Subjective Belief that Conduct Not Subject to Discharge Order Precludes Sanctions

Posted by NCBRC - October 30, 2018

A creditor’s good faith belief that its conduct did not violate the discharge order precludes a finding of contempt for violation of the discharge injunction even if that belief is unreasonable. Taggart v. Lorenzo (In re Taggart), No. 16-35402 (9th Cir. April 23, 2018).

Bradley Taggart, a 25% owner of a real estate business, became embroiled in state litigation involving two other 25% owners of the business after he transferred his share to his lawyer without giving the co-owners their contractual right of first refusal. Mr. Taggart filed for chapter 7 bankruptcy and the state court stayed the business litigation until after he obtained his discharge. At that time, the business litigation resumed for the purpose of unwinding the business interest, but with the condition that, due to his bankruptcy discharge, Mr. Taggart would not be liable for any monetary judgment. At the conclusion of the business litigation, however, the state court permitted both parties to seek attorney’s fees. The attorneys for Mr. Taggart’s opponents sought attorney fees for their post-discharge work on the basis that Mr. Taggart had “returned to the fray” and the fees were thus the result of post-discharge conduct not related to the bankruptcy discharge.

Mr. Taggart reopened his bankruptcy and sought an order of contempt against the creditors. The bankruptcy court ruled in favor of the creditors and the district court reversed, finding that Mr. Taggart’s post-discharge conduct was insufficient to constitute a “return to the fray.” On remand, the bankruptcy court found that the creditors’ good faith belief that their conduct did not violate the discharge injunction could not shield them from sanctions because they were aware of the discharge order and intended the conduct that violated it. The BAP reversed on the basis that the creditors could not be held in contempt because they did not “knowingly” violate the discharge injunction.

On appeal, the Ninth Circuit addressed the first prong of the two-part test for an order of civil contempt under which a potential contemnor must know the discharge injunction is applicable. The court agreed with the BAP that a creditor’s good faith belief that the injunction does not apply, insulates it from sanctions, and that the bankruptcy court erred when it held that a party’s subjective belief was irrelevant to the question. Furthermore, because an order of contempt requires that the offending conduct be willful, under In re Zilog, Inc., 450 F.3d 996, 1007 (9th Cir. 2006), the creditor’s belief that its conduct does not violate the injunction need not be reasonable to preclude sanctions.

Having found that the creditors could not be held in contempt for violation of the discharge order, the circuit court declined to address the creditors’ cross-appeal as to whether their conduct, in fact, violated that order.

Mr. Taggart filed a petition for certiorari on October 15, 2018, case no. 18-489.

Taggart 9th Cir April 2018

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