In the wake of Taggart, an appellate decision from North Carolina demonstrates how lawyers and courts must draft orders and plans with specificity, otherwise allegedly offending creditors can’t be held in contempt.
A couple filed a chapter 11 petition after falling $23,000 behind on their mortgage. The loan servicer objected to confirmation of the plan because it did not specify how mortgage payments would be applied to principal and interest. The bankruptcy court confirmed the plan without having the plan modified to address the objection, but the servicer did not appeal.
The debtors made monthly payments. For five years after confirmation, the lender treated the loan as being in default. After the debtors objected and claimed that their mortgage should be treated as current, the servicer conferred with counsel a dozen times. Counsel told the servicer that the loan was correctly listed as being in default.
The servicer eventually listed the property for foreclosure. After further complaints from the debtors, the servicer withdrew the foreclosure and treated the loan as being current.
Then, the debtors brought proceedings in bankruptcy court to impose civil contempt sanctions. Ultimately, the bankruptcy court imposed monetary sanctions of almost $115,000, including lost wages, attorneys’ fees and “loss of fresh start.”
The servicer appealed and won a reversal in a July 2 opinion by District Judge Terrence W. Boyle of Elizabeth City, N.C.
Judge Boyle conceded that bankruptcy courts have power to hold someone in civil contempt and to impose sanctions, citing Section 105(a). However, he judged the servicer’s contempt liability in light of Taggart v. Lorenzen, 139 S. Ct. 1795 (2019), where the Supreme Court held that there can be no sanctions for civil contempt of the discharge injunction if there was an “objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.” Id. at 1801. To read ABI’s discussion of Taggart, click here.
Naturally, Judge Boyle went on to quote Taggart for saying there can be contempt for violating the discharge injunction only “if there is no fair ground of doubt as to whether the order barred the creditor’s conduct.” Id. at 1799.
Against the backdrop of Taggart, the history recounted above left out several key facts contributing to reversal: (1) The plan and confirmation order, according to Judge Boyle, did not state how much the debtors would owe on confirmation; (2) the papers did not say how the $23,000 in arrears would be paid, “if at all,” Judge Boyle said; (3) the papers set the first day for payment but did not say how much the payment would be; and (4) the papers said that the original loan terms would remain in effect, except as modified.
With regard to the applicability of Taggart to contempt allegedly arising from violation of a chapter 11 plan, Judge Boyle said he was “not convinced . . . that the discharge order . . . in Taggart is different from the confirmation order at issue here.”
Judge Boyle found the undisputed facts to support a finding that the servicer acted in good faith and “adopted a reading that seemed consistent with the contractual terms of the loan and was objectively reasonable.”
“Furthermore,” Judge Boyle said, the servicer was “repeatedly advised by counsel that they could collect the amounts due from appellees under the original mortgage contract.” In that regard, he cited the Fourth Circuit for holding that reliance on advice of outside counsel is a sufficient defense to civil sanctions.
Judge Boyle reversed and remanded for further proceedings because “the bankruptcy court's contempt order falls far short of the standard required for a finding of civil contempt.”
In the wake of Taggart, an appellate decision from North Carolina demonstrates how lawyers and courts must draft orders and plans with specificity, otherwise allegedly offending creditors can’t be held in contempt.
A couple filed a chapter 11 petition after falling $23,000 behind on their mortgage. The loan servicer objected to confirmation of the plan because it did not specify how mortgage payments would be applied to principal and interest. The bankruptcy court confirmed the plan without having the plan modified to address the objection, but the servicer did not appeal.
The debtors made monthly payments. For five years after confirmation, the lender treated the loan as being in default. After the debtors objected and claimed that their mortgage should be treated as current, the servicer conferred with counsel a dozen times. Counsel told the servicer that the loan was correctly listed as being in default.
The servicer eventually listed the property for foreclosure. After further complaints from the debtors, the servicer withdrew the foreclosure and treated the loan as being current.
Then, the debtors brought proceedings in bankruptcy court to impose civil contempt sanctions. Ultimately, the bankruptcy court imposed monetary sanctions of almost $115,000, including lost wages, attorneys’ fees and “loss of fresh start.”
The servicer appealed and won a reversal in a July 2 opinion by District Judge Terrence W. Boyle of Elizabeth City, N.C.