Under a recent United States Supreme Court ruling, creditors could be subject to sanctions if there is no “fair ground of doubt” as to the actions violating a debtor’s bankruptcy discharge. In Taggart v. Lorenzen, 139 S.Ct. 1795, 204 L.Ed.2d (2019), the Supreme Court held that the appropriate standard for finding civil contempt is whether there was an objectively reasonable basis, or fair ground, to doubt that the creditor’s conduct was lawful.
The Taggart case involved a lawsuit by owners of a company against their former business partner, Bradley Taggart, for breach of the company’s operating agreement. Prior to trial in the lawsuit, Taggart filed a personal bankruptcy under Chapter 7 of the United States Bankruptcy Code. Taggart received his bankruptcy discharge in his bankruptcy case with an Order for such discharge provided to creditors, including Taggart’s former partners. Once Taggart’s bankruptcy case was closed, the state court handling the lawsuit entered judgment against Taggart and in favor of his former partners. The former partners of Taggart then filed a petition with the state court seeking to have their attorneys’ fees, incurred after Taggart’s petition date, included with the judgment.
Taggart responded by going back to the bankruptcy court to request sanctions against the former partners for violating the bankruptcy court’s discharge order. The bankruptcy court agreed with Taggart, finding that contempt sanctions were appropriate based on the former partners being aware of the discharge and intending the actions which they violated. As a result, the bankruptcy court awarded Taggart over $112,000 in attorneys’ fees and punitive damages.
On appeal, the Ninth Circuit reversed the bankruptcy court by holding the standard of review should have been the “creditor’s good faith belief” that the creditor did not violate the debtor’s bankruptcy discharge, rather than using the strict liability standard applied by the bankruptcy court.
The Supreme Court ultimately held that the appropriate standard of review for civil contempt was neither strict liability nor the creditor’s good faith belief, but a fair ground of doubt. Unlike the Ninth Circuit’s standard, which would require a subjective determination of a creditor’s state of mind regarding the actions, the Supreme Court reasoned that the fair ground of doubt standard is an objective one striking the balance between the interests of the creditors and the debtor.
The case is presently on remand to the lower court to determine if the action of Taggart’s former business partners were with a fair ground of doubt as to violating the bankruptcy discharge.
Creditors should always be careful with any actions that may be considered a potential violation of a bankruptcy discharge or a bankruptcy stay. Often, the best option for creditors is to present their intentions to the bankruptcy court and obtain the court’s approval before taking any action against a debtor that could be construed as a discharge or stay violation.
If you have any questions on the topic of this bulletin or other bankruptcy matters, feel free to contact attorney Eric von Helms at (414) 962-5110 or via email.
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