Without citing the Taggart decision by the Supreme Court in June, the Seventh Circuit reversed the lower courts and held a creditor in contempt of the discharge injunction.
In Taggart v. Lorenzen, 139 S. Ct. 1795, 204 L. Ed. 2d 129 (June 3, 2019), the Supreme Court rejected a strict-liability standard for the imposition of contempt for violating the discharge injunction. Instead, the high court held unanimously that the bankruptcy court “may impose civil contempt sanctions when there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.” Id. 139 S. Ct. at 1801.
Later, we will explore the question of whether the outcome would have been different had the parties relied on Taggart. To read ABI’s discussion of Taggart, click here.
The Arrest Warrant
In 2002, the creditor obtained a default judgment for about $2,500. In 2009, the debtor filed bankruptcy and obtained a discharge in January 2010. The creditor received notice of both the bankruptcy and the discharge, but the creditor did not notify its counsel about the bankruptcy filing or the discharge.
Unaware of the bankruptcy, the creditor’s counsel brought supplemental proceedings. For the debtor’s repeated failure to appear at hearings, the state court in Indiana issued an arrest warrant in April 2010, several months after discharge. Having stopped to give the debtor assistance for a flat tire, a police officer discovered the warrant and arrested the debtor in March 2011, more than a year after discharge. She spent two days in jail.
In bankruptcy court, the debtor sued the creditor and its counsel for contempt, alleging a willful violation of the discharge injunction. After a two-day trial, the bankruptcy court absolved both the creditor and its counsel of contempt.
The bankruptcy judge cleared the lawyers of contempt, because the lawyers lacked knowledge of the bankruptcy and didn’t have an affirmative duty to run a bankruptcy search. The bankruptcy judge also let the creditor off the hook, saying that the client was unaware of the lawyer’s collection actions and therefore did not violate the discharge injunction willfully.
The district court affirmed.
In an opinion on August 13 by Circuit Judge Amy J. St. Eve, the Seventh Circuit upheld the conclusion regarding the lawyers but reversed and ruled that the creditor was in contempt for a willful violation of the discharge injunction. Of potential significance on remand, Judge St. Eve mentioned that the creditor “aggressively” pursued the collection of small debts and had “referred hundreds of collection cases” to the same law firm.
The Circuit Reverses as to the Creditor
The appeal was argued in the circuit in April, two months before the Supreme Court handed down Taggart. Without mentioning Taggart, Judge St. Eve said that a creditor can be held in contempt only for a willful violation of discharge. Possibly equating contempt of discharge with contempt of the automatic stay, she said that willfulness does not require a specific intent to violate a court’s order. Rather, she said, willfulness requires clear and convincing evidence that the creditor violated the court’s order and that the creditor had “actual knowledge” that bankruptcy was in process or had ended in discharge.
Judge St. Eve upheld dismissal of the contempt citation against the lawyers, because the firm had not received notices from the client about the bankruptcy and the discharge and did not otherwise know the debtor was in bankruptcy. Since a client’s knowledge is not imputed to the lawyer, she said that the firm could not have willfully violated the discharge injunction.
For the creditor, Judge St. Eve said the law requires “both actual knowledge of the discharge order and an action violating it.”
Judge St. Eve saw no reason to overturn the bankruptcy court’s finding that the creditor had knowledge of the discharge. The bankruptcy court had absolved the client of contempt because the client itself had taken no action to violate discharge. That finding, Judge St. Eve said, “might be factually correct, but it reflects an error in legal reasoning.”
Citing the Restatement (Third) of Agency, Judge St. Eve said that the lawyer’s conduct is imputed to the client, “even if that conduct did not, standing alone, constitute a tort.” She therefore held that the lawyers’ actions, imputed to the creditor, “were taken despite [the client’s] knowledge of the discharge order, meeting the requirements for civil contempt.”
Judge St. Eve was not persuaded by the creditor’s argument that it was unaware of the lawyers’ actions. She said it was “not a case where counsel committed a wrongful act outside the scope of its authority.”
Judge St. Eve ended by justifying her conclusions on policy grounds, saying the result was “sensible.” “Holding otherwise,” she said, “would create a loophole through which creditors could avoid liability by simply remaining ignorant of their agent’s actions or by failing to notify their agents of debtors’ bankruptcy proceedings. We decline to incentivize such careless behavior.” [Emphasis added.]
By the way, there is no indication on the circuit court’s docket that counsel alerted the appeals court to the Taggart opinion, as required by F.R.A.P. 28(j). However, there may have been a so-called 28(j) letter, but it was not registered on the docket. Regardless, the circuit could have construed Taggart because most appellate courts believe they can affirm on any basis evident from the record, whether raised by the parties or not.
Violation of the Local Rule
Northern District of Indiana Local Rule B-4002-1(a)(2) requires a debtor to give immediate notice of the order for relief to any court where an action is pending. According to Judge St. Eve, the debtor violated the order by not notifying the state court.
Judge St. Eve said that the debtor’s arrest, which she called a “regrettable event,” could have been avoided had she complied with the local rule. On remand, she said the bankruptcy court could exercise discretion by factoring the violation of the local rule “into the damages calculation.”
What Result After Taggart?
More so, the law firm is off the hook after Taggart. To quote Taggart, the law firm had an “objectively reasonable basis for concluding that [its conduct] might be lawful under the discharge order” because three courts found no contempt.
Arguably, the creditor is also absolved by Taggart, because the bankruptcy and district courts both found no contempt. Is a conclusion by even one court always an “objectively reasonable basis” for believing that an action is not contemptuous? But is a court’s ruling an “objectively reasonable basis” if founded on an erroneous legal conclusion, as Judge St. Eve held in the case on appeal?
However, an “objectively reasonable basis” is not the entirety of Taggart’s holding.
Rather, Taggart permits a finding of contempt if there is “no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.” [Emphasis added.]
By not forwarding bankruptcy notices to the law firm, Judge St. Eve characterized the creditor’s actions as “careless behavior.” Arguably, careless behavior cannot qualify as an objectively reasonable belief that the conduct was permissible in light of discharge. In that regard, recall how Judge St. Eve said that the client “aggressively” pursued the collection of small debts and had “referred hundreds of collection cases” to the same law firm.
In this writer’s view, Taggart should not immunize careless conduct, nor should Taggart relieve creditors of a duty to undo actions taken before bankruptcy that could result in violations of discharge later.
Without citing the Taggart decision by the Supreme Court in June, the Seventh Circuit reversed the lower courts and held a creditor in contempt of the discharge injunction.
In Taggart v. Lorenzen, 139 S. Ct. 1795, 204 L. Ed. 2d 129 (June 3, 2019), the Supreme Court rejected a strict-liability standard for the imposition of contempt for violating the discharge injunction. Instead, the high court held unanimously that the bankruptcy court “may impose civil contempt sanctions when there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.” Id. 139 S. Ct. at 1801.
Later, we will explore the question of whether the outcome would have been different had the parties relied on Taggart. To read ABI’s discussion of Taggart, click here.
The Arrest Warrant
In 2002, the creditor obtained a default judgment for about $2,500. In 2009, the debtor filed bankruptcy and obtained a discharge in January 2010. The creditor received notice of both the bankruptcy and the discharge, but the creditor did not notify its counsel about the bankruptcy filing or the discharge.
Unaware of the bankruptcy, the creditor’s counsel brought supplemental proceedings. For the debtor’s repeated failure to appear at hearings, the state court in Indiana issued an arrest warrant in April 2010, several months after discharge. Having stopped to give the debtor assistance for a flat tire, a police officer discovered the warrant and arrested the debtor in March 2011, more than a year after discharge. She spent two days in jail.
In bankruptcy court, the debtor sued the creditor and its counsel for contempt, alleging a willful violation of the discharge injunction. After a two-day trial, the bankruptcy court absolved both the creditor and its counsel of contempt.
The bankruptcy judge cleared the lawyers of contempt, because the lawyers lacked knowledge of the bankruptcy and didn’t have an affirmative duty to run a bankruptcy search. The bankruptcy judge also let the creditor off the hook, saying that the client was unaware of the lawyer’s collection actions and therefore did not violate the discharge injunction willfully.