E.D.N.C.: Conway v. Palczuk- Law of the Case Doctrine

Summary:

The District Court affirmed a bankruptcy court's judgment, which held that the Conways, through their lawsuit, violated the discharge injunction protecting John and Karen Palczuk after their Chapter 11 bankruptcy discharge.

The Palczuks had filed for Chapter 11 bankruptcy in 2011 and were discharged in 2012. The Conways did not participate in the bankruptcy process, but in 2018, they sued the Palczuks in state court regarding a failed business venture that predated the bankruptcy, arguing the debt was nondischargeable under 11 U.S.C. § 523(a)(19), which pertains to securities law violations.

The bankruptcy court ruled that the Conways’ lawsuit violated the discharge injunction, which protects the debtor from post-discharge collection actions. The Conways appealed, claiming that their claims were not discharged under § 523(a)(19). The District Court, however, held that the “law of the case” doctrine,  which provides that when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case.  As applicable  in this case, meant that the bankruptcy court had already ruled on the dischargeability issue in a prior 2022 decision. 

The district court rejected the Conways' arguments that the 2002 decision was clearly erroneous  as it may decline to follow the law of the case only where: 

1. A subsequent trial produces substantially different evidence;
2. A controlling authority has since made a contrary decision of law applicable to the issue; or 
3. The prior decision was clearly erroneous and would work a manifest injustice.

 As the Conways violated the discharge injunction by asserting a securities violation,  not a §523(a)(19) claim,  the 2022 decision was not clearly erroneous and the bankruptcy court's sanctions award against the Conways for violating the discharge injunction was affirmed

Commentary:

Whether this law of the case analysis would help or hurt in appeals pending in the wake of Trantham v. Tate  regarding non-standard provisions that contradict local rules may be addressed in cases currently pending at the Fourth Circuit.

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