09 Apr Actions Taken Against Non-Debtor Spouse Violate Discharge Injunction
In Lumb v. Cimenian, 2009 WL 427836 (1st Cir.BAP Me. Feb. 23, 2009), the First Circuit Bankruptcy Appellate Panel held that actions taken post-discharge against the non-debtor spouse of a chapter 7 bankruptcy debtor can violate the discharge injunction of 11 U.S.C. section 524. According to the appeals court, this decision is the only known case to extend the protections of the bankruptcy discharge to a person other than the debtor. Henceforth, creditors proceed at their own peril in pursuing legal action against non-debtors, if their actions are designed to coerce the bankruptcy debtor into paying a discharged debt.
In this case, the debtor had entered into a business transaction with a creditor. This matter did not substantially involve the debtor’s wife. The debtor later filed a chapter 7 bankruptcy. The creditor did not object to the discharge of its debt, but his lawyer sent a letter to the debtor’s lawyer, prior to the granting of a discharge, threatening to take legal action against the debtor’s wife, unless the debtor settled the creditor’s claims against the debtor immediately.
The creditor’s lawyer later withdrew from representation due to the creditor making unethical demands upon the lawyer. At the conclusion of the chapter 7 case, the debtor was granted a discharge of debts.
The creditor subsequently sued the debtor’s wife, based upon the business transactions involving the debtor and the creditor. The wife successfully defended this lawsuit. The Maine Supreme Court affirmed this decision, observing that the creditor’s lawsuit was devoid of “even the slightest merit.” It upheld an award of $50,000 in attorney fees to the wife.
The debtor then sued the creditor in bankruptcy court, alleging that the creditor’s lawsuit against his wife amounted to a violation of the protections of the bankruptcy discharge. The debtor argued that the creditor’s actions were an effort to coerce him paying the discharged debt. The bankruptcy court held that the discharge of debts offered no protection to the wife, because she had not filed the bankruptcy; her husband had filed chapter 7 without her. The debtor/husband appealed.
The appeals court reversed the bankruptcy court and reinstated the lawsuit against the creditor, saying:
Although we are not aware of any case in which a creditor was found to have violated the discharge injunction by virtue of actions taken against a third party, we note that the prohibition in section 524(a)(2) is not limited to actions by creditors against the debtor to collect on a discharged debt. The plain language of section 524(a)(2) simply bars acts by creditors to collect on a discharged debt.
The creditor’s lawsuit had placed the debtor “between a rock and a hard place”: the debtor had to risk paying attorney fees and his wife losing in the lawsuit brought by the creditor, or he could pay the discharged debt. Thus, the debtor had stated a valid claim againt the creditor for violation of the discharge injunction, and the bankruptcy court should not have dismissed his lawsuit.
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