Ninth Circuit BAP Applies Taggart to Violations of the Automatic Stay

Last year, the Supreme Court ruled unanimously in Taggart 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.” Taggart v. Lorenzen, 139 S. Ct. 1795 (June 3, 2019).

The Ninth Circuit Bankruptcy Appellate Panel answered a question left open by Taggart: Does the Taggart standard apply to violations of the automatic stay?

In a nonprecedential opinion, the BAP held that the Taggart standard applies when a chapter 7 trustee seeks contempt sanctions for violation of the automatic stay under Section 362(a). By extension, the decision means that Taggart also applies when a corporate chapter 11 debtor seeks contempt sanctions. To read ABI’s report on Taggart, click here.

A Straightforward Stay Violation

The chapter 7 trustee discovered that the second and third mortgages on the debtors’ home did not correctly describe the property. The trustee demanded that the subordinate mortgage holders consent to the avoidance and preservation of the liens for the benefit of the estate.

The debtors’ lawyer responded on behalf of both the debtors and the holders of the subordinate mortgages. The lawyer informed the trustee that he had filed new mortgages with the debtors’ consent correcting the property descriptions. Evidently, the lawyer advised the debtors that they should enable the filing of the corrected mortgages.

The trustee filed a motion to hold the debtors, the subordinate mortgagees and the lawyer in contempt. At the first hearing, the bankruptcy judge said there was a “clear-cut” automatic stay violation. Before the next hearing, the mortgagees and the debtors settled with the trustee by paying $6,000 of the trustee’s attorneys’ fees totaling about $10,000. They also reconveyed the mortgages.

The trustee proceeded with the contempt motion against the lawyer. The lawyer claimed there was reasonable doubt that his actions violated the automatic stay.

The bankruptcy judge found a knowing and intentional violation of the stay because the lawyer prepared the corrective mortgage and advised his client that they should sign the mortgages. The bankruptcy judge also found a willful violation of the stay because there was no fair ground of doubt about the stay violation.

The bankruptcy court imposed a $4,000 sanction on the lawyer, representing the remainder of the trustee’s counsel’s fees.

The lawyer appealed.

The BAP’s Nonprecedential Affirmance

The BAP affirmed in a per curiam, nonprecedential opinion on March 16. The panel consisted of Bankruptcy Judges Gary A. Spraker, Laura S. Taylor and Robert J. Faris.

The trustee was the moving party, not the individual debtors. The distinction is significant because Section 362(k) allows the recovery of actual and punitive damages and attorneys’ fees by “an individual injured by any willful violation of a stay” in Section 362. The trustee is not an individual and thus was relegated to seeking a contempt citation and sanctions under Section 105(a) and common law governing contempt.

Citing Taggart, the BAP said that the “Supreme Court recently clarified the legal standard governing contempt in the discharge context.” The BAP interpreted Taggart to mean there can be no contempt if there was a “fair ground of doubt” or there was an “objectively reasonable basis” for believing that the action did not violate the stay.

In a footnote, the BAP assumed that Taggart applies to the automatic stay because neither party argued to the contrary. Citing Zilog, Inc. v. Corning (In re Zilog, Inc.), 450 F.3d 996, 1008 n.12 (9th Cir. 2006), partially overruled on other grounds by Taggart, 139 S. Ct. at 1802, the BAP went on to say in the footnote that applying the same standard to the automatic stay “is consistent” with Ninth Circuit precedent.

Applying Taggart to the case at hand, the BAP found “nothing in [the lawyer’s] authorities even suggesting” that a mortgage holder could file a corrected mortgage to gain priority over a bona fide purchaser under California law. The panel concluded that the lawyer’s “theory did not constitute a reasonable ground for [the lawyer] to doubt the applicability of the automatic stay to his actions.”

The BAP said that the lawyer’s arguments were “a disingenuous and cynical attempt to evade the clear mandate of the automatic stay.” With a defense “unsupported by any authority,” the panel upheld the finding of contempt because the lawyer had “no objectively reasonable basis” to believe his actions did not violate the stay.

The BAP also ruled that the bankruptcy court did not abuse its discretion in assessing $4,000 in attorneys’ fees.

The Recovery of Attorneys’ Fees on Appeal

The panel turned to the question of whether the attorney could be held liable for the trustee’s attorneys’ fees on appeal.

Because Section 362(k) was not available, the trustee could recover attorneys’ fees under Ninth Circuit precedent only under the bankruptcy court’s civil contempt power. The Ninth Circuit has held that the contempt power does not include the ability to award attorneys’ fees in defending a contempt ruling.

The BAP ruled that the lawyer was nonetheless liable for the trustee’s attorneys’ fees and double costs for prosecuting a frivolous appeal under Bankruptcy Rule 8020(a).

The panel said that the lawyer “has not cited any pertinent authority to support his interpretations of the automatic stay and California law” and that his arguments “are wholly without merit.”

The BAP directed counsel for the trustee to file a declaration showing the reasonable costs and fees in connection with the appeal. The lawyer will have an opportunity to respond.

Observations

Taggart, of course, did not say whether the discharge standard applies to violations of the automatic stay. Language in the unanimous opinion by Justice Stephen G. Breyer could be cited either way.

We sought comment from three law professors. Here is what they had to say:

Charles J. Tabb, Mildred Van Voorhis Jones Chair in Law Emeritus, Univ. of Illinois College of Law:

“There are two clues in the Taggart opinion that cut in opposite directions, and I think the ultimate outcome is a very close question. 

“First, in favor of extending Taggart to contempt for stay violations is the core ‘old soil’ reasoning of Taggart. Outside of 362(k) cases, the Code is silent on the contempt standard for violating the stay injunction. The Supreme Court’s basic rationale, that in such statutory silence cases the proper approach is to import the ‘traditional standards in equity practice,’ thus could equally be extended to stay cases. 

“Second, however, and cutting the other way, is the fact that the Court was not silent about stay cases. Instead, the Court took careful pains to distinguish [stay] cases . . . , saying that the ‘stay aims to prevent damaging disruptions to the administration of a bankruptcy case in the short run, whereas a discharge is entered at the end of the case and seeks to bind creditors over a much longer period.’

“One could make a cogent argument that this passage supports the view that the threat posed by a stay violation is both more harmful to the successful operation and functioning of the bankruptcy case than a discharge violation and less of a burden on creditors, and thus contempt can and should more readily be imposed as a sanction for violations. If I were a bankruptcy judge, that is the path I would take.”

Bruce A. Markell, Professor of Bankruptcy Law and Practice, Northwestern Univ. Pritzker School of Law:

“I think, unfortunately, the court got it right under Taggart, subject to a few quibbles.  

“If you don’t have a statute available such as § 362(k), you go back to the common law standard for contempt . . . and that’s the clear and convincing standard. But there is a great difference here between the common contempt of a judge’s order and the violation of a statute . . . .

“Applying the clear and convincing standard here would thus seem to be a bad fit, primarily because of the questionable role of intention. Clear and convincing evidence of a judge-crafted injunction directed initially at the contemnor is a vastly different animal than finding similar evidence of the violation of a Congressionally drafted one . . . .

“All of this makes me wonder if a violation of the stay is not necessarily redressed by contempt, but by implication of a federal cause of action based on the violation of a statute. That is, look to Cort v. Ash, 422 U.S. 66 (1975).”

John A. E. Pottow, John Philip Dawson Collegiate Professor of Law, Univ. of Michigan Law School:

“Taggart seems to imply the absence of any liability ab initio. Yet the absence of a corporate debtor remedy under [Section 362(k)] is surely premised upon a belief that the judge will take care of matters through contempt, which now Taggart precludes, substantially de-fanging the Code from one of its core protections.”

A Final Note

One of the overarching concerns of the Supreme Court in Taggart focused on the vague description of the discharge injunction in Section 524 and the resulting lack of clarity. The automatic stay and its exceptions, by contrast, are laid out in great detail in Section 362. Will the greater clarity about the scope of the automatic stay and the shorter duration of the stay make Taggart inapplicable to Section 362?