With the current state of today’s economy, dealing with account debtors and clients who are in bankruptcy has become a way of life for factors. As a result, many factors have become very proficient dealing with bankruptcies and know the basic rules. But even some of the most sophisticated financial institutions can still run dreadfully afoul of one of the most basic tenets of the bankruptcy code–the discharge injunction. And if you are caught, you can be in a for a very expensive lesson.
Last November, a bankruptcy judge in the Northern District of Texas issued an opinion in Danny and Kimberly McClure v. Bank of America, Creditors Financial Group LLC and Peter Rebelo, 2009 WL 4263365, (N.D. Tex. 2009) that reminds us of the consequences of violating the discharge injunction. Danny and Kimberly McClure filed for bankruptcy protection in July 18, 2007 and received a discharge on November 15, 2007. Among the debts discharged were personal guaranties on two Bank of America credit cards in the names of their business.
After the couple’s debts had been discharged, Bank of America referred the credit card debts to a collection agency. Bank of America testified that they knew the debtors had filed for bankruptcy when they referred the case to the collection agency. As an aside, this is not the kind of testimony that you want to have. Bank of America essentially admitted that they willfully and intentionally violated the discharge injunction.
When the collection agency received the placements, they performed an initial bankruptcy scrub, but used the tax identification number from the business that Mr. McClure owned instead of Mr. McClure’s social security number to run the scrub. Because of this, they failed to learn of the bankruptcy discharge.
The collection agency then assigned each credit card to a different collector. The first collector performed an Accurint search and found Mr. McClure’s social security number. In spite of this, he did not perform another bankruptcy scrub. That collector then contacted the McClures for payment. Mr. McClure testified that the collector told him that someone was likely headed to his house and that the collection agency would be filing a lawsuit shortly if he did not pay. The very fact that the court mentioned this testimony in the opinion indicates that the court was disturbed by the collector’s tactics. At that time, Mr. McClure informed the collector that he had received a bankruptcy discharge.
The first collector then entered the bankruptcy information into the collection agency’s system and apparently ceased his collection efforts. But the second collector, who was assigned to collect the debt owed on the other credit card, did not have access to this same information so he sent a collection letter and attempted to contact the McClures for payment.
That triggered the debtors filing a motion for contempt for willfully and intentionally violating the discharge injunction. The debtor requested attorney fees, damages and sanctions against Bank of America, the collection agency and the second collector.
After hearing the evidence presented, the court denied recovery and sanctions against the second collector. The court, however, did find that both Bank of America and the collection agency willfully and intentionally violated the discharge injunction.
The court awarded the debtor $79,839.14 in attorney fees and $2,500 in actual damages both jointly payable by Bank of America and the collection agency. The court also awarded a separate $100,000 sanction against Bank of America and $50,000 sanction against the collection agency. Each party’s sanction would be suspended and need not be paid if the president or general counsel of each company submitted an affidavit within 90 days detailing how their procedures had been changed to prevent this from happening again in the future.
A number of lessons can be learned. Among them is to ensure that you have adequate procedures in place to protect against violating the discharge injunction or automatic stay. Also, be careful who you refer delinquent accounts to for collection. I believe there is at least a possibility that Bank of America would never have been sanctioned if the collection agency had not had faulty procedures that triggered the debtor to complain to the bankruptcy court. I also believe the strong arm tactics that the collection agency used made the situation worse. The bottom line is you should check your procedures to ensure that once your company becomes aware that a debtor is in bankruptcy or has a received a discharge–stop collection efforts immediately.
About the author:
Scot Pierce is a partner with the lawfirm of Bracket & Ellis, P.C. located in Fort Worth, Texas. He has represented a number of factors with commercial litigation and bankruptcy issues. He also regularly writes articles and presents speeches on creditor issues. He can be reached at 817/339-2474 or spierce@belaw.com.