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holding that bankruptcy court lacked subject matter jurisdiction even over UDAP claims arising out of violation of discharge injunction
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Bankruptcy No. 93-17145DWS, Adversary No. 03-0153
October 29, 2003
MEMORANDUM OPINION
Before the Court are the Cross-Motions of Plaintiffs Henry and Sandra Close (collectively "Plaintiffs") and Defendant Andrea H. Edson ("Edson") for Summary Judgment (the "Close Motion" and "Edson Motion" respectively, and collectively the "Motions"). For the reasons stated herein, the Edson Motion will be denied, and the Close Motion will be granted as to Count I. Count II, however, will be dismissed for lack of jurisdiction.
BACKGROUND
The facts relevant to the adjudication of the Motions have been either stipulated to by the parties or are not otherwise subject to dispute. In 1991-92, Edson, who was at one time a close friend of Plaintiff Sandra Close, loaned Plaintiffs a total of $35,000 to help Plaintiffs avoid foreclosure of their residence (the "Loan"). Stipulated Facts ¶ 5.
I limit any findings of fact to the stipulated record filed by the parties. Stipulation of Facts and Joint Appendices A and B thereto. Doc. No. 13. I shall also take judicial notice of the docket entries in this adversary action as well as in the Plaintiffs' prior bankruptcy case discussed below. Fed.R.Evid. 201, incorporated in these proceedings by F.R.Bankr.P. 9017. See Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1200 n. 3 (3d Cir. 1991);Levine v. Egidi, 1993 WL 69146, at *2 (N.D. Ill. 1993); In re Paolino, 1991 WL 284107, at *12 n. 19 (Bankr. E.D. Pa. 1991);see generally In re Indian Palms Associates, Ltd., 61 F.3d 197 (3d Cir. 1995).
There are also conflicting affidavits attached to each party's memorandum discussing the events leading up to the Loan and the Edson Lawsuit. Clearly I cannot reconcile such testimony on summary judgment, and in any case such facts are irrelevant to adjudication of the Motions. I cite to them only to the extent that they serve as admissions by the party proffering the affidavit.
Plaintiffs subsequently filed a joint, voluntary Chapter 7 case on December 6, 1993 (the "1993 Bankruptcy"). In this bankruptcy, Plaintiffs purposely did not schedule Edson as a creditor or their obligation to her on the Loan for reasons that are unclear, Edson was aware of the 1993 Bankruptcy and Plaintiffs' failure to list her as a creditor at least as of March 1994, Stipulated Facts ¶¶ 7-9; Affidavit of Andrea Edson ("Edson Aff.") ¶¶ 11-12. Nevertheless, Edson did not file a proof of claim or assert an interest in the bankruptcy case. While she now contends that she was induced into such inaction by Plaintiffs, this is a factual dispute not subject to summary judgment and ultimately not relevant to my decision herein. The 1993 Bankruptcy was a simple no-asset case, requiring little administration by the Chapter 7 Trustee. The Trustee conducted a meeting of creditors, filed a report of no assets, and the Court entered an order discharging the Plaintiffs on November 23, 1994 (the "Discharge Order"). The case was closed on December 6, 1994. Plaintiffs do not allege that Edson received a copy of the Discharge Order. Indeed, their failure to list Edson as a creditor makes her receipt of the Discharge Order unlikely.
Edson disputes that the 1993 Bankruptcy was a no-asset case based on the fact that schedules filed with the bankruptcy petition in fact list "assets," including Plaintiffs' home. Response to Plaintiffs' Motion for Summary Judgment ("Edson Resp. Mem.") at 2 n.l. Edson simply misunderstands the meaning of a Chapter 7 "no-asset" case, which is one in which the trustee has determined that there are no assets available for distribution to unsecured creditors because all property is either subject to an exemption or is secured. That the Trustee in the 1993 Bankruptcy made such a determination is a matter of which I take judicial notice. Supra n. 1.
As of March 22, 2001, Plaintiffs had made no attempt to repay Edson, and she sent them a letter demanding repayment. Edson Aff. ¶ 17; Stipulated Facts ¶ 13. On July 23, 2001, Edson filed a lawsuit against the Plaintiffs in the Court of Common Pleas of Chester County, Pennsylvania (the "Edson Lawsuit"). Stipulated Facts ¶¶ 11-12. The Edson Lawsuit sought repayment of the Loan under theories of breach of contract and promissory estoppel. Joint App. B, Tab 1.
In their Answer and New Matter to the Complaint in that action, Plaintiffs alleged simply that Edson's "claims were discharged in bankruptcy." Joint App. B, Tab 4. Though Edson promulgated document requests to this defense, Plaintiffs did not respond, which ultimately led to her filing a motion for sanctions. Joint App. Tab 7. Plaintiffs entered into a settlement agreement (the "Settlement") before the trial court reached any decision on the sanctions motion. Stipulated Facts ¶ 12. It appears that Plaintiffs later recanted the voluntariness of their Stipulation, and Edson sought and obtained judicial enforcement of the agreement. Joint App. B, Tabs 13-23, Plaintiffs paid $2,500 pursuant to the Settlement. Stipulated Facts ¶ 13.
Plaintiffs subsequently came to this Court seeking to reopen their bankruptcy case so that they could pursue contempt proceedings against Edson's for allegedly violating the Discharge Order in the 1993 Bankruptcy by attempting to collect a discharged debt. By Order of February 24, 2003, I denied the request to reopen the case, finding it unnecessary. As discussed below, I have a continuing inherent power to enforce any violation of an order that I have previously issued. I did, however, grant Plaintiffs permission to file an adversary proceeding in order to enforce the Discharge Order.
DISCUSSION
I.
As a preliminary matter (although not raised by the parties), I note that a bankruptcy court is a court of limited jurisdiction. Section 1334(b) defines bankruptcy court jurisdiction as reaching (1) cases under title 11, (2) proceedings arising under title 11, (3) proceedings arising in a case under title 11, and (4) proceedings related to a case under title 11. In re Marcus Hook Development Park. Inc., 943 F.2d 261, 264 (3d Cir. 1991) (citations omitted). A bankruptcy court, like any federal court, has the continuing obligation as well as inherent power to determine its own jurisdiction. In re Greene, 1999 WL 761091 at *3 (E.D.Pa. 1999) ( citing Things Remembered. Inc. v. Petrarca, 516 U.S. 124, 131 n. 1, 116 S.Ct. 494 (1995) (Ginsburg, J., concurring).See also In re G.T.L Corp., 211 B.R. 244 (Bankr. N.D. Ohio 1997); In re Anderson, 129 B.R. 44, 48 (Bankr. E.D. Pa. 1991). Indeed, this duty is explicitly stated both by statute, 28 U.S.C. § 157(b)(3), and by the Court's rules of procedure. See Fed.R.Civ.P. 12(h).
"The bankruptcy judge shall determine, on the judge's own motion or on timely motion of a party, whether a proceeding is a core proceeding under this subsection or is a proceeding that is otherwise related to a case under title 11. 28 U.S.C. § 157(b)(3).
Rule 12, made applicable in adversary proceedings by F.R.Bankr.P. 7012, states in relevant pan: "Whenever it appears by suggestion of the parties or otherwise that the court lacks jurisdiction of the subject matter, the court shall dismiss the action."Id.,
Moreover, it is not enough that I have jurisdiction over one claim in this adversary proceeding. Unlike the district courts, bankruptcy courts are not empowered with supplemental jurisdiction. See Adams v. Prudential Securities. Inc. (In re Foundation for New Era Philanthropy) 201 B.R. 389, 397-98 (Bankr. E.D. Pa. 1996).Compare 28 U.S.C. § 1367. In a multi-claim proceeding, the various claims may have different jurisdictional foundations. Some may be core, some may be non-core and some may be unrelated to the bankruptcy case. Each claim must be analyzed separately. See Halper v. Halper, 164 F.3d 830, 839 (3d Cir. 1999). I will therefore examine my jurisdiction as to each claim before addressing its merits.
Count I seeks a determination that Edson, by attempting to collect the Loan, is in contempt of the Discharge Order issued in the 1993 Bankruptcy. Count I also asks for sanctions for such contempt and enforcement of the Discharge Order, namely that 1 direct Edson to cease all further collection activities. Here my subject matter jurisdiction is clear. As I noted in my February 24 Order, a court has an inherent power to enforce its own orders, and bankruptcy courts are given specific statutory authority to do so under 11 U.S.C. § 105.See Koehler v. Grant 213 B.R. 567, 569-70 (B.A.P. 8th Cir. 1997). The Court's contempt power therefore "arises under title 11."See Menk v. Lapaglia (In re Menk), 241 B.R. 896, 905 (B.A.P. 9th Cir. 1999) (discussing 28 U.S.C. § 1334(b)). See also 3 Collier on Bankruptcy ¶ 350.03[4], at 350-11 (L. King, et al., 15th ed. 2002), ("these issues clearly are within the court's jurisdiction under section 1334 of title 28").
Count II, however, seeks an adjudication that Edson's conduct — the same conduct which violates the discharge injunction — also violates Pennsylvania law, namely the Fair Credit Extension Uniformity Act, 73 P.S. 2270.1 et. seq. ("FCEUA") and the Unfair Trade Practices and Consumer Protection Act, 73 P.S. § 201-1, et seq. ("UDAP," and the claims thereunder, the "State Law Claims") and seeks damages under UDAP. In short, Plaintiffs allege that Edson's attempts to collect the Loan are unfair debt collection practices because there is no valid debt.
Like most of her sister states, Pennsylvania has adopted a statute which prohibits "unfair or deceptive acts and practices," hence the acronym "UDAP." While the UDAP provides a private right of action, 73 P.S. 201-9.2, the FCEUA does not. The FCEUA does provide, however, that a violation of that act is a violation of the UDAP. 73 P.S. 2270.5(a).
To determine whether this Court has subject matter jurisdiction over the State Law Claims, my inquiry focuses on whether they are "related to" the bankruptcy case. A proceeding is related to bankruptcy if "the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy." Id. ( quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984) (emphasis in original)). Bankruptcy jurisdiction will exist so long as it is possible that a proceeding may impact on "the debtor's rights, liabilities, options, or freedom of action" or the "handling and administration of the bankruptcy estate." Marcus Hook, 943 F.2d at 264 (quoting In re Smith, 866 F.2d 576, 580 (3d Cir. 1989)).
The Court of Appeals has stated that the first of the § 1334(b) jurisdiction categories, arising under, "refers" "merely to the bankruptcy petition itself." Marcus Hook, 943 F.2d at 264. It is therefore clearly not applicable to Count II. Of the latter three categories, the third, i.e., "related to," is the broadest. That said, "[i]t is not necessary, . . . to fit the proceeding into one of these particular categories since `they operate conjunctively to define the scope of jurisdiction.' . . .". Hence, we need only determine `whether a matter is at least `related to' the bankruptcy.'"Id. (citations omitted).
Several courts have applied the Pacor test under the same factual scenario now before me, namely discharged debtors whose bankruptcy cases were fully administered and closed and who subsequently pursued contempt proceedings against creditors who attempted to collect the discharged debt. Those plaintiffs also appended state law causes of action based on the same conduct, usually federal and/or state debt collection statutes, as here. See Steele v, Ocwen Federal Federal Bank (In re Steele), 258 B.R. 319 (Bankr. D. N.H. 2001); Reyes v. FCC Nat'l Bank (In re Reyes), 238 B.R. 507 (Bankr. D. R.I. 1999);Goldstein v. Marine Midland Bank (In re Goldstein), 201 B.R. 1 (Bankr. D. Me. 1996). While allowing the discharge violation claims, these bankruptcy courts all dismissed the state law actions grounded in the same conduct. The Steele opinion articulates the basis of these decisions:
Applying the Pacor test to the issue before it, the Court finds that the FDCPA and state law claims do not fall within the Court's "related to jurisdiction." Any recovery on the part of the Debtor would be his alone and would not inure to the benefit of the bankruptcy estate. Thus, "[t]he claims hold no potential to impact in any way on the `handling and administration of the bankrupt estate.'" In re Goldstein, 201 B.R. at 5 (quoting Pacor, Inc., 743 F.2d at 994). See also McGlynn, 234 B.R. at 576 ("[e]ven if plaintiffs prevail on [FDCPA] claim, the recovery would belong to them, not to their respective estates"). The fact that the allegations serving as the basis of the claim for violation of the discharge injunction, over which the Court has jurisdiction, are intertwined with the facts giving rise to the claims for violation of the federal and state debt collection statutes does not alter this result. The FDCPA and New Hampshire fair debt collection claims stand alone and could be asserted regardless of the bankruptcy case in a court of competent jurisdiction. See Vogt v. Dynamic Recovery Services (In re Vogt), 257 B.R. 65, 68 (Bankr. D. Colo.) (bankruptcy court did not have jurisdiction over FDCPA claims even though arising out of same set of facts as discharge injunction claim).
258 B.R. at 321. Similarly, district courts following Pacor have refused to transfer state law actions to bankruptcy courts based on the fact that the same conduct happened to violate the discharge orders issued by those courts. See Buckingham v. Baptist Memorial Hospital-Golden Triangle. Inc., 283 B.R. 691 (N.D. Miss. 2002); McGlynn v. The Credit Store, 234 B.R. 576 (D. R.I. 1999).
The reasoning behind all these decision is the same; the state law causes of action, based upon post-petition (and post-discharge) conduct, were not property of the estate. Prosecution of such claims would not benefit or otherwise have had a conceivable effect on the bankruptcy estates, which were fully administered and no longer existed. It is irrelevant that the same facts giving rise to the discharge violation also give rise to the state causes of action. As noted above, unlike the district courts, bankruptcy courts have no supplemental jurisdiction. Bankruptcy courts cannot invoke state laws, regardless of the factual nexus to a violation of a discharge order, unless the result will conceivably impact on the estate. Such an effect is an impossibility here where the estate ceased to exist over a decade ago.
Nor does adjudication of Plaintiffs' state law claim, albeit based upon an alleged discharge violation, impact on "the debtors rights, liabilities, options, or freedom of action." Marcus Hook, 943 F.2d at 264 (quoting In re Smith, 866 F.2d 576, 580 (3d Cir. 1989) (emphasis added)). "The role of debtor is defined by the panoply of rights and duties arising from the petition in bankruptcy."Community Bank of Homestead v. Boone fin re Boone), 52 F.3d 958, 961 (11th Cir. 1995). The outcome of the State Law Claims will not (and cannot) affect their rights and duties as debtors, In pursuing their State Law Claims claim, Plaintiffs stand in the same shoes as any individual who is wrongly pursued by a creditor for a debt he simply does not owe and who has a remedy under state law. Admittedly, the debt at issue here is purportedly not owed by virtue of bankruptcy law, but the cause of action framed by the State Law Claims is nonetheless created wholly by state law. Such a claim stands separate and apart from Plaintiffs' rights as bankruptcy debtors and must therefore be pursued in a court of competent jurisdiction.
Because I have no subject matter jurisdiction over Count II, it shall be dismissed on that basis. I will therefore only address the merits of Count I, which arises under title 11, namely the alleged violation of the Discharge Order and my inherent power to enforce such Order.
II.
A motion for summary judgment is governed by Federal Rule of Civil Procedure 56, applicable in this proceeding pursuant to Federal Rule of Bankruptcy 7056. Summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories and admissions on file, and affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c).
The party moving for summary judgment must overcome the initial burden of demonstrating the absence of a material question of fact. Celotex v. Catrett 477 U.S. 317, 325 (1986). The substantive law will determine which facts are material Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986). A court's function is not to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial. Id. at 255. A court must find that the motion alleges facts which, if proven at trial, would require a directed verdict. 6 J. Moore, Moore's Federal Practice, ¶ 56.26 (2d ed. 1988). With this standard in mind, I turn to the relevant law and the uncontested facts.
III. A.
Section 727(b) of the Bankruptcy Code describes the scope of the bankruptcy discharge: "Except as provided in section 523 of this title, a discharge under subsection (a) of this section discharges the debtor from all debts that arose before the date of the order for relief under this chapter . . ." 11 U.S.C. § 727(b). As the Loan was made before Plaintiffs filed their bankruptcy, it was therefore discharged unless it is determined to be within a statutory exception set forth in 11 U.S.C. § 523, aptly titled "Exceptions to discharge." However, as Edson never brought an action to seek a determination in any court that the Loan falls within any exception delineated in § 523 (nor does she even allege so in the context of these Motions), there is no question that the debt arising from the Loan was in fact discharged.
A creditor bears the burden of proving that a debt is nondischargeable under § 523 by a preponderance of the evidence.Grogan v. Garner, 498 U.S. 279, 289-88, 111 S.Ct. 654, 659-60 (1991).
While Edson focuses on Plaintiffs' failure to schedule her as a creditor in the 1993 Bankruptcy as an equitable basis for precluding the operation of § 524, see infra § III.B., she does not assert that the failure to schedule the Loan rendered the Loan nondischargeable. Indeed, the Third Circuit Court of Appeals has made clear that in a no-asset Chapter 7 case, the exception to discharge for unlisted debts is inapplicable. Judd v. Wolfe, 78 F.3d 110 (3d Cir. 1996). Even without Wolfe, it is undisputed that Edson knew about the bankruptcy case no later than March 1994. Edson Aff. ¶¶ 11-12. This knowledge places her outside of the exception for unlisted debts. See 11 U.S.C. § 523(a)(3)(A) and (B).
Once a debtor has been discharged, § 524 of the Bankruptcy Code, mandates that the discharge: "operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived." 11 U.S.C. § 524(a)(2). Such provision furthers a fundamental goal of the bankruptcy system i.e., to provide debtors with a "fresh start" by relieving of them their debt. Westmoreland Human Opportunities, Inc. v. Walsh, 246 F.3d 233, 250 (3d Cir. 2001). "Discharge is the legal embodiment of the `fresh start/ It is the barrier that prevents creditors from reaching the wages, property, and other assets of debtors in bankruptcy." Walker v. M M Dodge (In re Walker), 180 B.R. 834, 840-41 (Bankr. W.D. La. 1995). The discharge injunction prevents not only formal collection processes such as lawsuits or garnishment, but even informal actions such as phone calls, letters, and personal contact if they seek to coerce payment of a discharged debt. Id. at 842, Finally, the discharge injunction is self-executing and not dependent or affected by any conduct of the Debtor, including waiver. See Ruvacalba v. Munoz (In re Munoz), 287 B.R. 546, 556 (BAP 9th Cir. 2002);In re Dalton, 183 B.R. 127, 129 (Bankr. S.D. Tex. 1995). A debtor need not raise his discharge as a defense in a state court action. Indeed, he need not respond to the action at all. Walker, 180 B.R. at 841.
While the Bankruptcy Code preserves a debtor's right tovoluntarily pay a discharged debt, 11 U.S.C. § 524(f), it is clear that the discharge and its injunction stand as a firm barrier against any party who attempts to coerce payment from the debtor. Having determined that the Loan was discharged by the Discharge Order, § 524 gives that order the effect of an injunction against forced collection as a matter of law. The uncontested facts are that Edson sent a letter on March 22, 2001 demanding payment of the Loan, which she followed by initiation and prosecution of the Edson Lawsuit, The sole purpose of these actions was undisputedly to coerce Plaintiffs' payment of the Loan. As such, they violate the injunction of § 524. Nevertheless, Edson makes several arguments as to why her conduct did not violate the Discharge Order. I address each in turn.
B.
First Edson invokes this Court's equitable powers contending that (1) Plaintiffs misled and induced her from participating in the bankruptcy process and should therefore be equitably estopped or barred by unclean hands from claiming a violation of § 524(a); and (2) Plaintiffs waived their discharge argument by not pursuing it with the state court in the Edson Lawsuit. Even assuming the truth of her allegations as to Plaintiffs' conduct, "[t]he short answer to these arguments is that whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code." Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206-07, 108 S.Ct. 963, 969 (1988).
As the plain language of § 524(b) makes clear and as discussed above, the discharge injunction is a legal consequence of the discharge order; it cannot be waived. The appellate bankruptcy panel in Munoz, supra, aptly described the nature of the discharge injunction in the context of determining whether a bankruptcy court could modify the injunction:
The § 524(a)(2) discharge injunction does not come with some ameliorative phrase — such as "unless the court orders otherwise" — that would connote judicial discretion over its terms. Nor does it contain a provision paralleling the express authorization in § 362(d) for the court to terminate, annul, modify, or condition the automatic stay. The closest discharge injunction analog to § 362(d) is the statutory power to revoke discharges obtained by fraud, which revocation has the automatic consequence of removing the factual predicate for the discharge injunction., 11 U.S.C. § 727(d), 1144(2), 1228(d) 1328(e). Likewise, the court also has the procedural authority to vacate an order granting a discharge. Fed.R.Civ.P. 60, incorporated by F.R.Bankr.P. 9024, These powers of revocation, however, are too slender a reed to support an inference of judicial discretion, In short, this statutory scheme constitutes a "clear and valid" legislative command that leaves no discretion in the court to "modify" the discharge injunction.
287 B.R. at 552-53. While Edson cites to the equitable powers of a bankruptcy court generally, she provides no authority which supports my invocation of equity to exempt her or waive the operation of § 524.
Her reliance on Davis v. Illinois State Police Federal Credit Union (In re Davis), 244 B.R. 776 (Bankr. N.D. Ill. 2000) is misplaced. That Court did not invoke equitable estoppel to preclude the operation of § 524 but rather to preclude the debtor from changing his expressed position (made on the records of both bankruptcy and criminal courts) that his payments to the creditor were voluntary.Id. at 794-95. Unlike Davis, Plaintiffs did not make clearly voluntary payments which they are now seeking to recover by asserting the irreconcilably opposite position that such payments were involuntary. To the contrary, the stipulated record of the Edson Lawsuit clearly shows that Debtors only made payments under the Settlement after Edson sought and obtained judicial enforcement.
Even without regard to the statutory mandate of Congress, I find Edson's estoppel argument untenable on its merits. "[A party] claiming equitable estoppel must establish that (1) a representation of fact was made to it, (2) upon which [it] had a right to rely, and (3) the denial of the represented fact by the party making the representation would result in injury to the relying party." In re RFE Industries. Inc., 283 F.3d 159, 164 (3d Cir. 2002). As to the first element, she states that Plaintiffs misled her as to the legal effect of not listing her as a creditor or the overall effect discharge would have upon the Loan. Memorandum of Law in Support of Andrea Edson's Motion for Summary Judgment ("Edson Mem.") at 7-8. Such misrepresentations are at best misrepresentations of the law, Estoppel cannot be created by representations or opinions concerning matters of law. Gabovitz v. State Auto. Ins. Ass'n, 523 A.2d 403, 406 (Pa.Super. 1987) (Insurer's agent's alleged representation as to benefits recoverable under No-Fault Motor Vehicle Insurance Act were nothing more than expression of legal opinion and would not support claim of equitable estoppel); Ettinger v. Commonwealth, 539 A.2d 67, ( Pa. Commw. 1988) (Civil service commission not equitably estopped from terminating employee based upon his reliance on supervisor's alleged statement that employee's work as a deputy at polling place did not violate civil service statute. Such reliance on a legal opinion was misplaced).
As Edson cites to Pennsylvania law for her equitable estoppel defense, I will also apply Pennsylvania law. Edson Mem. at 6 (citing In re Rowland, 275 B.R. 209 (E.D. Pa, 2002) (quoting Novelty Knitting Mills, Inc. v. Siskind), 457 A.2d 502 (Pa. 1983)). In any case, this axiom is true under federal common law as well. See Commissioner of Internal Revenue v. Union Pac. R. Co., 86 F.2d 637, 639-40 (2d Cir. 1936):Jersey State Bank. v. Isringhausen (In re Isringhausen). 151 B.R, 203, (Bankr. S.D. Ill. 1993).
C.
Edson also alleges that Plaintiffs made numerous, post-discharge oral promises to repay the Loan (collectively the "New Promise"). She argues that she did not violate the discharge injunction because she is pursuing enforcement, not of a discharged debt, but of a new post-discharge promise supported by new consideration. Edson Mem. at 8. Assuming that Plaintiffs did in fact make the New Promise, it is nevertheless unenforceable.
In support of her argument, Edson first cites to several old Pennsylvania cases for the proposition that a post-discharge promise to pay a prior debt can be enforced under Pennsylvania law which recognizes that a moral obligation to pay a discharged debt forms sufficient consideration to make the promise binding. See Kravitz v. Povlotsky, 3 A.2d 922 (Pa. 1939); Bolton v. King, 105 Pa. 78, 1884 WL 3632 (Pa. 1884); McDermott v. Sulkin, 35 A.2d 556 (Pa. Super 1944). Notably Edson does not attempt to harmonize these decisions, rendered prior to the enactment of the Bankruptcy Reform Act of 1978, with current law. Had she done so, she would have recognized that Pennsylvania law alone no longer governs the enforceability of promises to pay discharged debts.
Edson also cites Young v. Pileggi, 455 A.2d 1228 ( Pa. Super. 1983), which supports the general proposition that moral obligation is sufficient new consideration for a promise to pay a debt barred by the statute of limitations. Young does not involve a debt discharged in bankruptcy.
Even if these cases had continuing vitality under the current Bankruptcy Code, they all hold that the post-discharge promise must be a "clear, distinct, and unequivocal promise to pay the specific debt."Bolton, 1884 WL at* 3; Kravitz, 3 A.2d at 923;McDermott 35 A.2d 557. A mere acknowledgment of the debt or expressed intention to pay will not suffice. Id. As Edson describes the New Promise, it does not have the characteristics of a post-discharge promise enforceable on this record.
In 1995, Sandi said: "we haven't forgotten about you and that we owe you the money that you loaned us. We just don't have the money yet."
She said that they had every intention to paying me back as soon as they could.
In the summer of 1996, Sandi. . . . said again that they still intended to pay me back . . .
In early 1999 . . . Sandi . . . told me once again they had not forgotten about the loan and intended to pay me
April 2000: "Sandi said that she still felt very badly about not paying me back yet and promised me that repayment of the loan was still a priority for them"
September 2000: "Sandi said that . . . she and Hank still had every intention to paying me back . . ."
Edson Aff ¶¶ 16(a)(f).
The factual and legal background in this case is substantially identical to that found in Renwick v. Bennett (In re Bennett), 298 F.3d 1059 (9th Cir. 2002). Like Plaintiffs, the former debtor Bennett had allegedly made post-discharge oral promises to pay a discharged loan. Like Pennsylvania law, California law holds that a moral obligation is sufficient consideration for a new promise on an otherwise unenforceable debt, and there are California decisions applying this rule to debts discharged in bankruptcy.
As noted by the Bennett court, the former Bankruptcy Act was silent as to the reaffirmation of dischargeable debts. A debtor could waive the discharge and make a new promise to pay the debt with the enforceability of such reaffirmation promises being left to the state courts. Congress has since remedied this silence by enacting §§ 524(c) and (d), which provide that an agreement to pay a discharged debt is enforceable only (1) "to any extent enforceable under nonbankruptcy law" (the "Nonbankruptcy Requirement") and (2) provided it meets specifically enumerated Bankruptcy Code reaffirmation requirements (the "Reaffirmation Requirements"). Id. at 1066. "The purpose of these requirements was to `deal with the problem which was perceived to exist at the time the language was drafted to-wit: Post-bankruptcy attempts to enforce pre-bankruptcy obligations in non-bankruptcy courts using non-bankruptcy law.'" Id. (citation omitted). See also In re Melendez, 224 B.R. 252, 254 (Bankr. D. Mass. 1998) (providing a comprehensive legislative history of § 524(c) and(d)).
Specifically, 524(c) states:
An agreement between a holder of a claim and the debtor, the consideration for which, in whole or in part, is based on a debt that is dischargeable in a case under this title is enforceable only to any extent enforceable under applicable nonbankruptcy law, whether or not discharge of such debt is waived, only if — . . .
11 U.S.C. § 524(c), This is followed by the Reaffirmation Requirements, which require that the agreement must; (1) be madebefore the granting of discharge; (2) contain a conspicuous statement of debtors right not to reaffirm and to rescind; (3) be filed with the court, attached to certain declarations by the debtor's attorney who negotiated the agreement, if applicable; (4) be rescindable for a certain period; and (5) be subject to a hearing if the debtor negotiated the agreement without counsel and obtain court approval that such agreement is in his best interest and not an undue hardship. 11 U.S.C. § 524(c)(1)-(6). Subsection (d) details further requirements for debtors who negotiated a reaffirmation agreement without counsel. There is no question of fact that the New Promise does not meet the Reaffirmation Requirements.
Indeed, the Commission on the Bankruptcy Laws of the United States, created by Congress to study bankruptcy reform, recommended abolishing such subsequent promises altogether:
Substantial evidence of the use of reaffirmations to nullify discharges has come to the Commission's attention. To the extent reaffirmations are enforceable, the "fresh start" goal of the discharge provisions is frustrated, Reaffirmations are often obtained by improper methods or result from the desire of the discharged debtor to obtain additional credit or continue to own property securing a discharged debt.
Menendez, 224 B.R. at 254 (citing Report of the Commission on the Bankruptcy Laws of the United States, H.R. Doc. No. 93-137, 93d Cong., 1st Sess. (1973) (part I, chapter 7, section C.3)). There was strenuous debate by legislators representing both the rights of creditors and debtors resulting in a compromise under which Congress decided to continue to allow reaffirmations, but subject to specific limitations. Id. See supra n. 13.
The Bennett court then rejected the creditor's argument that there was a new post-discharge promise, noting that the Reaffirmation Requirements apply to any "agreement between a holder of a claim and the debtor, the consideration for which, in whole or in part, is based on a debt that is dischargeable." 298 F.3d at 1066 (quoting 11 U.S.C. § 524(c)). Bennett's alleged new promise, even if enforceable under California law as supported by a moral obligation, was nevertheless a promise to pay the discharged debt. As such, the court held that the Reaffirmation Requirements must be met.Id. at 1067.
Similarly, while Edson characterizes the New Promise as separate and distinct from the discharged Loan, it is nevertheless a promise to pay the exact debt that was discharged in bankruptcy. As such, the New Promise must meet both (1) the Nonbankrutpcy Requirementand (2) the Reaffirmation Requirements. 11 U.S.C. § 524(c), As to the former, the summary judgment record simply does establish that the New Promise is sufficiently unequivocal so as to be enforceable under Pennsylvania law. More importantly, Edson concedes (and I easily take judicial notice) that the New Promise does not meet the Reaffirmation Requirements. Edson also cites several cases decided after the Bankruptcy Code was enacted as examples of enforceable post-discharge loans. Yet an examination of their facts only distinguishes them from the case sub judice. In Watson v. Shandell (In re Watson), 192 B.R. 739 (BAP 9th Cir. 1996),aff'd 116 F.3d 488 (1997), a secured creditor of the plaintiff/debtor Watson obtained relief from the automatic stay to seek recovery of its collateral, namely debtor's accounts receivable, in state court (the "Receivable Litigation"). The parties settled the Receivable Litigation in an agreement by which Watson was relieved of personal liability, but conceded the creditor's in rem rights to recover the collateral and agreed to turn over the accounts receivable. The bankruptcy court entered a discharge order several months after the settlement of the Receivable Litigation. When the creditor filed a second state suit after Watson reneged on the settlement, Watson moved to reopen his bankruptcy case to enforce his belief that the settlement agreement was an invalid reaffirmation. The bankruptcy appellate panel upheld the bankruptcy court's finding that the settlement agreement was a wholly separate contract not subject to § 524 because the consideration supporting the agreement was not based upon Watson's discharged personal liability to the creditor. Unlike Edson, Watson did not agree to pay his discharged debt to his creditor. Rather, he simply agreed to relinquish collateral that was excepted from the automatic stay and survived the bankruptcy in exchange for the saved costs of litigation on a valid suit against him based upon the creditor's valid in rem rights.
These rights would have survived Breyer's bankruptcy in any case. While a debtor's personal liability to a creditor may be discharged, "Valid liens that have not been disallowed or avoided survive the bankruptcy discharge of the underlying debt." Estate of Lellock v. Prudential Ins. Co. of America, 811 F.2d 186, 188-89 (3d Cir. 1987).
Minster State Bank v. Heirholzer (In re Heirholzer), 170 B.R. 938 (Bankr. N.D. Ohio 1994), also involved a secured creditor who, after discharge, proceeded to foreclose on a discharged debtor's house, and thereby pursue its valid in rem rights which survived bankruptcy. That debtor did not subsequently agree to pay his discharged debt, but rather entered into a new agreement, evidenced by a separate note, in exchange for the creditor giving up its valid right to foreclose on the property.
In Breyer v. Hetrick (In re Breyer), 216 B.R. 755 (Bankr. E.D. Pa. 1998) Breyer's, personal obligation under a joint mortgage with her ex-husband, Hetrick, had been discharged in her prior Chapter 7 case. The mortgage lien survived the Chapter 7 case, however. Hetrick subsequently settled a lawsuit against him by Breyer's parents for money they loaned for the purchase of the home ("the Settlement"). Under the Settlement, to which Breyer was a signatory, Hetrick vacated the home and Breyer and her new husband moved in and were to take over mortgage payments. Breyer failed to make the mortgage payments, which Hetrick continued to pay in order to protect his credit rating. Objecting to his proof of claim for those payments in this bankruptcy case, Breyer argued that the Settlement was an invalid reaffirmation agreement to pay her discharged obligations under the mortgage. The Court held that the Settlement did not require Breyer to pay her discharged mortgage obligations, but rather was a valid post-discharge agreement to pay Hetrick's mortgage obligations in return for the benefit of living in the house.
Button v. Sheridan Oil Co. (In re Button), 18 B.R. 171 (Bankr. W.D.N.Y. 1982), involved a debtor convicted of larceny whose terms of probation included restitution to his victim, Sheridan Oil Co. ("Sheridan"). He subsequently filed his bankruptcy petition and while the bankruptcy court discharged the debt to Sheridan, it determined it had no authority to interfere with the criminal penalty of restitution. Thus, the criminal sanction survived the bankruptcy case. In exchange for release from probation, he signed a promissory note to Sheridan (the "Note"). Button went back to the bankruptcy court under the theory that the Note was an improper reaffirmation agreement. The bankruptcy court denied his request, holding that the consideration supporting the Note was not based on the discharged debt. Button was merely entering into a new agreement a substituting civil enforcement for a valid, non-discharged criminal penalty.
All the above cases involved debtors who entered into valid post-discharge agreements in which they exchanged payment for something of value, neither of which was based "in whole or in part" on the discharged debt. In sharp contrast, Edson had neither a valid lien nor criminal process against Plaintiffs. All that Edson had after the 1993 Bankruptcy was a discharged debt, which Plaintiffs orally agreed to pay. While they are free to voluntarily do so,see Davis v. Illinois State Police Federal Credit Union (In re Davis), 244 B.R. 776 (Bankr. N.D. Ill. 2000), Edson's demand that they pay and her subsequent lawsuit to compel payment violated the injunction created as a matter of law by the Discharge Order.
In re Antonino, 241 B.R. 883 (Bankr. N.D. Ill. 1999) is even more factually inapposite in that there was no discharged debt at issue. That debtor entered into a post-discharge settlement agreement in a state court divorce proceeding whereby he agreed to pay his wife's attorney's fees. Id. at 885. While the wife may have accrued fees before debtor's bankruptcy, the attorney's claim against the debtor did not arise until after discharge. There was simply no discharged debt as to the attorney which could form the basis of a his discharge injunction Id. at 888-89.
Nor does In re Peterson, 110 B.R. 946 (Bankr. D. Colo. 1990) involve a creditor whose debt was discharged or who sought to collect on such a debt. At issue there was a lease of property which was deemed rejected under § 365(d)(4). The debtor entered into a post-discharge "Lease Addendum" whereby he reaffirmed the lease. At time, he was current on all his lease payments. Id. at 947. Two years later, the debtor became unable to pay the rent and tried to enjoin the lessor's state law suit to collect rent. I agree with the Peterson Court that the requirements of § 524(c) do not apply to a discharged debtor who wishes to reassume a lease rejected by the trustee.Id. at 950. By its own terms, § 524 only pertains to discharged debts, it does not preclude or govern how a discharged debtor engages in contractual relations with a party that he dealt with prior to bankruptcy. Clearly this debtor wished to continue using the property and obtained that benefit in exchange for reaffirming his lease. Any debt that arose from the reaffirmed lease arose post-discharge.
Davis involved a debtor who was voluntarily paying a discharged debt and then tried to recover those payments under § 524. The evidence unequivocally showed the voluntary nature of the payments.Id. at 787-88. Here, there is simply no dispute that Plaintiffs' payments to Edson were coerced through judicial process.
IV.
Having found Edson in violation of the discharge injunction, I now turn to Plaintiffs' request for a finding of contempt and an award of damages. Unlike § 362(h) which mandates sanctions for violations of the automatic stay, § 524 provides no statutory remedy. Relief therefore depends entirely upon the contempt power of this Court under 11 U.S.C. § 105. See, e.g., Bessette v. AVCO Financial Services, Inc., 230 F.3d 439, 445 (1st Cir. 2000); Hardy v. United States, 97 F.3d 1384, 1388 (11th Cir. 1996); Beck v. Gold Kev Lease. Inc. (In re Beck), 283 B.R. 163, 167 (Bankr. E.D. Pa. 2002).
In focusing solely upon whether there was a violation of the discharge injunction, neither party has addressed whether a finding of contempt is warranted. A finding of civil contempt requires clear and convincing evidence `"(1) that a valid order of the court existed; (2) that the defendants had knowledge of the order; and (3) that the defendants disobeyed the order.'" Stalford v. Blue Mack Transport, Inc. (In re Lands End Leasing. Inc.), 220 B.R. 226, 234 (Bankr. D. NJ. 1998) (citation omitted).
A valid order is one whose terms are specific and definite.Id. The Discharge Order explicitly states that it discharges all debts not specifically exempted and that it operates as an injunction against collection. It is specific and definite and unquestionably a valid order.
The Discharge Order stated as follows:
1. The above-named debtor is released from all dischargeable debts
2. Any judgment heretofore or hereafter obtained in any court other than this court is null and void as a determination of the personal liability of the debtor with respect to any of the following:
(a) debts dischargeable under 11 U.S.C. § 523;
(b) unless heretofore or hereafter determined by order of this court to be nondischargeable, debts alleged to be excepted from discharge under clauses (2), (4) and (6) of 11 U.S.C. § 523(a);
(c) debts determined by this court to be discharged
(3) All creditors whose debts are discharged by this order and all creditors whose judgments are declared null and void by paragraph 2 above are enjoined from instituting or continuing any action or employing any process or engaging in any act to collect such debts as personal liabilities of the above-named debtor.
Joint App. A.
The second requirement is knowledge of the order as clearly a party cannot be held in contempt for disregarding an order about which she had no knowledge. Edson claims to have had no knowledge of the Discharge Order, Edson Aff. ¶ 16, and there is certainly no evidence that she had knowledge prior to filing the Edson Lawsuit. Nevertheless, Edson was represented by counsel in the Edson Lawsuit, and the stipulated record shows that Plaintiffs pleaded their discharge in their Answer and New Matter on August 8, 2001. Joint App. B, Tab 4. Edson's attorney, learned in the law, could easily have verified this assertion by checking the archived docket report of this case, available through the PACER system. Where an attorney has knowledge of a bankruptcy case his, knowledge of the discharge order has been imputed. See Rhyne v. Cunningham (In re Rhyne), 59 B.R. 276 (Bankr, E.D. Pa. 1986). Moreover, knowledge of an order will be imputed to a party who had opportunity to know of it, but chose not to gain that knowledge,Yoppolo v. Walter (In re Walter), 265 B.R. 753, 759-60 (Bankr. N.D. Ohio 2001) (debtor wife deemed to have knowledge of order received by her husband where her lack of actual knowledge was a result of leaving such matters to her husband). Finally, a "party is deemed bound by the acts of his lawyer-agent and is considered to have `notice of all facts, notice of which can be charged upon the attorney/" Link v. Wabash R, Co., 370 U.S. 626. 634. 82 S.Ct. 1386, 1390(1962) (quoting Smith v. Aver, 101 U.S. 320 (1879)). Once Plaintiffs raised the red flag of discharge, Edson's counsel had sufficient knowledge, as well as the training and tools available to verify the accuracy of their claim. Edson therefore had constructive, if not actual, knowledge of the Discharge Order.
I do not imply in any way that Edson's counsel was dilatory in his duties, The stipulated record indicates that he aggressively sought proof of Plaintiffs' discharge claim through discovery in the Edson Lawsuit, which Plaintiffs consistently failed to provide. Joint App. B, Tab 7. Nevertheless, failure to check publicly available databases and records cannot create a lack of knowledge of the discharge. Because § 524 demands no action on the part of the debtor, the duty of inquiry is clearly upon the creditor. Id.
Finally, as willfulness is not a necessary element of civil contempt,Robin Woods, Inc. v. Woods, 28 F.3d 396, 399 (3d Cir. 1994), my conclusion, supra § III, that Edson disobeyed the Discharge Order, evidences satisfaction of the third element. With the requirements of civil contempt proven, I now turn to the request for sanctions.
Sanctions for civil contempt serve two purposes: "to coerce the defendant into compliance with the court's order and to compensate for losses sustained by the disobedience." Robin Woods Inc. v. Woods, 28 F.3d 396, 400 (3d Cir. 1994). Plaintiffs have requested an order directing Edson to cease all efforts in any jurisdiction to collect the Loan from the Debtors. I will grant this request. Such an order should be sufficient to coerce Edson's compliance now that she is aware of the impermissible nature of her conduct.
As noted, contempt sanctions should also compensate the Plaintiffs for their losses. Plaintiffs request the return of all payments they have made to Edson as a result of the Edson Lawsuit. I will grant this request to the extent of the evidence of such payments on this record, namely the $2,500 of stipulated payments made under the Settlement.
Plaintiffs also request their attorney's fees and costs in defending the Edson Lawsuit. While a court in a contempt proceeding may, in its discretion, award expenses, costs and fees to the petitioner, these items are restricted to reasonable amounts incurred in prosecuting the contempt petition, and some basis for their award must appear in the record, Lichtenstein v. Lichtenstein, 425 F.2d 1111, 1113 (3d Cir. 1970). Nothing appears on this summary judgment record to allow me to fix a reasonable amount for fees and costs. I will, however, allow Plaintiffs to supplement the record by filing (and serving on Plaintiffs) a fee application requesting counsel fees and costs associated with Edson's discharge violation. Such an application must comply with Local Bankruptcy Rule 2016-3 which will allow me to review the services and costs to determine if they were a result of the contemptuous actions. Edson will be allowed the opportunity to object to the amount of fees sought.
In connection with this application, I will consider that Plaintiffs did not immediately come to this Court when Edson began to seek enforcement of the Loan, despite the fact that their counsel in the Edson Lawsuit was knowledgeable in bankruptcy law, having represented Mr. Close in one of his subsequent bankruptcy cases. Instead, it appears that Plaintiffs not only allowed the litigation to proceed to a settlement, but actually caused expenses to both parties through their dilatory compliance with discovery. This adversary proceeding has served its purpose of putting Edson on notice of and enjoining her illegal conduct. As Plaintiffs have been required to seek Court intervention to secure that relief, their related counsel fees will be awarded. I will, however, scrutinize the submissions and objections to ensure that costs that could have been avoided are not rewarded by payment.
An Order consistent with the foregoing Memorandum Opinion shall be issued.