On January 19, the United States Bankruptcy Court for the Western District of Virginia entered an order sanctioning a collections law firm for violating the bankruptcy discharge injunction. The court in Skaggs v. Gooch (In re Skaggs) awarded the debtor $25,000 in attorneys’ fees based on a letter he received concerning a discharged debt.

In October of 2000, a cell phone provider obtained a judgment against debtor Morton Skaggs. Although Skaggs did not own any real estate at the time, the judgment was recorded in the land records for Rockingham County, Virginia. Subsequently, Skaggs filed for bankruptcy and obtained a discharge of his debts. Several months after the discharge, Skaggs inherited some real estate. During the process of selling the property, a title agent erroneously told Skaggs that the cell phone provider’s judgment would have to be paid prior to closing.

In March 2020, Skaggs contacted the defendant law firm, Stephen W. Gooch, P.C., concerning the judgment. After receiving a payoff statement, Skaggs told the firm that he believed the judgment had been included in his bankruptcy. Rather than checking to determine if this was accurate, the firm continued to communicate with Skaggs regarding the debt and ultimately offered to settle for $5,000.

Skaggs filed an action in the bankruptcy court, alleging the firm violated 11 U.S.C. § 524(a) by attempting to collect a debt that had been discharged. The court agreed, granting summary judgement in favor of Skaggs. In a subsequent order, the court imposed a remedial sanction of $25,000 on the firm, based on the amount of attorneys’ fees incurred by Skaggs.

In arguing against the imposition of sanctions, the firm argued that the payoff letter was sent to Skaggs at his request. The court rejected this argument, finding that “sending a payoff letter per a debtor’s request does not eliminate or diminish the defendants’ stated intent to collect the debt.”

The firm also asserted that responsibility for the discharge violation should fall on the title company who originally told Skaggs that the judgment appeared in the real estate records. The court disagreed, noting that the firm received a communication from Skaggs informing it that the debt was included in his bankruptcy and made its own determination that the debt was collectible. Another party’s opinion in connection with the matter, correct or not, could not provide a defense.

Although the court determined that the firm did not act in good faith, it found that its conduct did not rise to the level requiring an award of punitive damages. The court also rejected Skaggs’s request for additional damages based on his time spent dealing with the litigation and emotional distress.

Our Take:

This case serves as a reminder that any communication seeking to collect a debt discharged in bankruptcy — even if made in good faith, as a result of carelessness, or at the debtor’s own request — can result in significant sanctions for violation of the discharge injunction.