Jun 27, 2019

Supreme Court of the United States sets a standard for bankruptcy discharge violations

On June 3, 2019, the Supreme Court of the United States issued an opinion that set a standard for holding a creditor in contempt for attempts to collect on a previously discharged debt. The Bankruptcy Code provides that a discharge: “[o]perates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor.” 11 U.S.C. § 524(a)(2). e. In Taggart v. Lorenzen, Executor of the Estate of Brown1, in a unanimous decision, the Supreme Court held that a court may hold a creditor in civil contempt for violating a discharge injunction “if there is no fair ground of doubt as to whether the order barred the creditor’s conduct” (emphasis in original).

In the underlying case, the petitioner, Bradley Taggart, was sued in Oregon state court by former business partners. While that case was pending, Taggart filed for bankruptcy and received discharge pursuant to 11 U.S.C. § 727. Shortly afterwards, the Oregon state court entered a judgment against him, including attorneys’ fees incurred when Taggart continued litigating the case afterfiling his bankruptcy petition. Taggart then returned to the Bankruptcy Court seeking civil contempt sanctions against the creditor for violating a discharge order. He prevailed in the bankruptcy court after the court applied a standard bordering on strict liability, holding the creditors in contempt because they were aware of the discharge and yet intentionally followed through with their actions to collect. Following an appeal by the creditor, the Ninth Circuit reversed that decision concluding that the creditor could not be held in contempt based on the “creditor’s good faith belief” that a discharge did not apply to the claim even if the creditor’s claim was unreasonable.

In Taggart, the Supreme Court rejected both of the lower court’s standards and took a middle ground approach. It held that the 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.” In other words, a creditor’s subjective belief that it is complying with a bankruptcy order, while perhaps relevant in determining sanctions, will not insulate it from being held in civil contempt. However, striking a “careful balance between the interests of creditors and debtors,” the Court expressly rejected a strict liability standard pointing out that it would likely cause creditors to be overly cautious and frequently seek advance rulings from federal courts, leading to undue costs and delays.

While Taggart is not a tremendously impactful decision affecting creditors’ day-to-day operations, it provides a novel discussion of a topic that is frequently at issue in the bankruptcy courts. Violating a discharge injunction can be a costly endeavor for a creditor as a debtor can be compensated for damages resulting from a discharge violation, including punitive damages. Even though Taggart provided guidance and perhaps some shelter to creditors dealing with discharged debtors, creditors should remain cautious and consult with counsel before doing so.

Contact a Chuhak & Tecson Banking attorney for more information regarding this Supreme Court decision or any other bankruptcy laws or rulings.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by:
Paulina Garga-Chmiel, Associate.

This alert originally appeared in the Summer 2019 Banking Focus newsletter..

1 Taggart v. Lorenzen, Executor of the estate of Brown, 587 U. S. ____ (2019)