Discharge Injunction: Maybe It Works, and Maybe It Doesn’t

In re Sanchez, 545 B.R. 55 (Bankr. D.N.M. 2016)

Chapter 7 debtors reopened their bankruptcy case so that they could file a motion seeking sanctions against a trash collector for violating the discharge injunction. The court found that there was a willful violation and awarded $150 in actual damages and $3800 in attorney fees.

Prior to bankruptcy North Central Solid Waste Authority (NCSWA) provided trash pickup service for the debtors’ residence. NCSWA was a joint venture of various tribal and local governmental units, and the curbside trash pickup function was a utility service within the meaning of section 366 of the Bankruptcy Code. However, it was not a “waste authority” under the applicable statutes, and thus did not have the right to a lien to secure unpaid trash fees.

Prepetition the debtors paid a $150 deposit, NCSWA gave them a trash bin, and the monthly trash pickup service charge was ~$18. The debtors listed NCSWA in their bankruptcy schedules as an unsecured creditor with a claim of $880 for several years of unpaid bills. Towards the end of the bankruptcy case the court entered a standard discharge order. As a result, the unpaid prepetition trash bill was discharged.

A couple of months later NCSWA removed the trash bin from the debtors’ property and discontinued service. A few days later the debtor visited NCSWA’s office to pay his bill and paid $150 for service after the petition date. NCSWA also insisted that the debtor sign an agreement reaffirming the discharged debt and providing for payment of $78.54 per month in addition to the regularly $18 monthly payment.

Notwithstanding the payment and execution of the agreement NCSWA still did not reinstate service. So the debtors reopened their bankruptcy case and filed a motion for sanctions against NCSWA.

NCSWA did not respond to the motion, although shortly after the motion was filed it sent a letter stating that the account had been closed “due to the bankruptcy” and returned a check for $150 (presumably the attempted payment). It also directed the debtors to submit a new application and pay a $50 security deposit. The debtors did not do so, and NCSWA did not return the trash bin or pickup their trash. This resulted in about 20 bags of trash piling up the debtors’ yard. (Apparently they were not able to take care of the trash themselves because their truck needed a new transmission.)

Notwithstanding NCSWA’s failure to respond or object to the motion, the court held a hearing (at which NCSWA did not appear).

As background, the court explained that public utility companies often have a monopoly and are the only source of essential services. This in turn means that utilities can pressure debtors to pay prepetition debts in order to avoid a utility shut off. In response, section 366 was added to the Bankruptcy Code to prohibit utilities from discontinuing services while providing assurance that they will be paid for postpetition services.

The court noted that refusing to provide service is not a per se violation of the Bankruptcy Code. For example, courts have found that a utility has a right to discontinue service when there has been equipment tampering or unauthorized use. Similarly, a utility can discontinue service if the debtor fails to pay for postpetition services. But absent these circumstances discontinuing service during a bankruptcy constitutes a violation of the automatic stay (e.g. an act to collect a prepetition debt).

However, the utility provisions in section 366 and the automatic stay provisions in section 362 apply while the bankruptcy case is still pending. Once the case is closed, the primary restriction is the discharge injunction. Section 524(a)(2) provides 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 [i.e. prepetition] as a personal liability of the debtor, whether or not discharge of such debt is waived.”

The court determined that there is no private action for violation of the discharge injunction, but that it can assess sanctions using its equitable power under section 105 of the Bankruptcy Code. In determining whether there was a violation, it applied an objective standard: “the question is whether the creditor’s conduct had the practical, concrete effect of coercing payment of a discharged debt.”

In this case NCSWA discontinued service post discharge, threatened to place a lien on the debtors’ house if they didn’t pay the discharged debt, and did not resume service even after the debtor signed an unenforceable, quasi-reaffirmation agreement to pay the discharged debt. The court found that this was clearly a violation of the discharge injunction.

NCSWA’s actions after the motion was filed were more ambiguous. The court speculated that the return of the payment and invitation to submit a new service application could have been an offer to reinstate service without collecting the discharged debt. The court believed that the debtors should have tried to see whether submitting a new application would have resolved the problem.

However, since there were clear violations prior to the filing of the motion, the court awarded sanctions of $150 in actual damages (representing the value of the trash bin that was not returned) and $3800 in attorney fees. The court warned that it would impose additional sanctions if NCSWA continued to violate the discharge injunction or refused to pick up the accumulated trash.

As indicated by this case, just because a debtor has rights under the Bankruptcy Code does not necessarily mean that there will be clear sailing in exercising those rights.

In this case the debtors were able to obtain a relatively speedy resolution: the court’s opinion was issued just over 2 months after NCSWA discontinued service – although one wonders whether the sanctions were sufficient to deter future willful violations or whether they will be viewed as simply the cost of doing business. Further, in a more typical case you may not be able to count on getting the court’s attention once a case is in the final stages of winding up or after it is closed.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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