Court Decisions

An unsecured creditor's statement during settlement negotiations threatening to seek to revoke a debtor's real estate broker's license if a Bankruptcy Code Section 727 discharge proceeding was not resolved in its favor could be found to be coercive and a violation of the automatic stay, the U.S. Court of Appeals for the First Circuit held Oct. 9 (Diamond v. Premier Capital Inc. (In re Diamond), 1st Cir., No. 03-1102, 10/9/03).

Judge Juan R. Torruella concluded that where a "statement functionally forces the debtor to treat a professional license as collateral, a dismissal on the pleadings is unacceptable because the statement could be found to be coercive by a trier of fact." He reversed the dismissal of the debtor's complaint and remanded the case to the district court.

Coercive Negotiation Tactics Alleged.

Debtor John J. Diamond III, a real estate broker, filed a Chapter 13 petition in October 2000 that he later converted to a Chapter 7 proceeding. Premier Capital Inc., an unsecured creditor, brought an adversary proceeding seeking to deny the debtor a discharge under Section 727 on the basis that the debtor had concealed assets and made false oaths.

While negotiating a settlement of the adversary proceeding, Premier's attorney, Randall Pratt, allegedly told the debtor's attorney that if the dischargeability issue was not resolved in Premier's favor, he would take action at the New Hampshire Real Estate Commission to revoke the debtor's real estate broker's license. The debtor agreed to Premier's proposed settlement, but the bankruptcy court rejected the settlement and denied Premier's complaint on all grounds.

The debtor filed a complaint in bankruptcy court against Premier and Pratt alleging that Pratt's statement was an improper attempt to collect, assess, or recover a debt through the use of coercive negotiation tactics in violation of the automatic stay. The debtor sought actual damages, costs, attorney's fees, and punitive damages. Premier and Pratt moved to dismiss the complaint on the grounds that the debtor failed to state a claim upon which relief could be granted. The bankruptcy court concluded that Pratt's statement did not "go over the line" and dismissed the complaint. The debtor appealed, and the district court affirmed. The debtor further appealed.

Issue of First Impression.

"Whether settlement negotiations pertaining to a Section 727 challenge to discharge violate the automatic stay is an issue of first impression in this Court," Torruella said. However, he said, the First Circuit has recently held that "while the automatic stay is in effect, a creditor may engage in post-petition negotiations pertaining to a bankruptcy-related reaffirmation agreement so long as the creditor does not engage in coercive or harassing tactics," quoting Jamo v. Katahdin Federal Credit Union (In re Jamo), 283 F.3d 392 (2002)(13 BBLR 548, 6/14/01).

Torruella said it makes sense to extend the Jamo rule and adopt the majority approach allowing settlement negotiations in discharge proceedings. Next, he considered whether Premier's statement regarding the debtor's real estate license constituted impermissible "coercion or harassment."

"In evaluating the coerciveness of a statement made in the course of negotiations, this Court has not enunciated a specific test, but does look at the immediateness of any threatened action and the context in which a statement is made," Torruella said. Premier's alleged statement could "reasonably be deemed tantamount to a threat" of immediate action against the debtor, he said.

'A Rock and a Hard Place.'

"Premier's statement placed Diamond between a rock and a hard place," Torruella said. If he prevailed in the discharge proceeding, "he would face an administrative proceeding and quite possibly the revocation of his real estate license, the source of his livelihood." If Premier prevailed in the discharge proceeding, then the debtor would not obtain a discharge of his debts. "Thus, Diamond would lose either way," the judge said. "In this situation, where an unsecured creditor's statement functionally forces the debtor to treat a professional license as collateral, a dismissal on the pleadings is unacceptable because the statement could be found to be coercive by a trier of fact."

Torruella rejected Premier's arguments that the statement did not threaten immediate action because it was conditioned on the outcome of the adversary proceeding, and that the communication was not coercive since it was made to the debtor's counsel rather than the debtor himself. The judge concluded that "the alleged statement could be found coercive, and Diamond could indeed prove a set of facts--that Premier made the statement and that it coerced Diamond to settle--that would entitle him to relief."

The judge said the debtor's damages are unclear, noting that he would have had to defend against the discharge proceeding regardless of the coerciveness of the statement. He said the district court could examine the remedy issue more closely on remand.

Senior Judge Walter K. Stapleton of the U.S. Court of Appeals for the Third Circuit, sitting by designation, and Judge Jeffrey Howard joined the opinion.

Terrie Harman of Watson, Bosen, Harman, Venci & Lemire, Portsmouth, N.H., represented the debtor. James S. LaMontagne of Sheehan Phinney Bass + Green, Manchester, N.H., represented Pratt. Michael S. Askenaizer, Nashua, N.H., represented Premier.