Johnston v. Valley Credit Service, Inc.

THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE:
MICHELLE DENISE JOHNSTON,
Debtor.
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MICHELLE DENISE JOHNSTON,
Plaintiff,
v.
VALLEY CREDIT SERVICES, INC.,
Defendant.
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Case No 05-6288
Chapter 7
Adv. Proc. No. 06-180
MEMORANDUM OPINION
Michelle Denise Johnston (the “Debtor”) seeks entry of summary judgment against Valley Credit
Services, Inc. (“Valley Credit”), for allegedly violating the discharge injunction of 11 U.S.C. § 524(a) by
engaging in post-petition collection activity. Valley Credit also filed a cross-motion for summary judgement
arguing that it cannot be liable for any purported violation of the Debtor’s order of discharge based on the
undisputed facts of this case.
I. STANDARD OF REVIEW
Summary judgment is appropriate when the matters presented to the court “show that there is no
genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.”
Fed. R. Civ. P. 56(c); Fed. R. Bankr. P. 7056; Celotex v. Catrett, 477 U.S. 317, 322 (1986). The party
Dated: Thursday, October 25, 2007 2:23:13 PM
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1 As elicited during the deposition of Thomas Stovall, general manager of Valley Credit, the
Debtor was billed $105.02 by the Water Department on September 9, 2005. This bill was not paid.
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moving for summary judgment has the initial burden of proving that there is no genuine issue as to any
material fact. Adickes v. S. H. Kress & Co., 398 U.S. 144, 161 (1970). Once the moving party has met
this initial burden of proof, the non-moving party must set forth specific facts sufficient to raise a genuine
issue for trial and may not rest on its pleadings or mere assertions of disputed facts to defeat the motion.
Matsushita Electric Industrial Co., Ltd., v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986) (stating
that the party opposing the motion “must do more than simply show that there is some metaphysical doubt
as to the material facts”). The mere existence of a scintilla of evidence in support of the opposing party’s
position will not be sufficient to forestall summary judgment, but “the judge’s function is not himself to weigh
the evidence and determine the truth of the matter but to determine whether there is a genuine issue for
trial.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986). In ruling on a motion for summary
judgment, “the evidence of the nonmovant is to be believed, and all justifiable inferences are to be drawn
in his favor.” Id. at 255. A fact is not “genuinely disputed” unless the factual conflict between the parties
requires a trial of the case for resolution. Finley v. Giacobbe, 79 F.3d 1285, 1291 (2d Cir. 1996) (“If
there is any evidence in the record from which a jury could draw a reasonable inference in favor of the
non-moving party on a material fact, this Court will find summary judgment is improper.”).
II. BACKGROUND
Pre-petition, the Debtor owed money to Charles Town Water Department (the “Water
Department”) for services. When the Debtor filed her October 14, 2005 Chapter 7 bankruptcy petition,
however, she did not schedule the Water Department as a creditor. Consequently, the Water Department
never received notice of the Debtor’s bankruptcy filing or her January 25, 2006 discharge. Post-petition,
the Debtor also failed to make any payment to the Water Department for on-going services, and on May
27, 2006, the Water Department applied the Debtor’s $55 security deposit to her outstanding water bill.
On July 18, 2006, the Water Department referred the Debtor’s account to Valley Credit for collection.
At that time, the Debtor’s outstanding water bill was $295.54, a portion of which would have been related
to a pre-petition obligation.1
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The Debtor filed Bankruptcy on October 14, 2005, and she received a second water bill on November
7, 2005, for $86.93. Accordingly, all of the September 9, 2005 bill, and a portion of the November 7,
2005 bill, would have related to the Debtor’s pre-petition consumption of services. The Debtor did not
make any voluntary, post-petition payments to the Water Department.
2 In this context, a “wash” refers to Valley Credit’s computer program that checks an account
referred for collection against Valley Credit’s bankruptcy database.
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Unlike the Water Department, Valley Credit was listed on Schedule F of the Debtor’s petition as
the collection agent for two separate entities, Waste Management and Keystone Dental. Consequently,
Valley Credit had notice of the Debtor’s bankruptcy filing, and her order of discharge as it related to those
two accounts.
According to the Agreement for Collection Services between the Water Department and Valley
Credit, the Water Department is only allowed to send Valley Credit valid and legally enforceable claims,
i.e., claims that have not been discharged in bankruptcy. When Valley Credit received the account from
the Water Department, it prepared an initial dunning letter, and Valley Credit’s general manager, Thomas
Stovall, testified regarding Valley Credit’s bankruptcy related procedures:
A. The internal – the account is entered on a particular day. The wash[2] is done that
night as the letter is generated. If the wash picks up that its inside the bankruptcy period
the letter will be stopped.
. . . .
A. The external is . . . . usually done within three working days and it is sent to
UNISCORE and then it is returned the day after we send it.
. . . .
Q. So when your internal wash picks up Michelle D. Johnston and the new account’s
in that name, Michelle D. Johnston, your sole evaluation, and I think from what you told
me, would be to look at the date of last service or last payment as provided by your client
to determine whether or not you all believe its inside or outside the bankruptcy?
A. That is correct. Unless the client has indicated otherwise.
(Thomas Stovall Depo., 61-62).
Because the Water Department did not include the Debtor’s social security number or date of birth
on the account, the initial, internal wash treated the account as new business, and it did not link to those
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accounts that Valley Credit was handling on behalf of Waste Management or Keystone Dental, which had
both been closed due to the Debtor’s bankruptcy. Thus, when Valley Credit received the account from
the Water Department, it was not immediately aware that the Debtor had other accounts that were also
placed with Valley Credit.
On August 4, 2006, Valley Credit received a UNISCORE report, which returned the Debtor’s
social security number. At this time, Valley Credit was able to link the Debtor’s account with the Water
Department to her earlier, closed accounts with Waste Management and Keystone Dental. However,
because the account referral from the Water Department indicated that the last meter-read date was
January 4, 2006, and that the last pay date was May 27, 2006, Valley Credit proceeded to collect the debt
on the belief that it was related to service charges incurred after the Debtor filed her October 14, 2005
bankruptcy.
Accordingly, Valley Credit made three additional attempts to collect the account placed with it by
the Water Department. Valley Credit made two collection calls to the Debtor on September 18, 2006 and
October 3, 2006, and it sent the Debtor a collection letter on October 5, 2006. After the letter of
December 5, 2006, the Debtor’s counsel contacted Valley Credit and all further collection actions ceased.
III. DISCUSSION
The Debtor asserts that all the necessary elements for establishing a violation of the discharge
injunction are satisfied, and the Debtor is entitled to declaration to that effect. Valley Credit, however,
contends that no contempt sanctions are warranted based on the facts of this case.
A. The Debtor’s Motion for Summary Judgment
The Debtor argues that Valley Credit received notice of the Debtor’s underlying bankruptcy
petition and discharge because it was listed on the Debtor’s mailing matrix as a collection agent for debts
owed to Waste Management and Keystone Dental. The Debtor also asserts that Valley Credit attempted
to collect on a pre-petition debt owed to the Water Department, and, therefore, violated the Debtor’s
discharge injunction. Consequently, in the Debtor’s view, all that remains is for the court to determine the
amount of sanctions to be imposed against Valley Credit for its violation of the Debtor’s discharge
injunction.
The discharge injunction provided by § 524 of the Bankruptcy Code prohibits a creditor from
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attempting to collect on a debt that has been discharged in a bankruptcy proceeding. The discharge
injunction is effective as of the date that a debtor receives a discharge. 11 U.S.C. § 524(a). A violation
of the discharge injunction is punished by contempt of court. E.g., ZiLOG, Inc. v. Corning (In re ZiLOG,
Inc.), 450 F.3d 996, 1007 (9th Cir. 2005) (“A party who knowingly violates the discharge injunction can
be held in contempt . . . .”); Bessette v. Avco Fin. Serv., 230 F.3d 439, 445 (1st Cir. 2000) (“[A]
bankruptcy court is authorized to invoke § 105 to enforce the discharge injunction imposed by § 524 and
order damages . . . . Consistent with this determination, bankruptcy courts across the country have
appropriately used their statutory contempt power to order monetary relief . . . when creditors have
engaged in conduct that violates § 524.”); In re Nat'l Gypsum Co., 118 F.3d 1056, 1063 (5th Cir. 1997)
(“The discharge injunction granted by section 524(a) is a substantive right conferred by the Bankruptcy
Code, often enforced by a motion for contempt . . . .”).
Determining whether a party may be held liable for civil contempt is a two part inquiry: (1) did the
party know of the lawful order of the court, and (2) did the defendant comply with it. Burd v. Walters (In
re Walters), 868 F.2d 665, 670 (4t h Cir. 1989); see also ZiLog, Inc., 450 F.3d at 1007 (same);
Ashcraft v. Conoco, Inc., 218 F.3d 288, 301 (4th Cir. 2000) (stating that to establish civil contempt, the
movant must establish four elements by clear and convincing evidence: “ ‘(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.’ ”) (citation omitted).
In this case, the Debtor acknowledged that she neglected to include the debt that she owed to the
Water Department on her schedule of unsecured creditors, and the Water Department never received
notice of the Debtor’s bankruptcy. Because the Debtor’s case was a no asset Chapter 7, however, the
pre-petition debt owed to the Water Department was discharged. E.g., Watson v. Parker (In re
Parker), 313 F.3d 1267, 1269 (11th Cir. 2002) (“‘Pursuant to § 727(b), the Debtor receives a discharge
from all debts that arose before the date of the order for relief under Chapter 7, regardless of whether a
proof of claim based on any such debt or liability is filed . . . . [T]he Debtor's Chapter 7 case was a no
asset case with no claims bar date set; therefore, [the creditor] had suffered no prejudice because [the
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creditor] will have an opportunity to file a claim if any assets are discovered. . . . . [The creditor’s] claim
was discharged by operation of law under § 727(b).”).
Accordingly, when the Water Department sent the Debtor’s account to ValleyCredit for collection
on July 18, 2006, there was no indication in the referral that the Debtor had filed bankruptcy, or that any
portion of the account was related to pre-petition services. Moreover, the account referral did not contain
the Debtor’s social security number or birth date, information which would have allowed Valley Credit to
link the Water Department’s account with the two other accounts it had previously attempted to collect on
behalf of Waste Management and Keystone Dental, which were subsequently discharged in bankruptcy.
Therefore, no evidence suggests that Valley Credit knew of the discharge injunction issued by the
court when Valley Credit sent the collection letter to the Debtor on July 19, 2006. The collection letter
informed the Debtor that she had 30 days to dispute the debt, and unless the debt was disputed, Valley
Credit would assume that the debt was valid.
By August 4, 2006, after Valley Credit received the Debtor’s UNISCORE report, Valley Credit
was able to link the Debtor’s account with the Water Department to the two other discharged accounts
with Waste Management and Keystone Dental. Viewing the documentation provided by the Water
Department, however, ValleyCredit noticed that the documents reflected a last meter-read date of January
4, 2006, a last bill date of February 27, 2006, and a last payment date of May 27, 2006. Based on this
information, and the fact that the Debtor never responded to the initial collection letter to dispute the validity
of the debt, Valley Credit assumed that the Water Department’s services were post-petition and were not
encompassed within the scope of the Debtor’s discharge injunction. Consequently, Valley Credit made
two collection calls to the Debtor on September 18, 2006 and October 3, 2006, and sent an additional
collection letter to the Debtor on October 5, 2006. When the Debtor’s attorney informed Valley Credit
that a portion of the debt being collected was discharged in bankruptcy, Valley Credit ceased further
collection activity.
The Debtor asserts that Valley Credit had an independent duty to investigate – beyond the face of
the documentation initially supplied by the Water Department – whether any portion of the Water
Department’s account was related to pre-petition services. Based on the facts of this case, the court
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disagrees.
Namely, (1) Valley Credit’s agreement with the Water Department provided that only valid
accounts would be referred for collection (the Water Department believed that the account was valid
because it was never noticed of the Debtor’s bankruptcy); (2) no indication exists in the account referral
that a portion of the water service charges related to pre-petition services; (3) Valley Credit sent a letter
to the Debtor on July 19, 2006, asking the Debtor to inform it of whether the debt was valid within the next
30 days, to which it never received a response; and (4) when the Debtor’s attorney informed Valley Credit
that at least a portion of the Water Department’s account was discharged in bankruptcy, Valley Credit
ceased all collection activity. Based on these facts, the court does not believe that Valley Credit had
knowledge of the Debtor’s bankruptcy discharge as it related to the Debtor’s delinquent account with the
Water Department, and, under the circumstances, believes that the minimal investigation conducted by
Valley Credit was reasonable. Cf. Patrick v. Check Brokerage Corp. (In re Patrick), 300 B.R. 915,
917-18 (Bankr. S.D. Ill. 2003) (finding that the creditor, who proceeded to collect a discharged debt
based on a name mix-up, had a duty to perform a minimal investigation as to whether the account debtor
had filed bankruptcy after receiving correspondence from the debtor’s attorney asking that collections
actions be stopped because the account was discharged in bankruptcy).
In sum, the Debtor has not sufficiently demonstrated that Valley Credit knew that the Debtor’s
discharge injunction encompassed a portion of the debt that it was attempting to collect on behalf of the
Water Department. Therefore, the Debtor’s motion for summary judgment will be denied.
B. Valley Credit’s Motion for Summary Judgment
In ruling on Valley Credit’s contention that no violationof the discharge injunctionexists in this case,
the court must consider the uncontested facts in light of the Debtor’s substantive evidentiary burden at trial
– the Debtor must show by clear and convincing evidence that Valley Credit violated the discharge
injunction. See, e.g., ZiLOG, 450 F.3d at 1007 (“[T]he party seeking contempt sanctions has the burden
of proving, by clear and convincing evidence, that the sanctions are justified.”); Ashcraft, 218 F.3d at 301
(requiring civil contempt to be proven by clear and convincing evidence). See also Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 254 (1986) (“[T]here is no genuine issue if the evidence presented in the
opposing affidavits is of insufficient caliber or quantity to allow a rational finder of fact to find [liability] by
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clear and convincing evidence.”); 11 Moore’s Federal Practice – Civil § 56.13[3] (2007) (“The standard
of proof the party will be held to at trial will directly impact on the court's evaluation of the sufficiency of
the evidence presented in opposition or furtherance of the summary judgment motion.”).
In this regard, the Debtor outlined its theory as to Valley Credit’s knowledge of the Debtor’s
discharge injunction, as it related to the debt owed to the Water Department:
On August 4, 2006, upon receipt of the results of the wash through UNISCORE, the
Plaintiff’s social security number was returned and entered into the system with respect to
the subject account. At that time, August 4, 2006, the subject account was linked to the
two prior accounts which had been closed for bankruptcy. Clearly, at this point Valley
Credit Services not only had knowledge of the Plaintiff’s bankruptcy filing but had
associated the bankruptcy filing with the subject account that they were attempting to
collect.
However, rather than ceasing any attempts to collect the debt and performing a proper
analysis of whether or not the debt was included and discharged in the bankruptcy case,
the Defendant chose to ignore the bankruptcy filing information and proceeded with
attempting to collect the debt without contacting the Charles Town Water Department to
obtain the dates of service or further account information which would have enabled the
Defendant to determine whether or not the debt was incurred pre-petition or post-petition.
Instead, the Defendant only looked at the last transaction date/last date of payment, which
is completely irrelevant in the context of bankruptcy, and proceeded based upon the fact
that this date (May 27, 2006) was after the date of discharge. As the Defendant admits
that the last pay date is not relevant and the Defendant further does not ensure that it is
utilizing correct dates of service to determine if the bankruptcy applies to the debt, the
bankruptcy washes it completes are rendered useless.
. . . .
If the Defendant had only made . . . inquiry of its client regarding the account information
at the time the account was initially linked to the two other bankruptcy accounts, the
Defendant could have avoided the instant litigation. Rather, they chose to proceed blindly
. . . without making the proper analysis to determine if this debt was in fact discharged in
the underlying bankruptcy case.
(Pl.’s Mot. Summ. J. 4-6).
At best, the Debtor’s argument demonstrates that Valley Credit could have taken steps to ensure
that no portion of the debt owed to the Water Department had been discharged in bankruptcy. The Debtor
does not dispute that none of the documents received by Valley Credit from the Water Department indicate
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– clearly and convincingly – that a portion of the amount owed was related to pre-petition services. In fact,
when the Debtor’s attorney began reviewing the Debtor’s water usage record to demonstrate that a portion
of the services were rendered pre-petition, Valley Credit stated that it didn’t have that document when it
received the account. No date on the account transferred to it by the Water Department referenced a pre-
petition time period. William Hopkinson, Valley Credit’s president and chief executive officer, explained
that Valley Credit instructs its clients to list the last transaction date on every account. While the Debtor’s
last voluntary payment was on August 9, 2005, during the pre-petition period, the Water Department listed
the date of last payment as May 27, 2006, the day that it applied the Debtor’s security deposit to her
outstanding account balance. Had the Water Department indicated that the date of the last payment was
August 9, 2005, then Mr. Hopkinson stated that Valley Credit’s system would have recognized the account
as being in bankruptcy and it would have been immediately closed. Based on these undisputed facts, the
court cannot conclude that the Debtor can meet its burden of demonstrating by clear and convincing
evidence that Valley Credit knew it was attempting to collect the Water Department’s debt in violation of
the discharge injunction when it made collection calls on September 18, 2006 and October 3, 2006, or
when it sent a collection letter on October 5, 2006. Importantly, when the Debtor’s attorney informed
Valley Credit that the account was included in the Debtor’s bankruptcy, Valley Credit ceased all collection
activity.
IV. CONCLUSION
The court will enter a separate order denying the Debtor’s motion for summary judgment and
granting Valley Credit’s motion for summary judgment on the basis that, after considering the uncontested
facts of this case, the Debtor cannot demonstrate by clear and convincing evidence that Valley Credit had
knowledge that the Debtor’s discharge injunction applied to the debt that they were attempting to collect
on behalf of the Water Department.
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