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Bankruptcy Courts Must Advise Creditors on the Scope of Discharge Injunctions

| May 5, 2020 | Uncategorized |

In In re John G. Moser, BAP No. NC-19-1094-FBTa (April 15, 2020), the Ninth Circuit Bankruptcy Appellate Panel (“BAP”) held that the “return to the fray” doctrine requires bankruptcy courts to advise creditors on the scope of discharge injunctions.

The “return to the fray” doctrine is an equitable principle which states that if a debtor engages in litigation, receives a discharge in bankruptcy, and then voluntarily resumes the litigation, the discharge may no longer be applicable to certain fees and costs. By voluntarily resuming litigation post-petition, the debtor opens themselves up for consequences from the court for acting in an inequitable manner. Likewise, if a creditor believes that the debtor has “returned to the fray,” the creditor is advised to seek guidance from the court in order to avoid violating the discharge injunction, which would also result in consequences from the court.
In Moser, the debtor and the creditor entered into litigation for allegations regarding the misrepresentation of loans. Shortly after, the debtor filed a Chapter 7 petition and ultimately received a discharge. Several years later, the creditor, in an attempt to collect fees and costs from the debtor, filed an alter ego complaint in state court against the debtor. After much litigation, the creditor filed a complaint with the bankruptcy court asking whether the discharge injunction barred it from prosecuting certain claims against the debtor in state court because the creditor believed the debtor had “returned to the fray” of litigation. The bankruptcy court dismissed the creditor’s complaint and told the creditor to proceed at its own peril. The court held that it could not rule on the discharge issue without inappropriately speculating about the state court’s decisions. The BAP reversed and held that the bankruptcy court’s refusal to clarify the scope of the discharge injunction was an abuse of discretion. The BAP reasoned that declining to clarify the scope of the injunction left the creditor in an impossible position: it could either blindly proceed in state court and risk severe consequences in the bankruptcy court or play it safe and walk away from the potential recovery of large state court judgments.
The BAP determined that the “return to the fray” doctrine requires bankruptcy courts to advise creditors on the scope of discharge injunctions. Because the “return to the fray” doctrine is fact specific, Moser confirms that creditors may seek clarification from the bankruptcy court so they can avoid a the risk of a costly violation of a discharge injunction.
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