The Standard for Holding a Creditor in Civil Contempt for Violating a Discharge Order is an Objective One

By: Alexander C. Koban

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff Member

            A debtor is generally entitled to a discharge at the conclusion of a bankruptcy case.[1] A discharge is a legal injunction that both releases the debtor from liability for most pre-bankruptcy debts and bars creditors from collecting any debt that has been discharged.[2] A creditor that violates the discharge may be held in contempt and subject to sanctions by a court.[3] In Taggart v. Lorenzen, 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.”[4] Simply put, “civil contempt may be appropriate if there is no objectively reasonable basis for concluding that the creditor's conduct might be lawful.”[5]

            Bradley Taggart (“Taggart”) formerly owned an interest in Sherwood Park Business Center (“Sherwood”)[6] who, along with two other owners, sued Taggart in Oregon state court claiming that Taggart had breached Sherwood’s operating agreement.[7] Before trial, Taggart filed for bankruptcy under chapter 7 of title 11 of the United States Code (the “Bankruptcy Code”) with the United States Bankruptcy Court for the District of Oregon.[8] On February 23, 2010, Taggart received a discharge.[9] Thereafter, notwithstanding Taggart’s discharge, the Oregon state court proceeded to enter judgment against Taggart pursuant to a petition filed by Sherwood in state court seeking attorney’s fees incurred after Taggart filed his bankruptcy petition. The Oregon state court found Taggart had “returned to the fray,” and held Taggart liable for Sherwood’s post-petition attorney’s fees in the approximate amount of $45,000.00.[10]            

            Taggart returned to the federal bankruptcy court by moving the bankruptcy court to  reopen his bankruptcy case, arguing that the bankruptcy court should hold Sherwood in civil contempt for violating the discharge order.[11] The bankruptcy court denied Taggart’s motion for contempt, finding that the state court had correctly decided the issue. Taggart appealed to the United States District Court for the District of Oregon, which held that Taggart had not “returned to the fray” and that Sherwood violated the discharge order by suing to collect attorney’s fees.[12] The case was remanded to the bankruptcy court which held Sherwood in civil contempt,[13] finding that sanctions were appropriate as Sherwood had been “aware of the discharge order” and “intended the actions which violated it.”[14]

            Sherwood appealed to the Bankruptcy Appellate Panel for the Ninth Circuit, which vacated these sanctions, and the United States Court of Appeals for the Ninth Circuit affirmed the panel’s decision.[15] The Ninth Circuit concluded that a “creditor’s good faith belief” that the discharge order “does not apply to the creditor’s claim precludes a finding of contempt, even if the creditor’s belief is unreasonable.”[16] Taggart filed a petition for certiorari, asking the Supreme Court to decide whether “a creditor’s good-faith belief that the discharge injunction does not apply precludes a finding of civil contempt.”[17]

            The Supreme Court found that a bankruptcy court may sanction a creditor when there lacks a “fair ground of doubt” as to whether the creditor's conduct might be lawful under the discharge order.[18] In reaching its conclusion, the Court analyzed two provisions of the Bankruptcy Code.[19] First, under 11 U.S.C. § 524(a)(2), a discharge order “operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover, or offset” a discharged debt.[20] Second, under 11 U.S.C. § 105, a court is authorized to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”[21] Read together, these provisions from the Bankruptcy Code denote that a discharge order operates as an injunction and a court may issue any order or judgment that is necessary to carry out other bankruptcy provisions.[22]

            Civil contempt is a severe remedy, and the standard is generally an objective one.[23] As such, in cases outside the bankruptcy context,  civil contempt “should not be resorted to where there is [a] fair ground of doubt as to the wrongfulness of the defendant’s conduct.”[24] Through 11 U.S.C. §§ 523(a)(1)–(19), Congress has delineated which debts are exempt from discharge.[25] Thus, using the fair ground of doubt standard, “civil contempt may be appropriate when a creditor violates a discharge order based on an objectively unreasonable understanding of the discharge order or statutes that govern its scope.”[26]

            It follows that a court may refrain from holding creditors in contempt if there was an objectively reasonable basis for concluding that the creditor’s conduct might be lawful.

[1] See generally 11 U.S.C. § 727.

[2] See generally 11 U.S.C. § 524.

[3] See 11 U.S.C. § 105 (“The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”).

[4] Taggart v. Lorenzen, 139 S.Ct. 1795, 1799 (2019).

[5] Id.

[6] See id.

[7] See id.

[8] See id.

[9] Id. at 1800 (stating that a discharge relieves the debtor from all debts that arose before the date of the order for relief, except those listed under 11 U.S.C. §§ 523(a)(1)–(19)).

[10] Id. (explaining that a discharge order would normally cover and thereby discharge post-petition attorney’s fees stemming from prepetition litigation unless the discharged debtor “returned to the fray” after filing for bankruptcy) (emphasis in original).

[11] Id.

[12] See id.

[13] See id.

[14] Id.

[15] Id.

[16] Id. at 1800-01.

[17] Id.

[18] Id.

[19] See id.

[20] Id.

[21] Id.

[22] See id.

[23] See id. at 1802.

[24] Id. (quoting California Artificial Stone Paving CO. v. Molitor, 113 U.S. 609, 618 (1885)).

[25] See id.

[26] Id.