Opinion
19-04900-LT7
11-10-2022
In re: RAUL SILVA, Debtor.
This opinion is intended only to resolve the dispute between these parties and is not intended for publication.
MEMORANDUM DECISION RE: MOTION FOR SANCTIONS FOR VIOLATION OF THE DISCHARGE INJUNCTION
LAURA S. TAYLOR, UNITED STATES BANKRUPTCY COURT JUDGE
Debtor Raul Silva sought sanctions against self-represented creditors Guillermo A. Gomez and Lisandra de Gomez ("Creditors") for violations of the discharge injunction of 11 U.S.C § 524(a)(2). That violations of the discharge occurred is not in question. But this case involves error by the Debtor and his counsel compounded by error of the employees of the Clerk of Court ("Clerk Employees"). The evidence indicates that the self-represented Creditors sought information and tried to avoid improper actions. But in the perfect storm that swirled through this case, they made mistakes. The Court finds that: (1) under the circumstances, Creditors' actions do not warrant sanctions under the standard set forth in Taggart v. Lorenzen, 139 S.Ct. 1795 (2019); and (2) even if those actions met the Taggart standard, the Court would not exercise its discretion to award any sanctions under the unique facts of this case.
Unless otherwise indicated, all chapter, section, and rule references are to the Bankruptcy Code, 11 U.S.C. §§101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
Given its disposition, the Court need not determine whether the Creditors acted jointly in all relevant respects. The Court assumes that any violation involved a joint debt and, for ease of reference, thus uses the plural in many instances.
FACTS
Debtor filed a Chapter 7 bankruptcy proceeding on August 16, 2019, without listing Creditors in his schedules. This was the first mistake. It is likely that he did not tell his attorney about their claims because they had not matured into a judgment.
On the petition date, the Creditors' claims were outlined in a small claims action initiated prepetition on April 9, 2019. Creditors obtained a judgment after a post-petition hearing on September 18, 2019. Debtor did not inform the small claims court of the bankruptcy, and there is no evidence that Creditors knew about the case when they obtained their post-petition judgment. Debtor does not assert that this was sanctionable conduct. This was the second mistake.
After the judgment issued, Debtor amended his schedules to include Ms. Gomez, along with other amendments, on September 23, 2019. Ms. Gomez did not receive a copy of the amended schedules. Debtor's attorney did, however, serve the Notice to Creditors of the Above-Named Debtor Added by Amendment or Balance of Schedules (CSD 1101) on Ms. Gomez by regular mail. The notice referenced a continued § 341(a) meeting of creditors on September 25, 2019. The unrefuted evidence is that Creditors received the notice on September 26, 2019, the day after the § 341(a) meeting date. Ms. Gomez testified convincingly that Creditors did not understand the import of this document and wanted to preserve her rights. As a result, she contacted the Bankruptcy Court.
When adding creditors, a debtor should comply with the Local Bankruptcy Rules and Administrative Procedures. Such compliance requires a debtor to file amended schedules and to amend the List of Creditors. See LBR 1007-1; 1009-1; Local Forms CSD 1007, 1100, and 1101; Administrative Procedure 3.1(a) 3) Debtor amended the schedules but failed to amend the List of Creditors to include Ms. Gomez. This was the third mistake.
Admittedly, the Local Rules and Forms are not a model of clarity; but Debtor's counsel should have done more to alert Clerk Employees that an added creditor was among Debtor's schedule amendments.
And here a fourth mistake becomes critical to the Court's decision. Upon receipt of the amended schedules, the Clerk Employees either: (1) should have investigated the matter or issued a deficiency due to the absence of an amendment to the List of Creditors; or (2) should have added Ms. Gomez to the List of Creditors even though the Debtor failed to provide the amendment. But for reasons unknown, this did not happen. Thus, the Bankruptcy Noticing Center served nothing on Creditors and a review of the List of Creditors evidenced that neither Mr. nor Ms. Gomez was a creditor.
On September 27, 2019, Ms. Gomez came to the Bankruptcy Court to take action to preserve Creditors' rights. The unrefuted testimony is that she was told that Creditors were not listed on the List of Creditors and, thus, were not entitled to or did not need to take action. The Clerk Employees cannot give legal advice, so it is likely that they reviewed the claims docket, saw no listing for Creditors, and, based on the List of Creditors error, made statements to Ms. Gomez that led her to the mistaken conclusion that, in laymen's terms, she was not covered by the bankruptcy. In so doing, they inadvertently led to both a discharge violation and the loss of Creditors' ability to file a timely nondischargeability complaint. After this discussion, Creditors took no action to initiate a nondischargeability proceeding and considered their options.
Debtor received a discharge in his Chapter 7 proceeding on November 13, 2019. Because neither Mr. nor Ms. Gomez were included on the List of Creditors, and the Bankruptcy Noticing Center did not provide them with notice of the discharge, their names do not appear on the Bankruptcy Court's Certificate of Notice of the Discharge. There is no evidence that they received notice of the discharge at this time.
On January 10, 2020, Creditors sent Debtor a written demand for payment on their judgment. On January 14, 2020, Debtor's counsel sent them a very brief responsive email, stating that their demand violated the discharge, threatening to pursue contempt upon further contact regarding the obligation, and telling them to "go quietly into the night and the matter will raise no more dust." Counsel apparently was unaware of the List of Creditors and Bankruptcy Noticing Center error and assumed a knowing violation that the Court, based on the evidence, determines did not exist. Thus, he did not provide a copy of the schedules, the discharge order, or a fuller explanation.
After receipt of this communication, Creditors ceased collection activity and again contacted the Bankruptcy Court and reviewed the List of Creditors on PACER; and again they confirmed that they were not listed as creditors. They acknowledge that they did not review other documents on PACER, but there is no evidence that they understood that the bankruptcy schedules and schedule amendments might reveal error on the List of Creditors. So they again concluded that their claim was not "included in the bankruptcy." At some point, Ms. Gomez also talked to the Court's Help Center run by lawyers from Legal Aid. She testified convincingly that, again, she was advised to review the List of Creditors. And again, this review showed Creditors as unlisted.
Subsequently, Creditors scheduled a judgement debtor's exam. On October 15, 2021, Debtor's counsel emailed them, stating, "I don't know if you folks are slow minded or if you are taking the position that the law doesn't apply to you," and demanding that they take the debtor's exam off calendar. Counsel's choice of wording was unfortunate. He was unaware of the error in the List of Creditors, so his tone was abrupt. Ms. Gomez testified that the reference to "slow-mindedness" seemed to her to be an ethnic slur based on her last name. The Court does not find that the email was made with this intent, but notes that the email was short on substance and did not provide any basis for Ms. Gomez to call the attorney to discuss the matter. The Court finds that Ms. Gomez's view of the email as containing an ethnic slur was erroneous but not unfounded given its lack of explanation and wording.
Debtor's counsel also filed a notice in small claims court evidencing the bankruptcy discharge. The small claims court, however, told Creditors that they would need to appear at the hearing because the notice of stay was not properly filed. So, on November 3, 2021, they appeared at the debtor's exam where the Commissioner advised them to contact the Bankruptcy Court regarding the status of the bankruptcy. The Commissioner continued the matter to May 2, 2022. The Debtor did not appear.
Creditors now, yet again, called the Bankruptcy Court, and, for the first time, they were informed that there had been a clerical error in not adding them to the List of Creditors after Debtor amended his schedules. The Clerk Employees now corrected the error, and, on November 5, 2021, the Court reopened the case and re-issued the Discharge Order to include them. After that point, Creditors ceased all discharge-violative activity.
Debtor filed his sanctions motion on December 7, 2021. The Court held an initial hearing on the motion, expressing in its tentative its disinclination to order sanctions against Creditors. At a subsequent hearing, the Court again expressed that disinclination but agreed to hold an evidentiary hearing at Debtor's insistence.
STANDARD
The Supreme Court recently clarified the standard for awarding civil contempt sanctions for a violation of a discharge order in Taggart v. Lorenzen, 139 S.Ct. at 1799, and rejected a strict liability standard. The Court held that the standard was also not purely subjective:
Rather, in our view, a court may hold a creditor in civil contempt for violating a discharge order if there is no fair ground of doubt as to whether the order barred the creditor's conduct. In other words, civil contempt may be appropriate if there is no objectively reasonable basis for concluding that the creditor's conduct might be lawful.Id.
Thus, a creditor's subjective belief regarding compliance with an order ordinarily will not insulate her from civil contempt if that belief was objectively unreasonable. See Id. at 1802. But a creditor will not face contempt sanctions based merely on awareness of the discharge order and an intention to do the actions that violated the order. Id.
In establishing this standard, the Court explained, "This standard reflects the fact that civil contempt is a 'severe remedy,'... and that principles of 'basic fairness requir[e] that those enjoined receive explicit notice' of 'what conduct is outlawed' before being held in civil contempt." Id. at 1802.
If the record supports sanctions under the Taggart standard, the court may impose civil contempt sanctions but maintains broad discretion to determine the appropriate remedy for civil contempt. Beckhart v. NewRez LLC, 31 F.4th 274, 278 (4th Cir. 2022)
ANALYSIS
The Court determines that the record does not support the imposition of sanctions under Taggart, and that, even if it did, the Court would not elect to exercise its discretion to impose sanctions under the facts of this case.
Creditors took two potentially discharge violative activities: (1) sending the January 2020 demand letter; and (2) scheduling and noticing the November 2021 debtor's exam. Once the Court served them with the discharge order, they ceased such activities.
The Court concludes that the facts of this case would leave any non-lawyer with a fair ground of doubt as to whether Debtor's discharge order barred collection activity and that Debtor failed to establish that no objectively reasonable basis existed supporting the conclusion that Creditors' conduct might be unlawful. To the contrary, the Debtor's and the Clerk Employees' series of mistakes and their consequences created an objectively reasonable basis for Creditors to believe that the discharge order did not apply to them at the time of their discharge-violative actions.
First, there were errors by the Debtor, who failed to list Creditors on his initial schedules despite the ongoing action in small claims court. Debtor then permitted the small claims court to enter the judgment post-petition without informing that court of the bankruptcy. After that judgment, Debtor amended his schedules to add Creditors but did not amend the List of Creditors. Creditors did not receive notice of the bankruptcy until after the meeting of creditors had occurred.
And the Debtor's scheduling and amendment errors were then compounded by the Clerk Employees' error. After Debtor's amendment, the Clerk Employees also failed to add Creditors to the List of Creditors - a problematic ripple effect of consequences flowed forth. The Clerk Employees had a role in Creditors' decision not to file a nondischargeability complaint. Creditors were then not served with the discharge order. When they investigated whether the discharge applied to them, they were told to look at PACER, where they were not listed as creditors.
The Court disagrees with Debtor's argument that because the discharge order unambiguously included Creditors, Taggart requires a finding that no fair ground of doubt existed. Nothing in Taggart requires the Court to examine the discharge order in a vacuum to determine whether a reasonable ground of doubt existed. A clear and unambiguous order is not sufficient to support contempt sanctions if the creditor has not received notice of it. See In PHH Mortg. Corp. v. Sensenich (In re Gravel), 6 F.4th 503, 512 (2d Cir. 2021) ("a contempt order is warranted only where the party has notice of the order, the order is clear and unambiguous, and the proof of noncompliance is clear and convincing."). Prior to the January 14, 2020, email from Debtor's counsel, they had received no notice of Debtor's discharge.
Debtor then argues that his counsel's January 14, 2020, email responding to Creditors' demand letter provided notice to Creditors that their debt was discharged, rendering their subsequent scheduling of a debtor's exam problematic. The Court disagrees that this email was sufficient to remove all doubt regarding the discharge order. Taggart requires that notice to creditors of the discharge be explicit. The email from opposing counsel referenced the discharge and told Creditors to "go quietly into the night." It did not attach the discharge order, identify the noticing mistake, or better explain the facts of the case. The Court concludes that it does not suffice to establish the "explicit notice" that Taggart contemplates to comply with "principles of basic fairness" given Creditors' pro se status. Moreover, after this email, Creditors took reasonable steps to learn whether Debtor's counsel's email was accurate as to the discharge and were told by Clerk Employees and a Legal Aid employee or volunteer to check PACER. They checked the List of Creditors on PACER and saw that they were not listed.
Furthermore, the judgment underlying the debtor's exam would not have existed had Debtor informed the small claims court of the bankruptcy. That Debtor permitted the small claims court to enter a judgment post-petition without mentioning the bankruptcy contributes to the existence of an objectively reasonable basis to conclude that scheduling the judgment debtor's exam was lawful.
Finally, even if Taggart permitted the imposition of civil contempt sanctions on Creditors, the Court would not exercise its discretion to do so. The Court believes that the discharge violations would not have occurred but for the series of mistakes by Debtor and the Clerk Employees. These mistakes created confusion such that laypersons, like Creditors, would reasonably believe the discharge order did not apply to them. After Debtor's counsel's January 14, 2020, email referencing the discharge, they took reasonable steps to confirm their belief, and, again, due to Clerk Employees' error, their investigation confirmed their erroneous belief. Once Creditors received proper service by the Court of the discharge order - the first time Creditors had seen that order - they ceased all discharge violative acts.
CONCLUSION
Based on the foregoing, the Court declines to impose sanctions on Creditors.