Federal Preemption: The Bankruptcy Code and State Post-Discharge Claims

By Brit Suttell and Michael Truesdale of Barron & Newburger, P.C.

The United States Supreme Court recently denied review of an important case to the creditors’ bar. The petitioner in PHH Mortgage Corp. v. Guthrie asked the Court to review an opinion from the Fourth Circuit Court of Appeals addressing whether the remedies provided in the Bankruptcy Code for violation of a discharge order preempt state-law claims for wrongful post-discharge collection efforts. The denial of review leaves in place the Fourth Circuit’s opinion allowing a discharged debtor to bring a state-law consumer protection claim, here under the North Carolina Debt Collection Act, in state court rather than requiring the claim to proceed in the bankruptcy court presiding over the underlying bankruptcy.

The Fourth Circuit held that the Bankruptcy Code does not preempt a debtor’s claims for improperly attempting to collect a discharged debt. This is in contrast to the First, Sixth, and Ninth Circuits which all held that violations of the discharge injunction (including state-law consumer protection claims for such violations) must be brought in Bankruptcy Court. In similar circumstances, a handful of other courts have found preemption by the Bankruptcy Code over state law claims. Those other courts have concluded the debtor maintains a remedy under the bankruptcy court’s contempt rules for a creditor’s efforts to collect a discharged debt in violation of a discharge order, and that the remedy thus preempts the assertion of any similar claims in state court under state law.

NCBA filed an amicus brief in support of PHH’s petition for certiorari. It set forth its position why the remedies provided within the Bankruptcy Code for a violation of a discharge order preempt any remedies for wrongful collection that may be available under state fair debt collection schemes. It also explained the practical problems that would arise from an ongoing circuit split, leaving creditors facing different rules in different states rather than subject to consistent national rules as set forth in the Bankruptcy Code.

Many factors, independent of the merits of the Fourth Circuit’s opinion, may explain the denial of review, including the Court’s existing workload, the timing of when the case was presented given other petitions before the Court, and a desire to allow the conflict among the circuits to more fully develop before resolving it. Whatever the reason, the denial of review leaves inconsistent precedent governing different regions across the country, making valuable an awareness of any regional controlling precedent on a per-circuit basis.