Paul v. Iglehart

FILED
United States Court of Appeals
Tenth Circuit

July 28, 2008
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

In re:

RUDY LESLIE PAUL;
CAROL CHRISTENSEN PAUL, No. 07-1395

Debtors.

RUDY LESLIE PAUL;
CAROL CHRISTENSEN PAUL,

Plaintiffs-Appellees,

v.

TAMMY IGLEHART,

Defendant-Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
(D.C. Nos. 05-cv-02047-WYD & 05-cv-02266-WYD)

Submitted on the briefs: *

Robert T. Lego, Lego Law Firm, Englewood, Colorado, for Appellant.

*
After examining the briefs and appellate record, this panel has determined
unanimously that oral argument would not materially assist the determination of
this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is
therefore ordered submitted without oral argument.
David S. Oppenheim, David S. Oppenheim & Associates, P.C., Centennial,
Colorado, for Appellees.

Before McCONNELL and ANDERSON, Circuit Judges, and BRORBY, Senior
Circuit Judge.

ANDERSON, Circuit Judge.

This case concerns the protective scope of the “discharge injunction”

created by 11 U.S.C. § 524(a)(2), which bars efforts to collect personal debts

from debtors after they have been discharged in bankruptcy. 1 In an adversary

proceeding brought by former debtors Rudy and Carol Paul, the bankruptcy court

held that Tammy Iglehart violated the discharge injunction when, in state court

litigation against a corporate business she jointly owned with Rudy Paul, she

(1) sought discovery from the Pauls regarding the assets and operation of the

business and obtained sanctions when they did not comply, and (2) supplemented

her pleadings to allege claims for post-petition wrongdoing by Rudy Paul in

connection with the wind-up of the business. Ms. Iglehart contends that she did

nothing to violate the discharge injunction, since (1) the discovery was for the

entirely legitimate purpose of obtaining information in support of her recovery

1
The relevant text of the statute reads: “A discharge in a case under [the
Bankruptcy Code] – operates as an injunction against the commencement or
continuation of an action, the employment of process, or an act, to collect,
recover or offset any [discharged] debt as a personal liability of the debtor.”

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against the corporation (which never filed bankruptcy itself and was not part of

the Pauls’ bankruptcy estate 2), and expressly excluded inquiry into any discharged

claims against the Pauls, and (2) the claims she later added against Rudy Paul

were unaffected by the discharge injunction, which does not reach non-discharged

claims arising post-petition. We conclude that neither the bankruptcy court’s

findings, nor the facts of record on which they are based, demonstrate that

Ms. Iglehart’s facially permissible actions violated the discharge injunction.

We therefore reverse.

FACTUAL BACKGROUND

In 1997, Ms. Iglehart filed suit in state (Colorado) court asserting several

claims arising out of her connection with Peak Sports & Spine Physical Therapy,

P.C. (Peak Sports), of which she had been an owner, officer, and employee.

Some of these claims were asserted against Peak Sports itself, while others were

asserted against individuals, including Rudy Paul. Sometime later, Ms. Iglehart

added a claim against Carol Paul for defamation. In May 2001, the Pauls jointly

filed for bankruptcy under Chapter 7, staying proceedings against them in the

state suit, which had stalled for various reasons. In September 2001, Ms. Iglehart

obtained an entry of default against Peak Sports in the state suit, with damages

left to be determined. A month later, the Pauls’ bankruptcy proceeding was

2
Indeed, the Pauls’ bankruptcy trustee even abandoned their stock interest in
the corporation. App. Vol. 2 at 178-79.

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favorably terminated with an order discharging them from their pre-petition debts,

which included the claims Ms. Iglehart had asserted against them in state court.

Rudy Paul continued to oversee the wind-up of Peak Sports, which was dissolved

the next year.

In 2003, Ms. Iglehart sent notices of Colorado depositions to the Pauls

(who had moved to Wisconsin) in the state suit, which proceeded in substance

against Peak Sports with the Pauls left as nominal defendants. 3 She contended

that the Pauls still had to comply with discovery obligations, including traveling

to Colorado for deposition. At the same time, however, she acknowledged, with a

specific reference to § 524(a)(2) on the face of the deposition notices, that her

discovery efforts could not involve the Pauls’ own discharged pre-petition

liabilities. When the Pauls failed to appear, she moved to enforce their discovery

obligations through sanctions. The state court imposed penalties of $2,500 on

each of the Pauls and another on Rudy Paul as president of Peak Sports, all of

which would be voided if they appeared for a make-up deposition. The court also

imposed a similar penalty on Rudy Paul for failing to respond to requests for

documents relating to Peak Sports.

3
The Pauls had not sought a formal dismissal to remove themselves from the
case. Indeed, they subsequently relied on their continued presence in the case to
afford them standing to move for the entry of a default judgment against Peak
Sports.

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 The Pauls sought reconsideration of the sanctions, arguing that their

personal immunity from liability on the (pre-petition) claims asserted in the

litigation, by virtue of the discharge injunction, nullified their formal status as

parties for purposes of discovery obligations. The state court ultimately agreed,

holding that discovery could be obtained from them only in a manner appropriate

for non-resident non-parties. As Ms. Iglehart had not proceeded in this manner,

the court vacated the sanctions it had previously imposed. Nothing in the record,

however, suggests that the state court found any impropriety in the substance of

the discovery Ms. Iglehart sought from the Pauls—which she has consistently

maintained, with inherent legitimacy, was directed toward her claims against Peak

Sports (and, for a time, other co-defendants), in particular to obtain information

about corporate assets that might be traced to satisfy those claims. Indeed, the

state court plainly countenanced further efforts for such discovery from the Pauls,

limited solely as to the procedure to be followed.

The Pauls also brought this adversary proceeding in the bankruptcy court,

alleging that Ms. Iglehart’s conduct in the state case violated the discharge

injunction. In the meantime, Ms. Iglehart supplemented her state pleadings to add

claims against Rudy Paul for post-petition wrongdoing in connection with the

wind-up of Peak Sports. Liabilities for post-petition conduct are not discharged, 4

4
A chapter 7 bankruptcy discharges “all debts that arose before the date of
the order for relief.” 11 U.S.C. § 727(b). Under 11 U.S.C. § 301, “[t]he filing of
(continued...)

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and thus do not implicate the discharge injunction. Nevertheless, the bankruptcy

court inquired into the new claims, as well as Ms. Iglehart’s discovery efforts, at

a hearing on the Pauls’ adversary complaint, and ruled from the bench that the

discharge injunction had been violated in both respects. At the court’s request, its

lengthy oral ruling was summarized in an order prepared by the Pauls’ counsel.

As for prospective relief, the court enjoined “any further pursuit of the [Pauls] in

the State Court matter,” App. Vol. 1 at 53, including, unqualifiedly, any “further

efforts to depose [them] or submit to them requests for production of corporate

documents,” id. Vol. 2 at 355. As for sanctions, the court conducted additional

proceedings and ultimately ordered Ms. Iglehart personally to pay the Pauls over

$15,000 in fees and costs. On reconsideration, the bankruptcy court held to its

decision, which the district court later affirmed. This appeal followed.

GOVERNING LAW – THREE KEY PRINCIPLES

We turn now to the law governing enforcement of discharge injunctions.

There are three basic principles that together point to the problem raised by this

appeal.

4
(...continued)
a petition under Chapter 7 constitutes ‘an order for relief.’” Boeing N. Am., Inc.
v. Ybarra (In re Ybarra), 424 F.3d 1018, 1022 (9th Cir. 2005); see 2 Collier on
Bankruptcy ¶ 301.01, at 301-4 (15th ed. rev. 2008). Thus, “[d]ebts arising after
the bankruptcy case has commenced are not discharged.” In re Rostek, 899 F.2d
694, 696 (7th Cir. 1990); see River Place E. Housing Corp. v. Rosenfeld (In re
Rosenfeld), 23 F.3d 833, 836 (4th Cir. 1994); Bush v. Taylor, 912 F.2d 989, 993
(8th Cir. 1990) (en banc).

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 A. The Terms of § 524(a)(2) Control

Under 11 U.S.C. § 105(a), bankruptcy courts have the equitable power to

enforce and remedy violations of substantive provisions of the Bankruptcy Code,

including in particular the discharge injunction in § 524(a)(2). Walls v. Wells

Fargo Bank, N.A., 276 F.3d 502, 506-07 (9th Cir. 2002) (discussing Bessette v.

Avco Fin. Servs., Inc., 230 F.3d 439, 444 (1st Cir. 2000)); see Cox v. Zale Del.,

Inc., 239 F.3d 910, 916-17 (7th Cir. 2001); see also Mountain Am. Credit Union

v. Skinner (In re Skinner), 917 F.2d 444, 447 (10th Cir. 1990) (same holding as to

bankruptcy court powers to sanction violation of automatic stay). But that

equitable power cannot be exercised contrary to or in excess of the terms of the

substantive Code provision being enforced. 1 Norton Bankruptcy Law & Practice

§ 13:3 (3d ed. 2008); see, e.g., Alderete v. Educ. Credit Mgmt. Corp. (In re

Alderete), 412 F.3d 1200, 1207 (10th Cir. 2005); Landsing Diversified Props.-II

v. First Nat’l Bank & Trust Co. (In re W. Real Estate Fund, Inc.), 922 F.2d 592,

601 (10th Cir. 1990), op. modified on other grounds, 932 F.2d 898 (10th Cir.

1991). Thus, a bankruptcy court may sanction a party for violating the discharge

injunction only if the party took some action prohibited by § 524(a)(2)—i.e., an

action “to collect, recover or offset any [discharged] debt . . . of the debtor.”

This may seem an obvious point when stated in the abstract, yet it can

easily be overlooked in the course of a bankruptcy court’s practical effort to

support a debtor’s fresh start following discharge. A host of circumstances can

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affect a former debtor’s financial comeback. But the concept of “fresh start” is

just a general gloss on the purpose of § 524(a); it is not a license for courts to go

beyond the particular prohibitions specified in the statute to shield debtors from

adverse contingencies. However well-intentioned the effort in trying to facilitate

a debtor’s fresh start, a bankruptcy court may not enjoin and sanction a creditor

with respect to conduct that does not violate § 524(a).

B. § 524(a)(2) Permits Suits in which Debtors are Nominal Defendants
and Debtors may be Required to Comply with Discovery

Although § 524(a)(2) prohibits actions brought to collect a discharged debt

from the debtor, it permits suits—even those brought to collect on debts a debtor

has discharged—that formally name the debtor as a defendant but are brought to

collect from a third party. In re W. Real Estate Fund, Inc., 922 F.2d at 601 n.7;

accord Houston v. Edgeworth (In re Edgeworth), 993 F.2d 51, 54 & n.6 (5th Cir.

1993) (citing cases); Hendrix v. Page (In re Hendrix), 986 F.2d 195, 197 (7th Cir.

1993) (same). And requiring a debtor to bear such collateral burdens of litigation

as those relating to discovery (as opposed to the actual defense of the action

and potential liability for the judgment), does not run afoul of § 524(a)(2).

Walker v. Wilde (In re Walker), 927 F.2d 1138, 1143-44 (10th Cir. 1991);

In re Edgeworth, 993 F.2d at 54; Simpson v. Rodgers (In re Rodgers), 266 B.R.

834, 837 (Bankr. W.D. Tenn. 2001) (citing cases); In re Doar, 234 B.R. 203, 206

(Bankr. N.D. Ga. 1999) (same). As one court succinctly put it: “The Debtor,

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whether she has received a discharge or not, is not relieved of the responsibility

she has, as do all citizens, to testify at trial and/or participate in discovery as a

witness.” In re Doar, 234 B.R. at 206 (“reject[ing] the Debtor’s argument that

requiring her to participate in discovery in [collateral] state court litigation will

impermissibly interfere with her ‘fresh start’”). It is worth adding, since much of

the criticism our bankruptcy court leveled at Ms. Iglehart concerned what it saw

as the inept and burdensome manner in which she sought discovery in her state

suit, that if a creditor pursues discovery against a nominal-defendant debtor in a

suit otherwise permitted by § 524(a)(2), the court hearing that suit is the

appropriate authority to address the manner in which discovery is conducted

(as the state proceedings here illustrate). As a general matter, it is both

inappropriate and unnecessary for a bankruptcy court to oversee the conduct of

litigation in other courts.

C. Objective-Coercion Principle

This third principle operates as an overarching exception to what we have

said so far. Notwithstanding the facial permissibility of a lawsuit or some other

action taken by a creditor vis a vis a discharged debtor, a violation of § 524(a)(2)

may still be found if the debtor proves “the creditor acted in such a way as to

‘coerce’ or ‘harass’ the debtor improperly,” i.e., so as to obtain payment of the

discharged debt. Pratt v. Gen. Motors Acceptance Corp. (In re Pratt), 462 F.3d

14, 19 (1st Cir. 2006); see In re Schlichtmann, 375 B.R. 41, 95-97

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(Bankr. D. Mass. 2007) (applying Pratt with extensive discussion); see also In re

Jones, 367 B.R. 564, 570 & n.3 (Bankr. E.D. Va. 2007); 3 Norton Bankruptcy

Law & Practice 3d § 58:5, at 58-24 & n.13 (noting that discharge injunction

precludes otherwise permissible actions against third parties if “designed to

collect the debt from the discharged debtor”). The inquiry is objective; the

question is whether the creditor’s conduct had the practical, concrete effect of

coercing payment of a discharged debt, and bad faith is not required. In re Pratt,

462 F.3d at 19; In re Schlichtmann, 375 B.R. at 95. By the same token, the

presence of some other procedural impropriety or error in connection with the

creditor’s action will not give rise to a violation of the discharge injunction if the

objective effect is not to coerce payment of a discharged debt:

[T]he discharge prohibits prepetition creditors only from collecting
their prepetition debts. It is not [a] lifelong shield against other
acts–including . . . assertions of claims, and litigation–by those same
creditors, even where these other acts are undertaken wrongfully and
in bad faith. If an act is not in fact one to collect or enforce a
prepetition debt, then whatever its faults, it is not a violation of the
discharge, even though undertaken by the holder of a discharged
debt. [5]

In re Schlichtmann, 375 B.R. at 97 (emphasis added). Accordingly, a debtor may

establish that a creditor who has taken an action not overtly prohibited by

5
Again, if a creditor’s conduct in a non-bankruptcy case involves some
impropriety or error outside the limited scope of the discharge injunction, the
authority to evaluate and, if appropriate, to correct and/or sanction that conduct
properly lies with the court hearing that case. The discharge injunction does not
make bankruptcy courts overseers of subsequent litigation involving the debtor.

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§ 524(a)(2) nevertheless violated the discharge injunction, but to do so the debtor

must “prove not merely that [the creditor’s] act is not what it appears to be, but

that the act in question is one to collect a discharged debt in personam.” Id.

To flesh out this principle we discuss two examples: one case (Pratt) in

which objective coercion was found, and another (Schlichtmann) in which it was

not. In Pratt, a creditor held a lien on the debtors’ car for the purchase loan. The

lien remained enforceable in rem following discharge of the underlying debt in

bankruptcy. 6 State law allowed the creditor to refuse to release the lien (absent

payment of the loan), which prevented debtors from junking the worthless car.

The creditor also legitimately refused to accept a surrender of the car under

bankruptcy law. Neither act violated § 524(a), but the combined effect coerced

the debtors into re-assuming the loan debt they had previously discharged:

“confronted with the grim prospect of retaining indefinite possession of a

worthless vehicle” and incurring “attendant costs of possessing, maintaining,

insuring and/or garaging the vehicle,” debtors had no choice but to reaffirm the

discharged debt so that the creditor would release its lien and thereby enable them

to dispose of the car. In re Pratt, 462 F.3d at 19-20. In finding a violation of

§ 524(a), the court did not look for bad faith, but its objective inquiry did take

into account the lack of any reason other than coercion for the creditor’s action:

6
The discharge injunction prohibits efforts to collect a debt “as a personal
liability of the debtor,” 11 U.S.C. § 524(a)(2) (emphasis added), and thus in rem
rights are not affected. 3 Norton Bankruptcy Law & Practice 3d § 58:4.

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the court noted “there was no reasonable prospect that the automobile would

generate future sale proceeds (to which the [creditor’s] lien automatically would

have attached[)]” and hence “the legitimate raison d’etre for the [creditor’s

continuation of the] lien no longer obtained.” Id. at 20. The court concluded that

“the [creditor’s] refusal to release its valueless lien so that the vehicle could be

junked–though presumably not made in bad faith–was ‘coercive’ in its effect, and

thus willfully violated the discharge injunction.” Id.

In Schlichtmann, the court likewise reviewed a creditor’s post-discharge

enforcement of a security interest in a debtor’s collateral, there proceeds held in

escrow. Unlike the car in Pratt, the escrow fund had a substantial value and thus

the creditor’s facially permissible actions with respect to the collateral were not

undercut by the evident lack of any legitimate economic purpose—the creditor’s

“desire to enforce its rights in the collateral suffice[d] to explain [its] actions.”

In re Schlichtmann, 375 B.R. at 98. Under these circumstances, “one would need

very damning evidence indeed to justify a finding . . . that [the creditor] was

attempting not merely to enforce its in rem rights but also, or instead, to obtain

payment from [the debtor] in personam on the prepetition debt.” Id. Such

evidence was lacking, and the debtor’s claim for § 524 sanctions was denied.

Significantly, the court rejected the debtor’s allegations of tangential misconduct

by the creditor (the creditor had failed to disclose a third party’s interest in the

matter) as immaterial, illustrating the point that the discharge injunction is limited

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to violations of § 524 and does not give bankruptcy courts a broader authority to

intervene on the basis of other objections regarding a creditor’s actions toward a

discharged debtor: “[A]t worst, [the creditor] was enforcing the in rem rights

incorrectly. But the rights being enforced were still rights that were outside the

scope of the discharge, and [the creditor’s] actions would no more have been a

violation of the discharge for this impropriety.” Id.

ANALYSIS OF CREDITOR’S CONDUCT IN STATE SUIT

In light of the foregoing legal principles, Ms. Iglehart’s continuation of the

state litigation against Peak Sports, even with the Pauls nominally remaining in

the case as defendants, did not violate § 524(a)(2) and, thus, was not a basis for

imposing sanctions against her. Nor was § 524(a)(2) violated merely because she

pursued discovery (and sought sanctions for noncompliance) against the Pauls, or

because she supplemented her complaint to allege post-petition wrongdoing by

Rudy Paul. She could, however, still be held in violation of § 524(a)(2) if it were

determined, on a factually sufficient record, that the effect of the state litigation

was nevertheless to harass and coerce the Pauls into paying discharged debts.

But the bankruptcy court did not make such a determination. Rather, its

findings related to matters outside the scope of the § 524(a)(2) inquiry. Indeed,

considered within the confines of the proper inquiry, the facts of record would not

support a finding of objective coercion justifying the sanction imposed here.

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A. Bankruptcy Court’s Rulings

“Where a district court acts in its capacity as a bankruptcy appellate court,

we review the bankruptcy court’s decision independently.” Ahammed v. Sec.

Investor Prot. Corp. (In re Primeline Sec. Corp.), 295 F.3d 1100, 1105 (10th Cir.

2002). Thus, although this matter reaches us after an affirmance by the district

court, we directly review the bankruptcy court’s legal conclusions de novo and its

underlying factual findings for clear error. Id. We do not defer to the district

court’s intermediate appellate analysis, Bailey v. Big Sky Motors, Ltd. (In re

Ogden), 314 F.3d 1190, 1195 (10th Cir. 2002), though of course we may look to it

to inform our review of the result reached by the bankruptcy court.

1. Written Sanction Order Issued after Hearing

In its written order, drafted by the Pauls’ counsel, the bankruptcy court

found that Ms. Iglehart’s pursuit of discovery regarding Peak Sports in the state

suit was not undertaken “at the earliest opportunity or even within a reasonable

time after the default was entered against Peak Sports”; “was oppressively tardy

and unjustified”; and “has been a misplaced effort intended to obtain documents

from the corporation [that] has resulted in eviscerating the [Pauls’] fresh start and

an opportunity to get on with their lives.” 7 App. Vol. 1 at 52 (Bankruptcy Court

7
We note the delay involved here is more understandable when placed in its
practical context. The state suit stalled for three years over a dispute about
whether Ms. Iglehart had settled her claims before it was filed. Default was not
entered against Peak Sports until late 2001, the corporation was dissolved in
(continued...)

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Order filed Aug. 23, 2005). In the same vein, the order criticized Ms. Iglehart for

not “tak[ing] advantage of the opportunities in the [Pauls’] bankruptcy to require

information from the bankruptcy trustee [or] to examine the books in the trustee’s

possession,” adding that “[t]he [Pauls’] fresh start was impeded and severely

hindered mostly because of what has been done postpetition and should have been

done much earlier when the books were in the trustee’s control.” Id.

Whether or not this criticism of Ms. Iglehart’s conduct is justified, none of

it goes to the critical point, i.e., whether her conduct had a coercive effect on the

Pauls, pressuring them to pay off any discharged pre-petition claims. The two

references to the Pauls’ fresh start come closest, but even they just speak in terms

of circumstantial interference—an effect any discovery expense or burden,

regardless of connection to pre-petition debt, would have, and which the case law

discussed above holds permissible—and do not tie Ms. Iglehart’s conduct to any

specific prohibition in § 524(a)(2). More generally, these objections to the

manner in which discovery was conducted in the state suit were for the state court

to address. And, in fact, the state court did ultimately limit Ms. Iglehart to

non-party discovery procedures and vacate the sanctions it previously imposed on

the Pauls for noncompliance with Ms. Iglehart’s initial discovery requests.

7
(...continued)
2002, and the Pauls’ depositions were noticed in April 2003. This time-line is
entirely consistent with the facially legitimate purposes for which the discovery
was explicitly conducted.

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 As for the supplemental pleading of post-petition claims against Rudy Paul

regarding the wind-up of Peak Sports, the court’s order said only that it “finds

little evidence of postpetition wrongdoing by the [Pauls], which would give rise

to new claims against them.” App. Vol. 1 at 52. This analysis is problematic for

two reasons. First, the limited question for the bankruptcy court in this contempt

proceeding under § 524(a)(2) is whether the claims asserted in the state case fall

within the discharge injunction, i.e., allege pre-petition or post-petition conduct.

Whether the claims can be proven up is a question for the state court in which

they are litigated. In essence, the bankruptcy court made a summary judgment

ruling on the merits of matters outside its jurisdiction. We understand what the

court was getting at: if the claims are indeed baseless, it might be concluded that

the only possible function they serve is to coerce the Pauls into satisfying

pre-petition claims Ms. Iglehart can no longer press directly (assuming baseless

claims can have such coercive effect). But the merits of the state claims should

be determined by the court in which they are asserted. If that court finds them

groundless, then the bankruptcy court could, based on that disposition, properly

do a coercion analysis for purposes of § 524(a)(2) sanctions. Deciding the merits

of the claims as part of the § 524(a)(2) analysis, and then enjoining Ms. Iglehart

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from proceeding on them in the state suit, resulted in the bankruptcy court

effectively usurping the adjudicative role of the state court. 8

Second, Ms. Iglehart explained at the sanctions hearing that she needed

discovery to make her case on the post-petition claims, but the bankruptcy court

never addressed this point—which in a proper summary judgment proceeding in

the state case would have implicated the protections of Colorado’s version of

Rule 56(f). See Colo. R. Civ. P. 56(f). And if the bankruptcy court discounted

this point because of its view that such discovery would violate the discharge

injunction, it was, for reasons already discussed, doubly wrong.

2. Bench Ruling at Sanctions Hearing

The bankruptcy court’s bench ruling was more lengthy but to the same

effect. These passages give a good account of the essence of its rationale for

sanctioning Ms. Iglehart for her discovery efforts in the state suit: 9

8
That is not to say a bankruptcy court generally must await the disposition
of other litigation before holding that an action taken by a creditor therein
violates the discharge injunction. Often the violation will be evident on its face,
such as the assertion of a claim explicitly premised on pre-petition conduct, and
enjoining the creditor from proceeding with it does not involve any substantive
encroachment on the other court’s adjudicative role. Even when a less direct
violation turns on application of the objective-coercion principle, the bankruptcy
court’s analysis should not entail resolving the merits of a claim pending in
another court: the question, rather, is whether the objective effect of the claim is
to coerce payment of a pre-petition debt. But when a bankruptcy court seeks to
answer that question based on an adjudication of the merits of a creditor’s claim,
that adjudication should be made by the court hearing the claim.
9
As for Ms. Iglehart’s supplemental post-petition claims, the court said it
(continued...)

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 Now, let me address why I feel that continuing this effort and
some of the past efforts have or constitute a violation of the
injunction. There is an effort to get information [relevant to the
unresolved damages issue in the state suit against Peak Sports],
which frankly I understand, is an effort to get information by
Ms. Iglehart. But that effort to get information has been delayed,
complicated, ignored, evaded, or badly handled for about eight years
and certainly for the first three or four years and during the
bankruptcy.

Moreover, a default was entered [against Peak Sports] in the
year 2001; and that could and should have been the trigger to
undertake a vigorous, effective search for the information either
through the bankruptcy or through the trustee or getting relief from
stay to pursue matters in state court or going at Peak directly; but
instead, it’s dragged on.

And the discovery, especially in the relatively recent past,
2003 to today, has become burdensome, oppressive, costly, too tardy,
and unjustified under the circumstances which have come to pass.

I think the fresh start has been impeded and severely hindered,
and I think it’s mostly because of what’s been done postpetition.
There were many avenues, many opportunities up until the discharge
was entered in this bankruptcy case and shortly after the default was
entered but the judgment was not.

....

I cannot understand, and I say this somewhat as a finding but
part of my puzzlement, why there was never a vigorous effort to
request production of documents from Peak or the Pauls prepetition;
why interrogatories were not submitted to them either as officers of
Peak or as individuals prepetition; or other requests for admissions;

9
(...continued)
saw little or no evidence to support them and “conclude[d] that a claim of
postpetition wrongful conduct . . . is not there. It’s at least not there in this case
arising from [the record made in] this hearing.” App. Vol. 2 at 350. In this
respect, the oral ruling raises the same problems noted above in connection with
the written order.

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 or an ability to inspect the books and records prepetition. Why
discovery wasn’t undertaken while the Pauls were in Colorado, I
cannot understand because everything might have been avoided or
the misunderstanding that seems to have mushroomed over the years
might have been avoided if that had been undertaken.

I’m going to rule in favor of the [Pauls]. I am going to make a
specific finding that, as best as I can determine, especially after this
ruling and the findings and conclusions on the record, further efforts
to depose Mr. and Mrs. Paul or submit to them requests for
production of corporate documents would be or constitute a violation
of the injunction; an impingement on their fresh start from
bankruptcy; an improper litigation strategy to discharged or against
discharged debtors.

App. Vol. 2 at 353-55. Nothing in that rationale suffices as a basis for imposing a

§ 524(a)(2) sanction under the principles we have discussed. There is not a single

finding that Ms. Iglehart’s discovery efforts were just a means to coerce some

payment from the Pauls on discharged claims.

Indeed, the record made at the hearing before the bankruptcy court would

not support such a finding. The discovery sought from the Pauls served the

plainly legitimate purpose of scrutinizing the conduct of Peak Sports to locate

assets of the business to satisfy Ms. Iglehart’s significant damages claim against

it, and possibly in that regard also uncovering post-petition wrongdoing by Rudy

Paul in connection with the corporate wind-up. There was no “raison d’etre gap”

(as there was in Pratt) to fill by inferring a covert agenda implicating § 524(a)(2)

prohibitions. And such an agenda was explicitly disavowed by Ms. Iglehart and

counsel, not just after the fact at the bankruptcy hearing, but contemporaneously

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with the discovery sought in the state suit—on the face of the deposition notices

sent to the Pauls. Moreover, Rudy Paul admitted at the hearing that neither

Ms. Iglehart nor her counsel ever suggested that they would drop her discovery

effort in the state suit in exchange for any monetary consideration from the Pauls.

In sum, Ms. Iglehart pursued discovery from the Pauls relating to claims

that did not concern their pre-petition liabilities. As such, her conduct did not

violate any prohibition in § 524(a)(2). Clearly it imposed incidental burdens, as

discovery does on anyone. But, notwithstanding the “fresh start” gloss on the

statute, discharged debtors are not broadly free from any inconvenience and

expense that otherwise permissible litigation may impose on them. Their special

protection has been delimited by Congress in § 524(a)(2), and a creditor cannot be

sanctioned for conduct that does not fall within its terms. Of course, conduct that

facially appears permissible may still violate § 524(a)(2) if its objective effect is

prohibited, i.e., if it really serves to pressure the debtor to pay a discharged debt.

The bankruptcy court made no such finding here; indeed, the record would not

have supported such a finding. The thrust of the bankruptcy court’s criticism

concerned, rather, Ms. Iglehart’s practical management of discovery in the state

suit, which is not a matter put under bankruptcy court oversight by § 524(a)(2) or

any other provision of the Code. Finally, while the state court concluded that

Ms. Iglehart erred in the formal process by which she sought the discovery, and

for that reason reversed the sanctions it had initially imposed on the Pauls for

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noncompliance, that does not translate to a violation of the discharge injunction.

Again, “[i]f an act is not in fact one to collect or enforce a prepetition debt, then

whatever its faults, it is not a violation of the discharge, even though undertaken

by the holder of a discharged debt.” In re Schlichtmann, 375 B.R. at 97.

3. Order Denying Reconsideration

In its denial of Ms. Iglehart’s motion for reconsideration, the bankruptcy

court did not explicitly return to the merits of the supplemental claims asserted

against Rudy Paul in the state suit, but again focused on Ms. Iglehart’s discovery

efforts. The court began by stating that, when viewed in context, “the discovery

tactics employed in the State Court Action were not, as [Ms. Iglehart] suggests,

merely either (1) an attempt to obtain discovery as to other remaining Defendants

or (2) pursuit [of] some post-petition claim for Mr. Paul’s failure to properly

wind-down the business of Peak Sports.” App. Vol. 1 at 111 (Bankruptcy Court

Order filed Oct. 3, 2005). This sounds as if it would lead to a coercion analysis,

but what follows is just a short-hand summary of the same criticisms discussed

earlier regarding what the court saw as Ms. Iglehart’s delayed and ineffectual

pursuit of discovery. See id. at 112-13. The court then concluded:

The conduct of [Ms. Iglehart] was not merely to seek discovery to
find out information about related entities/other defendants, it was,
whether intentional or not, a continuation of the litigation in the
State Court Action and a grafting of additional or supplemental
claims post-petition, that seemingly arose—or sprung—from alleged
conduct emanating pre-petition. The reality, here, is that

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 [Ms. Iglehart] has pursued “a continuation of an action” and “an act
to collect debt” in violation of 11 U.S.C. § 524(a)(2).

Id. at 113 (footnote omitted 10). The general thrust of this passage is simply that

Ms. Iglehart continued with her state litigation following the Pauls’ discharge.

But, as we have seen, the fact that she continued to litigate her case against Peak

Sports, even with the Pauls as nominal defendants, did not violate § 524(a)(2),

and her pursuit of the supplemental post-petition claims against Rudy Paul was

clearly not prohibited.

The only thing implicating the discharge injunction is the notion that the

supplemental claims “seemingly arose—or sprung—from alleged conduct

emanating pre-petition,” if what the court meant by that tentative and oblique

statement is that, however the new claims were framed, they were really based on

Rudy Paul’s pre-petition conduct. Such an understanding, however, would not be

an accurate reflection of the bankruptcy court’s own findings from the hearing, or

of the factual record underlying those findings. Ms. Iglehart supplemented her

state pleadings to add allegations clearly limited to Rudy Paul’s post-petition

10
In the footnote, the court noted that Ms. Iglehart had settled with all of the
defendants in the state case except Peak Sports (and of course the Pauls) and that
this fact undercut her need for discovery to allocate liability on the (pre-petition)
claims thereafter pursued against Peak Sports alone. But Ms. Iglehart also sought
discovery to scrutinize the wind-up of Peak Sports to trace any assets that might
be reachable to satisfy her claims against it, and this purpose was not nullified by
settlement with other defendants. And, following the supplementation of her state
pleadings to include post-petition claims against Rudy Paul, additional reasons to
pursue discovery arose.

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conduct, and the bankruptcy court had not found otherwise. Rather, at the hearing

on § 524(a)(2) sanctions the court held only that Ms. Iglehart had not put forth

evidentiary support for those claims (again, a determination that should have been

left for the state court to make in a proper summary judgment proceeding after

allowance for adequate discovery).

B. District Court’s Decision Affirming Bankruptcy Court

We have been focusing on the bankruptcy court’s rulings, as they are the

direct object of our review. But we have also considered the district court’s

decision for what light it might shed on the legal side of the § 524(a)(2) analysis,

which the district court reviewed de novo as we do. It does not add or clarify

anything relating to Rudy Paul, but it does frame a possible justification for

sanctioning Ms. Iglehart for pursuing discovery from Carol Paul:

The notice of deposition for Mrs. Paul was clearly a violation of the
discharge injunction. Mrs. Paul was not involved in the business of
Peak [Sports] and, thus, there was no justification in noticing her for
a deposition. Further, pursuing discovery based on the defamation
claim would clearly be a continuation of a prepetition action against
Mrs. Paul.

App. Vol. 1 at 146 (District Court Order filed Aug. 21, 2007).

The problem is that nothing in the bankruptcy court’s rulings provides the

necessary foundation for this rationale. Nor does the factual record support the

critical premise here that Ms. Iglehart lacked a justification for deposing Carol

Paul. It is true that she was not, as Rudy Paul was, a shareholder/officer/director

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of Peak Sports. But she was of course married to a shareholder/officer/director,

from start-up through wind-up, and Ms. Iglehart testified at the hearing that it was

her understanding “that they [Rudy and Carol] were both intimately involved with

Peak Sports . . . and the business operations postbankruptcy petition and in

relationship to the other defendants in the case, and that there may be information

that we could glean in the deposition from them.” Id. Vol. 2 at 270. Rudy Paul

also testified at the hearing and did not in any way contradict this understanding.

CONCLUSION

For the reasons explained above, the sanction imposed by the bankruptcy

court lacks an adequate basis in law and fact. The bankruptcy court did not make

the findings required for a violation of the discharge injunction, focusing instead

on matters outside the scope of the proper inquiry. Further, the established facts

of record would not support the requisite predicate findings in any event.

The bankruptcy court’s order sanctioning Ms. Iglehart and enjoining her

pursuit of state court litigation is REVERSED.

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