Bankruptcy Judge Timothy A. Barnes of Chicago wrote an opinion elucidating the burdens of proof and standards for establishing liability for contempt following the Supreme Court’s decision in Taggart v. Lorenzen, 139 S. Ct. 1795, 1799 (June 3, 2019).
Judge Barnes ruled that taking a “gamble” by hoping to “overturn precedent and create new law” is not objectively reasonable and cannot shield someone from more than $9.5 million in damages for contempt.
Creditor Violates a Plan Injunction
In the case before Judge Barnes, the debtor had confirmed a liquidating chapter 11 plan. The creditor later found in contempt was a bonding company that had issued bonds in favor of municipalities to secure the completion of residential projects being built by the debtor.
The bonding company filed a claim and voted in favor of the plan prescribing distributions from the liquidation of assets. The plan and the confirmation order contained injunctions prohibiting those who voted for the plan from pursuing claims.
After confirmation, the bonding company sued several buyers who had purchased the debtor’s assets free and clear of claims under Section 363(f). A purchaser filed a motion in bankruptcy court asking Judge Barnes to hold the bonding company in contempt of the plan and the confirmation order.
The First Two Opinions
In his first decision, Judge Barnes found the bonding company in contempt. In a second opinion, he imposed a sanction of more than $9.5 million in actual damages. He did not impose punitive damages. The bulk of the sanction was $7.7 million for lost property value.
While the appeal was pending from the two orders, the Supreme Court handed down Taggart, holding that a court “may impose civil contempt sanctions [for violating the discharge injunction] when there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.” To read ABI’s report, click here.
On appeal, the district court ruled that Judge Barnes had subject matter jurisdiction and properly denied a motion to abstain. The district court also decided that Judge Barnes properly interpreted the plan as barring the bonding company’s claims against purchasers.
However, the district court remanded for Judge Barnes to decide whether a finding of contempt was proper under Taggart. Although he had questions about whether Taggart even applied because Taggart was a discharge case, Judge Barnes interpreted the district court’s mandate as directing him to decide whether the bonding company could be found in contempt under the Taggart standard.
The Record Satisfied Taggart
On remand, Judge Barnes found no reason to hold another evidentiary hearing because the record was already sufficient to decide whether the Taggart standard had been satisfied.
With regard to the burdens of proof, Judge Barnes decided that the debtor carried the burden of showing the right to relief, while the bonding company had the burden of demonstrating “uncertainty” under Taggart.
With regard to liability, Judge Barnes said that the bonding company had “repeatedly and knowingly violated the terms” of the injunction in the plan. He also said that the bonding company “pursued claims that it knew were released on theories where it knew the law was settled against it.” The bonding company’s actions, he said, “unequivocally violate the injunction in the Plan and thus the court’s Confirmation Order.”
Judge Barnes said the burden shifted to the bonding company to show “uncertainty” because its “persistent and contumacious” actions had been shown by “clear and convincing evidence.”
Judge Barnes said that courts “focused on different factors” in deciding whether “a fair ground of doubt” exists under Taggart. In the case at hand, he said there was “no question” that the bonding company knew about the injunction.
With regard to uncertainty, Judge Barnes said that the bonding company had “provided no holding from case law or statute to support the theories that [the bonding company] advances in the State Court Lawsuits — that a surety may pursue a purchaser of assets through a sale under section 363(f) of the Bankruptcy Code despite the surety having settled and released its claims in the bankruptcy itself.”
In other words, the bonding company “knew the case law did not support its actions when it took them,” Judge Barnes concluded.
The opinion by Judge Barnes could be read to stand for the principle that challenging authority cannot be grounds for showing uncertainty. He said that the bonding company’s “pursuits in multiple forums and lack of supporting case law demonstrate what this court has already found — that [the bonding company’s] pursuit of [the purchaser] was a gamble by [the bonding company] to overturn precedent and create new law that would allow it double recovery, against both bankruptcy estates and subsequent purchasers of bankruptcy property.”
Judge Barnes therefore found satisfaction of the Taggart standard because there was “no doubt, let alone a fair ground of doubt, that [the bonding company’s] actions were unlawful under the orders entered in the case.”
Although the district court had not directed him to revisit the quantum of damages, Judge Barnes said that satisfying Taggart “effects no change to the damages awarded” to the purchaser.
Bankruptcy Judge Timothy A. Barnes of Chicago wrote an opinion elucidating the burdens of proof and standards for establishing liability for contempt following the Supreme Court’s decision in Taggart v. Lorenzen, 139 S. Ct. 1795, 1799 (June 3, 2019).
Judge Barnes ruled that taking a “gamble” by hoping to “overturn precedent and create new law” is not objectively reasonable and cannot shield someone from more than $9.5 million in damages for contempt.
Creditor Violates a Plan Injunction
In the case before Judge Barnes, the debtor had confirmed a liquidating chapter 11 plan. The creditor later found in contempt was a bonding company that had issued bonds in favor of municipalities to secure the completion of residential projects being built by the debtor.
The bonding company filed a claim and voted in favor of the plan prescribing distributions from the liquidation of assets. The plan and the confirmation order contained injunctions prohibiting those who voted for the plan from pursuing claims.
After confirmation, the bonding company sued several buyers who had purchased the debtor’s assets free and clear of claims under Section 363(f). A purchaser filed a motion in bankruptcy court asking Judge Barnes to hold the bonding company in contempt of the plan and the confirmation order.