On June 3, 2019, the U.S. Supreme Court issued its opinion in the Taggart v. Lorenzen case.
The question before the Supreme Court, in Taggart v. Lorenzen, “concerns the legal standard for holding a creditor in civil contempt when the creditor attempts to collect a debt in violation of a bankruptcy discharge order.”
Two Bankruptcy Code provisions are involved:
- Section 524(a)(2) says a discharge order “operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset” a discharged debt; and
- Section 105(a) authorizes a court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions” of the Bankruptcy Code.
These two statutes, the Supreme Court says, “authorize a court to impose civil contempt sanctions when there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.”
Bankruptcy statutes incorporate traditional standards for holding parties in civil contempt. In traditional cases outside bankruptcy, civil contempt “should not be resorted to where there is a fair ground of doubt as to the wrongfulness of the defendant’s conduct.” That’s because civil contempt is a “severe remedy” for which enjoined parties must “receive explicit notice” of the conduct that is outlawed.
Under the fair ground of doubt standard, civil contempt may be appropriate when the creditor violates a discharge order based on an objectively unreasonable understanding of the discharge order or the statutes that govern its scope.
–Ninth Circuit’s “Good Faith” Standard
The Ninth Circuit adopted a different standard under which a “creditor’s good faith belief ” that the discharge order “does not apply” will preclude a finding of contempt, “even if the creditor’s belief is unreasonable.”
This standard is unacceptable because it:
- is inconsistent with traditional civil contempt principles;
- relies too heavily on difficult-to-prove states of mind; and
- “may too often lead creditors who stand on shaky legal ground” to proceed with enjoined behavior and undermine the debtor’s discharge.
–Strict Liability Standard
Appellant argues for a finding of civil contempt if the creditor was aware of the discharge order and intended the actions that violated the order.
This standard is unacceptable because it:
- would operate “like a strict-liability standard”;
- disregards the creditor’s subjective beliefs and any “reasonable basis for concluding” that a violation had not occurred;
- “may lead risk-averse creditors” to seek advance determinations in bankruptcy court, even when the violation concern is “only slight”—Congress expected such determinations “would be needed in only a small class of cases”; and
- would move most questions of this nature “out of state courts” and into bankruptcy courts, despite Congress’s intention that state courts hear such issues “in most instances” to minimize costs.
Distinguishing the Automatic Stay Standard
An automatic stay is entered at the outset of a bankruptcy proceeding and forbids collection-type actions by creditors.
Automatic stay violations are handled differently than discharge injunction violations. That’s because:
- Remedies for automatic stay violations are explicitly provided by the Bankruptcy Code [“an individual injured by any willful violation” of an automatic stay “shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages” (11 U. S. C. §362(k)(1))], while statutory language for discharge injunction violations is “more general”; and
- The purposes of automatic stays and discharge orders differ: a stay prevents disruptions to the administration of a bankruptcy case in the short run, while a discharge occurs at the end of a case and binds creditors over a much longer period.
Supreme Court’s Conclusion
The Supreme Court’s Taggart v. Lorenzen opinion concludes with the following:
- The Ninth Circuit “erred in applying a subjective standard for civil contempt”;
- The “proper standard is an objective one”;
- “A court may hold a creditor in civil contempt for violating a discharge order where there is not a ‘fair ground of doubt’ as to whether the creditor’s conduct might be lawful under the discharge order”;
- Such a standard “strikes the ‘careful balance between the interests of creditors and debtors’ that the Bankruptcy Code often seeks to achieve”; and
- “we vacate the judgment below and remand the case for further proceedings consistent with this opinion.”
Now that the U.S. Supreme Court has articulated the governing legal standard, it will be interesting to see how bankruptcy courts and their appellate overseers apply the standard.
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