Bankruptcy
PHH Mortgage Corporation v. Guthrie
Date: Feb. 21, 2024
Issue: Whether the Bankruptcy Code preempts state-law claims premised on alleged efforts to collect a debt in violation of the bankruptcy court’s discharge injunction.
Case Summary: The American Bankers Association filed a coalition amicus brief urging the U.S. Supreme Court to examine whether the Bankruptcy Code preempts state-law claims premised on alleged efforts to collect a debt in violation of the bankruptcy court’s discharge injunction.
In 2009, Marc Guthrie and his then-wife Tonia took out a loan to buy a home in Jacksonville, North Carolina. Following their separation, Marc Guthrie filed for a Chapter 13 bankruptcy. After their divorce, a North Carolina bankruptcy court confirmed Guthrie’s Chapter 13 bankruptcy plan. Under the plan, Guthrie had to make 60 monthly payments of $1,825 and would continue living at the property. In 2013, Guthrie relocated from the property to base housing. Guthrie moved the bankruptcy court to allow surrender of the property and modification of the bankruptcy plan. The court granted the motion and reduced his payment obligations. Following a long chain of assignments, PHH Mortgage Corporation obtained its interest in the property but did not foreclose on it after Guthrie surrendered it in 2013. In 2016, after Guthrie made all plan repayments, the bankruptcy court issued an order discharging Guthrie’s debt obligation.
In 2020, Guthrie sued PHH alleging it improperly contacted him attempting to collect the debt and misreported his credit status. Guthrie claimed PHH “harassed him” by placing collection telephone calls in connection with the loan weekly. The bankruptcy court previously sent the discharge order to PHH. When a debt is discharged, the bankruptcy court enters a discharge injunction that prevents creditors from seeking to obtain payment. Guthrie alleged state and federal claims against PHH. The district court granted PHH’s motion for summary judgment in full and denied Guthrie’s motion for summary judgment.
Guthrie appealed the district court’s decision on five of his ten claims: three claims were state-law claims—negligent infliction of emotional distress (NIED), intentional infliction of emotional distress (IIED) and violations of the North Carolina Debt Collection Act (NCDCA); two claims were federal—violations of the Fair Credit Reporting Act (FCRA) and the Telephone Consumer Protection Act (TCPA). In a 3-0 decision, a Fourth Circuit panel vacated the state claims, concluding the NIED, IIED and NCDCA violations are not preempted by federal bankruptcy law. The panel also affirmed the TCPA claim. PHH petitioned the U.S. Supreme Court to review the Fourth Circuit’s decision.
ABA filed an amicus brief supporting PHH, making three main arguments. First, ABA argued the Fourth Circuit’s decision sidesteps basic principles of federal law. The Constitution grants Congress the power to establish uniform laws on the subject of bankruptcies throughout the United States. That grant includes the power to discharge the debtor from his contracts and legal liabilities. Under the Bankruptcy Code, a discharge takes the form of an order that operates as an injunction against any future attempts to collect discharged debt. The judge that has issued an injunction is the judicial officer that is “solely responsible” for identifying, prosecuting, adjudicating and sanctioning any violation of that injunction. In effect, allowing a debtor to pursue a state-law claim premised on a violation of a discharge order offends these basic principles.
Second, ABA argued the Fourth Circuit’s decision will have serious practical consequences if allowed to stand. Permitting state-law claims for violation discharge orders threatens to impose onerous and unpredictable liability on creditors, even where they act reasonably. Federal law is clear on the consequences of violating a discharge injunction, and creditors are familiar with that body of law and used to conforming their conduct to its requirement. Even still, the Fourth Circuit’s approach would upend the state of affairs and introduce uncertainty into debt collection and foreclosure. In addition, ABA argued allowing state law claims for violating a bankruptcy court’s discharge injunction would lower the standard for finding the existence of a violation and also create inconsistency across different states.
ABA also emphasized that the uncertainty and unpredictability spawned by the Fourth Circuit’s approach would have pernicious practical effects. If the U.S. Supreme Court does not step in to align the Fourth Circuit with other circuits, the large number of discharge orders issued annually in numerous states could become potential sources of creditor liability.
Bottom Line: Guthrie’s response is due March 22, 2024.
Documents: Brief
