What better way to wake Plan Proponent from a seven (!) month slumber than a minor Supreme Court opinion? Monday’s Taggart v. Lorenzen decision is not a confirmation opinion, but we’ve always tried to cover the Court’s bankruptcy decisions. In Taggart, with Justice Breyer writing for his unanimous colleagues, the Court held that, under § 524 of the Bankruptcy Code, a court can impose civil contempt sanctions for violations of a debtor’s discharge order when there is no “objectively reasonable” basis for viewing the creditor’s conduct as lawful under that order.
Lower Courts Struggle with § 524
Taggart found himself against Sherwood Park Business Center, his former company, and its other owners (collectively, “Sherwood”) in an Oregon state court lawsuit. The Sherwood crowd–the respondents in Taggart v. Lorenzen–accused him of having violated Sherwood’s operating agreement. Taggart filed a Chapter 7 in response to the suit and obtained his discharge. Nevertheless, the Oregon state court proceeded to enter a post-discharge judgment against Taggart and Sherwood petitioned to find Taggart liable for their post-petition attorneys’ fees. Their § 524 workaround: Taggart had “returned to the fray”–a phrase used in the Ninth Circuit’s In re Ybarra decision–such that his discharge order no longer protected him. The state court agreed and assessed $45,000 in attorneys’ fees against Taggart.
Taggart then went and complained to the bankruptcy court, arguing that he had not “returned to the fray,” that his discharge did protect him from Sherwood’s fees, and that the bankruptcy court should find Sherwood in contempt for having violated the post-discharge injunction. The bankruptcy court sided with Sherwood and Taggart went the full route on the appeal: the district court disagreed with the bankruptcy court and remanded; the bankruptcy court found Sherwood in contempt to the tune of $112,000 in various damages (using a sort of strict liability standard for evaluating alleged discharge violations); the Ninth Circuit BAP reversed; and the Ninth Circuit Court of Appeals affirmed the BAP.
In short, the Ninth Circuit applied a subjective standard, holding that a creditor’s “good faith belief” that a discharge order doesn’t apply to its actions can insulate it from contempt.
Supreme Court Makes § 524 Look Easy
It takes Justice Breyer and a unanimous Court barely 11 pages to dispense with the Taggart issue.
For the Court, § 524(a) and § 105(a) are just a codification of the general civil contempt remedy, a remedy that the Court understands and, for that matter, the lower courts should have understood, very well. Thus, a bankruptcy court’s authority to issue contempt findings is informed and limited by “traditional standards in equity practice” for issuing contempt findings.
And the guiding equitable principles, says the Court, are that civil contempt is a “severe” remedy; “basic fairness” demands that the party enjoined should have explicit notice of what conduct is enjoined; and civil contempt should be reserved for those circumstances where the party acts with an “objectively unreasonable” understanding of the discharge order’s scope.
That is not to say that subjective intent is never relevant. As the Court points out, a party can continually and persistently engage in enjoined conduct to the point that the party’s subjective intent informs the severity of the contempt finding. Likewise, a party’s subjective good faith can lessen the severity, even if that good faith can’t avoid a contempt finding altogether.
The Court could have stopped there, but it goes the extra steps of rejecting the Ninth Circuit’s subjective standard and the bankruptcy court’s strict liability standard (and the standard advocated by Taggart). On the subjective standard, the Court explains that not only is that standard inconsistent with “traditional civil contempt principles,” but it’s also just not very workable because it relies “too heavily on difficult-to-prove states of mind.”
On the strict liability standard, the Court explains that finding creditors in contempt simply because they were aware of the discharge and intended their actions is too much, particularly given that it eliminates all considerations of subjective intent and of whether the creditor had an objectively reasonable basis for concluding that the conduct was not enjoined. Further, creditors’ uncertainty about strict liability, particularly given that discharge orders are very generally worded, would likely result in creditors flooding the dockets with requests for advance determinations and, thus, result in unnecessary, time-consuming, and expensive litigation. Further still, the increased use of advance determination procedures might also, adds the the Court, move discharge order scope determinations out of the state courts and into the federal courts.
Finally, the Court rejects Taggart’s analogy to how stay violations are determined, recognizing that those determinations are closer to strict liability determinations, but also pointing out that, while the automatic stay prevents disruptions of estate administration over the short-term, a discharge is entered towards the end of the process and seeks to bind creditors over a much longer period.
Thus, in the spirit of promoting “prompt and effectual” resolution of bankruptcy cases, the Court settles on the rule: “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.”
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