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The Importance of Defining the Identity of the Debtor: How a Creditor Got Away with Being Nasty and Vulgar

A recent decision by the United States Bankruptcy Court for the Eastern District of Wisconsin highlights the importance of knowing the identity of the debtor liable on a debt. In this case, the Court held that the creditor did not violate the discharge injunction under section 524 of the Bankruptcy Code when it used aggressive means to contact two individuals who received a discharge in bankruptcy but were not the debtor liable on the underlying debt. Rather, the debt was owed by a limited liability company (LLC) owned by the individuals.

In Myers v Asta, et al., the debtors, Doug and Carol Myers, asserted that the Asta Trust violated the discharge injunction under section 524 of the Bankruptcy Code by attempting to collect a debt from them after they received their discharge. The discharge injunction provides that a "discharge in a case under this title–(2) operates as an injunction against the commencement or continuation of an action, employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor..."

The facts of the case are relatively straightforward. The debtors were the sole members of an LLC known as Bayshore Electric, which operated an electrical contracting business. Bayshore borrowed $50,000 from the Asta Trust evidenced by a promissory note. The note was not guaranteed by the debtors. Bayshore stopped making payments under the note at which time the creditor initiated efforts to collect the debt. Shortly thereafter, the Myers filed a Chapter 7 bankruptcy case and received a discharge. Asta was not listed as a creditor in the case.

After the Myers filed for bankruptcy, the Asta Trust made numerous attempts to collect the debt. In addition to various dunning calls, letters and emails, the debtors alleged that the creditor sent:

  • A message via Facebook stating "Boy, life must be great when you can steal $55,000.00 from a 'friend' and not pay it back yet fix up your basement, get a new car, have a boat... I hate to see what you do with your enemies!!!!!"
  • An email to clients of Bayshore stating, "Your electrician Doug Myers robbed my wife and me of $55,000... Also after he filed bankruptcy, he finished the basement of his house, went boating all summer and bought his wife a new car. Classy guy you have on your staff."
  • An email to debtors stating, "Did I buy your wife's convertible from the money you robbed from me?"

The debtors even contacted the police department to file a complaint against the creditor alleging the creditor was harassing them, following them and yelling obscenities at them in public.

The actions taken by the creditor were so egregious that the Court stated that the "communications from the [creditor] can only be charitably described as nasty and, in several instances, vulgar in their contents."

Notwithstanding the tasteless comments, the  Court found that the creditor had not violated the discharge injunction because the demand for payment made by the creditor did not involve a debt due from either of the debtors personally. Since the Court found the debt was owed solely by Bay Electric and since a manager or member of an LLC is not liable for an LLC's debts, the creditor was not attempting to collect a debt owed by the debtors. Thus, because there was no obligation from the Myers individually, there was no "claim" in the Myers' bankruptcy case to be discharged.

The case highlights the importance of understanding whether a debt is an individual debt or a corporate debt, as that will determine who is entitled to the benefits of the discharge injunction (and the automatic stay). As a side note, the creditor's egregious conduct did not go unnoticed–the Court commented that while the creditor did not violate the discharge injunction, the Myers may have a state law claim for harassment that could be brought in the appropriate forum.

© 2022 Much Shelist, P.C.National Law Review, Volume II, Number 238
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About this Author

Jeff Schwartz, bankruptcy attorney, Much Shelist law firm
Principal

Jeffrey M. Schwartz, a Principal in the firm's Creditors' Rights, Insolvency & Bankruptcy group, focuses his practice on the representation of secured and unsecured creditors in business reorganizations under Chapter 11 of the Bankruptcy Code and in out-of-court restructurings. He also represents buyers and sellers of financially distressed companies and distressed debt, and regularly advises lenders, creditors' committees, indenture trustees, debtors and other parties involved in bankruptcy-related matters. 

312-521-2626
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