Fourth Circuit Rules Emphatically that Taggart Applies to All Contempt in Bankruptcy

The Fourth Circuit has ruled emphatically that Taggart applies to all contempt citations in bankruptcy court.

However, the Richmond, Va.-based appeals court held that advice of counsel is not a complete defense to civil contempt in bankruptcy court.

A couple filed a chapter 11 petition after falling $23,000 behind on their mortgage. The bankruptcy court confirmed the plan without modifying the plan to specify how future mortgage payments would be applied to principal, interest and arrears.

The plan and confirmation order were vague in other respects. The papers (1) did not state how much the debtors would owe on confirmation; (2) did not say how the $23,000 in arrears would be paid, if at all; (3) set the first day for payment but did not say how much the payment would be; and (4) said that the original loan terms would remain in effect, except as modified.

The servicer did not appeal confirmation.

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.

The debtors then 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 district court last July. See Newrez LLC v. Beckhart, 20-192, 2021 BL 294572, 2021 US Dist Lexis 146230, 2021 WL 3361707 (E.D.N.C. July 2, 2021). To read ABI’s report, click here.

The district court evaluated the servicer’s contempt liability by the standard in Taggart v. Lorenzen, 139 S. Ct. 1795 (2019), where the Supreme Court held that there can be no sanctions for civil contempt of a 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.

The district judge went on to say that he was “not convinced . . . that the discharge order . . . in Taggart is different from the confirmation order at issue here.” Applying Taggart, the district judge decided that the servicer had acted in good faith and “adopted a reading that seemed consistent with the contractual terms of the loan and was objectively reasonable.”

The district judge 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.” The district court also noted that the servicer had acted several times on advice of counsel.

The debtors appealed to the circuit.

Taggart Applies

The debtors argued in the circuit that Taggart only applies to alleged discharge violations. Circuit Judge Toby J. Heytens rejected this contention in his April 15 opinion. He said that “Taggart applies broadly and cannot be confined to Chapter 7 bankruptcy in the way the [debtors] seek.”

Judge Heytens said,

Nothing about the Supreme Court’s analysis in Taggart suggests it is limited to violations of Chapter 7 discharge orders — which liquidate a debtor’s assets and then discharge the debt — or that the Court’s decision turned on considerations unique to the Chapter 7 context.

Judge Heytens held “that the standard articulated by the Supreme Court in Taggart governs civil contempt under Chapter 11 of the Bankruptcy Code as well.” Although chapter 11 may differ from chapter 7, he said that “a bankruptcy court’s authority to enforce its own orders — regardless of which chapter of the Bankruptcy Code those orders were issued under — derives from the same statutes and the same general principles the Supreme Court relied on in Taggart.”

But Judge Heytens was not prepared to affirm. He found fault with one important aspect of the district court’s opinion: He said that “the district court erred in appearing to grant controlling weight to the fact that [the servicer] had requested and received legal advice from outside counsel.”

Judge Heytens cited the Fourth Circuit for holding before Taggart that advice of counsel is not a defense in civil contempt. Consequently, he held that “the district court erred when concluding that [the servicer’s] reliance on the advice of outside counsel was seemingly dispositive as a defense to civil contempt.”

Although advice of counsel is not a complete defense, Judge Heytens added in a footnote that it “may still be considered in appropriate circumstances as a relevant factor under the Taggart standard.” More particularly, he said that “a party’s reliance on guidance from outside counsel may be instructive, at least in part, when determining whether that party’s belief that she was complying with the order was objectively unreasonable.”

Having found error in the decisions by both the bankruptcy and district courts, Judge Heytens reversed and remanded to the bankruptcy court “as the court of first instance and the tribunal closest to the facts.” He gave instructions to “reconsider the contempt motion under the correct legal standard, including any additional factfinding that may be necessary.”