Wyly et al
Filing
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MEMORANDUM OPINION AND ORDER. The Court AFFIRMS the bankruptcy courts judgment. (Signed by Judge George C Hanks, Jr) Parties notified.(ByronThomas, 4)
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United States District Court
Southern District of Texas
ENTERED
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
In re JOHNNIE G. EICHOR,
Debtor.
BENSON WYLY, et al.,
Appellants.
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August 29, 2023
Nathan Ochsner, Clerk
CIVIL ACTION NO. 4:22-CV-3274
ADVERSARY CASE NO. 21-3937
MEMORANDUM OPINION AND ORDER
This is a bankruptcy appeal. The appellants, Benson and Pam Wyly (“the Wylys”),
sued the bankruptcy debtor, Johnnie Eichor (“Eichor”), in Texas state court and obtained a
default judgment against him. Eichor then filed an adversary complaint in which he alleged
that the Wylys’ state-court action violated the discharge injunction entered in his
bankruptcy case. After a bench trial, the bankruptcy court found that the Wylys willfully
violated the discharge injunction and awarded actual damages and attorney’s fees to
Eichor. The Wylys have appealed, and the Court AFFIRMS the bankruptcy court’s
judgment.
I.
BACKGROUND
Eichor and the Wylys had been friends for many years when Eichor mentioned to
Benson Wyly that his demolition business was struggling and that he was thinking of
borrowing money from his mother and stepfather. (Dkt. 2-8 at pp. 24, 167). As a result of
this discussion, Eichor and the Wylys entered into a series of three agreements whereby
Eichor purported to sell his house to the Wylys with the option to repurchase it. (Dkt. 2-4
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at pp. 51–54, 110–12, 116–18).1 The first agreement was dated June 25, 2015; the second,
May 26, 2016; and the third, January 20, 2017. (Dkt. 2-4 at pp. 102, 111, 117). Eichor
never transferred title to the Wylys, and he and his family continued to live in the house
and pay the property taxes. (Dkt. 2-8 at pp. 32–33, 45, 59, 109, 114–15, 189–91).
Eichor fell behind on his property taxes, and five taxing districts filed a lawsuit
against him in Texas state court in June of 2019. (Dkt. 2-4 at pp. 209–13). In October of
2020, the Wylys filed a petition in intervention in the taxing districts’ suit and sued Eichor,
asserting that Eichor had breached the third agreement with the Wylys—the one dated
January 20, 2017—for the supposed purchase of his home. (Dkt. 2-4 at pp. 215–17).
Initially, the Wylys did not serve the petition in intervention on Eichor. (Dkt. 2-8 at p. 149).
On November 1, 2020, Eichor filed a voluntary Chapter 7 bankruptcy petition and
claimed a homestead exemption on his house. (Dkt. 2-9 at p. 19). The bankruptcy court
issued Eichor’s Chapter 7 discharge order and closed the bankruptcy case on February 9,
2021. (Dkt. 2-9 at pp. 85–88). Two months later, on April 6, 2021, the Wylys served Eichor
with their petition in intervention from the taxing districts’ state-court lawsuit. (Dkt. 2-4 at
p. 224). In response, Eichor’s counsel sent a letter to the Wylys’ counsel stating that the
Wylys had “violated the discharge injunction issued by the U.S. Bankruptcy Court by
continuing with the intervention action.” (Dkt. 2-5 at p. 17). Eichor’s counsel’s letter
further explained that Eichor would not make an appearance in the Wylys’ state-court
Eichor’s ex-wife executed the agreements as well, but she is not a party to these proceedings. The
home, which Eichor purchased when he was single, was awarded to Eichor in the divorce because
it was his separate property. (Dkt. 2-8 at p. 17).
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action; that “[a]ny decision by the Brazoria District Court may be void[;]” and that, if the
Wylys continued to prosecute their state-court action, Eichor’s counsel would file an
adversary proceeding that would “seek monetary damages, including attorneys’ fees,
against Mr. and Mrs. Wyly for their willful violation of the discharge injunction granted to
Mr. Eichor.” (Dkt. 2-5 at p. 18).
Eichor did not file an answer to the Wylys’ suit; and, despite the warnings contained
in Eichor’s counsel’s letter, the Wylys took a default judgment against him. (Dkt. 2-4 at p.
226). The Texas state court’s default judgment provided that, because Eichor had breached
his January 20, 2017 contract with the Wylys, the Wylys had “acquired all right, title and
interest on [Eichor’s house] as of April 20, 2017” and that Eichor had been “divested of all
right, title and interest in the property that same day.” (Dkt. 2-4 at p. 227). The Wylys then
locked Eichor out of his house; Eichor came home one day to find the locks changed and
a copy of the default judgment taped to the front door. (Dkt. 2-8 at pp. 17–19).
Eichor filed an adversary complaint in the bankruptcy court, alleging that the Wylys
had violated the Chapter 7 discharge injunction in his bankruptcy case by continuing to
prosecute their state-court action against Eichor after Eichor received his discharge order.
(Dkt. 2-3 at pp. 1–29). The bankruptcy court held a bench trial. One of the witnesses was
the Wylys’ counsel, who engaged in the following exchange with the bankruptcy court:
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THE COURT:
All right. I have a couple questions. Mr. Gross, do you
regularly practice bankruptcy law?
[COUNSEL]:
No.
THE COURT:
All right. So before you went to the court and took the
default judgment on 6/24/2021, other than your own
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independent analysis did you reach out to anyone to try
and determine the effect that the Debtor’s discharge had
on you moving forward on 6/24/2021?
[COUNSEL]:
I did call the trustee and I asked if we could file
something and asked what would we file, and
something like an objection or whatever. And then I
determined, you know, me going with the Bankruptcy
Court, I didn’t know how to do that. And then it was, be
careful not to enter a ruling that disturbed a discharge
order.
So what I did then was I had looked at the petition and
I reviewed it for Mr. Wyly’s claim in this particular
case, and I didn’t see it.
I knew that if the property—if Mr. Eichor did not own
the property at the time he filed bankruptcy, if [Benson]
Wyly was the owner, then I didn’t think having a—the
two thirty-ninth district court enter a declaration just of
ownership at one particular time, I didn’t think that
declaration would interfere with the Bankruptcy Court’s
discharge.
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THE COURT:
So do you have an understanding, and if you do have an
understanding, what is that understanding, about the
effect that a bankruptcy filing has on perfection of a lien
or perfection of an interest?
[COUNSEL]:
I believe that if a bankruptcy discharge order, if there’s
money—
THE COURT:
No, I’m not talking about a discharge. I’m talking about
filing date, petition date. Do you have an
understanding—and if you don’t, that’s fine because
you’re not a bankruptcy practitioner. But do you have
any sort of opinion as to when a bankruptcy petition is
filed, how it affects perfection of let’s say a security
interest?
[COUNSEL]:
No. The—my understanding is limited to it just—you
just—there’s an automatic stay until—
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THE COURT:
All right. Thank you.
[COUNSEL]:
—it’s over.
Dkt. 2-8 at pp. 160–62.
After the bench trial, the bankruptcy court found that the three agreements whereby
the Wylys purported to purchase Eichor’s house were actually “disguised loans and not the
purchase of an asset.” (Dkt. 2-7 at p. 56). The bankruptcy court further found that, although
the agreements between the Wylys and Eichor “were all intended to be secured loans
between [Eichor] and [the Wylys],” the loans “were not and could not have been secured
as they violated [Eichor’s] homestead protections[.]” (Dkt. 2-7 at p. 48). As a result, the
Wylys “held no security interest in [Eichor’s house], there was no perfected lien, and [the
Wylys] merely held an unsecured claim.” (Dkt. 2-7 at p. 60). Consequently, the bankruptcy
court found that the Wylys’ suit against Eichor violated Eichor’s discharge injunction:
Simply stated the Court finds that any attempt to enforce the debts held by
the [Wylys] post discharge, including an attempt to quiet title to [Eichor’s
house,] violated the discharge injunction. The debts held by the [Wylys] were
unsecured, they had not perfected liens for the reasons stated herein. They
were discharged in the Chapter 7. The [Wylys’] attempt to quiet title was
simply an “end run” around the discharge injunction.
Dkt. 2-7 at pp. 61–62.
Finally, the bankruptcy court found that the Wylys’ violation of Eichor’s discharge
injunction was willful:
[E]ven after being advised that the prosecution of the suit was a violation of
the discharge injunction by Eichor’s counsel, and that counsel intended to
file suit on that basis, the Wylys willfully proceeded with obtaining a
judgment in the Intervention Suit. Instead, if they believed that they were
entitled to an exception from the discharge, the Wylys should have brought
an action to obtain the requisite determination of that exception.
...
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The Court finds that the Wylys willfully violated the discharge injunction in
this case.
Dkt. 2-7 at pp. 61–62.
The bankruptcy court found the Wylys liable for actual damages and attorney’s fees
and awarded title of Eichor’s house to Eichor but declined to award punitive damages
against the Wylys. (Dkt. 2-7 at p. 62). The Wylys appealed. (Dkt. 1).
II.
BANKRUPTCY APPEALS
Federal district courts have jurisdiction to hear appeals from the final judgments of
bankruptcy judges. 28 U.S.C. § 158(a). An appeal to a district court from the bankruptcy
court “shall be taken in the same manner as appeals in civil proceedings generally are taken
to the courts of appeals from the district courts[.]” 28 U.S.C. § 158(c)(2). This Court
reviews the bankruptcy court’s legal conclusions de novo but may only disregard a fact
finding made by the bankruptcy court if that fact finding is clearly erroneous. In re Perry,
345 F.3d 303, 309 (5th Cir. 2003). “A factual finding is not clearly erroneous if it is
plausible in the light of the record read as a whole.” In re Ramba, Inc., 416 F.3d 394, 402
(5th Cir. 2005). The Fifth Circuit has emphasized that, under the “clearly erroneous”
standard, this Court “may [not] weigh the evidence anew” and may only set aside the
bankruptcy court’s fact findings if it is “left with the definite and firm conviction that a
mistake has been committed.” In re Perry, 345 F.3d at 309 (quotation marks omitted).
III.
ANALYSIS
On appeal, the Wylys raise four arguments: (1) the bankruptcy court lacked subject
matter jurisdiction over the dispute regarding title to Eichor’s house; (2) the Wylys did not
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violate the discharge injunction by pursuing “a purely in rem” state-court action; (3) the
state-court default judgment is not void; and (4) even if the Wylys violated Eichor’s
discharge injunction, the evidence was insufficient to show “that they are liable for civil
contempt.” (Dkt. 3 at p. 2). The Court disagrees with the Wylys’ contentions.
—The bankruptcy court properly exercised jurisdiction.
The Wylys first challenge the bankruptcy court’s exercise of subject matter
jurisdiction. Eichor brought his adversary proceeding against the Wylys under Sections
524 and 727 of the Bankruptcy Code to enforce the discharge injunction entered in his
bankruptcy case. (Dkt. 2-4 at pp. 1–30). The bankruptcy court held that Eichor’s adversary
proceeding was “a core proceeding pursuant to 28 U.S.C. §§ 157(b)(1) and (b)(2).” (Dkt.
2-7 at p. 53). The Wylys argue that the bankruptcy court’s jurisdictional holding was
incorrect as to “the parties’ dispute over ownership of [Eichor’s house]” because
“[d]isputes based on state-created rights (such as disputes over the ownership of real
property) are not core proceedings.” (Dkt. 3 at p. 17).
The Court disagrees with the Wylys. The fact that a dispute is based on a “statecreated right,” as the Wylys put it, does not alone remove that dispute from the category of
core bankruptcy proceedings. Rather, the Bankruptcy Code provides that “[a]
determination that a proceeding is not a core proceeding shall not be made solely on the
basis that its resolution may be affected by State law.” 28 U.S.C. § 157(b)(3). Furthermore,
“[a] ‘core proceeding’ includes enforcement of the discharge, there being few matters as
‘core’ to the basic function of the bankruptcy courts as the enforcement of the discharge
under Sections 524 and 727 of the Bankruptcy Code.” In re Haynes, No. 13-8370, 2014
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WL 3608891, at *7 (Bankr. S.D.N.Y. July 22, 2014); see also In re Harlan, 402 B.R. 703,
710 (Bankr. W.D. Va. 2009) (“A debtor’s claim to enforce the discharge injunction is a
core proceeding arising under the Bankruptcy Code.”) (quotation marks omitted). The
definition of “core proceeding” also includes, as Eichor points out, determinations as to the
dischargeability of particular debts; objections to discharges; and determinations of the
validity, extent, or priority of liens. 28 U.S.C. §§ 157(b)(2)(I), (b)(2)(J), (b)(2)(K). And the
Bankruptcy Code further empowers a bankruptcy court to “issue any order, process, or
judgment that is necessary or appropriate to carry out” the Bankruptcy Code’s provisions.
11 U.S.C. § 105(a).
The bankruptcy court did not err in concluding that it had jurisdiction to award
ownership of Eichor’s homestead to Eichor. The Wylys’ actions in state court raised the
question of whether they had a valid pre-bankruptcy lien on Eichor’s homestead, and
Eichor filed an adversary complaint alleging that the Wylys had violated his Chapter 7
discharge injunction; these matters fell within the definition of “core proceeding.”
Moreover, the Bankruptcy Code broadly authorized the bankruptcy court to issue
judgments that were necessary and appropriate to facilitate the fresh start provided to
Eichor by the discharge injunction. In re Walker, 180 B.R. 834, 840 (Bankr. W.D. La.
1995) (“Remedial statutes such as the Bankruptcy Code are to be liberally construed in
favor of the debtor in order to better facilitate the debtor’s fresh start. . . . Discharge is the
legal embodiment of the fresh start.”) (quotation marks omitted). Accordingly, the Wylys
have not shown that the bankruptcy court lacked the power to award title of Eichor’s house
to Eichor.
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—The Wylys’ lawsuit violated Eichor’s discharge injunction.
The Wylys next contend that their actions “did not violate the discharge injunction
as a matter of law” because their suit against Eichor “was purely in rem.” (Dkt. 3 at pp.
20–22). The Court disagrees.
As the Wylys correctly note, a discharge injunction like Eichor’s “does not prevent
a creditor from enforcing a valid, pre-bankruptcy lien or security interest against property
that has been retained by the estate or by the debtor after discharge.” Id. at 841. Instead,
the discharge injunction “is designed to protect a debtor only from in personam liability.”
Id.; see also In re Simmons, 765 F.2d 547, 556 (5th Cir. 1985) (“[A] creditor with a loan
secured by a lien on the assets of a debtor who becomes bankrupt before the loan is repaid
[may] ignore the bankruptcy proceeding and look to the lien for satisfaction of the debt.”).
“Therefore, [an] in rem action on [a] secured claim survive[s] the bankruptcy.” Chandler
Bank of Lyons v. Ray, 804 F.2d 577, 579 (10th Cir. 1986). Citing these principles, the
Wylys argue that their state-court suit against Eichor did not violate Eichor’s discharge
injunction because the suit “was purely in rem” and did not seek any relief against Eichor
in personam. (Dkt. 3 at pp. 20–22).
The Court finds this argument unconvincing. “[D]ischarge establishes a legal right
not to pay a debt and safeguards against harassment by the creditor.” In re Walker, 180
B.R. at 840. “Accordingly, a creditor’s ability to proceed in rem against a debtor’s
collateral post-discharge requires that the creditor have a perfected security interest in the
collateral.” In re Loe, No. 12-4108, 2013 WL 6628960, at *8 (Bankr. N.D. Tex. Dec. 17,
2013). “[A] creditor may not proceed in rem against a debtor’s property interest if the
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creditor did not have a lien before the bankruptcy case and the debtor’s personal liability
has been discharged.” Id. Furthermore, “[n]umerous cases have held that a party who
exercises its in rem rights nonetheless violates [the discharge injunction] if either the
purpose or the objective effect of the action is to coerce the [bankruptcy] debtor into paying
the debt personally.” In re Mejia, 559 B.R. 431, 442–43 (Bankr. D. Md. 2016) (emphasis
in Mejia). Here, the bankruptcy court found as a matter of fact that the three agreements
whereby the Wylys purported to purchase Eichor’s house were actually “disguised loans
and not the purchase of an asset.” (Dkt. 2-7 at p. 56). The bankruptcy court further found
that the Wylys “held no security interest in [Eichor’s house], there was no perfected lien,
and [the Wylys] merely held an unsecured claim.” (Dkt. 2-7 at p. 60). These fact findings,
to the extent that the Wylys challenge them, were not clearly erroneous; and they establish
that the Wylys in fact had no right to proceed in rem against Eichor’s homestead postdischarge. The objective effect, and perhaps the purpose, of the Wylys’ state-court suit was
to coerce Eichor into personally paying a discharged unsecured claim. Accordingly, the
Wylys’ state-court suit against Eichor, even if it is appropriately characterized as an in rem
proceeding, violated Eichor’s Chapter 7 discharge injunction.
—The state-court default judgment was void.
The Wylys next contend that, “[f]or the same reasons that [their] actions did not
violate the discharge injunction, the state court’s default judgment was not void under 11
U.S.C. § 524(a)(1).” (Dkt. 3 at p. 22). The Court has rejected the Wylys’ argument that
their state-court suit did not violate the discharge injunction and consequently rejects their
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argument that the state-court judgment was not void under Section 524 of the Bankruptcy
Code.
11 U.S.C. § 524 essentially “declares that any judgment rendered on a discharged
debt in any forum other than the bankruptcy court is null and void as it affects the personal
liability of the debtor.” In re Walker, 180 B.R. at 841–42 (quoting 3 Collier on Bankruptcy,
¶ 524.01). “As Collier states, ‘section 524(a) contains an injunction prohibiting creditors
holding discharged debts from: (1) commencing an action on such debt; (2) continuing
such an action already initiated; or (3) employing process to collect on such
debt, e.g., through the use of garnishment or attachment writs.’” Id. at 842 (quoting 3
Collier on Bankruptcy, ¶ 524.01) (brackets omitted). The bankruptcy court has the power
to declare a violative post-petition state-court judgment void, and it is “unequivocally
unnecessary” for the bankruptcy debtor to raise the discharge injunction as an affirmative
defense or even to respond in the state-court action. Id. Since the Wylys’ state-court suit
violated Eichor’s Chapter 7 discharge injunction, the bankruptcy court properly declared
the state-court default judgment void.
—The bankruptcy court’s civil contempt finding is supported by the
evidence.
Finally, the Wylys contend that, “[e]ven if [they] had violated the discharge
injunction, the evidence is insufficient to show by clear and convincing evidence that they
are liable for civil contempt.” (Dkt. 3 at p. 23). The Court disagrees.
“To determine whether a party should be held in contempt for violating a discharge
injunction, courts employ an objective standard, and contempt is appropriate when there is
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not a ‘fair ground of doubt’ as to whether the creditor’s conduct might be lawful under the
discharge order.” In re McKinney, No. 21-50046, 2022 WL 1632156, at *2 (Bankr. N.D.
Tex. Apr. 28, 2022) (some quotation marks omitted; quoting Taggart v. Lorenzen, 139 S.
Ct. 1795, 1804 (2019)). Under Taggart, three elements must be proven for a court to hold
a party in contempt: “(1) the party violated a definite and specific order of the court
requiring him to refrain from performing particular acts; (2) the party did so with
knowledge of the court’s order; and (3) there is no fair ground of doubt as to whether the
order barred the party’s conduct.” In re McKinney, 2022 WL 1632156 at *2 (ellipses
omitted; quoting In re City of Detroit, Michigan, 614 B.R. 255, 265 (Bankr. E.D. Mich.
2020)). The bankruptcy debtor (or other moving party) must prove “at least” the first two
elements by clear and convincing evidence. In re City of Detroit, 614 B.R. at 265–66.
“Clear and convincing evidence” is evidence “so clear, direct and weighty and convincing
as to enable the fact finder to come to a clear conviction, without hesitancy, of the truth of
precise facts of the case.” Hornbeck Offshore Services, L.L.C. v. Salazar, 713 F.3d 787,
792 (5th Cir. 2013).
Eichor carried his burden before the bankruptcy court. The Wylys concede the
second element: they had knowledge of Eichor’s Chapter 7 discharge order when they
obtained the state-court default judgment against Eichor. (Dkt. 3 at pp. 23–27). And as to
the first element, the bankruptcy court found that the Wylys’ state-court lawsuit violated
Eichor’s discharge injunction. The bankruptcy court’s findings that the purported sale of
Eichor’s home was really a series of disguised loans; that the Wylys had no security interest
in Eichor’s homestead; and that the Wylys had no right to proceed in rem against Eichor’s
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homestead post-discharge were supported by clear and convincing evidence. The structure
of the purported sale of Eichor’s homestead alone constituted such evidence—the Texas
Constitution voids “[a]ll pretended sales of the homestead involving any condition of
defeasance[.]” Tex. Const. art. XVI, § 50; see also In re Perry, 345 F.3d 303, 313 (5th Cir.
2003) (“A condition of defeasance permits the seller to reclaim the title to the property
conveyed after the loan is repaid.”); In re Cadengo, 370 B.R. 681, 692 (Bankr. S.D. Tex.
2007) (“A common example of a condition of defeasance is an option to repurchase at the
end of the purported sale.”). Moreover, despite the supposed sale, Eichor never transferred
title to the Wylys, and he and his family continued to live in the house and pay the property
taxes. (Dkt. 2-8 at pp. 32–33, 45, 59, 109, 114–15, 189–91).
The same clear and convincing evidence also establishes the third element. With
regard to the third element, the question is whether there was an “objectively reasonable
basis for concluding” that the Wylys’ conduct might have been lawful under Eichor’s
discharge injunction. Taggart, 139 S. Ct. at 1801. The bankruptcy court found that the
Wylys had no objectively reasonable basis for concluding that their post-discharge actions
were proper. (Dkt. 2-7 at p. 62). This finding was not clearly erroneous, and the bankruptcy
court’s handling of the matter exhibited careful consideration of the facts and evidence.
Notably, the bankruptcy court evidently took into account the Wylys’ counsel’s confessed
unfamiliarity with bankruptcy law and did not award damages to Eichor that predated “the
first full month that the [Wylys] were given actual notice of [Eichor’s] claim by [Eichor’s]
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counsel[.]” (Dkt. 2-7 at p. 62).2 The bankruptcy court also declined Eichor’s request for an
award of punitive damages against the Wylys. (Dkt. 2-7 at p. 62). See In re Mooney, 340
B.R. 351, 361 (Bankr. E.D. Tex. 2006) (noting that a punitive damage award for violation
of a discharge injunction must be based on “malevolent intent” or “willful and malicious”
conduct).
The bankruptcy court’s finding that Eichor had established entitlement to a
contempt finding under Taggart by clear and convincing evidence was not clearly
erroneous. Accordingly, the Court will not reverse the bankruptcy court’s civil contempt
finding against the Wylys.
IV.
CONCLUSION
The Court AFFIRMS the bankruptcy court’s judgment.
SIGNED at Houston, Texas, on August 29, 2023.
_______________________________
__________________________________
GEOR
RGE C.
C HANKS,
HANKS JR.
JR
GEORGE
UNITED STATES DISTRICT JUDGE
As previously mentioned, after the Wylys served Eichor with their state-court lawsuit, Eichor’s
counsel sent a letter to the Wylys’ counsel stating that the Wylys had “violated the discharge
injunction issued by the U.S. Bankruptcy Court by continuing with the intervention action.” (Dkt.
2-5 at p. 17). Eichor’s counsel’s letter further explained that Eichor would not make an appearance
in the Wylys’ state-court action; that “[a]ny decision by the Brazoria District Court may be void[;]”
and that, if the Wylys continued to prosecute their state-court action, Eichor’s counsel would file
an adversary proceeding that would “seek monetary damages, including attorneys’ fees, against
Mr. and Mrs. Wyly for their willful violation of the discharge injunction granted to Mr. Eichor.”
(Dkt. 2-5 at p. 18).
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