WASHINGTON–The Supreme Court has reversed a lower court ruling in a case involving creditors and violations of discharge orders.
In its ruling on Taggart v. Lorenzen, the court vacated earlier rulings by the Bankruptcy Appellate Panel and the Ninth Circuit, which had held that a subjective good faith belief by a creditor that his actions do not violate the discharge injunction protecting an individual debtor who had discharged his debts in a Chapter 7 case.
The defendant in the case, Taggart, owned an interest in an Oregon company, who was sued by the other owners, who claimed Taggart had breached the company’s operating agreement. Before trial, Taggart filed for Chapter 7 bankruptcy, and the Bankruptcy Court issued a discharge order that released Taggart from liability for most pre-bankruptcy debts. An Oregon state court subsequently entered judgment against Taggart in the pre-bankruptcy suit and awarded attorney’s fees to respondents. The Bankruptcy Court found respondents in civil contempt for collecting attorney’s fees in violation of the discharge order. The Bankruptcy Appellate Panel and the Ninth Circuit then applied a subjective standard to hold that a “creditor’s good faith belief” that the discharge order does not apply to the claim precludes a finding of contempt, even if that belief was unreasonable.
But the Supreme Court disagreed.
"In Taggert v. Lorenzen, the Supreme Court reversed the Ninth Circuit and held that a subjective good faith belief by a creditor that his actions do not violate the discharge injunction protecting an individual debtor who had discharged his debts in a Chapter 7 case, is not sufficient to preclude a finding of contempt,” said Annette Jarvis, a partner at the law firm Dorsey & Whitney, following the decision. “Borrowing from other areas of law on injunctions and civil contempt principles, the court imposed a generally objective standard for determining whether civil contempt is warranted. Thus, a creditor may be held in contempt for violating a discharge order if there is “no fair ground of doubt” that the creditor’s conduct was barred by the discharge order. A creditor’s subjective good faith belief that he did not violate the discharge injunction will not save the creditor from civil contempt, but may perhaps influence or lessen the sanctions issued by the court for violating the discharge order.”
Careful Consideration Needed
"The ruling today means that a creditor must carefully consider any action taken against a discharged debtor on a pre-bankruptcy lawsuit or claim to objectively determine whether the conduct is barred by the discharge order before proceeding against the debtor on a claim,” continued Jarvis. “If an objective determination is not made and sustained, the creditor will be subject to civil contempt for violating the discharge order.”