Diamond v. Premier Capital, Inc.

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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