In re: ERIC ALLEN MCLEAN, DEBORAH DIANNE MCLEAN, Debtors.
ERIC ALLEN MCLEAN, DEBORAH DIANNE MCLEAN, Defendants - Appellees GREEN POINT CREDIT, LLC, GREEN TREE SERVICING LLC, Plaintiffs - Appellants,
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Appeal from the United States District Court for the Middle District of Alabama. D.C. Docket No. 1:13-cv-00925-WKW. Bankruptcy No. 12-bkc-11045-WRS.
For Green Point Credit, LLC, Green Tree Servicing LLC, Plaintiffs - Appellants: Robert Austin Huffaker Jr., J. Evans Bailey, Rushton Stakely Johnston & Garrett, PA, Montgomery, AL; Paul Joseph Spina III, Spina & Lavelle, PC, Birmingham, AL.
For Eric Allen Mclean, Deborah Dianne Mclean, Defendants - Appellees: Nicholas Heath Wooten, Nick Wooten, LLC, Auburn, AL.
Before ED CARNES, Chief Judge, JILL PRYOR and BLACK, Circuit Judges.
JILL PRYOR, Circuit
Green Point Credit, LLC and Green Tree Servicing LLC (collectively, " Green Tree" ) appeal the judgment the district court entered in its role as bankruptcy appellate court concerning an adversary proceeding that debtors Deborah and Eric McLean filed against Green Tree in the bankruptcy court. The district court affirmed the bankruptcy court's ruling that Green Tree violated the discharge injunction under 11 U.S.C. § 524(a)(2) by filing a proof of claim in the McLeans' instant bankruptcy proceeding to collect a debt that was discharged in their previous bankruptcy proceeding. The order also affirmed the bankruptcy court's award of both compensatory and non-compensatory sanctions to the McLeans.
This appeal presents a novel question: whether a creditor violates the discharge injunction under § 524(a)(2) by filing a proof of claim in a bankruptcy proceeding to collect a debt that was discharged in a previous bankruptcy proceeding. Green Tree asks us to answer this question in the negative or, in the alternative, to vacate the compensatory sanctions for lack of evidentiary foundation and the non-compensatory sanctions for being impermissibly punitive. After careful review, and with the benefit of oral argument, we conclude that Green Tree violated the discharge injunction; however, we vacate both monetary awards and remand to the district court with instructions to vacate and remand to the bankruptcy court.
The McLeans have twice met Green Tree in bankruptcy court. Their first encounter began in 2006, when the McLeans listed Green Tree as an unsecured creditor in their Chapter 13 petition in the Bankruptcy Court for the Middle District of Alabama. The bankruptcy court converted the petition to a Chapter 7 petition and subsequently discharged the debt, a deficiency of $11,018.00 on a sales contract for a mobile home, in its January 2009 discharge order. Green Tree received electronic notice of the discharge.
In June 2012, the McLeans filed a second Chapter 13 petition in the same bankruptcy court. This petition did not list Green Tree as a creditor. Despite the 2009 discharge order, Green Tree filed a proof of claim in the second proceeding for a debt in the amount of $11,018.03, representing the same deficiency that Green Tree had sought to recover in the McLeans' first proceeding. The McLeans learned of this filing in a letter from the bankruptcy court informing them that their projected bankruptcy plan payments were going to double because of the filing. According to the McLeans, this revised projection caused them emotional distress because they were unable to make the increased payments and expected to lose
all their possessions as a result. The McLeans objected to the proof of claim on December 13, 2012 on the basis that the debt previously had been discharged.
On January 7, 2013, before the bankruptcy court ruled on the objection, the McLeans initiated an adversary proceeding against Green Tree with a complaint alleging that Green Tree's proof of claim violated 11 U.S.C. § 524(a)(2), which provides that a discharge order operates as an injunction against further debt collection activities by creditors. Four days after the McLeans filed their complaint, Green Tree withdrew its proof of claim. Green Tree has since acknowledged that it filed the proof of claim in error, due to the failure of its automated electronic system to recognize that the McLeans' debt had been discharged. Still, the McLeans sought to recover actual damages for the emotional distress that the proof of claim caused before it was withdrawn and sanctions befitting of Green Tree's misconduct. The bankruptcy court sustained the McLeans' objection in the bankruptcy proceeding on January 16, 2013. After a trial in the adversary proceeding, the bankruptcy court found in favor of the McLeans, ruling that Green Tree violated the discharge injunction. The bankruptcy court awarded the McLeans compensatory sanctions for their emotional distress and a non-compensatory award that it labeled " coercive sanctions," which were designed to encourage Green Tree to correct any defects in its automated systems that could cause another such violation.
Green Tree appealed to the district court, which affirmed the bankruptcy court's judgment. The district court agreed with each of the bankruptcy court's conclusions but took care to address the risk that the non-compensatory sanctions, which the bankruptcy court imposed after Green Tree withdrew its offending proof of claim, might have been of a punitive, rather than coercive, nature. Finding Green Tree acted with reckless disregard of the risk of violating the discharge injunction, the district court concluded that, even if there remained no contempt ...