SCOTUS Adopts No Fair Ground of Doubt Standard for Discharge Order Violation

Posted by NCBRC - June 5, 2019

In a unanimous decision, the Supreme Court held that “a court may hold a creditor in civil contempt for violating a discharge order if there is no fair ground of doubt as to whether the order barred the credi­tor’s conduct.” Taggart v. Lorenzen, No. 18-489, 587 U. S. ___ (June 3, 2019).

Chapter 7 debtor, Bradley Taggart, was involved in pre-petition litigation in state court at the time he filed for bankruptcy. After he obtained his discharge, Sherwood, an opposing party in the state court litigation, obtained a judgment against him. Sherwood then sought attorney’s fees, and the state court awarded those fees notwithstanding Ninth Circuit precedent making clear that the post-petition attorney’s fees were discharged along with Taggart’s other debts. The bankruptcy court found that Sherwood was aware of the discharge and intended the act that violated it and, under that standard, it held Sherwood in contempt of the discharge order. The bankruptcy appellate panel reversed the sanction award and the Ninth Circuit affirmed, holding that Sherwood could not be held in contempt in light of its good faith belief that its conduct did not violate the discharge injunction regardless of whether that belief was reasonable.

In finding that neither the Bankruptcy court nor the Ninth Circuit applied the correct standard, Justice Breyer, writing for a unanimous court, discussed section 524(a)(2), which states that a discharge order acts as an injunction against further collection attempts, and section 105(a), which permits a court to issue any order necessary to carry out the provisions of the Bankruptcy Code. The Court applied an objective test, finding that a creditor may be held in contempt for violation of the discharge injunction if he lacked an objectively reasonable basis to believe that his conduct would not violate the order. The Court reasoned that because injunctions in bankruptcy were transplanted from injunctions in other areas of the law, they carried “old soil” and should be treated similarly to those traditional injunction actions. Because contempt is a severe remedy, courts have generally allowed a defendant to rely on the defense of “fair ground of doubt” as to the wrongfulness of his conduct. Under this standard, a defendant’s subjective belief that his conduct does not violate the injunction will not insulate him from a finding of contempt where that belief is objectively unreasonable.

The Court noted, however, that its conclusion leaves room for a subjective element to enter into a court’s determination of the proper sanction after contempt is found.

The Court turned to counterarguments, noting that even the Ninth Circuit agreed that it had applied the wrong standard when it broadly allowed a defense based on the creditor’s subjective belief however unreasonable. The Court rejected the standard endorsed by Taggart (and NACBA as amicus) and applied by the bankruptcy court—knowing of the discharge and intending the act that violated it—as too close to a strict liability standard. The fact that a creditor has the option of seeking advance determination of the scope of the discharge in a post-discharge proceeding would only burden the federal bankruptcy courts and increase costs to both creditors and debtors.

The Court differentiated between violations of the automatic stay and violations of the discharge injunction, noting first that remedies for violation of the automatic stay are provided for in a specific statute, section 362(k), while remedies for violation of the discharge injunction come out of the bankruptcy court’s more general powers provided for in section 105. Additionally, the automatic stay is a short-term provision that promotes effective administration of the bankruptcy case and ends at the conclusion of the case, whereas, the discharge injunction is a long-term restraint on a creditor’s conduct.

The Court vacated the Ninth Circuit decision and remanded the case.

Taggart (USSC) June 2019

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