Discharge Injunction Violation Results in $90,000 Award

A recent case in the District Court, Romanucci & Blandin, LLC et al. v. Lempesis, affirmed a judgment by the Bankruptcy Court awarding $90,000 for an especially egregious violation of the discharge injunction, including damages for emotional distress and punitive damages. Spiro Lempesis, a former baseball coach, was sued by Anthony Collaro, one of his former players, with the help of Roamanucci & Blandin, a law firm. Lempesis filed for bankruptcy. But because of how the law firm dealt with the bankruptcy filing and eventually with the discharge injunction, the law firm wound up owing the defendant money.

The filing of a bankruptcy case creates an automatic stay, stopping all collections actions in favor of the debtor. Not only are actions taken in violation of the automatic stay void, there are consequences for violating the stay. Generally, a plaintiff in a lawsuit has to seek relief from the stay in the bankruptcy court before proceeding in any other court. In addition to providing the debtor with a breathing spell, the stay helps to channel lawsuits into the bankruptcy court so the bankruptcy court can provide air traffic control. The discharge injunction provides the debtor with permanent protection against lawsuits for pre-petition conduct. While there are exceptions to both the automatic stay and the discharge, an order from the bankruptcy court is often required.

Here, after the bankruptcy was filed, notice was sent to the law firm, but the mail was returned because the law firm had moved. So Lempesis’s bankruptcy lawyer faxed it to the law firm, where an associate put it in the file, but apparently didn’t tell anyone else at the law firm about it. Lempesis received a discharge. The lawsuit was voluntarily nonsuited and later refiled (a common strategy in Illinois courts, used by plaintiffs to buy time when the statute of limitations is looming). Even after Lempesis moved to enforce the discharge and for sanctions, the law firm continued to pursue Lempesis in the state court lawsuit, and even went on TV to repeat the allegations.

The bankruptcy court eventually awarded $90,000 in damages: $11,000 in attorneys’ fees and costs, $12,000 in emotional distress damages, $50,000 in punitive damages, and $17,000 of additional attorney’s fees based on a supplemental statement of fees, presumably required to bring the discharge injunction litigation to trial.

This award was appealed to the district court, which affirmed the whole award against the firm, but vacated the award against the client.

Things did not have to turn out this way. If the notice of bankruptcy had not been ignored, it would have been possible to ask the bankruptcy court’s permission to continue with the lawsuit, and to keep any claim against Lempesis alive despite the discharge. Based on the facts we know from the court opinions, it would have been worth a shot to seek denial of the dischargeability of Collaro’s claim. But by the time Lempesis sought relief of his own, that boat had sailed.

The law firm also ran up damages by pursuing the lawsuit even after the motion for sanctions was filed. Discharge injunction litigation is for all intents and purposes a lawsuit in federal court, and lawsuits in federal court are expensive.

One aspect of the punitive damages was judge’s conclusion that a lawyer should have known better. Of course, not all lawyers need to know the nuances of how the discharge works, but they should all know to proceed with caution. Even so, it is also necessary to proceed quickly. Damages for a violation of the stay can multiply as time goes on. The deadline for seeking a dischargeability determination comes and goes quickly, and can only be extended before the time expires. It is important for a lawyer to be educated about these potential consequences, or to have experienced bankruptcy counsel on the team so as to not run afoul of the automatic stay and the discharge injunction, and to preserve client rights considering fast and inexorable bankruptcy deadlines.