Case No. 18-489 | 9th Cir.
Preview by Sean Lowry*
The question presented in Taggart is whether, under the federal Bankruptcy Code, a creditor’s good-faith belief that the discharge injunction does not apply precludes a finding of civil contempt.
This case arises out of a complicated set of facts and litigation arising out of a business dispute concerning interests in a limited liability corporation (“LLC”). Mr. Taggart was sued in state court for breach of contract by other members of an LLC (the “Creditors”), in which he owned an interest. Shortly before trial, Taggart filed for Chapter 7 bankruptcy protection, which stayed the state court proceedings against him and another business associate. Taggart received a discharge injunction from the bankruptcy court, preventing collections on prior debts, and then moved to dismiss the state court proceedings based on that discharge. The state court denied the motion, finding him a necessary party in the breach of contract proceedings (which continued against the person to whom he transferred his interest in the LLC). He provided testimony and argument in the trial. The parties agreed, though, that no monetary judgement would be sought from Mr. Taggart. The state court ruled in favor of the Creditors, and held that Taggart could be liable for their attorneys’ fees that were incurred after his bankruptcy discharge because he “returned to the fray” after his discharge, citing In re Ybarra, 424 F.3d 1018, 1026–27 (9th Cir. 2005) (holding that claims arising from debtor’s postdischarge petition pursuit of litigation commenced pre-petition are nondischargeable), cert. denied, 547 U.S. 1163 (2006). See Brief for Respondents at 8, Taggart v. Lorenzen, No. 18-489 (U.S. filed Mar. 21, 2019). Meanwhile, Taggart filed a motion in the bankruptcy court to reopen his proceedings, seeking to hold the Creditors in contempt for violating the discharge under the court’s powers to “issue any order, process, or judgment that is necessary or appropriate to carry out [the bankruptcy code].” See 11 U.S.C. § 105(a) (2012).
After a long bout of litigation through state and federal courts, the Ninth Circuit held that the Creditors could not be found in contempt because they did not willingly violate the bankruptcy discharge. Taggart v. Lorenzen, 888 F.3d 438, 444–45 (9th Cir. 2018). To fulfill the elements of a contempt sanction, Taggart needed to prove that the Creditors (1) knew the discharge injunction was applicable, and (2) intended to violate the discharge injunction. Here, the Ninth Circuit held that the Creditors’ subjective belief was lacking with respect to the first element.
Counsel for Taggart (who is now deceased) petitioned the Court for certiorari claiming that the Ninth Circuit’s decision created a split with the First, Fourth, and Eleventh Circuits and federal bankruptcy courts. Those courts do not recognize a creditor’s subjective belief of a good-faith mistake as a valid defense to civil contempt claims. Additionally, Petitioner argues that allowing a subjective intent defense to civil contempt would undermine the bankruptcy code’s goal of giving debtors a “fresh start,” free from pursuit of debtors that issued any debt later discharged. Brief for the Petitioner at 12, Taggart, No. 18-489 (U.S. filed Feb. 19, 2019).
In contrast, Respondents urge the Court to adopt the Ninth Circuit’s rule. To them, contempt is a severe remedy that should be imposed when a party directly disobeys a court order. Here, the state court gave them the green light to collect attorney’s costs. Also, as a policy matter, they argue that Petitioner’s “strict liability” interpretation of the contempt statute would chill creditors from collecting on nondischarged debts. Brief for Respondents at 15, Taggart, No. 18-489 (U.S. filed Mar. 21, 2019).
*Sean Lowry is a 2LE (Class of 2021) and Analyst in Public Finance at the Congressional Research Service (CRS). The views expressed are those of the author and are not necessarily those of the Library of Congress or CRS.