unsophisticated debtors may not understand they no longer owe a debt. And debtors who know their liabilities evaporated may pay the lender rather than pay a lawyer to enforce their discharges.
Debtors will have a tougher time finding counsel because lawyers may decline to take cases on contingency, since contempt citations and monetary sanctions will be more difficult to obtain.
When (if) Congress undertakes bankruptcy reform, enforcement of the discharge injunction should be on the table. In terms of protecting debtors, the federal Fair Debt Collection Act provides a potentially useful standard.
Under the FDCPA, a communication from a creditor is evaluated using the “least sophisticated consumer” test. A similar standard for alleged violations of discharge injunctions would go a long way toward stopping lenders from using confusing language to dupe debtors into paying debts that no longer exist.
In most of the country, creditors had been judged by an almost strict liability standard for violating the discharge injunction. A decision by Chief Bankruptcy Judge Scott W. Dales of Grand Rapids, Mich., demonstrates how the Supreme Court’s Taggart decision in June can let lenders off the hook for contempt even if the court believes the creditor was attempting to collect a discharged debt.
In Taggart, the Supreme Court held that a creditor cannot be in contempt of the discharge injunction if there was “an objectively reasonable basis for concluding that the creditor’s conduct might be lawful.” Taggart v. Lorenzen, 139 S. Ct. 1795, 1801 (June 3, 2019). For ABI’s report on Taggart, click here.
The October 30 decision by Judge Dales shows that the Supreme Court’s “objectively reasonable” standard is a creditor-friendly test that can subject debtors to attempted collection of discharged debts. Because a bankrupt’s prepetition retainer won’t cover legal fees for enforcing discharge, a debtor after Taggart who has no counsel may decide to pay a debt that no longer exists.
The Ambiguous Demand Letter
The debtor in Judge Dales’ case surrendered a car after filing a chapter 7 petition. The lender sold the car at auction. One week after the debtor received her discharge, the lender sent her a notice demanding that she pay a deficiency of some $8,700, a debt that had been discharged.
Judge Dales divided his opinion into two parts: (1) Did the deficiency notice violate the discharge injunction; and (2) if it did, was the lender in contempt under Taggart?
Although he said that the deficiency notice “equivocates, somewhat,” Judge Dales found a discharge violation. But because the lender proffered non-frivolous arguments defending its conduct, Judge Dales said the lender’s action was not contemptuous.