Happy Anniversary, Taggart!

The Supreme Court’s opinion in Taggart v. Lorenzen[1] articulated an objective standard for determining whether a party should be held in civil contempt for a violation of the discharge order.[2] In light of Taggart’s recent one-year anniversary, we are revisiting the Supreme Court’s opinion and cases that have applied it.

Recap of Taggart

In the underlying case, a plaintiff in a pre-petition state court suit sought post-petition attorneys’ fees from the defendant after the defendant received a discharge in his chapter 7 bankruptcy case. The state court allowed the plaintiff to collect those fees, and the debtor-defendant filed a motion with the bankruptcy court to hold the plaintiff in civil contempt for violation of the discharge injunction.

The bankruptcy court initially determined the fees were exempt from the discharge order because the defendant had, after filing for bankruptcy, “returned to the fray” in state court.[3] The district court disagreed, and on remand, the bankruptcy court held that if the fees were subject to the discharge injunction, the plaintiff was in violation of that injunction because it was “aware of the discharge” and “intended the action.”[4] On further appeal, the Ninth Circuit applied a standard far from strict liability. It held that a creditor could not be held in contempt for violation of the discharge injunction if it had a “good faith belief” that the discharge injunction did not apply to its action, “even if the creditor’s belief is unreasonable.”[5]

In a unanimous decision, the Supreme Court determined that a creditor may be held in civil contempt for violating the discharge injunction if there is “no fair ground of doubt” as to whether the creditor’s conduct was barred by the order placing that injunction.[6] The Court declined to adopt the standard of either of the courts below — the bankruptcy court’s strict liability standard, or the Ninth Circuit’s good faith belief “even … if unreasonable” standard. Instead, the Court determined that “civil contempt may be appropriate if there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful.”[7]

The Supreme Court clarified the standard to be used in determining whether a creditor has violated the discharge injunction. The Court analyzed the historical use of an objective standard grounded in reasonableness and fairness, and adopted a standard found in an 1885 case: that “civil contempt ‘should not be resorted to where there is [a] fair ground of doubt as to the wrongfulness of the defendant’s conduct.’”[8] The Court reasoned that under the “fair ground of doubt” standard, a creditor’s good faith can be analyzed, but only under that objective standard of reasonability.[9]

Recent Cases Interpreting Taggart

Several cases in recent months have explored the contours of the Court’s opinion in Taggart, including applicability in the context of the “safe harbor” provisions of § 524(j) of the Bankruptcy Code; the level of proof necessary to establish civil contempt under the Taggart standard; and whether conflicting case law on a particular issue creates an objectively reasonable basis for taking action that violates the discharge, shielding the creditor from civil contempt.

In Parente v Fay Servicing LLC,[10] the U.S. District Court for the Northern District of Illinois held that communications falling within the purview of § 524(j) could not be considered violations of the discharge order subjecting a creditor to civil contempt under Taggart.[11] In Parente, the debtor alleged violations of the Fair Debt Collection Practices Act, the Telephone Consumer Protection Act, and the discharge order associated with telephone calls and correspondence from the creditor related to a mortgage loan. The correspondence consisted primarily of monthly billing statements associated with the loan, and this correspondence included both payment coupons and bankruptcy disclaimers.

The district court denied the creditor’s motion to dismiss with respect to the FDCPA and TCPA claims, but granted the motion to dismiss with respect to the cause of action alleging violations of the discharge.[12] The court determined that with respect to the FDCPA and TCPA claims, the debtor had alleged facts sufficient to withstand dismissal.[13] However, the court held that even if all allegations in the complaint were true, the debtor could not state a claim for violations of the discharge order.[14] The court cited Taggart, holding that is could hold the creditor in contempt if there was no fair ground of doubt as to whether the conduct was barred by the discharge order.[15] The court held that there was no “fair ground of doubt that the creditor understood the effect of the Bankruptcy Court’s discharge order and continued to collect on Parente’s discharged mortgage.”[16] However, the court concluded that § 524(j) sufficiently insulated the creditor from liability under the facts as alleged by Parente because there was no indication that the calls and correspondence diverged from the ordinary course in seeking periodic payments in lieu of in rem relief.[17] Accordingly, the court dismissed cause of action for a discharge violation without prejudice.[18]

In In re Moon,[19] the U.S. Bankruptcy Court for the District of Nevada awarded significant damages for a creditor’s stay violation, but found insufficient evidence to satisfy the standard imposed by Taggart for a discharge violation.[20] In Moon, the bankruptcy court confirmed a chapter 13 plan that stripped a junior lien, treating it as wholly unsecured based on an order valuing the debtors’ residence. The evidence in the record established that the lien-stripped creditor had actual knowledge of debtors’ bankruptcy by virtue of a telephone call with one of the debtors. Despite the creditor’s record of the phone call and the binding confirmation order, the creditor sent dozens of billing statements and made over 100 phone calls to the debtors in attempts to collect on the loan treated by the plan. The evidence in the record did not, however, establish that the creditor had actual knowledge of the debtors’ eventual discharge order.

The bankruptcy court concluded that the creditor willfully violated the automatic stay and awarded the debtors $100,000 in compensatory damages, $200,000 in punitive damages and attorneys’ fees to be determined.[21] The court, however, denied that the creditor’s actions also amounted to willful violation of the discharge injunction, construing Taggart narrowly with respect to the parties’ post-discharge communications. The creditor admitted that if it had actual knowledge of the discharge order, there would be no objectively reasonable basis for believing that post-discharge communications were not violations of the discharge order, and that the creditor could be held in civil contempt under the Taggart standard. The evidence suggested doubt as to whether the discharge order was sent to an address sufficient to put the creditor on notice of its entry. The court held that absent clear and convincing evidence the creditor had actual knowledge of the discharge order, there could be no finding of civil contempt.[22]

In In re Orlandi, the Bankruptcy Appellate Panel for the Sixth Circuit Court of Appeals found that a creditor violated the discharge injunction by filing a state court complaint for the debtor’s pre-petition personal guarantee of a business debt. Despite the court’s finding of a discharge violation, the creditor was not required to pay monetary sanctions for its conduct, as the court upheld Taggart’s fair ground of doubt standard when considering the creditor’s actions in this case.

In Orlandi,[23] the debtor filed a chapter 7 case jointly with his spouse. The debtor owned and operated an incorporated business that leased commercial space. The debtor signed the lease agreement as president of the business and also personally guaranteed the commercial lease. When the debtor filed chapter 7, he listed the commercial landlord as a creditor due to the personal guarantee.[24] The landlord received notice of both the bankruptcy filing and the debtor’s bankruptcy discharge. About three years after the discharge, the debtor’s business exercised its option to extend the commercial lease.[25] The parties did not enter into a new lease, instead relying on the original lease. The debtor signed the lease extension as president of the business, which later defaulted on payments.[26] The landlord filed suit in state court naming the both the business and the debtor as co-defendants. The debtor moved to reopen his bankruptcy case, alleging a violation of the discharge injunction. The bankruptcy case was reopened, staying the state court proceedings.

The bankruptcy court ruled that the debtor’s personal guaranty was discharged in the chapter 7.[27] The opinion noted that some bankruptcy courts had found a contingent claim such as a personal guaranty cannot be discharged without a post-petition right to payment.[28] In doing so, the court relied on cases in which a debtor’s pre-petition guaranty was held to be a dischargeable contingent claim.[29] The court further noted that the creditor’s knowledge of the bankruptcy discharge was indisputable, and that the creditor’s actions in state court were a willful effort to collect on a debt that was previously discharged. The court awarded the debtor monetary sanctions in the amount of $10,720, but denied punitive damages.[30]

The Sixth Circuit BAP agreed that the creditor violated the discharge injunction. The BAP noted that there was no controlling law in the Sixth Circuit regarding the discharge of pre-petition guaranty. Further, the bankruptcy opinion noted conflicting case law on discharging a pre-petition guaranty. The BAP reversed the award of monetary sanctions, finding that the conflicting case law provided the creditor a fair ground of doubt for its action.[31]

Conclusion

Taggart’s fair-ground-of-doubt standard is not based on the willfulness of the creditor’s actions. The creditor’s actions are to be reviewed under an objective standard of reasonability. Before engaging in any post-discharge contact, creditors must educate themselves on statutory safe harbors and controlling case law, and identify whether their intended action could potentially be construed as a discharge violation.