In re Paul

• Decision Date: 28 July 2008
• Docket Number: No. 07-1395.,07-1395.
• Citation: 534 F.3d 1303
• Parties: In re Rudy Leslie PAUL; Carol Christensen Paul, Debtors. Rudy Leslie Paul; Carol Christensen Paul, Plaintiffs-Appellees, v. Tammy Iglehart, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

534 F.3d 1303

In re Rudy Leslie PAUL; Carol Christensen Paul, Debtors.

Rudy Leslie Paul; Carol Christensen Paul, Plaintiffs-Appellees, v. Tammy Iglehart, Defendant-Appellant.

No. 07-1395.

United States Court of Appeals, Tenth Circuit.

July 28, 2008.

Submitted on the briefs:^*

Robert T. Lego, Lego Law Firm, Englewood, CO, for Appellant.

David S. Oppenheim, David S. Oppenheim & Associates, P.C., Centennial, CO, for Appellees.

Before McCONNELL and ANDERSON, Circuit Judges, and BRORBY, Senior Circuit Judge.

ANDERSON, Circuit Judge.

This case concerns the protective scope of the "discharge injunction" created by 11 U.S.C. § 524(a)(2), which bars efforts to collect personal debts from debtors after they have been discharged in bankruptcy.¹ In an adversary proceeding brought by former debtors Rudy and Carol Paul, the bankruptcy court held that Tammy Iglehart violated the discharge injunction when, in state court litigation against a corporate business she jointly owned with Rudy Paul, she (1) sought discovery from the Pauls regarding the assets and operation of the business and obtained sanctions when they did not comply, and (2) supplemented her pleadings to allege claims for post-petition wrongdoing by Rudy Paul in connection with the wind-up of the business. Ms. Iglehart contends that she did nothing to violate the discharge injunction, since (1) the discovery was for the entirely legitimate purpose of obtaining information in support of her recovery against the corporation (which never filed bankruptcy itself and was not part of the Pauls' bankruptcy estate²), and expressly excluded inquiry into any discharged claims against the Pauls, and (2) the claims she later added against Rudy Paul were unaffected by the discharge injunction, which does not reach non-discharged claims arising post-petition. We conclude that neither the bankruptcy court's findings, nor the facts of record on which they are based, demonstrate that Ms. Iglehart's facially permissible actions violated the discharge injunction. We therefore reverse.

FACTUAL BACKGROUND

In 1997, Ms. Iglehart filed suit in state (Colorado) court asserting several claims arising out of her connection with Peak Sports & Spine Physical Therapy, P.C. (Peak Sports), of which she had been an owner, officer, and employee. Some of these claims were asserted against Peak Sports itself, while others were asserted against individuals, including Rudy Paul. Sometime later, Ms. Iglehart added a claim against Carol Paul for defamation. In May 2001, the Pauls jointly filed for bankruptcy under Chapter 7, staying proceedings against them in the state suit, which had stalled for various reasons. In September 2001, Ms. Iglehart obtained an entry of default against Peak Sports in the state suit, with damages left to be determined. A month later, the Pauls' bankruptcy proceeding was favorably terminated with an order discharging them from their pre-petition debts, which included the claims Ms. Iglehart had asserted against them in state court. Rudy Paul continued to oversee the wind-up of Peak Sports, which was dissolved the next year.

In 2003, Ms. Iglehart sent notices of Colorado depositions to the Pauls (who had moved to Wisconsin) in the state suit, which proceeded in substance against Peak Sports with the Pauls left as nominal defendants.³ She contended that the Pauls still had to comply with discovery obligations, including traveling to Colorado for deposition. At the same time, however, she acknowledged, with a specific reference to § 524(a)(2) on the face of the deposition notices, that her discovery efforts could not involve the Pauls' own discharged pre-petition liabilities. When the Pauls failed to appear, she moved to enforce their discovery obligations through sanctions. The state court imposed penalties of $2,500 on each of the Pauls and another on Rudy Paul as president of Peak Sports, all of which would be voided if they appeared for a make-up deposition. The court also imposed a similar penalty on Rudy Paul for failing to respond to requests for documents relating to Peak Sports.

The Pauls sought reconsideration of the sanctions, arguing that their personal immunity from liability on the (pre-petition) claims asserted in the litigation, by virtue of the discharge injunction, nullified their formal status as parties for purposes of discovery obligations. The state court ultimately agreed, holding that discovery could be obtained from them only in a manner appropriate for non-resident non-parties. As Ms. Iglehart had not proceeded in this manner, the court vacated the sanctions it had previously imposed. Nothing in the record, however, suggests that the state court found any impropriety in the substance of the discovery Ms. Iglehart sought from the Pauls — which she has consistently maintained, with inherent legitimacy, was directed toward her claims against Peak Sports (and, for a time, other co-defendants), in particular to obtain information about corporate assets that might be traced to satisfy those claims. Indeed, the state court plainly countenanced further efforts for such discovery from the Pauls, limited solely as to the procedure to be followed.

The Pauls also brought this adversary proceeding in the bankruptcy court, alleging that Ms. Iglehart's conduct in the state case violated the discharge injunction. In the meantime, Ms. Iglehart supplemented her state pleadings to add claims against Rudy Paul for post-petition wrongdoing in connection with the wind-up of Peak Sports. Liabilities for post-petition conduct are not discharged,⁴ and thus do not implicate the discharge injunction. Nevertheless, the bankruptcy court inquired into the new claims, as well as Ms. Iglehart's discovery efforts, at a hearing on the Pauls' adversary complaint, and ruled from the bench that the discharge injunction had been violated in both respects. At the court's request, its lengthy oral ruling was summarized in an order prepared by the Pauls' counsel. As for prospective relief, the court enjoined "any further pursuit of the [Pauls] in the State Court matter," App. Vol. 1 at 53, including, unqualifiedly, any "further efforts to depose [them] or submit to them requests for production of corporate documents," id. Vol. 2 at 355. As for sanctions, the court conducted additional proceedings and ultimately ordered Ms. Iglehart personally to pay the Pauls over $15,000 in fees and costs. On reconsideration, the bankruptcy court held to its decision, which the district court later affirmed. This appeal followed.

GOVERNING LAW — THREE KEY PRINCIPLES

We turn now to the law governing enforcement of discharge injunctions. There are three basic principles that together point to the problem raised by this appeal.

A. The Terms of § 524(a)(2) Control

Under 11 U.S.C. § 105(a), bankruptcy courts have the equitable power to enforce and remedy violations of substantive provisions of the Bankruptcy Code, including in particular the discharge injunction in § 524(a)(2). Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, 506-07 (9th Cir.2002) (discussing Bessette v. Avco Fin. Servs., Inc., 230 F.3d 439, 444 (1st Cir.2000)); see Cox v. Zale Del., Inc., 239 F.3d 910, 916-17 (7th Cir.2001); see also Mountain Am. Credit Union v. Skinner (In re Skinner), 917 F.2d 444, 447 (10th Cir.1990) (same holding as to bankruptcy court powers to sanction violation of automatic stay). But that equitable power cannot be exercised contrary to or in excess of the terms of the substantive Code provision being enforced. 1 Norton Bankruptcy Law & Practice § 13:3 (3d ed.2008); see, e.g., Alderete v. Educ. Credit Mgmt. Corp. (In re Alderete), 412 F.3d 1200, 1207 (10th Cir.2005); Landsing Diversified Props.-II v. First Nat'l Bank & Trust Co. (In re W. Real Estate Fund, Inc.), 922 F.2d 592, 601 (10th Cir.1990), op. modified on other grounds, 932 F.2d 898 (10th Cir.1991). Thus, a bankruptcy court may sanction a party for violating the discharge injunction only if the party took some action prohibited by § 524(a)(2) — i.e., an action "to collect, recover or offset any [discharged] debt ... of the debtor."

This may seem an obvious point when stated in the abstract, yet it can easily be overlooked in the course of a bankruptcy court's practical effort to support a debtor's fresh start following discharge. A host of circumstances can affect a former debtor's financial comeback. But the concept of "fresh start" is just a general gloss on the purpose of § 524(a); it is not a license for courts to go beyond the particular prohibitions specified in the statute to shield debtors from adverse contingencies. However well-intentioned the effort in trying to facilitate a debtor's fresh start, a bankruptcy court may not enjoin and sanction a creditor with respect to conduct that does not violate § 524(a).

B. § 524(a)(2) Permits Suits in which Debtors are Nominal Defendants and Debtors may be Required to Comply with Discovery

Although § 524(a)(2) prohibits actions brought to collect a discharged debt from the debtor, it permits suits — even those brought to collect on debts a debtor has discharged — that formally name the debtor as a defendant but are brought to collect from a third party. In re W. Real Estate Fund, Inc., 922 F.2d at 601 n. 7; accord Houston v. Edgeworth (In re Edgeworth), 993 F.2d 51, 54 & n. 6 (5th Cir.1993) (citing cases); Hendrix v. Page (In re Hendrix), 986 F.2d 195, 197 (7th Cir.1993) (same). And requiring a debtor to bear such collateral burdens of litigation as those relating to discovery (as opposed to the actual defense of the action and potential liability for the judgment), does not run afoul of § 524(a)(2). Walker v. Wilde (In re Walker), 927 F.2d 1138, 1143-44 (10th Cir.1991); In re Edgeworth, 993 F.2d at 54; Simpson v. Rodgers (In re Rodgers), 266 B.R. 834, 837 (Bankr. W.D.Tenn.2001) (citing cases); In re Doar, 234 B.R. 203, 206 (Bankr.N.D.Ga.1999) (same). As one court succinctly put it: "The...