Green Point Credit, LLC v. McLean (In re McLean)

Green Point Credit, LLC v. McLean (In re McLean), Case No. 14-14002 (11th Cir. July 23, 2015).
The Eleventh Circuit concluded that Green Point Credit, LLC and Green Tree Servicing, LLC (collectively, "Green Tree") violated the discharge injunction by filing a proof of claim in the debtors' chapter 13 bankruptcy case in an effort to collect a debt that was discharged in their prior chapter 7 case but vacated the monetary sanctions awarded by the bankruptcy court and affirmed by the district court and remanded to the district court with instruction to vacate and remand to the bankruptcy court.
Procedural context:
Appeal from the United States District Court for the Middle District of Alabama's judgment entered against Green Tree and affirming the bankruptcy court's ruling that Green Tree violated the discharge injunction and award of compensatory and non-compensatory sanctions to the debtors, reviewed de novo.
Eric and Deborah McLean (the "Debtors" or the "McLeans") initially sought relief under chapter 13 of the Bankruptcy Code in 2006. Green Tree filed a proof of claim asserting an unsecured deficiency claim arising from a sales contract for a mobile home. Their case was subsequently converted to a case under chapter 7, and the McLeans' discharge was entered in January 2009. Green Tree received electronic notice of discharge. The Debtors filed a second chapter 13 petition in June 2012, and the schedules did not list Green Tree as a creditor. Green Tree proceeded to file a proof of claim asserting the same deficiency claim that had been discharged in connection with the Debtors' chapter 7 case. As a result of the filing of the claim, the Debtors' estimated chapter 13 plan payments doubled. On December 13, 2012, the Debtors filed an objection to Green Tree's claim on the basis that it had already been discharged. Prior to the bankruptcy court disposing of the claim objection, on January 7, 2013, the McLeans initiated an adversary proceeding against Green Tree alleging that Green Tree's filing of the proof of claim was a violation of the discharge injunction under section 524 of the Bankruptcy Code and seeking damages for the emotional distress caused by the filing of the claim. Green Tree withdrew the claim four days after the filing of the complaint, citing the failure of its automated electronic system to recognize that the debt had been discharged as the reason why the claim was filed in error. Following a trial, the bankruptcy court concluded Green Tree violated the discharge injunction and awarded to the Debtors compensatory sanctions for the emotional distress suffered by the Debtors and $50,000 in non-compensatory sanctions intended to encourage Green Tree to prevent future violations of the discharge injunction by correcting its automated system. The district court affirmed, noting that the non-compensatory sanctions could be upheld as punitive damages. Green Tree contended that the filing of the proof of claim was an action against the bankruptcy estate rather than the Debtors individually and, therefore, was outside the ambit of section 524(a)(2) because it was not an action to collect, recover, or offset debt as a personal liability of the Debtors. Green Tree also argued that procedural protections were available to debtors through the claims objection process. In rejecting both arguments, the Eleventh Circuit concluded that Green Tree's filing of a proof of claim on account of the deficiency claim was an action to collect debt as a personal liability of the Debtors and was within the scope of section 542(a)(2). The Eleventh Circuit vacated the award of non-compensatory sanctions because they were punitive in nature. As a result, Green Tree was entitled to the procedural protections afforded an alleged criminal contemnor, and the Eleventh Circuit held that the bankruptcy court's power to sanction under section 105 cannot abrogate such rights. With respect to the compensatory sanctions, the Eleventh Circuit noted that not every violation of the discharge injunction results in damages for emotional distress and remanded to the bankruptcy court to determine whether the Debtors were entitled to damages based on the elements established by the Eleventh Circuit's decision in Lodge v. Kondaur Capital Corporation without making any findings about the merit of the relief sought by the Debtors. The Eleventh Circuit also directed the bankruptcy court to enter an order converting the adversary proceeding to a contested matter on remand, as civil contempt sanctions must be sought through a contested matter rather than by adversary.
Carnes, Chief Judge, and Pryor, J., and Black, Circuit Judges.

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