Discharge injunction not defied by lender contacts.


Byline: Barry Bridges

Post-bankruptcy discharge correspondence from a mortgage lender to a borrower issued while the parties were in mediation to avoid foreclosure were not attempts by the creditor to collect a debt in violation of 11 U.S.C. 524(a)(2)'s discharge injunction, according to the 1st Circuit Bankruptcy Appellate Panel.

That determination applied equally to communications related to the impending foreclosure, such as insurance disclosures and a "right to cure" notice, that were sent when loan modification negotiations fell through.

The BAP emphasized that while the Bankruptcy Code's discharge injunction does not enjoin a secured creditor from recovering on valid pre-petition liens, which typically "ride through bankruptcy unaffected," a creditor may not pursue in personam relief against the debtor.

The question in the lawsuit filed by the homeowner, Gregory M. Kirby, therefore centered on whether the mortgage company's correspondence improperly "coerced or harassed" Kirby to pay a debt in violation of the injunction.

Writing for a three-judge panel, Judge Elizabeth D. Katz affirmed the Maine Bankruptcy Court in answering that question in the negative.

"We conclude, based on the totality of the circumstances surrounding the post-discharge communications together with the substance of those communications, that Mr. Kirby did not establish that the correspondence in question, whether viewed individually or cumulatively, coerced or harassed him to pay a discharged debt," Katz wrote.

The 32-page decision is Kirby v. 21st Mortgage Corporation, Lawyers Weekly No. 03-008-19. The full text of the ruling can be found here.

Fact-intensive inquiry

Several local bankruptcy attorneys weighed in on the import of the ruling.

Pawtucket's John S. Simonian said it would be a leap for most lawyers to view the communications at issue as problematic.

"It would never cross my mind to seek monetary damages for these types of boilerplate notices," he said. "Some were required by state law, and others were helpful to the homeowner, who was seeking a loan modification after his discharge."

However, one piece of correspondence giving Simonian pause was a "cash-for-keys" letter, which said that under certain conditions the mortgage company would not seek a deficiency judgment between the sale price of the foreclosed property and its fair market value.

"The panel determined that, even if it was admissible, the letter did not violate the discharge injunction...

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