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“No-Discharge” Language in Loan is Not Enforceable

by | Jul 25, 2018 | Violations of Automatic Stay and Discharge Order | 0 comments

In the case of In re Chionis, the  Bankruptcy Appellate Panel of the Ninth Circuit Court of Appeals held that a creditor’s stated subjective belief that “no-discharge” language in a loan excepts the loan debt from a bankruptcy discharge does not constitute that creditor’s unawareness that the discharge is in fact applicable to the debt.

Pursuant to § 524(a)(2), a debtor’s bankruptcy discharge prohibits creditors from ANY attempts to collect pre-petition debts, UNLESS those debts were excepted from the discharge. There is no private right of action for a violation, so the party seeking to enforce must seek civil contempt sanctions.

A party seeking to demonstrate contempt in a discharge injunction context must prove by clear and convincing evidence that the alleged contemnor:

(1) knew the discharge injunction was applicable, and

(2) intended the actions which violated the injunction. (In re Zilog, Inc., 450 F. 3d).

In this case, debtors’ counsel warned the creditor, verbal and in writing, that the “no-discharge” language in the loan was invalid. The creditor never attempted to assert his legal theory to enforce the language in bankruptcy court, even though the bankruptcy notice advised him to file a complaint regarding the discharge, and the discharge itself invited a response.

The only evidence indicating the creditor’s belief he could ignore the discharge was his own ‘self-serving testimony’. The Court determined the creditor knew and understood the legal effect of the discharge order, yet relied on the no-discharge language to “work around the unequivocal legal impact of the discharge”.

The Court emphasized that it is possible to interpret the language from Zilog to preclude a ruling of willfulness WHENEVER any alleged contemnor testifies they did not subjectively believe, for whatever reason, that the discharge applied to them and their claim; However, such an expansive reading of Zilog is likely not appropriate since it would essentially render bankruptcy discharges ‘toothless’.



KEYWORDS: willful violation of discharge order, violation of discharge injunction, discharge injunction, discharge order, In re Zilog, sanctions, contempt

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