9th Circuit: Barrientos v. Wells Fargo Bank, N.A.

Ruling:

A party alleging contempt for violation of the discharge injunction must bring the contempt action by way of motion in the underlying bankruptcy case, not by adversary proceeding.

Facts:

Appellant Adolfo Barrientos ("Debtor") filed a Chapter 7 bankruptcy petition and received a discharge. After entry of the discharge, Debtor filed an adversary proceeding against Wells Fargo alleging Wells Fargo verified certain debts to credit reporting agencies in violation of the discharge injunction. The Adversary Complaint alleged a single cause of action for contempt for violation of Section 524 of the Bankruptcy Code and sought an injunction, declaratory relief, monetary penalties and attorney fees. Wells Fargo moved to dismiss under Rule 12(b)(6) alleging that such a contempt action must be dismissed under the reasoning set forth in Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, 506-07 (9th Cir. 2002) because Section 105 does not support a private right of action for violation of Section 524. The bankruptcy court agreed and the district court affirmed, noting that the proper procedural avenue for such a contempt proceeding was through a motion in the underlying bankruptcy proceeding. The Ninth Circuit affirmed, reasoning that allowing an adversary proceeding would potentially permit a judge other than the judge in the underlying bankruptcy to enforce the discharge, which would undermine the bankruptcy court's supervision of the discharge. The Ninth Circuit also reasoned that Bankruptcy Rule 9020 requires "parties in interest" to bring contempt proceedings by way of a Rule 9014 contested matter and allowing an adversary proceeding would obliterate the distinction between contested matters and adversary proceedings. In support of its ruling, the Barrientos court cited In re Kalikow, 602 F.3d 82 (2d Dir. 2010), which held a proceeding under Section 524 seeks to enforce an injuction already entered and therefore does not need to be brought as an adversary proceeding under Bankrutpcy Rule 7001.

http://www.ca9.uscourts.gov/datastore/opinions/2011/02/10/09-55810.pdf

Comments:
The United States Court of Appeals for the Ninth Circuit recently affirmed a district court’s dismissal of an adversary complaint for alleged violation of a discharge of debt injunction under 11 U.S.C. § 524. The Court held that “[a]n action for contempt for violation of a discharge injunction under § 524 must be brought via motion in the bankruptcy case, not via an adversary proceeding.”


The debtor in this matter had filed for Chapter 7 bankruptcy, and been granted a discharge of debt under 11 U.S.C. § 524. Despite this discharge, some credit reporting agencies continued to report the debtor’s previous debt to Wells Fargo Bank, N.A. amounting to $80,831, which the creditor then confirmed in alleged violation of § 524.

The lower court dismissed the adversary proceeding, and the debtor appealed. The appellate court referenced that the “civil contempt power of bankruptcy judges” as based on 11 U.S.C. § 105. The Court then looked to its previous decisions, which held that “the availability of contempt proceedings under §105 for violation of a discharge injunction under § 524 does not create a private right of action for damages.” The Court stated that this precedent alone would be enough to “dispose of the present case,” and further noted that the proper procedure for “an action for contempt arising out of the violation of an order” from the bankruptcy case is to bring a motion in the bankruptcy case.

The Court next delineated the differences in procedure in bankruptcy court between “contested matters” and “adversary proceedings.” As the Court noted, Bankruptcy Rule 9020 “provides that Bankruptcy Rule 9014 governs contempt proceedings in bankruptcy.” Bankruptcy Rule 9014 “governs contested matters,” which are distinguished from adversarial proceedings governed by Part VII of the Bankruptcy Rules.

The Court disagreed with the debtor’s argument that “because Bankruptcy Rule 9014 invokes certain rules utilized for adversary proceedings” pursuant to Part VII, “any motion brought pursuant to Rule 9014 could also impliedly be brought as an adversary proceeding.” The Court noted that a “plain reading” of the language of Rule 9020 states that contempt proceedings “brought by the trustee or a party in interest” qualify as contested matters required to be brought by a motion in the bankruptcy case pursuant to Rule 9014. The Court further stated that Rule 9020 “exists solely for the purpose of mandating this” result.

In closing, the Court noted that even in the absence of Rule 9020, the debtor’s action does not qualify as an adversarial proceeding as described in Bankruptcy Rule 7001, as the debtor specifically requests punitive damages, and such damages are not a form of equitable relief.

In addition to seeking punitive damages, debtor also sought an injunction for the violation of the discharge which “already exists by operation of law.” The Court finally stated that “[a]n injunction against violating an existing injunction would be superfluous.” Thus, the Court ruled that the Appellant would suffer “no prejudice from the bankruptcy court’s requirement to proceed by motion rather than by adversary proceeding because he has failed to pursue the avenue of relief that no court has denied” him, that of bringing the proper motion in bankruptcy court.

The Court further denied the debtor’s arguments attempting to differentiate “motions” from “applications” as mere semantics, and stated there was no conflict in the Bankruptcy Rules when using one term rather than the other, as “in the Southern District of California . . . the words are generally considered synonymous.”