Failing to amend a prepetition complaint to assert only post-petition claims resulted in a violation of the discharge injunction, even though the plaintiff in state court argued that it only intended to pursue post-petition claims for violation of a noncompetition agreement.
In his December 11 opinion, Bankruptcy Judge Jeffery W. Cavender of Atlanta concluded that the creditor’s actions met the contempt standard in Taggart v. Lorenzen, 139 S. Ct. 1795 (June 3, 2019), and ruled that the debtor was entitled to recover her attorneys’ fees.
Before bankruptcy, the debtor sold the creditor’s services. The employment agreement contained a one-year nondisclosure and nonsolicitation agreement. Also before bankruptcy, the creditor sued the debtor in state court for soliciting customers in violation of the agreement. The complaint included claims for breach of contract and sought an injunction to preclude further solicitation of customers.
The debtor filed a chapter 7 petition one month after being served with the complaint. The debtor listed the creditor and the lawsuit in her schedules and sent notices about the bankruptcy to the creditor and the state court.
The debtor received her discharge. The creditor’s counsel received a copy.
At a status conference in state court after discharge and after the one-year nonsolicitation agreement expired, the judge entered a scheduling order to reopen discovery. The creditor then served broad discovery requests for documents and admissions going back several years before bankruptcy.
The debtor responded by reopening her bankruptcy case and filed a motion to hold the creditor in contempt of the discharge injunction. In defense of its actions, the creditor contended that it had told the state court that it intended only to pursue an injunction and post-petition claims. However, the creditor did not produce a transcript or other evidence to prove the assertions.
Addressing the contempt motion, Judge Cavender observed that the creditor did not amend its complaint to assert only post-petition claims.
Naturally, Judge Cavender laid out the discharge-contempt standard under Taggart. That is, contempt of the discharge injunction will not arise unless there is “no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.” Taggart, supra, at 1801. To read ABI’s discussion of Taggart, click here.
First, Judge Cavender tackled the question of whether the creditor had violated the discharge order. There would be a violation, he said, if the debtor could produce “clear and convincing” evidence that the creditor’s actions “sought to pressure Debtor to repay a discharged debt.”
Judge Cavender found that the debtor had satisfied her burden. He pointed to the creditor’s failure to amend the complaint to assert only post-petition claims. Furthermore, the discovery notices related to events occurring long before the debtor’s bankruptcy and were not limited to post-petition matters.
The creditor’s contention that it only sought an injunction did not hold water because the nonsolicitation period had ended.
Judge Cavender found a violation of the discharge order because “the objective effect of [the creditor’s] conduct was to pressure Debtor into repaying discharged debts.”
Next, Judge Cavender analyzed whether the creditor had an argument that its actions might be lawful. Alluding to Taggart, he noted that “a good-faith belief that an action taken does not violate the discharge injunction will not shield a party if the belief is not objectively reasonable.”
Judge Cavender found no “fair ground of doubt” that “continuing prepetition litigation on prepetition claims without any amendment of the Complaint or limitation of the litigation to post-petition conduct, viewed objectively, violated the terms of the Discharge Order.”
When it came to damages, the debtor came up short, because her testimony was not sufficient to justify damages for emotional distress. Likewise, punitive damages were not warranted because the creditor’s actions were not “sufficiently egregious or extreme.”
However, Judge Cavender did find that the creditor was entitled to an award of attorneys’ fees, “based on the circumstances of this case.” He called for another hearing to review the debtor’s counsel’s time records.
Without prejudice, Judge Cavender declined to enjoin the creditor from further pursuit of the lawsuit in state court, because the record was unclear about whether nondischarged claims existed. He told the creditor to “exercise caution” if it continues the lawsuit and said that his opinion should not be construed to mean there was a “fair ground of doubt” that seeking further relief in state court would not violate the discharge order.
Failing to amend a prepetition complaint to assert only post-petition claims resulted in a violation of the discharge injunction, even though the plaintiff in state court argued that it only intended to pursue post-petition claims for violation of a noncompetition agreement.
In his December 11 opinion, Bankruptcy Judge Jeffery W. Cavender of Atlanta concluded that the creditor’s actions met the contempt standard in Taggart v. Lorenzen, 139 S. Ct. 1795 (June 3, 2019), and ruled that the debtor was entitled to recover her attorneys’ fees.
Before bankruptcy, the debtor sold the creditor’s services. The employment agreement contained a one-year nondisclosure and nonsolicitation agreement. Also before bankruptcy, the creditor sued the debtor in state court for soliciting customers in violation of the agreement. The complaint included claims for breach of contract and sought an injunction to preclude further solicitation of customers.
The debtor filed a chapter 7 petition one month after being served with the complaint. The debtor listed the creditor and the lawsuit in her schedules and sent notices about the bankruptcy to the creditor and the state court.
The debtor received her discharge. The creditor’s counsel received a copy.