The debtor owned a company that was struggling financially. The debtor borrowed money from a friend (the lender) and signed a promissory note, which was secured by a security interest in construction equipment. The debtor told the lender he was considering filing for bankruptcy and that the debt would not be included. However, the debtor sold the construction equipment without giving any proceeds to the lender, who had a security interest in that equipment. Shortly after, the debtor filed for Chapter 7 bankruptcy and did not include the debt to his friend in his bankruptcy schedules nor did he inform his friend about the bankruptcy filing. After the discharge order, the debtor signed a second promissory note with the lender-friend. After seven years, the loan was not repaid in the full amount. The sued the debtor, alleging unjust enrichment and breach of contract. The debtor argued that the debt had been discharged in his previous bankruptcy case and initiated a proceeding against the lender, alleging the lender was in contempt of the discharge order. The bankruptcy court held that the debt had been discharged in the bankruptcy but did not hold the lender in contempt. The court also did not order the lender to pay attorney’s fees. The district court then affirmed.
In Bernhard v. Kull, No. 23-1358, 2024 WL 379468, 2024 U.S. App. LEXIS 2225 (3d. Cir. February 1, 2024) (unpublished opinion), the court affirmed the ruling of the district court and denied the debtor’s motion to hold the lender in contempt and to pay attorney’s fees. The standard for holding a creditor in contempt is when “there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.” Taggart v. Lorenzen, 587 U.S. 554, 557 (2019). The debtor argued that the bankruptcy court misapplied the law to the facts of this case and that the court should have relied on facts beyond his own actions of misleading the lender. The court concluded that the debtor’s own actions created a reasonable belief that the lender’s actions had been barred by the discharge order, affirming the holding of the district court. Note that the court stressed that the only issue on appeal was whether the friend was in contempt and should pay attorney’s fees.
By Ashley Boyce: [email protected]
Edited By Hayden Mariott: [email protected]