The recent case of In re Micah Cade McKinneyCase No. 21-50046-rlj-11 (Bankr. ND Tex., April 28, 2022) provides information on violations of the bankruptcy order of discharge.
Contempt litigation in bankruptcy court is occasionally fueled by intentional and willful conduct on the part of a creditor, perhaps despite the fact that the debtor who owed them money had filed for bankruptcy in the first place. But more often than not, automatic suspension or termination violations are due to a misunderstanding of the applicable law. This case represents an example of the latter.
Since December 2018, the Debtor, Micah McKinney, and his wife, Leslie McKinney, have been parties to a divorce case in State Court. On March 31, 2021, the State Court held a hearing on two motions filed by Leslie McKinney in the divorce case: a motion to enforce temporary orders and a motion to appropriate a tax refund. The State Court orally granted Leslie McKinney’s requested relief on the record, held Micah McKinney in contempt, and ordered him to transfer approximately half of a $3 million tax refund to Leslie McKinney.
On April 5, 2021, before the State Court issued a written order, Micah McKinney filed this chapter 11 bankruptcy case. The case was filed primarily because Micah McKinney did not have the funds to comply with the State Court ruling. of March 31.
On August 22, 2021, after lengthy mediation, Micah McKinney and Leslie McKinney entered into a settlement agreement that resolved all of their divorce disputes, except for certain SAPCR (“lawsuits affecting the parent-child relationship”) issues. The terms of the settlement agreement were incorporated into the Micah McKinney bankruptcy plan (“Plan”). On November 4, 2021, the Plan was confirmed. Under the Plan, and the settlement agreement incorporated therein, Leslie McKinney released all claims against Micah McKinney, including the claims in the divorce case, except for certain post-petition SAPCR matters. The Plan also states that all claims of the Lanfear Firm, which represented Leslie McKinney in the divorce case, were released. The order confirming the Plan includes a broad amparo (“download order”) excluding all actions to enforce any pre-confirmation claim against Micah McKinney in a manner inconsistent with the terms of the Plan. At the time of the hearing on the subject of this case, Micah McKinney had fulfilled all of his obligations to Leslie McKinney under the Plan.
On February 17, 2022, Leslie McKinney, through the Lanfear Firm, filed a motion in the divorce case requesting the issuance of two orders related to the State Court hearing held on March 31, 2021 (“motion to enter”). The orders, as proposed, provide for Micah McKinney to be jailed if he fails to pay various pre-bankruptcy claims to Leslie McKinney, Lanfear Firm and others; they also required Micah McKinney to place the $3 million tax refund in escrow for payment of a claim to the Lanfear Firm. Each of the claims addressed by the proposed orders were discharged through the order confirming the Micah McKinney Plan. After Micah McKinney’s attorney emailed Leslie McKinney’s attorney on February 17, 2022, expressing Micah McKinney’s objection to the Motion to Enter as a violation of the Release Order, Leslie McKinney’s attorney said that he did not intend to seek relief in the Motion to Enter. but he simply wanted a clear record to facilitate adjudication of the remaining
SAPCR problems in the State Court. Subsequently, Leslie McKinney filed an amended motion on February 28, 2022 (“Modified motion to enter”) who added language to the orders indicating that his entry was not an attempt to enforce the remedy but, rather, accurately reflect the record. A hearing on the Amended Motion to Enter State Court is set for March 22, 2022.
On February 25, 2022, Micah McKinney filed a motion seeking to hold Leslie McKinney and the Lanfear Firm in contempt for violating the discharge injunction by filing motions to enter. On March 1, 2022, he filed a motion for a preliminary injunction, which was granted on March 8, 2022, barring Leslie McKinney and the Lanfear Firm from proceeding with their Motion to Enter and Amended Motion to Enter (collectively, “Motions to enter”). and prohibit the State Court from considering the Motions to Enter at the March 22 hearing. The Court took the motion for contempt under counsel.
When a creditor violates the discharge order in a bankruptcy case, a bankruptcy court may hold the creditor in contempt to compensate the debtor for the violation and force the creditor to comply with the order. Placid Refining Co. v. Terrebonne Fuel & Lube, Inc. (In relation to Terrebonne Fuel & Lube, Inc.), 108 F.3d 609, 612–13 (5th Cir. 1997). This authority is derived from 11 USC § 105, which allows a bankruptcy court to make any order necessary to carry out the provisions of the Bankruptcy Code. Cirillo v. Valley Baptist Health Sys. (Regarding Cirillo), No. 09-10324, 2014 WL 1347362, at *4 (Bankr. SD Tex. 2014 Apr 3). In determining whether a party should be held in contempt for violating a discharge order, courts employ an objective standard, and contempt is appropriate when “there is no ‘fair cause for doubt’ as to whether the creditor’s conduct might be lawful under discharge order”. order.” Taggart vs. Lorenzen, 139 S.Ct. 1795, 1804 (2019).
Under Taggart, three elements must be proven for a court to hold a party in contempt: “(1) the party violated a defined and specific order of the court requiring it to…refrain from performing…certain…acts; (2) the party did so with knowledge of the court order; and (3) there is no just cause for doubt as to whether the order prohibited the party’s conduct.” In re City of Detroit, Michigan.614 BR 255, 265 (Bankr. ED Mich. 2020).
The Court had no trouble finding that Leslie McKinney and Lanfear Firm violated the discharge injunction by filing motions to enter. The download command states:
AS OF THE EFFECTIVE DATE ALL HOLDERS OF CLAIMS AGAINST THE DEBTOR… ARE PERMANENTLY PROHIBITED AND PROHIBITED FROM… THE COMMENCEMENT OR CONTINUATION IN ANY WAY, DIRECT OR INDIRECT, OF ANY ACTION, CASE, LAWSUIT OR OTHER PROCEEDING OF ANY TYPE AGAINST THE DEBTOR OR THE ESTATE, WITH RESPECT TO ANY CLAIM OR INTEREST ARISING OR ACCUMULATED PRIOR TO THE EFFECTIVE DATE, INCLUDING, WITHOUT LIMITATION, THE ENTRY OR ENFORCEMENT OF ANY JUDGMENT, OR ANY OTHER COLLECTION ACT, WHETHER DIRECTLY OR INDIRECTLY, OF ANY CLAIM OR INTEREST AGAINST THE ESTATE OR THE DEBTOR.
The proposed orders on the Motions to Enter stated that Micah McKinney was required to make payments to Leslie McKinney for a portion of the $3 million tax refund and payments to the Lanfear Firm for attorneys’ fees, obligations that were expressly fulfilled by confirmation of the Plan. . The discharge injunction imposes the “continuation in any manner” of “the entry or execution of any judgment” in a pre-petition claim. As an action that continues to seek State Court entry of a pre-petition claim, Leslie McKinney and Lanfear Firm’s filing of Motions to Enter clearly violated the Release Order. So would a hearing on the motions or the issuance of an order by the State Court on the motions. The Court rejected the notion that the inclusion of a disclaimer in the motion saying that there was no attempt to collect any of the monetary awards or damages therein saved the conduct from contempt. And the Court flatly rejected any thought that the requested State Court order was necessary to accurately reflect the record. Micah McKinney’s bankruptcy filing stayed all further proceedings in State Court. Furthermore, the language of saving did nothing to solve the critical problem, which is that none continuation of a canceled claim violates the cancellation injunction independently of the continuation object. The Court made clear that the issuance of an order against a debtor in a pre-petition claim during the course of a bankruptcy case violates the automatic stay; and issuing an order against a debtor in a pre-petition claim after the debtor receives a release violates the Order of Release.
As for the second point of the Taggart evidence, the Court easily found the existence of knowledge, since Leslie McKinney and Lanfear Firm did not dispute that they were aware of the discharge order when they filed motions to enter. Both were claimants under the plan, actively negotiating with Micah McKinney prior to its approval. Both received distributions under the post-confirmation plan. The Amended Entry Motion expressly acknowledged that the Plan resolves the monetary relief sought through its motions.
Going back to the low end tip Taggartthe Tribunal concluded that Leslie McKinney and Lanfear Firm had “no objectively reasonable basis to conclude that [their] the conduct may be lawful. Despite Leslie McKinney’s belief that she was acting
legally, the Court found no factual basis to conclude that her and Lanfear Firm’s continued prosecution of claims in State Court on a pre-petition claim would not violate the Release Requirement; such conduct directly violates the plain and simple language of the requirement.
Find that the three elements of the Taggart the test was met, the Bankruptcy Court found Leslie McKinney and Lanfear Firm in contempt. Therefore, the Court dedicated itself to designing an adequate sanction. The Court found that the evidence made it clear that neither Leslie McKinney nor the Lanfear Firm intended to violate the court’s discharge order. Thus, the Tribunal concluded that, while it never had an objectively reasonable basis to conclude that it was not in breach of the discharge injunction, it had shown that it “was not proceeding in bad faith but, instead, under a misguided understanding of how It was restricted.” under the unloading order”. Therefore, despite a request for attorneys’ fees and punitive damages, the Court ultimately limited its damage assessment to a penalty of $250 per day for each day after the date this order became final Leslie McKinney did not file a notice in State Court withdrawing the motions to enter.
The refusal to award attorneys’ fees to Micah McKinney was somewhat surprising, but the Court found that an additional sanction was neither necessary nor appropriate in the circumstances in this case.