A ‘Plausible’ Claim for a Discharge Violation Is No Longer Sufficient after Taggart

A case from Alabama demonstrates how the Supreme Court’s decision this term in Taggart v. Lorenzen, 139 S. Ct. 1795, 204 L. Ed. 2d 129 (June 3, 2019), means that a complaint can be dismissed for failure to state a claim even if it plausibly alleges a violation of the discharge injunction.

The debtor was in the used car business. In a case begun in 2012, he obtained a chapter 7 discharge obliterating his $70,000 personal liability to an auto finance company.

Together with a partner, the debtor formed a new corporation years later to sell used cars. To function, the new business required access to online and physical auctions of used cars.

As described in the debtor’s complaint, an outfit known as AuctionAccess approved credentials allowing used car dealers to participate in auctions throughout the country. Allegedly, the finance company persuaded AuctionAccess to withhold credentials for the debtor’s new company.

Having been barred by the finance company from receiving credentials from AuctionAccess to buy cars at auction, the debtor struck a deal to pay the finance company $2,000. In return, the finance company withdrew its objection, thus allowing the debtor’s new company to obtain credentials for participating in auctions.

The debtor reopened his 2012 bankruptcy and filed a complaint alleging that the finance company violated the discharge injunction under Section 524(a). Bankruptcy Judge William R. Sawyer of Montgomery, Ala., dismissed the complaint under Rule 12(b)(6) for failure to state a claim.

District Judge Andrew L. Brasher of Montgomery upheld dismissal in an opinion on July 24.

Applying the law to the facts, Judge Brasher began with Taggart. He quoted the Supreme Court for the proposition that someone cannot be held in contempt of the discharge injunction if there was “an objectively reasonable basis for concluding that the creditor’s conduct might be lawful.” Taggart, 139 S. Ct. at 1801. To read ABI’s discussion of Taggart, click here.

Next, Judge Brasher laid out four pertinent rules regarding discharge: (1) Discharge does not eliminate the underlying debt, only the debtor’s personal liability; (2) a creditor is not required to do business with someone who has received a bankruptcy discharge; (3) a creditor can require a debtor to repay a discharged debt as a condition to continuing a business relationship; and (4) a debtor can elect to pay a discharged debt.

Judge Brasher said that the case on appeal presented a “twist” on the usual circumstances. The debtor was not aiming to do business with the finance company. Instead, the finance company was blocking the debtor’s access to credentials issued by a third party.

“That is a distinction without a difference,” Judge Brasher said. He held that the finance company did not violate the discharge injunction because “a creditor can lawfully tell a third-party credentialing service that it should not credential a debtor because of a discharged debt.”

“At the very least,” Judge Brasher said, “there was ‘an objectively reasonable basis for concluding that the creditor’s conduct might be lawful,’” quoting Taggart, Id. In other words, even if his holding on the merits was in error, the debtor’s complaint was due for dismissal because it did not lay out facts showing an indisputable discharge violation.

Observations

In the case on appeal, there are two ways to view the finance company’s conduct. If AuctionAccess had a policy of withholding credentials from former bankrupts or dealers with questionable credit quality, the finance company’s actions would not amount to a discharge violation, in line with Judge Brasher’s holding on the merits.

On the other hand, if discovery demonstrated that AuctionAccess would typically issue credentials to someone with the debtor’s credit history, then the finance company’s conduct could been seen as a tort that might amount to an actionable discharge violation.

However, pleading facts that might be actionable is not sufficient after Taggart. Fair minds might draw different inferences from the facts and might differ on the legal conclusion that the creditor violated the discharge injunction.

Judge Brasher’s opinion shows there was a “reasonable basis” for believing that the creditor’s conduct did not violate the discharge injunction, thus precluding liability for contempt under Taggart.

Before Taggart, the debtor might have stated a plausible claim for a discharge violation, at least if the complaint included allegations that the finance company caused AuctionAccess to depart from its usual business practices. Before Taggart, the bankruptcy court might not have been able to dismiss the complaint short of a trial or a motion for summary judgment.

In other words, it is no longer sufficient to state a plausible claim for violation of the discharge injunction. The debtor must assert an ironclad claim to survive a motion to dismiss.

Caution: Do not assume that Taggart and its implied pleading standards apply to alleged violations of the automatic stay. That is to be determined.