United States Court of Appeals
For the First Circuit
No. 03-1102
IN RE: JOHN J. DIAMOND, III,
Debtor,
JOHN J. DIAMOND, III,
Plaintiff, Appellant,
v.
PREMIER CAPITAL, INC. and
RANDALL L. PRATT,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Paul J. Barbadoro, U.S. District Judge]
Before
Torruella, Circuit Judge,
Stapleton,* Senior Circuit Judge,
and Howard, Circuit Judge.
Terrie Harman, with whom Watson, Bosen, Harman, Venci &
Lemire, PA and Elizabeth Cazden, were on brief, for appellant.
James S. LaMontagne, with whom Sheehan Phinney Bass + Green,
was on brief, for appellee Randall L. Pratt.
Michael S. Askenaizer, with whom Law Office of Michael S.
Askenaizer, PLLC, was on brief, for appellee Premier Capital, Inc.
October 9, 2003
*
Of the Third Circuit, sitting by designation.
TORRUELLA, Circuit Judge. John J. Diamond, III, debtor
and plaintiff below, appeals the district court's affirmance of the
bankruptcy court's dismissal of his complaint for failure to state
a claim. After careful review, we reverse the district court's
dismissal and remand for further proceedings.
I. Background
Diamond, a seventeen year veteran of the real estate
industry, filed a voluntary Chapter 13 bankruptcy petition in
October 2000 that he later converted to a Chapter 7 proceeding.
One unsecured creditor, Premier Capital, Inc. ("Premier"), filed an
adversary proceeding to deny Diamond a discharge pursuant to 11
U.S.C. § 727 on the basis that Diamond had concealed assets and
made false oaths.
While negotiating a settlement in the discharge
proceeding, Premier's attorney, Randall Pratt, allegedly told
Diamond's attorney that if the dischargeability issue was not
resolved in Premier's favor, he would take action at the New
Hampshire Real Estate Commission to revoke Diamond's real estate
broker's license. Diamond agreed to Premier's proposed settlement,
but the bankruptcy court rejected the settlement and denied
Premier's complaint on all grounds.
Diamond filed a bankruptcy court complaint against both
Premier and Pratt alleging that Pratt's statement was an improper
attempt to collect, assess, or recover a debt by using coercive
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negotiation tactics in violation of the Bankruptcy Code's ("Code")
automatic stay. See 11 U.S.C. § 362(a) (2000). Diamond sought
actual damages, costs, attorney's fees, and punitive damages.
Premier and Pratt moved to dismiss the complaint on the
grounds that Diamond failed to state a claim upon which relief
could be granted. The bankruptcy court refused to construe Pratt's
statement as a violation of the automatic stay, holding that
"lawyers have to be free to -- I can't say use every tactic, but
use tactics within bounds to try to negotiate the best deal for
their client." Accepting as true the facts alleged in Diamond's
complaint, the bankruptcy court concluded Pratt's statement did not
"go over the line" and dismissed the complaint. Diamond appealed
to the district court, which affirmed the dismissal. He now
appeals the dismissal to this Court.
II. Analysis
Diamond argues that Premier's statement that it would
seek revocation of his real estate license, which occurred during
negotiations to settle the adversary proceeding regarding
discharge, constituted coercive tactics in violation of the
automatic stay provision of the Bankruptcy Code. According to
Diamond, the district court erred in dismissing his complaint on
the basis that the statement could not be considered coercive. We
review the dismissal for failure to state a claim de novo, assuming
the truth of all well-pleaded material facts and indulging all
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reasonable inferences in favor of Diamond. Arruda v. Sears,
Roebuck & Co., 310 F.3d 13, 18 (1st Cir. 2002).
A. Settlement Negotiations Concerning Denial of Discharge
We begin with the issue of whether negotiations regarding
a § 727 challenge to discharge are ever permissible, or if such
negotiations should be considered a per se violation of the
automatic stay.1
"The automatic stay is one of the fundamental protections
that the Bankruptcy Code affords to debtors." Jamo v. Katahdin
Federal Credit Union (In re Jamo), 283 F.3d 392, 398 (1st Cir.
2002). Under 11 U.S.C. § 362(a)(6), the filing of a bankruptcy
petition operates as an automatic stay of "any act to collect,
assess, or recover a claim against the debtor that arose before the
commencement of the case." Section 727 is a specific exemption
from the automatic stay to allow for a challenge to discharge.
Whether settlement negotiations pertaining to a challenge
to discharge violate the automatic stay is an issue of first
impression in this Court. Recently, however, we held that, "while
the automatic stay is in effect, a creditor may engage in post-
petition negotiations pertaining to a bankruptcy-related
1
Although Diamond's brief presents arguments that the Court
should adopt a per se rule that negotiations about discharge
violate the automatic stay, we do not believe this is a matter in
dispute. At oral arguments and indeed in parts of his brief,
Diamond's attorney clearly stated that negotiations about a
discharge are allowed if such negotiations are not coercive. Thus,
Diamond and Premier agree on this issue.
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reaffirmation agreement so long as the creditor does not engage in
coercive or harassing tactics." Jamo, 283 F.3d at 399. We agree
with the parties that it makes sense to extend the Jamo rule and
adopt the majority approach allowing settlement negotiations in
§ 727 discharge proceedings. See generally Terrence L. Michael and
Michael R. Pacewicz, Settling Objections to Discharge in Bankruptcy
Cases: An Unsettling Look at Very Unsettled Law, 37 Tulsa L. Rev.
637 (2002) (reviewing the approaches to the settlement of § 727
proceedings and indicating that the majority of courts allow
settlement on a case-by-case basis). Absent controversy on the
point, we need not belabor the issue.
B. Coerciveness of the Threat
Having agreed with the parties that negotiations
regarding discharge are not per se violations of the automatic
stay, we turn to the settlement negotiations in this case to
determine whether Premier's statement regarding Diamond's real
estate license could have constituted impermissible "coercion or
harassment." Jamo, 283 F.3d at 399.2 A 12(b)(6) dismissal would
be appropriate only if "it appears beyond doubt that the plaintiff
can prove no set of facts in support of his claim which would
entitle him to relief." Medina-Claudio v. Rodríguez-Mateo, 292
2
Since the proposed settlement was rejected and Diamond
ultimately prevailed in the discharge proceeding, we need not
consider the merits of the settlement itself. The only issue here
is whether the alleged statement could constitute an impermissible
negotiation tactic.
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F.3d 31, 34 (1st Cir. 2002) (internal quotation and citation
omitted).
In evaluating the coerciveness of a statement made in the
course of negotiations, this Court has not enunciated a specific
test, but does look at the immediateness of any threatened action
and the context in which a statement is made. See Jamo, 283 F.3d
at 402 (citing In re Brown, 851 F.2d 81, 86 (3d Cir. 1988))
(considering creditor's references to foreclosure in context and
deciding they were not coercive because, rather than signaling
"immediate action," they indicated that foreclosure was not "on the
[creditor's] agenda").
Here, Premier's alleged statement could "reasonably be
deemed tantamount to a threat" of immediate action against Diamond.
Jamo, 283 F.3d at 402. Premier's statement placed Diamond between
a rock and a hard place. If he prevailed in the § 727 proceeding,
as he ultimately did, he would face an administrative proceeding
and quite possibly the revocation of his real estate license, the
source of his livelihood. If Premier prevailed in the § 727
proceeding, then Diamond would suffer because he would not obtain
a discharge of his debts. Thus, Diamond would lose either way. In
this situation, where an unsecured creditor's statement
functionally forces the debtor to treat a professional license as
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collateral, a dismissal on the pleadings is unacceptable because
the statement could be found to be coercive by a trier of fact.3
Premier presents several arguments against the
statement's coerciveness, but we find none of them convincing.
First, Premier argues that the statement, which was a one-time
communication,4 did not threaten immediate action because it was
conditioned on the outcome of the adversary proceeding. We cannot
agree. Filing of the administrative proceeding to have Diamond's
license revoked at the time of the statement likely would have
violated the automatic stay, thus making truly instantaneous action
to that effect risky if not impossible. See 11 U.S.C. § 362(a)(1)
(barring initiation of "administrative or other proceeding against
the debtor" once bankruptcy petition has been filed). In light of
3
In Jamo, the Court acknowledged that "a Chapter 7 debtor is not
inoculated against the necessity for making hard choices" and that
"[b]ankruptcy, as life itself, is a series of tradeoffs." Id. at
400. The Jamo Court also noted that "reaffirmation agreements are
consensual, and a debtor always has the option of walking away from
an unattractive proposal." Id. A debtor can either reaffirm his
secured debt and keep the collateral or surrender the collateral
and receive complete debt relief. Although it may appear at first
blush that Diamond would face a similar dilemma, we note that
Diamond's real estate license was not collateral for the unsecured
debt to Premier. Thus, Premier cannot put him in a position where
his license would be the functional equivalent to collateral, such
that he would choose to either keep it and repay his debt to
Premier or surrender it in exchange for a discharge.
4
The fact that the statement was made once may in fact weigh in
favor of coerciveness. If settlement occurred soon thereafter --
something that is unclear on this undeveloped record -- then it was
perhaps such a coercive statement that it only needed to be
communicated once.
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the procedural block to an immediate filing of revocation
proceedings, the statement threatened action that was as immediate
as possible, and sufficiently imminent to be potentially coercive.
Second, Premier argues that the communication could not
be considered coercive because it occurred between counsel during
an administrative proceeding, not reaffirmation. The fact that the
statement was made by Premier's attorney to Diamond's attorney does
not detract from its coerciveness. In Jamo, the statements at
issue were also between counsel, but the Jamo Court did not find
this fact relevant to the coerciveness determination. Id. at 402.
Similarly, we do not find it determinative that the statement was
made to Diamond's counsel rather than to Diamond himself,
particularly where counsel swiftly communicated the threat to his
client. Although we doubt Premier's proposition that statements
made in an adversary context should be given greater leniency, we
leave that issue for the district court's consideration on remand.
Finally, Premier would have us find that it was
unreasonable for Diamond to perceive the threat as coercive, and
further that Diamond's complaint is insufficient because it failed
to allege Premier lacked a good faith basis for a complaint to the
Real Estate Commission.5 If the threat was an empty one -- in
5
Premier relies on the New Hampshire Rules of Professional
Conduct ("New Hampshire Rules") in its argument that Diamond had to
allege lack of a good faith basis, and urges this Court to turn to
the Rules as authority for what constitutes coercive behavior.
Although the district court's order referred to the NH Rules and
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other words if it lacked a good faith basis -- we do not think that
Premier would have made it at all. Further, Premier cannot have it
both ways, arguing it had a good faith basis for making the threat
while simultaneously claiming that the threat was an empty one.
We conclude that the alleged statement could be found
coercive, and Diamond could indeed prove a set of facts -- that
Premier made the statement and that it coerced Diamond to settle --
that would entitle him to relief. We note, however, that because
Diamond would have had to defend against the § 727 discharge
proceeding regardless of the statement's coerciveness, his damages
are unclear. The remedy issue is one the district court should
examine more closely on remand.
III. Conclusion
For the foregoing reasons, we reverse the dismissal of
Diamond's complaint and remand to the district court for further
proceedings consistent with this opinion.
Reversed and remanded.
the American Bar Association's Model Rules of Professional Conduct
("Model Rules"), it did so only as an illustration of what
reasonable people might view as coercive. No authority is
presented to support use of the New Hampshire Rules or the Model
Rules as the guideposts for determining if a statement made during
settlement negotiations is coercive. We need not decide here if
such an approach should be adopted in cases involving alleged
violations of the automatic stay.
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