June 03, 2019

Supreme Court Decides Taggart v. Lorenzen

On June 3, 2019, the Supreme Court decided Taggart v. Lorenzen, No. 18-489, holding that a court may hold a creditor in civil contempt for violating a bankruptcy court’s discharge order as long as there is “no fair ground of doubt” as to whether the creditor’s conduct was lawful—in other words, if there is “no objectively reasonable basis” for concluding that the creditor’s violation of the discharge order was lawful.

Bradley Taggart owned an interest in an Oregon company. The company and the other owners sued Taggart for breach of contract. Before trial, Taggart filed a Chapter 7 bankruptcy proceeding and received a discharge. Under § 524(a) of the Bankruptcy Code (11 U.S.C. § 524(a)), the discharge order “operates as an injunction” that bars creditors from collecting any debt that was discharged in the bankruptcy.

After the discharge order was issued, the Oregon state court entered judgment against Taggart in the lawsuit against him, and the plaintiffs in that case tried to recover attorney’s fees that they incurred after Taggart filed his bankruptcy petition.

Taggart asked the bankruptcy court to hold the plaintiffs in civil contempt for violating the discharge order. The bankruptcy court determined that the plaintiffs had not violated the discharge order in seeking postpetition attorney’s fees because Taggart had “returned to the fray” in the state-court litigation, thus making him potentially liable for post-petition attorney’s fees under Ninth Circuit precedent. Taggart appealed to the district court, which held that Taggart had not returned to the fray and that the plaintiffs had violated the discharge order in seeking postpetition attorney’s fees. On remand, the bankruptcy court held the plaintiffs in civil contempt for violating the discharge order under a standard akin to strict liability, holding that the company was “aware of the discharge” order and “intended the actions” that violated the discharge order and imposing monetary sanctions against the plaintiffs. The plaintiffs appealed to the Bankruptcy Appellate Panel of the Ninth Circuit, which vacated the contempt sanctions, and the Ninth Circuit affirmed. The Ninth Circuit held that a creditor’s good-faith belief that the discharge order did not apply to its claims precluded a finding of contempt, even if the creditor’s belief was unreasonable. The Ninth Circuit concluded that the plaintiffs had a good-faith belief that the discharge order did not apply to their claims.

The Supreme Court vacated and remanded for further proceedings. The Court held that a court may 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. The Court concluded that the post-discharge-injunction provisions in § 524 of the Bankruptcy Code and § 105 of the Code (which provides that a bankruptcy court can “issue any order, process, or judgment” necessary to carry out the provisions of the Code) incorporate traditional principles of equity practice that govern the imposition of contempt sanctions. One of those principles is that a court should not impose contempt sanctions where there is “a fair ground of doubt as to the wrongfulness of the defendant’s conduct.” The Court emphasized that this is an objective standard, not a subjective one: contempt may be appropriate when a creditor violates the discharge order based on an objectively unreasonable understanding of the discharge order or the statutes that govern its scope.

Because the Ninth Circuit applied an improper standard in reviewing the bankruptcy court’s contempt order, the Court vacated the Ninth Circuit’s judgment and remanded for further proceedings consistent with the standard announced in the Court’s opinion.

Justice Breyer announced the opinion for a unanimous Court.

Download Opinion of the Court.

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