In re John J. Diamond III CV-02-384-B 12/13/02 P
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
In re: John J. Diamond, III
Civil N o . 02-384-B Opinion N o . 2002 DNH 218 P
MEMORANDUM AND ORDER
John J. Diamond, I I I , the debtor in a Chapter 7 bankruptcy
proceeding, filed a complaint in bankruptcy court seeking damages
from one of its creditors, Premier Capital, Inc. and Premier’s
attorney, Randall Pratt. Diamond claims that Premier and Pratt
violated the Bankruptcy Code’s automatic stay, see 11 U.S.C. §
362 (1993 & Supp. 2002), by using coercive negotiation tactics in
an attempt to obtain a favorable settlement of a discharge
proceeding. The bankruptcy court dismissed Diamond’s complaint
for failure to state a claim. Diamond appeals.
I. BACKGROUND
Diamond has worked as a licensed real estate broker for
approximately seventeen years. In October 2000, he filed a
Chapter 13 bankruptcy petition in this district that was later converted to a Chapter 7 proceeding. Premier, an unsecured
creditor, subsequently filed a complaint challenging the
dischargeability of Diamond’s debt. During the course of
negotiations to resolve the discharge proceeding, Premier’s
attorney, Randall Pratt, allegedly told Diamond’s attorney, James
Molleur, that, if Premier lost, it “would proceed to the New
Hampshire Real Estate Commission to have [Diamond’s] real estate
license taken away from him,” Compl. at 14 (Doc. N o . 2 1 ) .
Diamond filed a complaint against both Premier and Pratt in
the bankruptcy court alleging that Pratt’s statement was an
improper attempt to collect, assess, or recover a debt in
violation of the automatic stay. See 11 U.S.C. § 362(a).
Premier and Pratt moved to dismiss the complaint, arguing that
Diamond had failed to state a claim upon which relief could be
granted. After a hearing, the bankruptcy court ruled that
Pratt’s statement could not be construed as a violation of the
automatic stay. The court held, inter alia, that “lawyers have
to be free to - - I can’t say use every tactic, but use tactics
within bounds to try to negotiate the best deal for their
client.” Accepting as true the facts alleged in Diamond’s
-2- complaint, the court concluded that Pratt’s statement did not “go
over the line.”
Diamond appeals the dismissal of his complaint.
II. STANDARD OF REVIEW
I review a bankruptcy court’s dismissal of a complaint for
failure to state a claim de novo, “tak[e] as true the well-
pleaded facts contained in the complaint and dra[w] all
reasonable inferences therefrom in the plaintiff’s favor.”
Garrett v . Tandy Corp., 295 F.3d 9 4 , 97 (1st Cir. 2002); see also
In re Christo, 192 F.3d 3 6 , 37 (1st Cir. 1999). I may affirm,
modify, or reverse a bankruptcy court’s decision or remand for
further proceedings. Fed. R. Bankr. P. § 8013.
III. DISCUSSION
This appeal turns on whether Attorney Pratt’s threat to
report Diamond to the Real Estate Commission can be construed as
a violation of the automatic stay.
The filing of a petition in bankruptcy operates as a stay of
“any act to collect, assess, or recover a claim against the
-3- debtor that arose before the commencement of the case under this
title.” 11 U.S.C. § 362(a)(6). The automatic stay remains in
effect unless and until a federal court either disposes of the
underlying case or grants relief to a particular creditor. 11
U.S.C. § 362(c)(2). As the First Circuit recently acknowledged,
however, “[t]aken to an extreme, the automatic stay could be
construed to prohibit all post-petition contact between creditors
and debtors pertaining to dischargeable debts, . . . .” In re
Jamo, 283 F.3d 3 9 2 , 399 (1st Cir. 2002). A literal reading of
§ 362(a), of course, would confound other Code provisions and
bankruptcy rules that allow creditors to take certain actions
despite the existence of the automatic stay. See, e.g., 11
U.S.C. §§ 362(d) (creditor may request relief from stay itself);
727 (creditor may object to discharge); § 524(c) (creditor may
engage in reaffirmation negotiations); Fed. R. Bankr. P. §§ 9019
and 2002. Recognizing this reality, the First Circuit refused to
read § 362(a) in isolation. Instead, it held that “while the
automatic stay is in effect, a creditor may engage in post-
petition negotiations pertaining to a bankruptcy-related
reaffirmation agreement so long as the creditor does not engage
-4- in coercive or harassing tactics.” In re Jamo, 283 F.3d at 399.
Diamond has failed to identify any reason why the court’s holding
in In re Jamo should not apply with equal force to statements
made by counsel in an effort to resolve a discharge proceeding.
There is no litmus test for determining when aggressive
post-petition settlement tactics “cross the line” and become
coercive or harassing. Settlement negotiations inevitably are
coercive in the sense that they involve the use of economic
pressure to induce settlement. Yet, when negotiations focus on
the immediate risk of an adverse result, no one would regard them
as improperly coercive, even though they necessarily involve at
least an implied threat that “I will win and make you pay more if
you do not settle now.” Few would claim improper coercion even
when, as they commonly d o , negotiators emphasize collateral
consequences of an adverse result such as the impact it will have
on a litigant’s reputation, the potential that it will spawn
additional lawsuits or the risk that it might cause a litigant to
lose a business or professional license. The First Circuit
recognized as much when it observed in the context of bankruptcy
proceedings that “[t]he fact one party has a superior bargaining
-5- position does not warrant a court in placing a thumb on the
scales.” Id. at 401.
What arguably makes this case different is that Pratt
allegedly threatened to take adverse action against Diamond in
another forum if he did not settle Premier’s discharge claim.
Reasonable people can disagree as to whether such threats should
ever be permitted during settlement negotiations. For example,
the drafters of the California Rules of Professional Conduct,
presumably believing that all threats of this type are inherently
coercive, have determined that a lawyer may never “threaten to
present criminal, administrative, or disciplinary charges to
obtain an advantage in a civil dispute.” Cal. Rules Prof’l.
Conduct R. 5-100. In contrast, the American Bar Association has
adopted Model Rules of Professional Conduct that permit a lawyer
to use a threat to take action in another forum as leverage in
settlement negotiations unless the threat is unrelated to the
claim under negotiation, the person making the threat lacks a
factual or legal basis for either the threat or the underlying
claim, or the person making the threat claims to be able to exert
improper influence over the threatened proceeding. See ABA
-6- Comm’n on Ethics and Prof’l Responsibility, Formal O p . 363 (1992)
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In re John J. Diamond III CV-02-384-B 12/13/02 P
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
In re: John J. Diamond, III
Civil N o . 02-384-B Opinion N o . 2002 DNH 218 P
MEMORANDUM AND ORDER
John J. Diamond, I I I , the debtor in a Chapter 7 bankruptcy
proceeding, filed a complaint in bankruptcy court seeking damages
from one of its creditors, Premier Capital, Inc. and Premier’s
attorney, Randall Pratt. Diamond claims that Premier and Pratt
violated the Bankruptcy Code’s automatic stay, see 11 U.S.C. §
362 (1993 & Supp. 2002), by using coercive negotiation tactics in
an attempt to obtain a favorable settlement of a discharge
proceeding. The bankruptcy court dismissed Diamond’s complaint
for failure to state a claim. Diamond appeals.
I. BACKGROUND
Diamond has worked as a licensed real estate broker for
approximately seventeen years. In October 2000, he filed a
Chapter 13 bankruptcy petition in this district that was later converted to a Chapter 7 proceeding. Premier, an unsecured
creditor, subsequently filed a complaint challenging the
dischargeability of Diamond’s debt. During the course of
negotiations to resolve the discharge proceeding, Premier’s
attorney, Randall Pratt, allegedly told Diamond’s attorney, James
Molleur, that, if Premier lost, it “would proceed to the New
Hampshire Real Estate Commission to have [Diamond’s] real estate
license taken away from him,” Compl. at 14 (Doc. N o . 2 1 ) .
Diamond filed a complaint against both Premier and Pratt in
the bankruptcy court alleging that Pratt’s statement was an
improper attempt to collect, assess, or recover a debt in
violation of the automatic stay. See 11 U.S.C. § 362(a).
Premier and Pratt moved to dismiss the complaint, arguing that
Diamond had failed to state a claim upon which relief could be
granted. After a hearing, the bankruptcy court ruled that
Pratt’s statement could not be construed as a violation of the
automatic stay. The court held, inter alia, that “lawyers have
to be free to - - I can’t say use every tactic, but use tactics
within bounds to try to negotiate the best deal for their
client.” Accepting as true the facts alleged in Diamond’s
-2- complaint, the court concluded that Pratt’s statement did not “go
over the line.”
Diamond appeals the dismissal of his complaint.
II. STANDARD OF REVIEW
I review a bankruptcy court’s dismissal of a complaint for
failure to state a claim de novo, “tak[e] as true the well-
pleaded facts contained in the complaint and dra[w] all
reasonable inferences therefrom in the plaintiff’s favor.”
Garrett v . Tandy Corp., 295 F.3d 9 4 , 97 (1st Cir. 2002); see also
In re Christo, 192 F.3d 3 6 , 37 (1st Cir. 1999). I may affirm,
modify, or reverse a bankruptcy court’s decision or remand for
further proceedings. Fed. R. Bankr. P. § 8013.
III. DISCUSSION
This appeal turns on whether Attorney Pratt’s threat to
report Diamond to the Real Estate Commission can be construed as
a violation of the automatic stay.
The filing of a petition in bankruptcy operates as a stay of
“any act to collect, assess, or recover a claim against the
-3- debtor that arose before the commencement of the case under this
title.” 11 U.S.C. § 362(a)(6). The automatic stay remains in
effect unless and until a federal court either disposes of the
underlying case or grants relief to a particular creditor. 11
U.S.C. § 362(c)(2). As the First Circuit recently acknowledged,
however, “[t]aken to an extreme, the automatic stay could be
construed to prohibit all post-petition contact between creditors
and debtors pertaining to dischargeable debts, . . . .” In re
Jamo, 283 F.3d 3 9 2 , 399 (1st Cir. 2002). A literal reading of
§ 362(a), of course, would confound other Code provisions and
bankruptcy rules that allow creditors to take certain actions
despite the existence of the automatic stay. See, e.g., 11
U.S.C. §§ 362(d) (creditor may request relief from stay itself);
727 (creditor may object to discharge); § 524(c) (creditor may
engage in reaffirmation negotiations); Fed. R. Bankr. P. §§ 9019
and 2002. Recognizing this reality, the First Circuit refused to
read § 362(a) in isolation. Instead, it held that “while the
automatic stay is in effect, a creditor may engage in post-
petition negotiations pertaining to a bankruptcy-related
reaffirmation agreement so long as the creditor does not engage
-4- in coercive or harassing tactics.” In re Jamo, 283 F.3d at 399.
Diamond has failed to identify any reason why the court’s holding
in In re Jamo should not apply with equal force to statements
made by counsel in an effort to resolve a discharge proceeding.
There is no litmus test for determining when aggressive
post-petition settlement tactics “cross the line” and become
coercive or harassing. Settlement negotiations inevitably are
coercive in the sense that they involve the use of economic
pressure to induce settlement. Yet, when negotiations focus on
the immediate risk of an adverse result, no one would regard them
as improperly coercive, even though they necessarily involve at
least an implied threat that “I will win and make you pay more if
you do not settle now.” Few would claim improper coercion even
when, as they commonly d o , negotiators emphasize collateral
consequences of an adverse result such as the impact it will have
on a litigant’s reputation, the potential that it will spawn
additional lawsuits or the risk that it might cause a litigant to
lose a business or professional license. The First Circuit
recognized as much when it observed in the context of bankruptcy
proceedings that “[t]he fact one party has a superior bargaining
-5- position does not warrant a court in placing a thumb on the
scales.” Id. at 401.
What arguably makes this case different is that Pratt
allegedly threatened to take adverse action against Diamond in
another forum if he did not settle Premier’s discharge claim.
Reasonable people can disagree as to whether such threats should
ever be permitted during settlement negotiations. For example,
the drafters of the California Rules of Professional Conduct,
presumably believing that all threats of this type are inherently
coercive, have determined that a lawyer may never “threaten to
present criminal, administrative, or disciplinary charges to
obtain an advantage in a civil dispute.” Cal. Rules Prof’l.
Conduct R. 5-100. In contrast, the American Bar Association has
adopted Model Rules of Professional Conduct that permit a lawyer
to use a threat to take action in another forum as leverage in
settlement negotiations unless the threat is unrelated to the
claim under negotiation, the person making the threat lacks a
factual or legal basis for either the threat or the underlying
claim, or the person making the threat claims to be able to exert
improper influence over the threatened proceeding. See ABA
-6- Comm’n on Ethics and Prof’l Responsibility, Formal O p . 363 (1992)
(discussing threats of prosecution).
This district follows the Model Rules.1 Accordingly, we do
not blanketly prohibit a lawyer from threatening to initiate an
administrative or disciplinary action against a party during the
course of settlement negotiations. Instead, such threats must be
carefully considered in the context in which they are made to
determine whether they are improperly coercive or harassing. A
similar approach is warranted in determining when aggressive
negotiation tactics of this type violate the automatic stay.
Pratt’s alleged threat to report Diamond to the Real Estate
Commission and have his licence revoked if he did not settle
plainly qualifies as hard bargaining. Nevertheless, it is not so
coercive or harassing, standing alone, as to qualify as a
violation of the automatic stay. Diamond does not allege that
1 Both this court and the bankruptcy court have adopted the New Hampshire Supreme Court’s Rules of Professional Conduct as our standards of professional conduct. See L.R. 83.5, DR-1; Administrative Order, Bankruptcy Court for the District of New Hampshire, 2090-2(3), DR-1. While the New Hampshire Rules of Professional Conduct are not identical to the ABA Model Rules, they follow the Model Rules in not adopting a per se prohibition on threatening administrative or disciplinary action during settlement negotiations.
-7- Pratt lacked a good faith basis either for a complaint to the
Real Estate Commission or his demand that Diamond’s debt should
remain non-dischargeable. He does not assert that Pratt claimed
an ability to improperly influence the Real Estate Commission.
Nor does he claim that the threatened referral was for a matter
unrelated to the dispute at issue in the discharge proceeding.
In short, all we know about Pratt’s alleged threat from reading
Diamond’s complaint is that he made his threat in an attempt to
obtain a favorable settlement of the discharge proceeding. By
itself, this is not sufficient to permit a conclusion that the
threat was improperly coercive or harassing. Accordingly,
Diamond’s complaint fails to state a viable claim for relief.2
The Bankruptcy Court’s order dismissing Diamond’s complaint
is affirmed.
SO ORDERED.
Paul Barbadoro Chief Judge December 1 3 , 2002
2 Diamond does not argue that Pratt’s alleged threat qualifies as Theft by Extortion under N.H. Rev. Stat. Ann. § 637:5. Accordingly, I have not attempted to determine whether the threat should be considered coercive because it violates the New Hampshire Criminal Code.
-8- cc: Michael S . Askenaizer, Esq. James S . LaMontagne, Esq. Terrie Harman, Esq.
-9-