Although the lower courts are split, the Fourth Circuit became the first court of appeals to rule that the Bankruptcy Code does not preempt claims under state law for violation of the discharge injunction. However, the panel itself was split 2/1.
The dissenter would have found preemption by analogy to decisions from other circuit courts that found preemption barring state law claims for violations of the automatic stay.
A man filed a chapter 13 petition in 2011 and confirmed a plan. Two years later, the debtor modified his plan and surrendered his home. Plan payments completed, the debtor received a discharge in 2016, with the effect of discharging his personal liability on the home mortgage.
According to the debtor, the holder of the mortgage began violating the automatic stay before discharge by repeatedly making calls and sending letters demanding payment of the mortgage. The lender’s efforts to collect the mortgage continued after discharge in 2016, the debtor claimed.
The debtor sued the lender in federal district court in 2020, based on violations of the discharge injunction. The complaint asserted claims for emotional distress under state law and for violation of a state consumer protection statute for attempting to collect an invalid debt. The complaint also made claims under the federal Fair Credit Reporting Act and the Telephone Consumer Protection Act.
The district court granted the lender’s motion for summary judgment, ruling that the state law claims were preempted by the Bankruptcy Code. Regarding the federal and state claims, the district court granted summary judgment in favor of the lender, finding no disputed issues of fact.
Setting aside summary judgment in favor of the lender in an opinion on August 18 for himself and Chief Circuit Judge Albert Diaz, Circuit Judge A. Marvin Quattlebaum, Jr. ruled there was no federal preemption and disputed issues of fact on the state law claims.
Preemption
Because the state law claims all required proof of violation of the discharge injunction, the district court found preemption, believing that the ability to hold the lender in contempt under Section 105(a) provided the debtor’s sole remedy. However, the district court did not specify which version of preemption applied.
Judge Quattlebaum said that express preemption did not apply and that the lender made no argument that field preemption barred the suit. Therefore, conflict preemption was the only possibility, and conflict preemption comes in two varieties: direct conflict preemption and obstacle preemption.
Direct preemption requires showing that compliance with state and federal law is impossible. In the case on appeal, Judge Quattlebaum said that compliance with both was “easy,” meaning that “direct conflict preemption does not apply.” Obstacle preemption, he said, is “trickier.”
No other circuit has discussed obstacle preemption in the context of a discharge violation, Judge Quattlebaum said. However, the First and Sixth Circuits have held that obstacle preemption bars state law claims for violation of the automatic stay, given the availability of contempt sanctions meted out by the bankruptcy court under Section 105(a).
For there to be obstacle preemption, Judge Quattlebaum said that the court must first divine “Congress’s ‘significant objectives’” and then decide “whether the state law stands ‘as an obstacle to the accomplishment of a significant federal regulatory objective.’”
The principal objective of the Bankruptcy Code is to provide the debtor with a “fresh start,” Judge Quattlebaum said. The debtor’s “state law claims create no obstacle to providing him with a fresh start.”
On the other hand, Judge Quattlebaum said that the lender’s “best argument” was based on the idea that the Bankruptcy Code features “centrality of administration.” Since the discharge violations occurred after the bankruptcy case was closed and did not impact any order issued during the case, he could not “see how they detract from the ease or centrality with which the federal bankruptcy system operates.”
Next, Judge Quattlebaum dealt with the notion that the Bankruptcy Code prescribes contempt under Section 105(a) as the sole remedy for a discharge violation, but he saw “no reason why the mere fact that state law claims provide broader remedies than federal law means the state claims are preempted.”
“Since § 105(a) is neither specific to discharge injunction violations nor comprehensive,” Judge Quattlebaum rejected the idea of obstacle preemption because the possibility of a contempt citation “is not the type of Congressionally designed balance that implicates obstacle preemption.”
In a pregnant footnote, Judge Quattlebaum said that “[e]ven a more comprehensive remedial scheme may not guarantee obstacle preemption.”
Next, Judge Quattlebaum dealt with the lender’s argument that the Bankruptcy Clause of the Constitution means that Section 105(a) is the exclusive remedy. To the contrary, he said that the Bankruptcy Clause “is about empowering Congress to enact bankruptcy laws and ensuring that federal bankruptcy laws themselves do not vary impermissibly from state to state.”
“In sum,” Judge Quattlebaum said, the debtor’s state law claims “do not create an obstacle to the goals of the Bankruptcy Code” and “are not preempted.”
Disputed Facts
Backing up the finding of federal preemption, the district court had ruled in favor of the lender across the board with regard to summary judgment by finding no material factual disputes. With one exception, Judge Quattlebaum reversed, finding disputed facts.
Regarding the debtor’s claims under state consumer protection law, the lender relied on language in written communications saying they were only for informational purposes. Judge Quattlebaum found there were disputed facts because transcripts of telephone calls to the debtor did not contain disclaimers, and the debtor said the lender was demanding payment in full.
Similarly, Judge Quattlebaum found disputed facts regarding claims under the Fair Credit Reporting Act. However, he upheld summary judgment with regard to claims under the Telephone Consumer Protection Act, because there was no evidence that the lender made automated calls.
In short, the majority vacated the district court’s ruling on preemption and summary judgment on the claims under state law and the Fair Credit Reporting Act.
The Dissent
Circuit Judge James Andrew Wynn dissented “respectfully” regarding preemption, believing “it was Congress’s intent to preempt these types of claims.” He based his conclusion in part on the Bankruptcy Clause and on decisions from the Sixth and Ninth Circuits holding that state law claims for violation of the automatic stay were preempted.
Judge Wynn saw “no reason why state-law claims alleging violations of a discharge injunction should be treated differently” from claims for automatic stay violations. He also saw centrality of administration as a “principal purpose” of the Bankruptcy Code.
Judge Wynn believes that Congress designed the Bankruptcy Code so a state court would not “wade into the underlying bankruptcy proceeding” to decide whether a debt was discharged. He also said that a bankruptcy court could award “traditional damages and attorneys’ fees.” The availability of contempt, he said, “keeps state courts from wading into potentially thorny issues of bankruptcy law.”
[Note: Judge Wynn did not deal with a state court’s concurrent jurisdiction to decide whether a debt was discharged.]
Believing that the state law claims should have been preempted, Judge Wynn concurred in the remainder of the majority’s opinion finding disputed issues of fact.
Although the lower courts are split, the Fourth Circuit became the first court of appeals to rule that the Bankruptcy Code does not preempt claims under state law for violation of the discharge injunction. However, the panel itself was split 2/1.
The dissenter would have found preemption by analogy to decisions from other circuit courts that found preemption barring state law claims for violations of the automatic stay.