The Bankruptcy Hegemon: Section 524(A) and Its Effect on State and Federal Comity

The modern Bankruptcy Code was born in 1978 amidst rising calls, from within Congress and without, to overhaul a system that had largely fallen into disrepair. The resulting legislation, with its myriad provisions, makes up Title 11 of the United State Code, bound together via an intricate network of internal references, exceptions and exemptions. Designed to accommodate a broad range of debtor classes, from individuals to large multinational corporations, the modern legislative scheme subjects each class of debtor to a distinct and carefully orchestrated bankruptcy proceeding. But as all roads lead to Rome, so too do all Title 11 proceedings lead to the discharge at bankruptcy - and to section 524(a). At first blush, section 524(a) of Title 11 is unproblematic; it grants discharged debtors two powerful automatic defenses in the form of a statutory injunction and a statutory avoidance provision. In so doing, the section protects debtors against post-discharge suits filed by unscrupulous creditors in an attempt to collect the already discharged debts. However, further consideration reveals a worrisome fact: Section 524(a) seemingly allows federal courts to avoid state judgments unilaterally, thus exacerbating a tension between federal and state courts that has existed for generations. The most troubling scenario is simple enough to articulate:A debtor, D, obtains a discharge order from a bankruptcy court, thereby automatically triggering the protections of section 524(a). One of D’s former creditors, C, files a post-discharge civil suit in state court, attempting to collect on the pre-discharge debt. D, out of an overabundance of caution, pleads his discharge at bankruptcy in the state suit and C replies that the debt was not discharged during the bankruptcy proceedings. Having weighed the arguments, the state court holds that the discharge order did not cover D’s debt to C and, thus, section 524(a) protections do not bar C’s suit. Accordingly, the state court renders judgment against D who in turn petitions the bankruptcy court for an injunction barring enforcement of the state court’s judgment on the ground that it violates either the discharge injunction of section 524(a)(2) or is void under the statutory avoidance provision of section 524(a)(1).The bankruptcy court is thus presented with a Gordian knot: If it does nothing and permits C to enforce the state judgment against D, it ignores the language of section 524(a) which “voids any judgment at any time obtained [which is] a determination of the personal liability of the debtor with respect to any debt discharged.” On the other hand, if the bankruptcy court enjoins C from enforcing the judgment, it effectively voids a state decision which, according to the United States Code, is entitled to full faith and credit. To aid in navigating the labyrinthine system of doctrines and procedures that has developed, Part I of this Note provides a whistle-stop tour of the history behind the discharge injunction described in section 524(a) of Title 11. Part II discusses the current language of sections 524(a) and 523(a). Part III then describes the three doctrinal approaches that courts have taken in their attempts to resolve the issue of state-court power to adjudicate the scope of the bankruptcy discharge. Part IV focuses on In re Hamilton and the Sixth Circuit’s recent, and troubling, argument that state courts can decide post-discharge matters, but only if they do so correctly. Part V then proposes that the tension between federal and state courts must be resolved in favor of the states, based on the federal courts’ power to amend the discharge order after the bankruptcy proceedings end. Finally, the conclusion serves as a call to arms for the federal courts to address this dispute directly and clearly instead of lingering in the current doctrinal morass.