Greenwood Trust Co. v. Florence Jean Smith ( 1997 )

UNITED STATES BANKRUPTCY APPELLATE PANEL
FOR THE EIGHTH CIRCUIT
No. 97-6006SI
No. 97-6007SI
No. 97-6008SI
GREENWOOD TRUST CO. and DISCOVER *
CARD, INC. *
Plaintiffs/Appellants *
*
v. *
*
FLORENCE J. SMITH * APPEAL FROM THE UNITED
* STATES BANKRUPTCY
Debtor/Appellee. * COURT FOR THE
_________________________________________ * SOUTHERN DISTRICT
* OF IOWA
GREENWOOD TRUST CO. and DISCOVER *
CARD, INC. *
*
Plaintiffs/Appellants *
*
v. * Consolidated Appeals
*
JILL RENEE LENAHAN, *
*
Debtors/Appellee. *
_________________________________________ *
*
GREENWOOD TRUST CO. and DISCOVER *
CARD, INC. *
*
Plaintiffs/Appellants *
*
v. *
*
KONRAD STEFAN MONTSKO, *
*
Debtor/Appellee. *
Submitted: August 21, 1997
Filed: October 8, 1997
Before KRESSEL, SCHERMER, and DREHER, Bankruptcy Judges
SCHERMER, Bankruptcy Judge:
Greenwood Trust Company and Discover Card Services, Inc.
(collectively, “Greenwood”) appeal from the decision of the United
States Bankruptcy Court for the Southern District of Iowa1 which held
that Greenwood’s practice of sending debtors an informational copy of a
proposal to reaffirm violated Iowa’s Consumer Credit Code
§ 537.7103(5)(e). We affirm the decision of the bankruptcy court.
I
Florence J. Smith, John and Jill Lehnahan, and Konrad Montsko
(collectively the “Debtors”) filed chapter 7 petitions listing Discover
Card Services, Inc.2 as an unsecured creditor. After learning of the
bankruptcy filings, Greenwood sent letters to counsel for the Debtors
proposing a reaffirmation of the unsecured debt pursuant to 11 U.S.C. §
524(c).3 Greenwood also sent a copy of its letters to each Debtor. The
letters stated that Greenwood promised to “re-
1
Lee M. Jackwig, Judge, United States Bankruptcy Court for the Southern District of
Iowa.
2
Discover Card Services, Inc. is the servicing affiliate for Greenwood Trust Company.
3
The Bankruptcy Code is 11 U.S.C. §§ 101-1330. All future references are to Title 11
unless otherwise indicated.
2
establish a line of credit” should the Debtor reaffirm the debt and make
two consecutive monthly payments. The proposal also required the
account balance to be under the pre-petition credit limits.
The Debtors charged that Greenwood’s letters violated §
537.7013(5)(e) of Iowa’s Consumer Credit Code, which prohibits
communication with debtors who are represented by counsel in an attempt
to collect a debt. Greenwood filed a complaint for declaratory
judgment in each Debtor’s case requesting a determination that Iowa Code
§ 537.7013(5)(e) is preempted by federal bankruptcy law which permits
direct negotiation of reaffirmation agreements with debtors who are
represented by counsel. In the alternative, Greenwood requested a
declaration that its communication to the Debtor did not violate Iowa
Code § 537.7103(5)(e) because the communication was non-coercive.
The bankruptcy court granted Greenwood’s motion for summary
judgment, determining that there were no genuine issues of material
fact. However, with respect to the specific relief requested in each
adversary proceeding, the bankruptcy court entered an order in favor of
the Debtors as if the Debtors had each filed cross motions for summary
judgment. Specifically, the bankruptcy court held that federal
bankruptcy law dealing with reaffirmation of debt (§ 524(c)), does not
preempt Iowa Code § 537.7103(5)(e) and that the correspondence at issue
amounted to an act to collect a debt under Iowa Code § 537.7103(5)(e).
These consolidated appeals followed.
II
As the facts in these cases are not disputed, the only issues
before this Court are (1) whether the Bankruptcy Code preempts Iowa Code
§ 537.7103(5)(e); and (2) whether Greenwood’s practice of sending an
“informational copy” of its reaffirmation proposal to each
3
4
Debtor violated Iowa Code § 537.7103(5)(e). We hold that the
Bankruptcy Code does not pre-empt Iowa Code § 537.7103(5)(e), and we
further hold that Greenwood’s practice of communicating directly with
debtors who are represented by counsel violates Iowa Code
§ 537.7103(5)(e).
III
We review the bankruptcy court’s grant of summary judgment de novo,
applying the same standard as applied by the bankruptcy court. That is,
the moving party would have been entitled to summary judgment on its
claim only if there had been a showing that “there [was] no genuine
issue as to any material fact and that the moving party [was] entitled
to a judgment as a matter of law.” Fed. R. Civ. P. 56(c). See generally
Williams v. City of St. Louis, 783 F.2d 114, 115 (8th Cir. 1986). We
review the legal conclusions of the bankruptcy court de novo. First
Nat’l Bank of Olathe Kansas v. Pontow, 111 F.3d 604, 609 (8th Cir. 1997);
Estate of Sholdan v. Dietz (In re Sholdan), 108 F.3d 886, 888 (8th
Cir.1997).
IV
As a preliminary matter, at the court’s request, the parties
addressed the issue of whether a single document entitled a Memorandum
of Decision and Order entered by the bankruptcy court
4
Greenwood also argues that the bankruptcy court erred in observing that Greenwood’s
practice violated the automatic stay imposed by § 362(a). However, in this respect, Greenwood
misreads the bankruptcy judge’s Memorandum of Decision because the court did not make such a
conclusion. In its complaints for declaratory judgment, Greenwood discussed the interaction of
§ 362(a) and § 524(c), but it did not request a finding whether or not its conduct violated
§ 362(a). In accordance with the relief requested, the bankruptcy court properly ruled on only
those issues on which Greenwood sought a determination. Since no determination of whether
Greenwood violated § 362(a) was sought or made by the bankruptcy court, that issue is not on
appeal in these consolidated cases.
4
in each case was a final judgment subject to appeal. Federal Rule of
Bankruptcy Procedure 9021, which incorporates Fed.R.Civ.P. 58, provides
“[e]very judgment in an adversary proceeding or contested matter shall
be set forth on a separate document.” This rule is intended to help
parties ascertain when the time for an appeal begins to run. Bankers
Trust Co. v. Mallis, 435 U.S. 381, 384 98 S. Ct. 1117, 1120, 55 L. Ed. 2d
357 (1978)(per curiam). In Bankers Trust, the district court clearly
evidenced its intent that its opinion was a final decision. The
judgment of dismissal was recorded in the docket, and the parties did
not object to the absence of a separate document. Id. at 387-8. Under
those facts, the parties were deemed to have waived the separate
document requirement of Fed. R. Civ. P. 58. See also Hall v. Bowen, 830
F.2d 906, 911 n.7 (8th Cir.1987) (holding that Rule 58 compliance was
waived where neither party raised the noncompliance issue, where entry
of the district court order was docketed and where the record indicates
that the district court intended the memorandum opinion and order to be
a final decision). We are likewise convinced that, in the instant
matter, the court intended the Memorandum of Decision and Order in each
proceeding to be a final decision on the merits. Accordingly, we
conclude that the Memorandum of Decision and Orders from which the
parties appeal are final, appealable orders properly before this court.5
V
5
In addition to the separate document requirement, there may be a question of whether or
not the order appealed from is final since the order, in effect, denies the relief requested by the
summary judgment movant, Greenwood. An order denying a motion for summary judgment is
typically the classic interlocutory order. Although the summary judgment motions were brought
by Greenwood, we are convinced that the bankruptcy court had the authority to rule for the
Debtors as a matter of law. Johnson v. Bismarck Pub. School Dist., 949 F.2d 1000 (8th Cir.
1991).
5
Turning to the issues on appeal, we address first, whether the
Bankruptcy Code preempts Iowa Code § 537.7103(5)(e). That section of
Iowa’s Consumer Credit Code provides:
A debt collector shall not engage in the following
conduct to collect or attempt to collect a debt: .
. . a communication with a debtor when the debt
collector knows that the debtor is represented by
an attorney and the attorney’s name and address
are known, or could be easily ascertained, unless
the attorney fails to answer correspondence,
return phone calls or discuss the obligations in
question, within a reasonable time, or prior
approval is obtained from the debtor’s attorney or
when the communication is a response in the
ordinary course of business to the debtor’s
inquiry.
Iowa Code § 537.7013(5)(e) (1989).
The bankruptcy court found that Greenwood’s practice violated Iowa
Code § 537.7103(5)(e) based on the analysis in a previous decision
rendered by the same court. See Sears, Roebuck and Co. v. O’Brien (In
re O’Brien), Ch. 7 Case No. 95-01292 -D J, Adv. No. 95-95103, slip op.
(Bankr. S.D. Iowa, Jan. 13, 1997) (appeal pending). In O’Brien, the
court declined to adopt the Seventh Circuit’s position that a creditor-
initiated offer to reaffirm a debt did not inherently violate the
Bankruptcy Code. In re Duke, 79 F.3d 43, 45 (7th Cir.1996). The O’Brien,
opinion contrasted offers to reaffirm secured and unsecured debts,
holding that offers to reaffirm unsecured debts interfered with the
policy of a bankruptcy discharge and fresh start. That order stated:
Permitting creditors to send informational letters
about their secured claims indirectly to debtors
represented by counsel and directly to debtor
representing themselves is far different from
condoning attempts to collect unsecured debts
veiled as ‘offers” to grant a line of credit or
reinstate an account. The breathing spell
afforded by the automatic stay and the fresh start
provided by the discharge injunction become almost
meaningless if any unsecured creditor may solicit
6
continued business on old terms as long as they do
so nicely.
7
O’Brien, slip op. at 29. In so holding, the bankruptcy court discounted
the creditor’s argument that it is in the debtor’s best interest for the
creditor to advise that the debtor could make voluntary payments under §
524(f) and receive credit on terms suitable to the particular debtor.
Id. at 31. The O’Brien court therefore concluded that Sears’ action was
an effort to collect a dischargeable debt; that Sears violated the
automatic stay; and further, that Sears violated Iowa Code §
537.7103(5)(e). Id. slip op. at 32. This analysis underlies the
decisions in the cases at bar.
VI
On appeal, Greenwood argues that applying § 537.7103(5)(e) of the
Iowa Consumer Code interferes with the operation of the Bankruptcy Code,
and that the Bankruptcy Code preempts this inconsistent state law.
Congress may preempt a state statute explicitly or implicitly. Gade v.
Nat’l Solid Waste Management Assc., 505 U.S. 88, 98, 112 S. Ct. 2374,
2383, 120 L.ED.2d. 73 (1992)(citing cases). Where, as in this case,
the federal statute does not contain explicit pre-emptive language,
federal courts have recognized two types of implied preemption: field
preemption and conflict preemption. Id. Field preemption occurs “where
the scheme of federal regulations is ‘so pervasive as to make reasonable
the inference that Congress left no room for the States to supplement
it.’” Id. (quoting Rice v Santa Fe Elevator Corp., 331 U.S. 218, 230, 67
S. Ct. 1146, 1152, 91 L.ED.2D. 1447 (1947)). Conflict preemption occurs
where either “compliance with both federal and state regulations is a
physical impossibility,” Id. (citing Florida Lime & Avocado Growers,
8
Inc. v. Paul, 373 U.S. 132, 142-43, 83 S. Ct. 1210, 1217-18, 10 L. Ed. 2d
248
9
(1963), or where state law “stands as an obstacle to the accomplishment
and execution of the full purposes and objectives of Congress.” Id.
(citing cases).
Greenwood argues that the Iowa statute is preempted under the
conflict theory of preemption because the Iowa statute is inconsistent
with the Bankruptcy Code. Greenwood asserts that the “Code authorizes a
creditor to send an informational copy of a proposal to reaffirm
directly to the debtor” citing Duke, and therefore contends that since
the Code permits it to provide informational copies to a debtor, the
State of Iowa cannot prevent that practice.
We disagree with Greenwood’s characterization of the interaction of
the Bankruptcy Code and the Iowa Consumer Code. Sections 524(c)(3) and
524(c)(6) of the Code authorize negotiation toward reaffirmation
agreements, but these sections of the Code are silent on the issue of
whether a debtor who is represented by counsel may be contacted
directly. Iowa Code § 537.7103(5)(e), however, prohibits such
negotiation by contacting a debtor who is known to be represented by
counsel.
For this preemption analysis, the critical issue is whether
compliance with Iowa’s state law impedes Greenwood’s right to seek
reaffirmation agreements under the Bankruptcy Code. Gade, 505 U.S. at
98. Nothing in Iowa Code § 537.7103(5)(e) prohibits Greenwood from
seeking reaffirmation of its Discover Card debts. Iowa’s statute only
restricts to whom Greenwood’s communication may be directed when the
debtor is known to be represented by counsel. Compliance with Iowa Code
§ 537.7103(5)(e) therefore, does not render Greenwood’s right of
reaffirmation meaningless nor impede the purposes of the Bankruptcy
Code.
10
Greenwood does not argue that communication indirectly through a
debtor’s counsel is a less effective means of seeking reaffirmation than
communication directly with a debtor.
11
Nevertheless, even if we analyze preemption of the Iowa statute on this
basis, the preemption argument must fail because the Iowa statute
already provides an exception to permit direct contact with the debtor
in such instances. Indeed, the statute enumerates three conditions when
its prohibition on direct contact is waived:
(A) where the attorney fails to answer correspondence, return
phone calls or discuss the obligations in question, within a
reasonable time;
(B) where prior approval is obtained from the debtor’s
attorney; or
(C) where the communication is a response in the ordinary
course of business to the debtor’s inquiry.
Iowa Code § 537.7103(5)(e) (1989).
Because compliance with Iowa’s Code § 537.7103(5)(e) does not
obstruct a creditor’s right to seek reaffirmation under § 524(c) of the
Bankruptcy Code, we reject Greenwood’s argument on preemption and hold
that the Bankruptcy Code does not preempt this Iowa statute.
VII.
Greenwood next argues that initiating the reaffirmation process is
not an act to “collect or attempt to collect” a debt under Iowa Code
§ 537.7103(5)(e); rather, it is a proposal to enter into a substitute
contract that would replace the existing indebtedness. Greenwood
insists that its letter and “offer to reaffirm” is not an “act to
collect” a pre-petition debt but rather, by its terms, the letter is “a
proposal to enter into a substitute contract replacing the original debt
and extending a new line of credit.” Greenwood cites Northwest Bank and
Trust Co. v. Gutshall, 274 N.W.2d 713 (Iowa 1979) overruled in part on
other grounds, and Ipalco Employee Credit Union v. Culver, 309 N.W.2d
484, 487 (Iowa 1981), for the proposition that Iowa courts view a
reaffirmation agreement as creating a “new debt.”
12
We agree that in Iowa, the execution of a reaffirmation agreement
between a debtor and a creditor creates a new debt and a new contractual
obligation. However, we also believe that proposing a reaffirmation
agreement is, in all instances, an “attempt to collect a debt.” Where,
as in these cases, new credit has been offered, it is quite obvious that
the new credit is premised upon reaffirmation of the existing debt. In
other words, the offer of a “new contract” would not be made without the
opportunity to collect the prior debt. Thus, we determine that the
conduct of inviting reaffirmation falls squarely within Iowa Code
§ 537.7103(5)(e) as “an act to collect” a debt.
Accordingly, we conclude that Greenwood’s practice of sending a
copy of a proposed reaffirmation agreement directly to the debtor is an
attempt to collect a debt and, we affirm the bankruptcy court’s
determination that the practice violated Iowa Code § 537.7103(5)(e).
VIII
For the reasons stated, we affirm the decisions of the bankruptcy
court.
A true copy.
Attest:
CLERK, U.S. BANKRUPTCY APPELLATE PANEL
FOR THE EIGHTH CIRCUIT
13