Filed: Jan. 07, 2014
Latest Update: Mar. 02, 2020
Summary: UNPUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 12-2526 In Re: CHRISTOPHER J. FINA; CARLY ELIZABETH FINA, Debtors. - RONALD BRADLEY; TERRI LEE BRADLEY; WILLIAM A. ERHART; M. RYAN MADISON, Plaintiffs – Appellants, v. CHRISTOPHER J. FINA, Defendant – Appellee, and CARLY ELIZABETH FINA, Defendant. Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. Gerald Bruce Lee, District Judge; Theresa C. Buchanan, Magistrate Judge. (1:12-cv-00
Summary: UNPUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 12-2526 In Re: CHRISTOPHER J. FINA; CARLY ELIZABETH FINA, Debtors. - RONALD BRADLEY; TERRI LEE BRADLEY; WILLIAM A. ERHART; M. RYAN MADISON, Plaintiffs – Appellants, v. CHRISTOPHER J. FINA, Defendant – Appellee, and CARLY ELIZABETH FINA, Defendant. Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. Gerald Bruce Lee, District Judge; Theresa C. Buchanan, Magistrate Judge. (1:12-cv-006..
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UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 12-2526
In Re: CHRISTOPHER J. FINA; CARLY ELIZABETH FINA,
Debtors.
----------------------------
RONALD BRADLEY; TERRI LEE BRADLEY; WILLIAM A. ERHART;
M. RYAN MADISON,
Plaintiffs – Appellants,
v.
CHRISTOPHER J. FINA,
Defendant – Appellee,
and
CARLY ELIZABETH FINA,
Defendant.
Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria. Gerald Bruce Lee, District
Judge; Theresa C. Buchanan, Magistrate Judge. (1:12-cv-00660-
GBL-TCB; 10-13678-RGM)
Argued: October 31, 2013 Decided: January 7, 2014
Before GREGORY, SHEDD, and KEENAN, Circuit Judges.
Affirmed by unpublished per curiam opinion.
Kevin Jerome Funk, DURRETTECRUMP PLC, Richmond, Virginia, for
Appellants. Richard George Hall, Annandale, Virginia, for
Appellee.
Unpublished opinions are not binding precedent in this circuit.
2
PER CURIAM:
This case involves the appellants’ violation of a
bankruptcy court’s discharge injunction. The bankruptcy court
imposed contempt sanctions against the appellants, and the
district court upheld the decision. Finding no error, we
affirm.
I.
The matter originated with a 2006 agreement between Ronald
and Terri Bradley and Christopher Fina. Fina, operating a
construction business under the name Fina Homes and Remodeling,
agreed to perform work on the Bradleys’ home. Shortly after the
work began, a city inspector discovered defects in the
construction and issued a stop work order on the project. After
attempts to resolve the situation failed, the Bradleys filed a
lawsuit in Minnesota state court against Fina and his father,
James Edward Fina, alleging several state law claims. Fina’s
father was named as a party because he was identified as an
owner/licensee of Fina Homes and Remodeling.
The Bradleys served James Fina with the complaint but were
unable to locate the younger Fina. On September 3, 2009, after
James Fina failed to answer the complaint, the Minnesota court
entered a default judgment against him in the amount of $40,865.
3
The Bradleys then discovered that James Fina was not a
viable source of recovery and began contemplating whether they
were entitled to relief under the Minnesota Contractors Recovery
Fund (“MCRF” or “Fund”). Created by Minnesota law, the MCRF is
designed to provide up to $50,000 to homeowners who have
suffered a loss caused by a licensed contractor’s failure to
adequately complete a construction project. Minn. Stat.
§ 326B.89, subd. 4. As a prerequisite to recovering from the
Fund, homeowners must obtain a court judgment against each
licensed member of the contracting company. Id. § 326B.89,
subd. 6. The statute notes that homeowners may seek
compensation regardless of whether the final judgment against
the contractor has been discharged by order of a bankruptcy
court.
Id. The Fund does not guarantee full payment of any
claim and does not cover attorneys fees or costs.
Id.
Instructions from the Minnesota Department of Commerce, which
administers the program, advise that in cases where the
contractor has filed for bankruptcy, the applicant “will need to
petition the Judge of the Bankruptcy Court to lift the automatic
stay and explain that your lawsuit is solely for the purpose of
obtaining restitution from the Recovery Fund and that you
understand that you will not be able to collect the judgment
from the contractor directly.”
4
The Bradleys hired an attorney, appellant M. Ryan Madison,
to assist them in their efforts to collect under the MCRF. They
filed an application with the Fund based on the default judgment
they had previously obtained against James Fina. However, the
state denied the Bradleys’ application because of their failure
to also obtain a judgment against Christopher Fina. Id.
In the meantime, Christopher Fina filed a petition under
Chapter 7 of the United States Bankruptcy Code in the Eastern
District of Virginia. As creditors, the Bradleys were notified
of the action, and they ceased efforts to collect against Fina
in light of the automatic stay provisions of the bankruptcy
petition. On August 19, 2010, the Bradleys received notice that
Fina’s debt to them had been discharged pursuant to an approved
bankruptcy plan.
Aware of the discharge, Madison contacted the Minnesota
Attorney General’s office for advice on whether he could still
pursue relief under the MCRF. Madison was advised to include
language in an amended complaint indicating that the sole
purpose of the action was to obtain a judgment against Fina in
order to seek recovery under the Fund. Id.
On October 12, 2010, the Bradleys filed an amended
complaint in Minnesota state court against the Finas. It sought
monetary damages totaling $58,377.50, as well as attorney’s fees
and costs. However, paragraph six of the amended complaint
5
stated that: “[t]his lawsuit is being filed solely for purposes
of collecting from the [MCRF] pursuant to Minnesota Statute
§ 326B.89.”
Fina retained new counsel in Minnesota to defend the suit
and filed an answer. Paragraph two of the answer admitted
paragraphs one through eight of the Bradleys’ amended complaint,
including the stipulation that the suit was brought solely for
purposes of collecting under the MCRF.
After the Bradleys hired appellant William Erhart to serve
as additional counsel, the parties engaged in settlement talks.
A tentative agreement was reached wherein Fina would allow the
Bradleys to obtain a default judgment against him in the amount
of $50,000 in order to enable them to pursue relief from the
Fund. In exchange, the Bradleys would drop Fina’s father from
the lawsuit. Erhart then received a letter from Fina’s
Minnesota counsel stating that the viability of the settlement
was in question due to objections from Fina’s bankruptcy counsel
in Virginia.
Upon Fina’s petition, the bankruptcy court reopened the
case, issued a show cause order against the appellants, and set
the matter for trial. The issue at trial was whether the
Bradleys and their counsel acted in contempt of the bankruptcy
court’s discharge injunction when they filed the amended
complaint.
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At the close of trial, the bankruptcy court ruled against
the appellants. The court found that they willfully violated
the discharge injunction because, despite the self-imposed
limitation in paragraph six of the complaint, the Minnesota
lawsuit subjected Fina to personal liability and imperiled his
right to an economic fresh start. The court ordered the
appellants to pay Fina $31,192.98, which included his attorney’s
fees and costs, as well as $4,000 for lost wages, lost vacation
pay, and pain and suffering. The district court affirmed the
decision of the bankruptcy court in all respects except for the
pain and suffering damages.
After the bankruptcy court issued its decision, it granted
a motion allowing the Bradleys to continue pursuing their claim
against Fina in Minnesota state court so that they might
eventually collect under the MCRF. The order granting the
motion contained several stipulations, including that the
Bradleys not seek to hold Fina personally liable for any amount.
II.
Section 524(a)(2) of the Bankruptcy Code provides that a
discharge in bankruptcy “operates as an injunction against the
commencement or continuation of an action, the employment of
process, or an act, to collect, recover or offset any such debt
as a personal liability of the debtor . . . .” 11 U.S.C.
7
§ 524(a)(2). Section 105 authorizes a bankruptcy court to hold
a party in civil contempt for violating an order of the court,
including a discharge order. See In re Barbour, 77 B.R. 530,
532 (Bankr. E.D. N.C. 1987). Most courts to have considered the
issue of contempt sanctions in this context have settled on a
two-part test, which we adopt: (1) whether the creditor
violated the injunction, and (2) whether he or she did so
willfully. See, e.g., In re Bennett,
298 F.3d 1059, 1069 (9th
Cir. 2002); In re Hardy,
97 F.3d 1384, 1390 (11th Cir. 1996); In
re Cherry,
247 B.R. 176, 187-88 (Bankr. E.D. Va. 2000).
As the language of § 524(a)(2) makes clear, a violation
occurs when the debtor is exposed to personal liability. The
willfulness prong requires only that the acts taken in violation
of the injunction be intentional. In other words, a good faith
mistake is generally not a valid defense. See In re Stempf, 37
F.3d 155, 159 (4th Cir. 1994) (evaluating willfulness in context
of an automatic stay violation and stating “[t]o constitute a
willful act, the creditor need not act with specific intent but
must only commit an intentional act with knowledge of the
automatic stay.”); In re
Cherry, 247 B.R. at 187 (“In a civil
contempt proceeding, the state of mind with which the contemnor
violated a court order is irrelevant and therefore good faith,
or the absence of an intent to violate the order, is no
defense.”).
8
The appellants argue that the stipulation in paragraph six
of the amended complaint, which states that the lawsuit was
filed solely for purposes of collecting from the MCRF, indicates
that the suit did not expose Fina to personal liability and
therefore did not violate the discharge order. The appellants
also contend that Fina’s answer admitting paragraph six is
dispositive because it shows that both parties understood the
suit not to affect Fina personally.
We disagree, holding that the courts below did not clearly
err in determining that the amended complaint exposed Fina to
the potential for personal liability on his discharged debt.
Mort Ranta v. Gorman, 721 F.3d 241, 250 (4th Cir. 2013) (stating
standard of review). First, the lawsuit sought a legal ruling
that Fina was responsible for the loss suffered by the Bradleys
–- the very same claim which gave rise to the discharged debt.
On its face, then, the lawsuit was an attempt to hold Fina
accountable for the underlying debt, despite the limitation in
paragraph six.
More importantly, the amended complaint sought damages in
excess of the $50,000 statutory cap available under the MCRF.
The Bradleys requested specific monetary damages of $58,377.50,
as well as attorney’s fees and costs, which are expressly not
available under the MCRF. Thus, even assuming that the
appellants’ intent at the time of filing the suit was only to
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collect from the Fund, if the Minnesota state court had entered
judgment in the amount requested in the amended complaint,
nothing but the appellants’ good word would prevent them from
later using the judgment to collect the additional sums from
Fina. At the very least, Fina would have an excess judgment
amount hanging over his head for the indefinite future. *
The purpose behind the discharge injunction is “to
eliminate any doubt concerning the effect of the discharge as a
total prohibition on debt collection effort, and to ensure that
once a debt is discharged, the debtor will not be pressured in
any way to repay it.” In re Cherry, 247 B.R. at 182 (internal
quotation marks omitted). The evidence in this case shows that,
in contrast, Fina was justifiably concerned that his discharged
debt remained a source of potential liability for him, at least
insofar as he might feel obligated to continue to defend himself
from future collection efforts. We are thus satisfied that the
courts below did not clearly err in ruling that the amended
complaint exposed Fina to personal liability in violation of the
discharge injunction.
*
The district court also correctly noted the legitimate
concern that Fina’s credit rating might suffer from an entry of
judgment against him, further imperiling his right to a fresh
economic start guaranteed by 11 U.S.C. § 524.
10
As to the second element of a contempt claim, the courts
below also rightly held that the appellants’ violation of the
discharge injunction was willful. As stated, the appellants’
intentions and their apparent attempts to comply with the law
are irrelevant. There is no dispute that the Bradleys and their
counsel were aware of the injunction at the time they filed the
amended complaint. This is sufficient to establish that the
violation was willful. See In re Stempf, 37 F.3d at 159; In re
Hardy, 97 F.3d at 1390 (“[T]he focus of the court’s inquiry in
civil contempt proceedings is not on the subjective beliefs or
intent of the alleged contemnors in complying with the order,
but whether in fact their conduct complied with the order at
issue.”) (quoting Howard Johnson Co. v. Khimani,
892 F.2d 1512,
1516 (11th Cir. 1990)).
Our decision does not mean that the Bradleys were without a
means to recover from the Fund once Fina filed his bankruptcy
petition. The Bradleys could have requested leave from the
bankruptcy court prior to filing the amended complaint. This
would have enabled the bankruptcy court to determine at the
outset whether the amended complaint sought to hold Fina
personally liable for any of the discharged debt, as well as
given the court the opportunity to impose limiting conditions
designed to protect Fina from post-judgment issues that might
negatively affect his rights. Indeed, the Bradleys, albeit too
11
late to save them here, eventually did this, and the bankruptcy
court allowed them to continue their efforts to recover from the
Fund. Such a step also accords with guidance from the Minnesota
Department of Commerce advising MCRF applicants to petition the
bankruptcy court before filing suit.
We also note that we are not persuaded by the appellants’
attempts to analogize this case with those that have allowed
suits nominally brought against debtors but only for the purpose
of collecting on a third-party insurer’s contractual obligation
on an underlying debt. This rule derives from 11 U.S.C.
§ 524(e), which provides that “discharge of a debt of the debtor
does not affect the liability of any other entity on, or the
property of any other entity for, such debt.” As is the case
with the MCRF, creditors are often required to obtain a judgment
against the debtor before collecting from an insurer. However,
this case differs in that there is no “liability of any other
entity on . . . [the] debt.” Unlike an insurer, the MCRF is
under no obligation, contractual or otherwise, to recompense the
Bradleys. Therefore, § 524(e) simply does not apply in this
case.
Additionally, the fact that the MCRF is not an insurer
relegated the cost of defending the lawsuit entirely to Fina.
Ordinarily, an insurance company is obligated to defend an
insured debtor, or at least will have an interest in doing so in
12
order to avoid a default judgment. Here, however, the absence
of a third-party insurer meant that Fina had to defend the
lawsuit himself. This came at a financial cost that interfered
with his right to a fresh economic start. See In re Gas
Transmission Corp., 219 B.R. 716 (S.D. W. Va. 1998) (holding
that a tort victim could not proceed against a debtor solely for
the purpose of recovering from the debtor’s insurer where the
debtor would be liable for defense of the suit).
In sum, we are not persuaded to accept the appellants’
argument that creditors may bypass the bankruptcy court’s
discharge injunction without first requesting that court’s
permission. As the bankruptcy judge noted in this case, he is
routinely asked to consider such modifications to discharge
injunctions, and he routinely grants them. The proper course
for the appellants was to first seek leave of the bankruptcy
court before pursuing a judgment against the debtor.
III.
For the reasons stated, we affirm the district court’s
judgment upholding the bankruptcy court’s decision.
AFFIRMED
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