SCOTUS: Objectively Reasonable Standard Applies to Discharge Violations

09/09/2019 / Alexander Beeby

In Taggart v. Lorenzen, 139 S. Ct. 1795 (2019), the Supreme Court established the threshold for determining whether a creditor can be held in contempt for violating a bankruptcy discharge as whether the creditor had an objectively reasonable basis for concluding that its actions were lawful.

In Taggart, prior to trial in a pending lawsuit against the debtor, the debtor filed for Chapter 7 bankruptcy, and the bankruptcy court issued a standard discharge under Section 727. The state trial court subsequently entered judgment against the debtor. The creditor filed a petition in the state court action seeking post-petition attorney fees. Under Ninth Circuit precedent, a bankruptcy discharge includes post-petition attorney fees, unless the debtor “returned to the fray.” In re Ybarra, 424 F.3d 1018 (9th Cir. 2015). The state court agreed with the creditor that the debtor had returned to the fray and held the debtor liable for $45,000 in post-petition fees.

The debtor turned to the bankruptcy court, and the case wound its way to the Supreme Court. The bankruptcy court agreed that the debtor had returned to the fray and denied the debtor’s request to hold the creditor in civil contempt for requesting the fees. The district court, on appeal, held that the debtor had not returned to the fray and concluded that the creditor had violated the discharge order.

On remand, the bankruptcy court used a strict liability standard to hold the creditor in contempt for being aware of the discharge order and intending the actions of pursuing post-petition attorney fees. On appeal, the Bankruptcy Appellate Panel for the Ninth Circuit vacated the sanction and the Ninth Circuit Court of Appeals affirmed the B.A.P. ruling. The Ninth Circuit determined that the creditor could not be held in contempt as long as it had a good-faith belief that its actions were legal—regardless of how unreasonable that belief might be.

On cert to the Supreme Court, neither party supported the Ninth Circuit’s standard. The debtor argued that the strict liability standard used by the bankruptcy court should apply. The creditor and Solicitor General, by amicus, argued for an objective standard.

Determining that the discharge injunction statute carried the “old soil” of how courts enforce injunctions in non-bankruptcy contexts, the Supreme Court agreed that an objective standard is appropriate. The Supreme Court held that contempt is not available where there is a “fair ground of doubt” whether the creditor’s actions are lawful.

In doing so, however, the Supreme Court distinguished discharge injunctions from bankruptcy stays through both the language and purpose of the respective statutes. While declining to decide whether the language of the stay statute supports a strict-liability standard, the Supreme Court noted that the language used in the stay statute is that which “typically does not associate with strict liability but whose construction is often dependent on the context in which it appears.” Taggart, 139 S. Ct. at 1804.

Justice Breyer authored the unanimous opinion.