Taggart v. Lorenzen, 587 U.S. (2019).
The U.S. Supreme Court has established an objective standard for determining whether a creditor should be held in civil contempt when the creditor attempts to collect a debt subject to a bankruptcy discharge order.
In Taggart, the debtor filed a petition for relief under Chapter 7 of the Bankruptcy Code on the eve of trial and received his discharge under Section 727 of the Bankruptcy Code. The creditor then received a judgment in state court against the debtor, in which the creditor sought an award of attorneys’ fees related to the debtor’s post-petition conduct. The state court awarded the creditor its fees, and the debtor sought relief from the bankruptcy court.
The bankruptcy court ultimately found that the creditor was in violation of the discharge order based on a strict liability standard. The bankruptcy appellate panel vacated the finding, and the Ninth Circuit Court of Appeals affirmed the panel’s decision based on the creditor’s good faith belief that its conduct did not violate the discharge order. The U.S. Supreme Court granted a review of the lower court’s decision.
Supreme Court Decision
Drawing on legal precedent from cases outside of the bankruptcy context, the U.S. Supreme Court held that “civil contempt should not be resorted to where there is [a] fair ground of doubt as to the wrongfulness of the defendant’s conduct.” Even though it agreed with the Ninth Circuit’s result, the Court rejected the subjective standard that the Ninth Circuit applied, stating it was “inconsistent with traditional civil contempt principles” and likely to encourage further litigation. Likewise, the Court held that the bankruptcy court’s strict liability standard was not appropriate because it would further burden the court system and interfere with the stated purpose of securing a prompt and efficient resolution of bankruptcy disputes.
Taggart provides only limited relief to creditors. While the U.S. Supreme Court rejected the strict liability standard, a creditor caught with its hand in the cookie jar still faces an uphill battle. Because there are only a few exceptions to the enforcement of a bankruptcy discharge order, a creditor will have a difficult time arguing that its actions give rise to a “fair ground of doubt” as to their wrongfulness and therefore such actions satisfy the objectively reasonable standard.