Bankruptcy Judge Scott M. Grossman of Fort Lauderdale, Fla., explained why “merely selling a debt to another holder” does not “somehow immunize a creditor and create a fair ground of doubt as to whether that debt was discharged.”
Finding that the conduct of the purchaser of discharged debt was “reckless, reprehensible, and egregious,” Judge Grossman awarded the debtor almost $65,000, including $10,000 for emotional distress and some $21,500 in punitive damages.
The Chapter 7 Discharge in 2002
The individual debtor had filed a “no asset” chapter 7 petition in 2002 and received a discharge. In her list of creditors, the debtor showed $7,400 owed on a credit card.
In his January 12 opinion, Judge Grossman said that the credit card lender sold the debt about five months after discharge. Several months later, the purchaser filed suit and won a judgment against the debtor in state court for more than $13,000. Over the next 20 years, the purchaser of the debt took no action.
Then, in early 2023, the purchaser filed a motion for supplementary proceedings in state court and obtained a writ of garnishment for what it said was a debt that had grown to almost $25,000. After the debt purchaser served the garnishment on the debtor’s bank, the debtor learned that more than $21,000 in her accounts had been frozen.
The debtor hired attorneys to vacate the writ of garnishment, and her attorneys told the purchaser that the debt had been discharged in 2002. The purchaser did not dissolve the garnishment until a month later, after the debtor engaged another firm to reopen her bankruptcy case and pursue sanctions for violation of the discharge injunction.
The debt purchaser effectively conceded that the debt had been discharged. Opposing the motion for sanctions, the debt purchaser contended there was a fair ground of doubt about the discharge because the purchaser was not listed on the debtor’s schedules.
What Taggart Says and Doesn’t Say
Judge Grossman held two hearings, one to decide whether there was a discharge violation and a second to assess damages.
In the first hearing to decide whether there had been a discharge violation, Judge Grossman explained that “the burden to prove its debt was not discharged still lies with the creditor” in a “no asset case” because “a creditor’s notice or actual knowledge of the case is not relevant.”
“Because the exception to discharge under section 523(a)(3)(A) for unscheduled debts applies only to cases where there is a deadline to file proofs of claim — and there was no such deadline in this case — the exception does not apply here,” Judge Grossman said. Thus, it was irrelevant whether the purchaser of the debt had been listed among the creditors.
For not having been listed by name, the debt purchaser claimed to have a defense under Taggart v. Lorenzen, 139 S. Ct. 1795, 1799 (2019), where the Supreme Court said there can be no contempt if the creditor had an “objectively reasonable basis” for contending there was no violation of the automatic stay.
The debt purchaser argued there was “objective” doubt about a discharge violation because the debtor had not sought to establish that the debt had been discharged after reopening the case.
“[S]uch a construction,” Judge Grossman said, “would turn [the discharge injunction] on its head and render any debt that has been transferred from the original creditor to another entity presumptively nondischargeable, and improperly put the burden on the debtor to prove the new holder of the claim is the successor to the original creditor.”
Requiring the debtor to prove that a buyer had purchased a discharged debt “would eviscerate the protections of the discharge injunction, and certainly is not what Taggart requires,” Judge Grossman said.
Judge Grossman found “no fair ground of doubt that this debt was discharged” and said “it was objectively unreasonable for [the debt purchaser] to assume otherwise.” He therefore ruled that the debtor was “entitled to an award of sanctions.”
Contempt Sanctions
Judge Grossman found that the debtor was entitled to some $33,000 in “actual compensatory damages,” representing reasonable time charges by the two law firms the debtor had engaged. He awarded the debtor another $10,000 in actual damages for emotional distress, because, by clear and convincing evidence, she had shown “significant emotional distress,” clearly established “significant emotional distress” and demonstrated a causal connection between the distress and the discharge violation.
Noting that the debt purchaser had “refused to release the writ until after she moved to reopen her bankruptcy case and sought sanctions,” Judge Grossman found that the purchaser’s conduct had “been egregious and reprehensible.” He said that the purchaser’s conduct was “indicative of an overly aggressive business model that encourages extortive settlements of debts that by law have been discharged.”
Finding that the purchaser’s conduct had “been reckless, reprehensible, and egregious,” Judge Grossman imposed about $21,500 in punitive sanctions, representing 50% of actual compensatory sanctions.
Bankruptcy Judge Scott M. Grossman of Fort Lauderdale, Fla., explained why “merely selling a debt to another holder” does not “somehow immunize a creditor and create a fair ground of doubt as to whether that debt was discharged.”
Finding that the conduct of the purchaser of discharged debt was “reckless, reprehensible, and egregious,” Judge Grossman awarded the debtor almost $65,000, including $10,000 for emotional distress and some $21,500 in punitive damages.