Collection of Discharged Debt From Debtor’s Alter Ego Does Not Violate Discharge Injunction
Collection of Discharged Debt From Debtor’s Alter Ego Does Not Violate Discharge Injunction
The U.S. Bankruptcy Appellate Panel for the Ninth Circuit concluded that a creditor does not violate the discharge injunction by attempting to collect a discharged debt from the debtor’s alleged alter egos in state court.
The debtor filed a motion for sanctions against his creditors, arguing that the state court complaint impermissibly sought to recover a discharged debt because the alter ego allegation meant that the debtor and its alter egos are all one and the same. The debtor also argued that, although the debtor was not a defendant in the state court suit, merely requiring the debtor to participate in discovery for that litigation violated the discharge injunction.
Affirming the bankruptcy court, the BAP rejected the debtor’s arguments. First, it underscored the general principle that a discharge injunction only precludes acts to recover a debt as a personal liability of the debtor.
The BAP rejected the premise that the creditor’s alter ego allegations meant that the debtor was being held liable for the discharged debt since, if true, the alter egos and the debtor would be deemed the same entity. The panel explained that, under applicable (Delaware) law, the result of the alter ego doctrine is not to deem the relevant entities the same, but to hold one liable for the other’s debts.
In this sense, the BAP expressly disagreed with the holding in In re Torres, 594 B.R. 890 (Bankr. C.D. Cal. 2018), which had held “that if A receives a bankruptcy discharge, an action against B alleging that A and B are alter egos violates the discharge injunction if it is shown that the alter ego claim is a prepetition claim.” Finally, the BAP rejected the debtor’s last argument, given that a discharged debtor’s obligation to participate in discovery is not an effort to personally collect a debt and thus does not violate the discharge injunction.
The 9^(th) Circuit BAP held that collection of discharged debt from debtor’s alter ego does not violate discharge injunction.