It is virtually impossible for a debtor to waive discharge as an affirmative defense, even if judgment has already been entered on the discharged claim, according to Bankruptcy Judge Thomas J. Tucker of Detroit.
You guessed it! The case involved the effect of confirmation of Detroit’s chapter 9 plan in late 2014.
About 10 months before Detroit filed its petition in 2013, the city police conducted a raid pursuant to a warrant. Individuals whose property was raided filed a lawsuit in federal district court in Chicago in 2018, alleging that the search violated their constitutional rights under 42 U.S.C. § 1983.
Waiting more than four years, the city filed a motion in the Detroit bankruptcy court in April 2022 to enforce the discharge afforded the city under Section 524.
The plaintiffs contended that their claim had not been discharged in bankruptcy because they never received any notice of the city’s chapter 9 proceeding.
To resolve the question, Judge Tucker first decided whether the plaintiffs were known or unknown creditors during Detroit’s bankruptcy. The distinction matters, because unknown claimants are afforded due process from notice by publication.
To decide whether the plaintiffs were known or unknown, Judge Tucker said in his August 26 opinion that the claims were unknown if they were not “readily ascertainable” by the city. In turn, a claim is not readily ascertainable if “reasonably diligent efforts” would not turn up the claim.
Reasonably diligent efforts require the debtor to search its own books and records, looking for a demand for payment or “some communication” about the existence of a claim.
At the earliest, Judge Tucker said that the plaintiffs communicated with the city about their claims about four months after confirmation. He therefore held that the claims were discharged because the plaintiffs had been given constitutionally adequate notice.
For having waited four years to raise the defense, the plaintiffs argued that the city was barred from raising the defense by the doctrines of equitable estoppel and laches. The plaintiffs said that the city had not adequately explained the reasons for the delay.
No matter, Judge Tucker said; “[T]he Court cannot apply either equitable estoppel or laches to bar the City’s relief.”
Judge Tucker cited Sixth Circuit authority for the idea that judgments in contravention of the discharge injunction are “void ab initio.” Indeed, he paraphrased the appeals court for saying that a debtor served with a lawsuit in violation of discharge “has no duty to do anything.”
“It follows,” Judge Tucker said, “that the City’s delay in seeking the relief it now seeks cannot be used to deny such relief, under equitable doctrines like equitable estoppel and laches, or otherwise.”
Judge Tucker granted the city’s motion, required the plaintiffs to have their suit dismissed in district court and barred the plaintiffs from raising the claims again against the city.
It is virtually impossible for a debtor to waive discharge as an affirmative defense, even if judgment has already been entered on the discharged claim, according to Bankruptcy Judge Thomas J. Tucker of Detroit.
You guessed it! The case involved the effect of confirmation of Detroit’s chapter 9 plan in late 2014.
About 10 months before Detroit filed its petition in 2013, the city police conducted a raid pursuant to a warrant. Individuals whose property was raided filed a lawsuit in federal district court in Chicago in 2018, alleging that the search violated their constitutional rights under 42 U.S.C. § 1983.
Waiting more than four years, the city filed a motion in the Detroit bankruptcy court in April 2022 to enforce the discharge afforded the city under Section 524.
The plaintiffs contended that their claim had not been discharged in bankruptcy because they never received any notice of the city’s chapter 9 proceeding.