TAGGART V. LORENZEN : CASE SUMMARY

The Supreme Court unanimously in Taggart v. Lorenzen 587 U.S. 161 (2019) held that a court may hold a creditor in civil contempt for violating a discharge order when there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful.

FACTS OF THE CASE

Stephen Taggart was involved in litigation concerning a business dispute before filing for Chapter 7 bankruptcy. He subsequently received a bankruptcy discharge, which generally prohibits creditors from attempting to collect discharged debts.

After the discharge, certain creditors resumed litigation against Taggart and sought attorneys’ fees incurred after the discharge order. Taggart argued that these actions violated the discharge injunction under § 524 of the Bankruptcy Code and sought to hold the creditors in civil contempt.

The creditors contended that they had a good-faith belief that the discharge injunction did not apply because of Taggart’s continued participation in the litigation.

ISSUE BEFORE THE SUPREME COURT

The issue before the Supreme Court was what standard should a court apply when determining whether a creditor may be held in civil contempt for violating a bankruptcy discharge injunction.

FINDINGS OF THE SUPREME COURT

Justice Stephen Breyer delivered the opinion of the Court. The  Supreme  Court rejected two competing standards. The Supreme Court rejected strict liability standard under which a creditor could be held in contempt whenever a discharge violation occurred, regardless of intent. The Supreme Court also rejected subjective Good-Faith Standard, underwhich a creditor’s sincere belief that its conduct was lawful would automatically prevent contempt.

Instead, the Supreme Court adopted an objective standard derived from traditional principles of civil contempt. The Supreme Court  observed  that Civil contempt is appropriate only when a court order is clear and the violation is sufficiently certain.  Creditors should not be punished when there is a fair ground of doubt about whether the discharge order applies.

A creditor’s subjective belief is relevant but not determinative. The key question is whether there was an objectively reasonable basis for believing the conduct was lawful.

The Supreme Court vacated the lower court’s judgment and remanded the case, directing the lower courts to apply the objective “no fair ground of doubt” standard.

The Supreme Court laid down the principle that a creditor may be held in civil contempt for violating a bankruptcy discharge injunction only when there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful. In other words, contempt is appropriate when there is “no fair ground of doubt” as to whether the discharge order barred the creditor’s actions.

SIGNIFICANCE OF THE JUDGMENT

Taggart v. Lorenzen is the leading Supreme Court decision on enforcement of the bankruptcy discharge injunction.The decision is important because it – (i) established a uniform national standard for contempt in discharge-injunction cases.  (ii) balanced debtor protection against fairness to creditors.  (iii) rejected both strict liability and purely subjective good-faith defenses.  (iii) adopted the traditional civil-contempt standard used in federal courts.

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Mukesh Suman is a lawyer and legal author based at Delhi, India. He has extensive experience in insolvency and bankruptcy matters. He also provides legal support services to USA based bankruptcy lawyers. Mukesh can be approached at mukesh_suman@outlook.com or +91 9717864570.