Tuesday, February 15, 2011

FYI: 9th Cir Confirms BK Action for Violation of Discharge Injunction Must Be Brought by Motion, Not by Adversary Proceeding

The United States Court of Appeals for the Ninth Circuit recently affirmed
a district court's dismissal of an adversary complaint for alleged
violation of a discharge of debt injunction under 11 U.S.C. § 524. The
Court held that "[a]n action for contempt for violation of a discharge
injunction under § 524 must be brought via motion in the bankruptcy case,
not via an adversary proceeding."

A copy of the opinion is available online at:

The debtor in this matter had filed for Chapter 7 bankruptcy, and been
granted a discharge of debt under 11 U.S.C. § 524. Despite this
discharge, some credit reporting agencies continued to report the debtor's
previous debt to Wells Fargo Bank, N.A. amounting to $80,831, which the
creditor then confirmed in alleged violation of § 524.

The lower court dismissed the adversary proceeding, and the debtor
appealed. The appellate court referenced that the "civil contempt power
of bankruptcy judges" as based on 11 U.S.C. § 105. The Court then looked
to its previous decisions, which held that "the availability of contempt
proceedings under §105 for violation of a discharge injunction under § 524
does not create a private right of action for damages." The Court stated
that this precedent alone would be enough to "dispose of the present
case," and further noted that the proper procedure for "an action for
contempt arising out of the violation of an order" from the bankruptcy
case is to bring a motion in the bankruptcy case.

The Court next delineated the differences in procedure in bankruptcy court
between "contested matters" and "adversary proceedings." As the Court
noted, Bankruptcy Rule 9020 "provides that Bankruptcy Rule 9014 governs
contempt proceedings in bankruptcy." Bankruptcy Rule 9014 "governs
contested matters," which are distinguished from adversarial proceedings
governed by Part VII of the Bankruptcy Rules.

The Court disagreed with the debtor's argument that "because Bankruptcy
Rule 9014 invokes certain rules utilized for adversary proceedings"
pursuant to Part VII, "any motion brought pursuant to Rule 9014 could also
impliedly be brought as an adversary proceeding." The Court noted that a
"plain reading" of the language of Rule 9020 states that contempt
proceedings "brought by the trustee or a party in interest" qualify as
contested matters required to be brought by a motion in the bankruptcy
case pursuant to Rule 9014. The Court further stated that Rule 9020
"exists solely for the purpose of mandating this" result.

In closing, the Court noted that even in the absence of Rule 9020, the
debtor's action does not qualify as an adversarial proceeding as described
in Bankruptcy Rule 7001, as the debtor specifically requests punitive
damages, and such damages are not a form of equitable relief.

In addition to seeking punitive damages, debtor also sought an injunction
for the violation of the discharge which "already exists by operation of
law." The Court finally stated that "[a]n injunction against violating an
existing injunction would be superfluous." Thus, the Court ruled that the
Appellant would suffer "no prejudice from the bankruptcy court's
requirement to proceed by motion rather than by adversary proceeding
because he has failed to pursue the avenue of relief that no court has
denied" him, that of bringing the proper motion in bankruptcy court.

The Court further denied the debtor's arguments attempting to
differentiate "motions" from "applications" as mere semantics, and stated
there was no conflict in the Bankruptcy Rules when using one term rather
than the other, as "in the Southern District of California . . . the words
are generally considered synonymous."

Ralph T. Wutscher
Kahrl Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@kw-llp.com

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