Violations Of The Bankruptcy Discharge Injunction – Insolvency/Bankruptcy – United States – Mondaq

The recent case of In re Micah Cade McKinney, Case No.21-50046-rlj-11 (Bankr. N.D. Tex., April 28, 2022) provides insightas to violations of the bankruptcy discharge injunction.

Contempt litigation in bankruptcy court is occasionally drivenby intentional, willful conduct on the part of a creditor - perhapsout of spite that the debtor who owed them money had filed forbankruptcy in the first place. But more often than not, violationsof the automatic stay or the discharge injunction occur out of amisunderstanding of the applicable law. This case represents anexample of the latter.

Since December, 2018, the Debtor, Micah McKinney, and his wifeLeslie McKinney, were parties to a divorce case in State Court. OnMarch 31, 2021, the State Court held a hearing on two motions filedby Leslie McKinney in the divorce case: a motion for enforcement oftemporary orders and a motion to allocate a tax refund. The StateCourt orally granted Leslie McKinney's requested relief on therecord, holding Micah McKinney in contempt and ordering that hetransfer approximately half of a $3 million tax refund to LeslieMcKinney.

On April 5, 2021, before any written order was issued by theState Court, Micah McKinney filed this chapter 11 bankruptcy case.The case was primarily filed because Micah McKinney did not havethe funds to comply with the State Court's March 31 ruling.

On August 22, 2021, after a lengthy mediation, Micah McKinneyand Leslie McKinney entered into a settlement agreement thatresolved all their divorce disputes save for certain SAPCR("suits affecting the parent-child relationship") issues.The terms of the settlement agreement were incorporated into MicahMcKinney's bankruptcy plan ("Plan"). On November 4,2021, the Plan was confirmed. Under the Plan, and the settlementagreement incorporated therein, Leslie McKinney released all claimsagainst Micah McKinney, including claims in the divorce case,except for certain post-petition SAPCR issues. The Plan also statesthat all claims of the Lanfear Firm, which represented LeslieMcKinney in the divorce case, were released. The order confirmingthe Plan includes a broad injunction ("DischargeInjunction") barring all actions to enforce anypre-confirmation claims against Micah McKinney in a mannerinconsistent with the terms of the Plan. At the time of the hearingthe subject of this case, Micah McKinney had satisfied all hisobligations to Leslie McKinney under the Plan.

On February 17, 2022, Leslie McKinney, through the Lanfear Firm,filed a motion in the divorce case requesting entry of two ordersrelated to the State Court hearing held on March 31, 2021("Motion to Enter"). The orders, asproposed, provide that Micah McKinney be incarcerated if he failsto pay several pre-bankruptcy claims to Leslie McKinney, theLanfear Firm, and others; they also required that Micah McKinneyplace the $3 million tax refund in escrow for payment of a claim tothe Lanfear Firm. Each of the claims addressed by the proposedorders were discharged through the order confirming MicahMcKinney's Plan. After counsel for Micah McKinney emailedLeslie McKinney's counsel on February 17, 2022, voicing MicahMcKinney's objection to the Motion to Enter as a violation ofthe Discharge Injunction, counsel for Leslie McKinney said she didnot intend to seek the relief in the Motion to Enter but simplywanted a clear record to ease the adjudication of the remaining

SAPCR issues in State Court. Subsequently, Leslie McKinney filedan amended motion on February 28, 2022 ("AmendedMotion to Enter") that added language to the ordersstating that their entry was not an attempt to enforce relief but,rather, to accurately reflect the record. A hearing on the AmendedMotion to Enter was set in State Court for March 22, 2022.

On February 25, 2022, Micah McKinney filed a motion seeking tohold Leslie McKinney and the Lanfear Firm in contempt for violatingthe Discharge Injunction by filing the Motions to Enter. On March1, 2022, he filed a motion for a preliminary injunction, which wasgranted on March 8, 2022, enjoining Leslie McKinney and the LanfearFirm from pursuing their Motion to Enter and Amended Motion toEnter (collectively "Motions to Enter") and enjoining theState Court from entertaining the Motions to Enter at the March 22hearing. The Court took the motion for contempt underadvisement.

When a creditor violates the discharge injunction in abankruptcy case, a bankruptcy court may hold the creditor incontempt to compensate the debtor for the violation and to coercethe creditor into compliance with the injunction. PlacidRefining Co. v. Terrebonne Fuel & Lube, Inc. (In re TerrebonneFuel & Lube, Inc.), 108 F.3d 609, 612-13 (5th Cir. 1997).This authority derives from 11 U.S.C. 105, which allows abankruptcy court to enter any order necessary to carry out theprovisions of the Bankruptcy Code. Cirillo v. Valley BaptistHealth Sys. (In re Cirillo), No. 09-10324, 2014 WL 1347362, at*4 (Bankr. S.D. Tex. Apr. 3, 2014). To determine whether a partyshould be held in contempt for violating a discharge injunction,courts employ an

objective standard, and contempt is appropriate when "thereis not a 'fair ground of doubt' as to whether thecreditor's conduct might be lawful under the dischargeorder." Taggart v. Lorenzen, 139 S. Ct. 1795, 1804(2019).

Under Taggart, three elements must be proven for acourt to hold a party in contempt: "(1) the party violated adefinite and specific order of the court requiring him to . refrainfrom performing . particular . acts; (2) the party did so withknowledge of the court's order; and (3) there is no fair groundof doubt as to whether the order barred the party'sconduct." In re City of Detroit, Mich., 614 B.R. 255,265 (Bankr. E.D. Mich. 2020).

The Court had no trouble finding that Leslie McKinney and theLanfear Firm violated the Discharge Injunction by filing theMotions to Enter. The Discharge Injunction states:

AS OF THE EFFECTIVE DATE ALL HOLDERSOF CLAIMS AGAINST THE DEBTOR . ARE HEREBY PERMANENTLY ENJOINED ANDPROHIBITED FROM . THE COMMENCING OR CONTINUATION IN ANY MANNER,DIRECTLY OR INDIRECTLY, OF ANY ACTION, CASE, LAWSUIT OR OTHERPROCEEDING OF ANY TYPE OF NATURE AGAINST THE DEBTOR OR THE ESTATE,WITH RESPECT TO ANY SUCH CLAIM OR INTEREST ARISING OR ACCRUINGBEFORE THE EFFECTIVE DATE, INCLUDING WITHOUT LIMITATION THE ENTRYOR ENFORCEMENT OF ANY JUDGMENT, OR ANY OTHER ACT FOR THECOLLECTION, EITHER DIRECTLY OR INDIRECTLY, OF ANY CLAIM OR INTERESTAGAINST THE ESTATE OR THE DEBTOR.

The proposed orders on the Motions to Enter directed that MicahMcKinney was to make payments to Leslie McKinney for a portion ofthe $3 million tax refund and payments to the Lanfear Firm forattorney's fees-obligations that were expressly discharged byconfirmation of the Plan. The Discharge Injunction enjoins the"continuation in any manner" of "the entry orenforcement of any judgment" on a prepetition claim. As anaction that continues to seek entry in State Court of a prepetitionclaim, Leslie McKinney and the Lanfear Firm's filing of theMotions to Enter plainly violated the Discharge Injunction. So toowould a hearing on the motions or the State Court's issuance ofan order on the motions. The Court rejected the notion that theinclusion of a disclaimer in the motion saying that it was not anattempt to collect any of the monetary relief or awards thereinsaved the conduct from contempt. And the Court flatly rejected anythought that the requested State Court order was needed toaccurately reflect the record. Any further proceedings in the StateCourt were stayed by Micah McKinney's bankruptcy filing. Inaddition, the savings language did nothing to solve the criticalissue, which is that any continuation of a dischargedclaim violates the Discharge Injunction regardless of thepurpose of the continuation. The Court made clear that Entry of anorder against a debtor on a prepetition claim during the pendencyof a bankruptcy case violates the automatic stay; and entry of an order againsta debtor on a prepetition claim after the debtor receives adischarge violates the Discharge Injunction.

Turning to the second prong of the Taggart test, theCourt easily found the existence of knowledge, as Leslie McKinneyand the Lanfear Firm did not dispute that they were aware of theDischarge Injunction when they filed the Motions to Enter. Bothwere claimants under the plan, actively negotiating with MicahMcKinney before its approval. They both received distributionsunder the plan post-confirmation. The Amended Motion to Enterexpressly recognized that the Plan resolves the monetary reliefsought through their motions.

Turning to the final prong under Taggart, the Courtfound that Leslie McKinney and the Lanfear Firm had "noobjectively reasonable basis for concluding that [their] conductmight be lawful." Despite Leslie McKinney's belief thatshe was acting lawfully, the Court found no objective basis forconcluding that her and the Lanfear Firm's continuedprosecution of claims in State Court on a prepetition claim wouldnot violate the Discharge Injunction-such conduct directly violatesthe injunction's clear and plain language.

Finding that all three elements of the Taggart test hadbeen met, the Bankruptcy Court found Leslie McKinney and theLanfear Firm in contempt. The Court therefore turned to fashioningan appropriate sanction. The Court found that evidence made clearthat neither Leslie McKinney nor the Lanfear Firm intended toviolate the Discharge Injunction. Therefore, the Court found that,while she never had an objectively reasonable basis for concludingshe was not violating the Discharge Injunction, she had shown thatshe was "not proceeding in bad faith but, instead, under amisguided understanding of how she was restrained under theDischarge Injunction." Therefore, despite a request forattorneys' fees and punitive damages, the Court ultimatelylimited its damage assessment to a sanction of $250/day for everyday after the date that this order became final that LeslieMcKinney failed to file a notice in State Court withdrawing theMotions to Enter.

The refusal to grant attorneys' fees to Micah McKinney wassomewhat surprising, but the Court determined that, in this case,further sanction was not necessary or appropriate under thecircumstances.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.

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Violations Of The Bankruptcy Discharge Injunction - Insolvency/Bankruptcy - United States - Mondaq