Ninth Circuit Bankruptcy Appellate Panel Vacates Discharge Contempt Order

By Michael Fuller, The Underdog Lawyer ®

Earlier this month, the Ninth Circuit Bankruptcy Appellate Panel clarified the procedural requirements necessary to hold a creditor in contempt for willful violation of the discharge order.

See related New York Times article: Debts Canceled by Bankruptcy Still Mar Consumer Credit

The Panel's recent opinion, Yen v. Pedroche, involved a creditor whose gambling debts were discharged in bankruptcy. 

The bankruptcy judge held the creditor in contempt of the discharge order based on his attempt to re-recorded his judgment against two consumers after bankruptcy.

On appeal, the Panel remanded the case back to bankruptcy court for a determination as to whether the creditor actually believed the discharge order applied to his claim.

The Panel reasoned that, "The bankruptcy court made no factual finding that Yen knew that the discharge injunction applied to his claim."

The Panel's reasoning appears to contradict its prior December 2013 opinion called In re Chionis. Oddly, Bankruptcy Judges Pappas and Kurtz took part in both opinions.

In Chionis, a creditor violated the discharge injunction by continuing litigation in mistaken reliance on a “no discharge” provision in his contract. However, the bankruptcy judge refused to hold the creditor in contempt because he subjectively believed the discharge order did not apply to him.

The Panel reversed the bankruptcy judge in Chionis, holding that the creditor’s choice to ignore warnings and refusal to do research or take precautionary measures constituted contempt.

Although the Yen and Chionis opinions reached opposite conclusions, their reasonings were distinguishable in at least two regards.

First, the bankruptcy judge in Chionis held a trial, as opposed to Yen, where the contempt order was based solely on the written record.

Second, the creditor in Chionis had multiple warnings that his lawsuit violated the discharge order. In Yen, the record did not reflect any prior warnings.

Regardless of these distinctions, the Panel's Yen holding is troubling, to the extent it may condition a consumer's "fresh start" on whether they can prove a creditor's illegal conduct was actually intended to violate the discharge injunction.

In the Ninth Circuit, consumers have no inexpensive way to remedy discharge violations.

No matter how minor the violation, it cannot be resolved in small claims court or mediation. Rather, the Walls v. Wells Fargo opinion requires consumers to hire special bankruptcy counsel to re-open their bankruptcy cases and pursue contempt remedies.

Requiring clear and convincing evidence of a creditor's actual subjective intent to violate the discharge injunction will prohibit many consumers from enforcing their "fresh starts".

For this reason, bankruptcy courts should continue to rely on Chionis for the proposition that a creditor who chooses to remain ignorant of the bankruptcy rules should do so at its own peril.

Ignorance of the bankruptcy laws is no excuse for consumers, and discharge violators should be held to the same standard.