McDonald v. Norwest Financial, Inc. (In Re McDonald)McDonald v. Norwest Financial, Inc. (In Re McDonald)
This matter comes before the Court on the motion of Norwest Financial, Inc. and Norwest Financial Massachusetts, Inc. (“the Defendants”) to dismiss the Debtor Plaintiffs’ complaint (“the Motion”). The Debtors’ complaint (“the Complaint”), styled as a class action suit, alleges that the Defendants violated the automatic stay imposed by § 362(a) of the Bankruptcy Codе, 11 U.S.C. § 101,
et seq.
(“the Code”), and also that the Defendants violated § 524 of the Code.
1
At a hearing on this matter, the parties agreed this Court’s decision on one count was controlled by the First Circuit Court of Appeals’ decision in
Bessette v. Avco Fin. Serv., Inc.,
I. Background
The Debtors, through counsel, filed a voluntary Chapter 7 petition on November 27, 1996. The Debtors’ petition scheduled the Defendants as creditors in the Debtors’ case. An interim trustee was appointed who conducted and concluded the § 341 creditors’ meeting. On January 17, 1997, the trustee filed a report of no distribution. On March 11, 1997, this Court entered an Order discharging the Debtors, and the Court closed the Debtors’ case on March 21, 1997. Prior to the Debtors’ discharge, only one reaffirmation agreement was filed by a creditor not involved in this litigation.
In September 1999, the Debtors moved through new counsel to reopen their case. The Court allowed that motion, and the Debtors subsequently filed the Complaint seeking damages for themselves and others in a presently uncertified сlass of persons. In Counts I and II of the Complaint, the Debtors allege the Defendants violated subsections (c) and (a) of § 524 respectively. The Complaint states that the Defendants violated § 524(a) by executing a reaffirmation agreement with the Debtors prior to discharge in connection with a pre-petition debt of $500.00 that the Defendants did not file with the Court. The Debtors allege the Defendants violated subsection (c) of that same section by attempting to collect a pre-petition debt not properly reaffirmed under § 524(c). Count III alleges the Defendants violated the automatic stay provisions of § 362(a) by making certain misrepresentations to the Debtors and other debtors about thеir bankruptcy rights during reaffirmation solicitations.
The Defendants were served with a summons and the Complaint, but in lieu of an answer the Defendants filed the Motion. In the Motion, the Defendants seek to dismiss the Complaint pursuant to Federal Bankruptcy Rule 7012(b) and Rule 12(b)(6) of the Federal Rules of Civil Procedure for failing to state a claim for relief. Specifically, the Motion states that: (1)
II. Applicable Legal Standard Under Federal Bankruptcy Rule 7012(b)
On consideration of a defendant’s motion to dismiss a plaintiffs complaint for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure, applicable in these proceedings pursuant to Rule 7012(b) of the Federal Rules of Bankruptcy Procedure, the Court accepts as true the well pleaded factual allegations of the plaintiffs complaint. Fed.R.Bankr.P. 7012(b); Fed.R.Civ.P. 12(b)(6);
TAG/ICIB Serv., Inc. v. Pan Am. Grain Co., Inc.,
A. Count I — Violation of § 524(c).
Applying the standard set forth above, the Court finds that Count I must be dismissed for failing to state a claim on which the Court can grant relief. Quite simply, taking all the Plaintiffs’ allegations as true, there is but one reason for this conclusion: Subsection (c) of § 524 is not a statutory provision that either confers rights or imposes duties that this Court can enforce. On the contrary, § 524(c) sets forth nothing more than a list of conditions precedent to the enforcement of a purported reaffirmation agreement the consideration for which is based at least in part on a pre-petition debt. 11 U.S.C. § 524(c). For example, § 524(c)(1) requires that the agreement be executed before the Court discharges the debtor. 11 U.S.C. § 524(c)(1). Section 524(c) also requires that those agreements contain certain informative statements, and that those statements be conspicuous. 11 U.S.C. § 524(c)(2). The subsection also mandates that the agreement be filed with the Court to be enforceable. 11 U.S.C. § 524(c)(3). Section 524(c) also states that the agreement will not be enforceable if the debtor exercises Code granted rescission rights before the later of sixty days after the parties execute the agreement, or the Court orders the debtor discharged. 11 U.S.C. § 524(c)(4). In addition to the above requirements, § 524(c) imposes other requirements, not applicable in this instance, before an agreement to reaffirm a pre-petition debt may be enforced by eithеr party to that agreement. 11 U.S.C. § 524(c). Given the clear content of § 524(c), the Court finds there are no duties imposed on any party in this matter to enforce, and similarly that there are no rights created for any party to invoke.
2
B. Count II — Violation of the § 524(a)(2) Discharge Injunction.
Prior to
Bessette,
this Court would have been free to follow оne of two schools of thought on the availability of a remedy for § 524(a)(2) violations.
3
Under what one appellate panel characterized as a minority view,
Bassett v. Am. Gen. Fin., Inc. (In re Bassett),
Under the majority approach, though, courts remedy § 524(a) violations via their contempt power, be that power inherent or that conferred by § 105(a).
See Hardy v. United States (In re Hardy),
The First Circuit Court of Appeals, though, has conclusively addressed the issue of relief for § 524(a) violations in this circuit in the
Bessette
decision.
Bessette,
Based on its own analysis of
Bessette,
the Court concludes that the First Circuit has adopted the majority approach that courts sitting in bankruptcy may remedy § 524(a)(2) violations pursuant to their authority under § 105(a) to issue contempt orders. This conclusion is warranted for three reasons, all of which become clear on a careful reading of
Bessette
and its underlying authority. First, after concluding the language of § 524(a) made no express grant of a remedy, the
Bessette
Court declined “to jump into the fray with the complex analysis required by
Cort v. Ash”
when it found a readily available statutory remedy in § 105(a).
Bessette,
Second, the
Bessette
Court noted, in evaluating whether the combination of §§ 524(a) and 105(a) created a private right of actiоn for § 524(a)(2) violations, that its own decisions on the scope of § 105(a) consistently concluded that courts sitting in bankruptcy could not invoke § 105(a) to create substantive rights not otherwise granted in the Code.
Bessette,
Lastly, and further supporting the conclusion the First Circuit rejected legal remedies for § 524(a)(2) violations, is the
Bessette
Court’s discussion on a bankruptcy court’s authority under § 105(a) to order sanctions for § 524(a)(2) violations.
Bessette,
The First Circuit having decided a remedy exists for § 524(a)(2) violations, and consequently that there is sоme cognizable theory on which the Debtors may recover, the Court turns now to the Complaint to determine if the Debtors set forth sufficient allegations to justify recovery of sanctions for contempt for the Defendants’ violation of the discharge injunction.
See TAG/ICIB Serv.,
C. Count III — Violation of the § 362(a) Automatic Stay.
The Defendants challenge to Count III of the Complaint similarly fails as the Complaint is sufficient in its allegations to support a claim for relief for a violation of the automatic stay. In addition to the possible legal damages afforded debtors by § 362(h), 11 U.S.C. § 362(h), an award of sanctions is also not extraordinary for violations of the automatic stay.
See In re Smith Corset Shops, Inc.,
III. A Procedural Matter
As the parties have raised the issue, the Court feels it appropriate to resolve at this time the mаtter of whether the Debtors’ action is one properly before the Court in the posture of an adversary proceeding, see Fed.R.Bankr.P. 7001, or rather, as the Defendants contend, as a contested matter brought by motion, see Fed.R.Bankr.P. 9014. Resolution determines what procedural devices will be available to the parties during the course of the impending litigation. See Fed. R.Bankr.P. 9014. The Court is comfortable that the broad language of Rule 7001(1) of the Federal Rules of Bankruptcy Procedure permits the Debtors to bring the litigation to recover money from the Defendants as an adversary proceeding. Fed.R.Bankr.P. 7001(1). Even if the Court errs on this point, the Court would also be within its discretion to order that all of Part VII of the Federal Bankruptcy Rules will apply in this matter. Fed. R.Bankr.P. 9014. As such, the Court directs that the matter will continue as an adversary proceeding with all the attendant Rules of Part VII of the Bankruptcy Rules made applicable.
IV. Conclusion
For the reasons set forth herein, the Court hereby GRANTS the Defendants’ Motion to Dismiss as to Count I of the Debtor Plaintiffs’ Complaint only. The Court hereby DENIES the Defendants’ Motion to Dismiss as to Counts II and III of the Debtor Plaintiffs’ Complaint. An order scheduling hearing on the Plaintiffs’ Motion for Class Certification to issue forthwith by separate Order.
SO ORDERED.
Notes
. The Complaint originally contained four counts: Counts I and II sought recovery for violations of § 524 of the Code, Count III sought recovery for violations of § 362(a) of the Code, and Count IV set forth state law claims for relief in equity. The Debtors have since abandoned Count IV.
. This conclusion is further supported by the fact that reaffirmation of a pre-petition debt is a wholly voluntary transaction, one which neither the creditor nor the debtor can compel the other to enter into.
See Katahdin Fed. Credit Union v. Jamo (In re Jamo), 262
B.R. 159, 164 (1st Cir. BAP 2001). It would be incongruent for the Court to find that a statute stating only legal conditions precedent to the enforcement of a purely voluntary trans
. Section 524 of the Bankruptcy Code provides, in pertinent part, that:
(a) A discharge in a case under this title—
(2) operates as an injunction against the сommencement 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 discharge of such debt is waived.
11 U.S.C. § 524(a)(2).
. The phrase "right of action” is a legal phrase of art defined by Black's Law Dictionary as "[t]he right to bring a specific сase to court. A right that can be enforced by legal action.” Black’s Law Dictionary 1324 (7th ed.1999).
. Notwithstanding the numerous cases cited in support of the
Bessette
Court’s conclusion that contempt is the proper remedy for § 524(a)(2) violations, following its final statement of the court’s holding that court also directly referred to
Malone v. Norwest Fin., Cal, Inc., Bessette,