Supreme Court applies civil contempt standard to bankruptcy creditors
skeeze / Pixabay
Supreme Court applies civil contempt standard to bankruptcy creditors

The US Supreme Court ruled Monday that a creditor may be held in civil contempt for violating a bankruptcy court’s discharge order if there is no fair ground of doubt as to whether the order barred the creditor’s conduct.

The case, Taggart v. Lorenzen, involved the petitioner Bradley Taggart, who had once owned an interest in an Oregon company, and the respondents, the same Oregon company and two of its other owners. Before the trial for that proceeding, Taggart filed for bankruptcy and the court issued a discharge order releasing Taggart from debts incurred prior to bankruptcy. Following that discharge order, a judgment was entered against Taggart in the company suit and attorney’s fees were awarded to the company and respondents. Taggart, believing the awarding of attorney’s fees to be in violation of the discharge order, filed for civil contempt against the respondents.

The bankruptcy court held the respondents in contempt, but, on appeal, the Bankruptcy Appellate Panel vacated the sanctions and the US Court of Appeals for the Ninth Circuit affirmed. Taggart filed a petition for certiorari.

Taggart and the bankruptcy court suggested a theory similar to strict liability when following the discharge order of the Bankruptcy court, finding a party culpable for contempt when the party is “‘aware of the discharge’ order and ‘intended the actions which violate[d]’ it.” The Ninth Circuit and the respondents espoused a theory “that a ‘creditor’s good faith belief’ that the discharge order ‘does not apply to the creditor’s claim precludes a finding of contempt, even if the creditor’s belief is unreasonable.'”

The Supreme Court decided what standard should be applied by utilizing the principle: “When a statutory term is ‘obviously transplanted from another legal source,’ it ‘brings the old soil with it.'” The court meant this to say that the civil contempt action which is meant to force compliance with injunctions, such as the bankruptcy discharge order, must “incorporate the traditional standards in equity practice for determining when a party may be held in civil contempt for violating an injunction.”

The court viewed the Ninth Circuit’s theory as relying “too heavily on difficult-to-prove states of mind,” allowing creditors with weaker cases to force debtors into litigation, contrary to the purpose of the discharge order from the Bankruptcy Courts. Taggart’s theory would force creditors to seek advance determinations in bankruptcy courts in an increased number of cases and cause additional federal litigation and increase costs.

The court reasoned that neither the Ninth Circuit subjective good-faith standard nor Taggart’s strict liability standard was correct and held 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,'” using an objective approach, where an unreasonable belief will not insulate a party from civil contempt.