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 .

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

(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

(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.,

4 , 97 (1st Cir. 2002); see also

In re Christo,

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.”

(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.

(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,

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.,

(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,

.

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

. 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-