Debt Purchaser Sanctioned for Violating Discharge Injunction

A bankruptcy judge in the Southern District of Florida has determined that “merely selling a debt to another holder” does not “somehow immunize a creditor and create a fair ground of doubt as to whether that debt was discharged.”

In a January 12, 2024 opinion in In re McIntosh, Case No. 02-25039-SMG (S.D.Fl. 2024) (a copy of which can be found here) Judge Scott M. Grossman addressed the implications of a debt purchased five (5) months after a discharge had been granted to a Chapter 7 debtor (meaning that the pre-bankruptcy debt could no longer be collected) where the purchaser then attempted to enforce the debt.

At the time of the bankruptcy filing, the debt was $7,400.00. The purchaser filed a lawsuit a few months after purchasing the debt and won a judgment for more than $13,000.00. It then took no action for nearly 20 years. In early 2023, it commenced supplemental proceedings to collect the debt and obtained a writ of garnishment.

The debtor hired counsel seeking to vacate the writ given the debt had been discharged in 2002. The purchaser refused to vacate the write and release the accounts for nearly a month and only did so after the debtor obtained separate counsel to reopen her bankruptcy case and move for sanctions against the purchaser for violating the discharge injunction.

Judge Grossman bifurcated the dispute before him, holding one hearing to determine if there was a discharge violation warranting the imposition of sanctions and a second on damages upon the finding of a violation.

At the conclusion of an evidentiary hearing held on August 15, 2023, after hearing from a principal of the purchaser, who was also a partner at the firm that pursued collection of the debt, and the purchaser’s state court counsel, Judge Grossman issued an oral ruling finding that the purchaser had violated the discharge injunction, warranting an award of sanctions to Ms. McIntosh.

A second evidentiary hearing on damages was held on December 12, 2023, at which the debtor and her daughter testified, exhibits were offered into evidence, and unobjected-to proffers were made by counsel.

In awarding sanctions, Judge Grossman observed,

Although nearly twenty years had gone by, Florida Credit Research did not conduct any search (including a national PACER search) to see if its judgment debtor had filed for bankruptcy. But Florida Credit Research clearly did some investigation, because it was able to identify a bank where Ms. McIntosh had money on deposit.

Ms. McIntosh understandably “freaked out” when her accounts were garnished and contacted her bank. It provided contact information for counsel to the debt purchaser, whom she called. She mentioned her bankruptcy case in that call and also attached the docket and creditor list from her 2002 bankruptcy case to her responsive pleading in the supplemental proceeding on March 21, 2023. That list included a creditor identified by a registered trademark used by the debt purchaser’s predecessor in interest. Notwithstanding, the debt purchaser moved for a final judgment of garnishment in which it contended that because neither it nor the entity from which it acquired the debt were listed as creditors, the debt being collected by the debt purchaser was not discharged.

McIntosh then moved to reopen her bankruptcy case and to sanction the purchaser for violating the discharge injunction. On the date the Bankruptcy Court issued a notice of hearing on that motion, the purchaser finally dissolved the writ of garnishment, resulting in Ms. McIntosh regaining access to her accounts after two (2) months.

At the outset of the August 15 evidentiary hearing, the purchaser admitted the debt it was seeking to enforce was the $7,400.00 debt listed on Ms. McIntosh’s bankruptcy schedules as owed to Direct Merchants Bank, which is not an actual bank, but a registered trademark owed by Metris Companies (the entity from which the purchaser acquired the debt). It became evident at the hearing the purchaser had purchased and collected thousands of debts and had knowledge of the relationship between Metris Companies and Direct Merchants Bank.

At the December 12 evidentiary hearing, Ms. McIntosh and her daughter testified as follows:

With her savings and checking accounts frozen pending entry of a final judgment in garnishment, Ms. McIntosh was unable to provide her daughter with many of the accoutrements attendant to being a senior in high school – including a new prom dress and a class ring. Her daughter also could not go on a senior class trip, and Ms. McIntosh had to delay paying for her daughter’s driving lessons. Although Ms. McIntosh had previously prepaid for a trip to Chicago with her daughter to celebrate her senior year, because of the garnishment Ms. McIntosh now had very little spending money – with the funds she had set aside for meals and entertainment having been garnished – with which to enjoy this trip with her daughter.

During this time Ms. McIntosh had trouble paying some bills, she had to open a new bank account to receive her paychecks, and, as a single mother on a nurse’s salary, she suffered significant emotional distress over how she would be able to pay for her daughter’s college education. She was also concerned with how she would even be able to afford lawyers to fight this wrongful garnishment, with the source of savings she might otherwise have used to pay legal fees having been garnished. Ms. McIntosh testified that because of the garnishment, she was emotionally unavailable to share in the joy of her daughter’s senior year due to her worries about her savings having been garnished for a debt she understood to have been discharged twenty years earlier.

In arguing against the imposition of sanctions, the purchaser asserted “that because it was enforcing a debt it did not see listed on Ms. McIntosh’s bankruptcy schedules, it could safely assume the debt was an unscheduled debt that was not discharged, and if Ms. McIntosh contended otherwise, it was her burden to prove so.” The purchaser fundamentally overlooked the significance of the discharge and sought to unfairly shift the burden of proving the debt was not discharged to the debtor.

The Court observed that once a debtor meets her prima facie burden to prove by clear and convincing evidence that a creditor violated a discharged order, Taggart v. Lorenzen, 587 U.S. _______,139 S.Ct. 1795, 1799-1801 (2019) provides for an affirmative defense. “If the creditor can establish a fair ground of doubt as to whether its actions violated the discharge order, under Taggart the court cannot impose civil contempt sanctions.”

Judge Grossman found that

there was no objectively reasonable basis for Florida Credit Research to believe Ms. McIntosh’s failure to move to reopen her bankruptcy case to seek a determination of dischargeability somehow renders Florida Credit Research’s claim enforceable because the current holder of the debt didn’t see its name listed on her bankruptcy schedules. Indeed, such a construction of the discharge injunction would turn it on its head and render any debt that has been transferred from the original creditor to another entity presumptively nondischargeable, and improperly put the burden on the debtor to prove the new holder of the claim is the successor to the original creditor.

Judge Grossman awarded $23,742.62 in legal fees incurred by her bankruptcy counsel, $9,382.00 in legal fees incurred in fighting the writ of garnishment, $10,000.00 as actual compensatory damages for the emotion distressed inflicted on Ms. McIntosh (noting, “she can never get back that time with her daughter, or the experiences they were going to share together with that money”), and $21,562.31 in punitive sanctions (finding that the purchases conducted was “indicative of an overly aggressive business model that encourages extortive settlements of debts that by law have been discharged”).

David’s Dicta: Debt purchasers are not insulated from violating the discharge injunction if they later buy a debt that is no longer enforceable. Nor should they be. A debt purchaser’s rights are no greater than those of the creditor from whom the debt was purchased. If the debt was unenforceable at the time of purchase, the debt purchaser cannot attempt to collect the debt. Debt collection firms generally have the ability to run reports on account debtors and do so in the ordinary course of their collection efforts. The most rudimentary search would have revealed that Ms. McIntosh had filed for bankruptcy subsequent to incurring the debt at issue and received her discharge. The purchaser should also have realized its error early on and consented to both the vacatur of the writ of garnishment and the state court judgment once it recognized that the name by which the debt was scheduled in this debtor’s petition. Instead, the purchaser made the mistake of doubling down and taking a questionable position with respect to a debt that was actually scheduled. The conduct here was egregious and the position taken by the purchaser untenable under the facts and the law. The fact that the purchaser and the law firm collecting the debt shared common owners suggests a lack of independent judgment being exercised in pursuing collection of the debt. Sanctions in the form of attorney’s fees, compensatory damages and punitive damages were warranted to discourage such predatory practices.

Leave a Reply

Your email address will not be published. Required fields are marked *