Cyrus Mead

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
CYRUS MEAD IV,
DEBTOR
CASE NO.
10-09630-8-SWH
ORDER REOPENING CASE, FINDING CONTEMPT
OF DISCHARGE INJUNCTION, AND IMPOSING SANCTIONS
The matter before the court is the chapter 7 debtor’s motion to reopen the bankruptcy case
and for the court to find Madeleine M. Ward in contempt for violating the discharge injunction by
reinstating her federal lawsuit against the debtor in Illinois after the discharge injunction was
imposed and his case closed. A hearing took place in Raleigh, North Carolina, on January 4, 2012.
At the conclusion of the hearing, the court announced that it would take the matter under advisement.
The court requested that counsel provide it with supplemental briefs on the effect of the discharge
injunction on in rem and in personam claims, and both parties have done so.
Background
The debtor filed a petition for relief under chapter 7 of the Bankruptcy Code on
November 22, 2010. Ms. Ward, the debtor’s former fiancée, was included on Schedule F as a
creditor with a disputed claim in an unknown amount. The statement of financial affairs listed a
SO ORDERED.
SIGNED this 24 day of February, 2012.
________________________________________
Stephani W. Humrickhouse
United States Bankruptcy Judge
____________________________________________________________
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pending civil lawsuit brought by Ms. Ward against the debtor in the United States District Court for
the Northern District of Illinois, Eastern Division. The civil proceeding, Ward v. Mead, (Case
No. 08-5581) (hereinafter referred to as the “Illinois Lawsuit”), was filed by Ms. Ward in 2008, and
was dismissed on July 26, 2011 without prejudice.
The Illinois lawsuit arose in the context of a property dispute in the state of Illinois.
Ms. Ward owned a home in Naperville, Illinois for several years, but in 2005, her ownership was
contested in Illinois state court by a third-party. In order to settle the dispute, the debtor purchased
the third-party’s interest in the home, and Ms. Ward relinquished her claim in the home at that time
to allow him to acquire free and clear title. The debtor agreed that the home would be re-titled in
Ms. Ward’s name if he died or their relationship ended, and a written agreement containing those
terms dated May 13, 2005, was filed with the registrar of deeds in Illinois. The written agreement
did not contain any provisions detailing how the reconveyance was to be accomplished. The
relationship between the debtor and Ms Ward ended and she initially filed the Illinois Lawsuit to
enforce the agreement. Ms. Ward sought five forms of relief in the Illinois Lawsuit: Count I sought
specific performance of the written agreement; Count II sought recovery against the debtor for breach
of contract; and Counts III through V sought claims against the debtor for conversion of specific
items of personal property of significant value that Ms. Ward claimed to own.
During the debtor’s chapter 7 bankruptcy, on April 4, 2011, Ms. Ward filed an adversary
proceeding against the debtor, seeking denial of the debtor’s discharge for his alleged failure to
disclose transfers of money that occurred within one year of the petition. Ms. Ward’s attorney was
allowed to withdraw from the adversary proceeding on July 26, 2011, the complaint was dismissed
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on August 11, 2011, and the adversary proceeding was closed on August 26, 2011. The debtor
received his discharge on April 12, 2011, and his chapter 7 case was closed on August 29, 2011.
On September 16, 2011, Ms. Ward filed a pro se motion in the Illinois district court to
reinstate the Illinois Lawsuit. The Illinois district court denied Ms. Ward’s motion to reinstate her
lawsuit on October 4, 2011. On October 5, 2011, the debtor filed this motion to reopen his chapter
7 case and to hold Ms. Ward in contempt of the discharge injunction. The debtor contends that Ms.
Ward’s filing of her motion to reinstate the Illinois Lawsuit was a willful violation of the injunction
that arose as a result of the debtor’s discharge in bankruptcy. Ms. Ward counters that her motion in
district court did not violate the discharge injunction because she had an equitable claim to the
property, and the discharge injunction does not bar in rem proceedings.
Discussion
I. Motion to Reopen the Case
Section 350(b) of the Bankruptcy Code permits a bankruptcy court to reopen a case which
has been closed in order to administer assets, accord relief to the debtor, or for other cause. 11
U.S.C. § 350(b). The decision to reopen a closed case is within the court’s discretion and depends
upon the circumstances of the particular case. Hawkins v. Landmark Fin. Co. (In re Hawkins), 727
F.2d 324, 326 (4th Cir. 1984). To establish grounds for a motion to reopen a case, the moving party
bears the burden of proof. In re Lee, 356 B.R. 177, 180 (Bankr. N.D. W. Va. 2006) (citing In re
Cloninger, 209 B.R. 125, 126 (Bankr. E.D. Ark. 1997). The court is satisfied that it is appropriate
to reopen the debtor’s closed case for the limited purpose of giving the debtor the opportunity to
present his claim that Ms. Ward violated the discharge injunction by seeking to reinstate the Illinois
Lawsuit against him. E.g., In re Schneider, 126 B.R. 626, 628 (Bankr. M.D. Fla. 1991) (court
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allowed debtor to reopen a closed chapter 7 case for the purpose of considering debtor’s motion for
a finding of contempt against a creditor who filed suit in state court after discharge).
II. Civil Contempt
The discharge injunction set forth in 11 U.S.C. § 524 “operates as an injunction against the
commencement or continuation of an action, the employment of process, or an act, to collect, recover
or offset any such debt as a personal liability of the debtor, whether or not such debt is waived.” 11
U.S.C. § 524(a)(2). A violation of the discharge injunction may be redressed by a bankruptcy court
under its civil contempt power. 11 U.S.C. § 105(a); In re Bock, 297 B.R. 22, 29 (Bankr. W.D.N.C.
2002) (“[D]ischarge is a Bankruptcy Court order, and as such, most courts treat its violation as civil
contempt.”); Burd v. Walters, 868 F.2d 665 (4th Cir. 1989) (holding that bankruptcy court has civil
contempt powers to carry out the provisions of the Code); In re Bruce, 2000 WL 33673773 (Bankr.
M.D.N.C. 2000) (“Although section 524 does not explicitly authorize monetary damages for
violation of a discharge injunction, the court may award actual damages pursuant to the statutory
contempt powers set forth in 11 U.S.C. § 105.”) The Court of Appeals for the Fourth Circuit
articulated the standard to establish civil contempt in Ashcraft v. Conoco, Inc., 218 F.3d 288, 301
(4th Cir. 2000) (internal quotations omitted), as follows:
1) the existence of a valid decree of which the alleged contemnor had
actual or constructive knowledge; (2) ... that the decree was in the
movant’s “favor”; (3) ... that the alleged contemnor by its conduct
violated the terms of the decree, and had knowledge (at least
constructive knowledge) of such violations; and (4) ... that [the]
movant suffered harm as a result.
Each of these elements must be established by clear and convincing evidence. Ashcraft, 218 F. 3d
at 301 (construing Colonial Williamsburg Found. v. The Kittinger Co., 792 F. Supp. 1397, 1405-06
(E.D.Va. 1992), aff’d, 38 F.3d 133, 136 (4th Cir. 1994)).
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In addition to the four Ashcraft factors, bankruptcy courts in this circuit, including this court,
have increasingly looked to whether a creditor’s violation of the discharge injunction was willful.
E.g., In re Adams, 2010 WL 2721205 at *3 (Bankr. E.D.N.C 2010); In re Morton, 2011 WL
5509196 *3 (Bankr. E.D.N.C. 2011) (debtors failed to carry burden of proving willful violation of
automatic stay, and failed to establish civil contempt); In re Kirkbride, 2010 WL 4809334 (Bankr.
E.D.N.C. 2010). While it is not clear that willfulness is an element to contempt required in the
Fourth Circuit, the rule established in the Eleventh Circuit in In re Hardy, 97 F.3d 1384 (11th Cir.
1996) “has found increasing acceptance by other courts, including courts in this circuit.” Adams,
2010 WL 2721205 at *4 (citing Almond v. Ford Motor Co. (In re Almond), 2007 WL 1345224, at
*5 (Bankr. M.D.N.C. 2007)). Pursuant to Hardy and the decisions that follow it, the burden of
proving that the creditor’s violation was “willful” can be met by a showing that “the creditors knew
that the discharge injunction was invoked and intended the act which violated the injunction.’” In
re Adams, 2010 WL 2721205 at *3 (citing In re Dendy, 396 B.R. 171, 178 (Bankr. D.S.C. 2008)).
In contrast to the standard for civil contempt, a willful violation of the discharge injunction must be
proven by the lower preponderance of the evidence standard. In re Cherry, 247 B.R. 176, 188 n. 18
(Bankr. E.D.Va. 2000).
Out of the five elements to be proven, the only two elements in controversy are whether there
was a violation of the discharge injunction and whether that violation was willful. It is established
that Ms. Ward had actual or constructive knowledge of the debtor’s receipt of his discharge on April
12, 2011, prior to the dismissal of the adversary proceeding. The discharge is a decree in the
debtor’s favor, and Ms. Ward, in reinstating the Illinois Lawsuit against the debtor, caused the debtor
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to suffer harm in that he was forced to reopen his bankruptcy case and incur additional attorneys’
fees to insure that the behavior did not continue or was not repeated.
To determine whether Ms. Ward’s attempt to reinstate the Illinois Lawsuit constitutes a
violation of the discharge injunction, the court must review the effects of the discharge. A
bankruptcy discharge, of course, extinguishes “the personal liability of the debtor with respect to any
debt.” 11 U.S.C. § 524(a)(1). The Code defines “debt” as a “liability on a claim.” 11 U.S.C.
§ 101(12). The Code defines “claim” as a “right to payment, whether or not such right is reduced
to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed,
legal, equitable, secured, or unsecured.” 11 U.S.C. § 101(5). Therefore, a discharge extinguishes
the debtor’s personal liability on his creditor’s claims. However, a discharge does not extinguish a
creditor’s right to seek a claim in rem. Coastal Fed. Credit Union v. Hardiman, 398 B.R. 161, 183
(Bankr. E.D.N.C. 2008) (quoting Johnson v. Home State Bank, 501 U.S. 78, 84 (1991)(“[I]t is well
settled that a bankruptcy discharge extinguishes only one mode of enforcing a claim – namely, an
action against the debtor in personam – while leaving intact another – namely, an action against the
debtor in rem.”).
The debtor listed Ms. Ward on his schedules as the holder of a disputed claim, in an unknown
amount, growing out of the Illinois lawsuit. His personal liability on this claim was discharged in
his bankruptcy if the claim was of the kind subject to discharge, and Illinois law determines the
nature of the claim brought by Ms. Ward. The Illinois Lawsuit sought both equitable and legal relief
in the form of specific performance of the terms of the agreement, recovery against the debtor for
breach of contract, and recovery against the debtor for wrongful conversion of personal property.
Illinois law states that “[a]n action in rem is considered to be taken directly against property or
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brought to enforce a right in the thing itself.” Metrobank v. Cannatello, 2012 WL 146706, *4 (Ill.
Ct. of App. 2012). Ms. Ward’s action sought not just to enforce her right in the property through
specific performance or other equitable means, but also to seek affirmative monetary relief from the
debtor – in other words, a legal remedy.
Illinois law focuses on the requirement of personal service of process in distinguishing
between in rem and in personam proceedings. “[I]n a proceeding strictly in rem, no notice is
required to be given; that in such a proceeding seizure of the res, or what is regarded as equivalent
to seizure, is essential, and... sufficient constructive notice.” Austin v. Royal League, 232 Ill. App.
1 Dist. 359, 372 (1924). For example, suits “to enforce liens or contracts relating to property, may
be regarded as proceedings in rem, so far as they affect property in this state." Id., at 373 (citing
Pennoyer v. Neff, 95 U.S. 714 (1878)). While it is unclear whether Ms. Ward was required to serve
the debtor with personal service of process, the claims she brought against the debtor exceed the
limited relief in equity that she could have sought without violating the discharge injunction. The
fact that Ms. Ward could have brought a proceeding strictly in rem without violating the injunction
does not mean that she can also seek legal remedies against the debtor without violating the
injunction. Because Ms. Ward brought the action directly against the debtor and sought affirmative
monetary relief in addition to specific performance, she violated the discharge.
The reinstatement of the Illinois Lawsuit by Ms. Ward also constitutes a willful violation of
the discharge injunction. Ms. Ward intended to reinstate her claim when she filed the pro se motion
with the Illinois district court, and she had knowledge of the discharge injunction entered in the
debtor’s bankruptcy case. There is therefore ample evidence that Ms. Ward’s action in attempting
to reinstate the Illinois Lawsuit was willful. E.g., Adams, 2010 WL 2721205 *3 (willfulness is
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proven by showing creditor knew the discharge injunction was invoked and intended the act which
violated the injunction). For these reasons the court finds that Ms. Ward has willfully violated the
discharge injunction and is in civil contempt of a court order.
III. Damages
A bankruptcy court has not only the inherent authority to enforce its orders, but also the
statutory authority, under 11 U.S.C. § 105(a), to issue “any order, process, or judgment that is
necessary or appropriate to carry out the provisions” of the Bankruptcy Code. This authority
encompasses the court’s ability to impose sanctions as a consequence of violating the discharge
injunction. In re Barbour, 77 B.R. 530, 532 (Bankr. E.D.N.C. 1987); see also In re Workman, 392
B.R. 189, 194 (Bankr. D.S.C. 2007) (citing multiple recent cases in which bankruptcy courts invoked
power under §105(a) to sanction parties who violated the discharge injunction). Thus, while § 524
does not explicitly authorize an award of monetary damages for violation of the discharge injunction,
damages for those violations may be awarded under §105(a). See, e.g., Workman, 392 B.R. at 195.
Such sanctions may include “actual damages, attorney’s fees and, when appropriate, punitive
damages.” In re Cherry, 247 B.R. 176, 187 (Bankr. E.D. Va. 2000) (citing Mickens v. Waynesboro
Dupont Employees Credit Union, Inc. (In re Mickens), 229 B.R. 114, 118 (Bankr. W.D.Va. 1999)).
Debtor’s attorneys have provided the court with invoices totaling $4,469 related to the
contempt motion. No other evidence of compensatory damages was introduced. There is
insufficient evidence of the egregious conduct the Cherry court required as a basis for an award of
punitive damages, and the court chooses not to impose them. Cherry, 247 B.R. at 189-90 (awarding
punitive damages requires some sort of egregious conduct, malevolent intent, or clear disregard of
the bankruptcy laws).
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Accordingly, the debtor’s motion to reopen the case is ALLOWED. The court finds
Madeleine M. Ward in contempt of the discharge injunction and sanctions her for violation of the
discharge injunction in the amount of $4,469. Ms. Ward is ORDERED to pay such amount no later
than fourteen (14) days from the date of this order to THE JANVIER LAW FIRM, counsel for the
debtor, 1101 Haynes Street, Suite 102, Raleigh, NC, 27604.
SO ORDERED.
END OF DOCUMENT
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