Recent Sixth Circuit BAP Case Shows Risks To Lawyers Arising From Violations Of Discharge Injunction

Nelson Mullins Riley & Scarborough LLP

Nelson Mullins Riley & Scarborough LLP

In a recent decision by the Sixth Circuit’s bankruptcy appellate panel, the court affirmed contempt sanctions against a creditor’s lawyer for violating the discharge injunction in connection with a garnishment. See In re Ragone, 2021 WL 1923658 (6th Cir. BAP May 13, 2021). The bankruptcy court sanctioned the creditor’s lawyer for continuing the garnishment and refusing to return garnishment proceeds after the debtor’s counsel notified him that the debt was discharged. The sanctions included $4,275.39 in post-discharge garnishment proceeds and $10,580.00 in attorney’s fees.

On appeal, the creditor’s lawyer argued alternatively that the discharge injunction was not violated and that he could not be personally liable because he was acting on behalf of his client and not for himself. The appellate court rejected both arguments and affirmed.

Regarding the first issue, the appellate court held that an obligation to dismiss the garnishment arose when there was “no fair ground of doubt that the Judgment had been discharged.” Because the garnishment was not promptly dismissed following notice from the debtor’s counsel, the appellate court affirmed. As for the lawyer’s personal liability, the appellate court reasoned that the bankruptcy court correctly held the lawyer personally liable based on the actions that he took as creditor’s counsel, which included taking months to investigate whether the debt was discharged and refusing to return the post-discharge garnishment proceeds.

Notably, the three judges on the appellate panel disagreed on one issue. Although all three judges concurred in finding the creditor’s lawyer could be held personally liable for attorney’s fees, one of the judges dissented from holding the lawyer personally liable for refusing to return the garnishment funds. The dissenter stated, “We should tread lightly here lest we inadvertently drive a wedge between creditors and their counsel upon whom we all depend to encourage their clients to conform their conduct to the law, including § 524.” This concern arose from the dissenter’s realization that a conflict could arise between a lawyer and a client when both face contempt sanctions, especially when the client has received funds in violation of the discharge injunction. For example, the dissenter envisioned a scenario in which the client cannot afford to pay and the creditor’s lawyer effectively becomes a guarantor for his client. Thus, Ragone serves as a cautionary tale, not only as to the risks of personal liability, but also regarding the potential for conflicts of interest arising from violations of the discharge injunction.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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