Discharge Injunction: Is a Billing Statement Disclaimer Enough to Avoid Contempt?

Roth v. Nationstar Mortgage, LLC (In re Roth), 935 F.3d 1270 (11th Cir. 2019) –

A chapter 13 debtor sought to reopen her case so that she could move for imposition of contempt sanctions against a mortgagee based on its willful violation of the discharge injunction. The bankruptcy court denied the motion. The debtor appealed and the district court affirmed. The debtor then further appealed to the 11th Circuit.

The debtor identified the relevant mortgage on non-homestead property in her schedules, indicating that she would surrender the property. The plan provided that secured creditors would retain the liens securing their claims regardless of whether they were dealt with under the plan.

The debtor completed payments under the plan and received a discharge. The discharge order provided:

[T]he discharge prohibits any attempt to collect from the debtor a debt that has been discharged. For example, a creditor is not permitted to contact a debtor by mail, phone, or otherwise, to file or continue a lawsuit, to attach wages or other property, or to take any other action to collect a discharged debt from the debtor.

The order also provided:

[A] creditor may have the right to enforce a valid lien, such as a mortgage or security interest, against the debtor’s property after the bankruptcy, if that lien was not avoided or eliminated in the bankruptcy case. Also, a debtor may voluntarily pay any debt that has been discharged.

The mortgagee did not foreclose and started sending monthly statements with the disclaimer that they were not debt collection. The debtor’s attorney sent a cease-and-desist letter and then brought a motion for sanctions for violation of the discharge injunction and the Fair Debt Collection Practices Act (FDCPA). The parties settled this first motion, but the mortgagee sent another statement.

The statement included a “lengthy disclaimer”:

This statement was sent for information purposes only and is not intended as an attempt to collect, assess, or recover a discharged debt, or as a demand for payment from any individual protected by the United States Bankruptcy Code. If this account is active or has been discharged in a bankruptcy proceeding, be advised this communication is for informational purposes only and is not an attempt to collect a debt. Please note, however [the mortgagee] reserves the right to exercise its legal rights, including but not limited to foreclosure of its lien interest, only against the property securing the original obligation.

However, the statement also contained an amount due, due date, and instructions for how to make a payment. Press

In response, the debtor’s attorney filed an action in district court claiming improper collection under FDCPA (which settled) and a second motion in bankruptcy court claiming violation of the discharge order. The mortgagee defended on the grounds that the “informational statement” was not a debt collection attempt, and the bankruptcy court denied the motion. On appeal the district court affirmed, and the debtor further appealed to the 11th Circuit.

The 11th Circuit noted that section 524(a)(2) of the Bankruptcy Code provides that a discharge operates as an injunction against collection of a discharged debt which can be enforced through section 105 (which provides that a court can issue orders “necessary or appropriate” to carry out the provisions of the Bankruptcy Code). These sections authorize imposing civil contempt sanctions for attempts to collect a discharged debt “if there is no fair ground of doubt as to whether the order barred the creditor’s conduct.”

Thus, the court framed the question as whether the objective effect of the creditor’s action was to pressure the debtor to repay a discharged debt. Under this standard, the court concluded that the informational statement was not debt collection. In addition to the repeated disclaimer, the payment coupon was marked in large letters as “voluntary.” Although the statement used the terms “amount due” and “due date,” that was not impermissible since section 524 allows the debtor to repay a discharged debt voluntarily.

The debtor asked the court to apply the FDCPA “least sophisticated consumer” standard instead. In the FDCPA case the district court concluded that the debtor “plausibly alleges” that the statement was sent to induce payment and consequently was related to debt collection. The debtor argued that the FDCPA and Bankruptcy Code serve the same purpose of protecting vulnerable people from improper conduct, so the same test should be used.

The court rejected the debtor’s argument because the two statutes have different purposes and structural features. While the FDCPA does provide consumer protection, the Bankruptcy Code is a “delicate balance of a debtor’s protections and obligations.” Accordingly, the court declined to incorporate the FDCPA standard into the bankruptcy proceeding.

Finally, even if the court had found the question of debt collection to be a close one, contempt is a severe remedy, so the burden to show contempt is a high one. In this case there was more than a “fair ground of doubt” that the creditor’s actions were barred, so sanctions would have been inappropriate.

Thus, the bankruptcy court decision was affirmed.

Many debtors will not understand the distinction between collection based on personal liability as opposed to taking enforcement action against collateral. If the court had chosen to incorporate the “least sophisticated consumer” standard to determine whether there was an attempt to collect the debt, it could be difficult for a creditor to exercise its valid lien rights.

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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