US SUPREME COURT FINDS BANK | Key Points
- On June 3, 2019, the United States Supreme Court (“USSC”) granted certiorari relief and weighed in on “the criteria for determining when a court may hold a creditor in civil contempt for attempting to collect a debt that a discharge order has immunized from collection.” Taggart v. Lorenzen, 139 S. Ct. 1795, 1799 (2019). The USSC reviewed the Ninth Circuit Court of Appeals’ order which found a creditor (“Sherwood”) who sought attorney’s fees against a debtor (“Taggart”) after Taggart had obtained a discharge of his debts did not violate a Chapter 7 bankruptcy discharge order and could not be held in civil contempt. The USSC remanded the matter finding both the lower court (bankruptcy court) and the appellate court (Ninth Circuit) employed the wrong standard for evaluating the appropriateness of a civil contempt sanction.
- The Ninth Circuit employed a subjective “good faith belief” standard which the USSC found was “inconsistent with traditional civil contempt principles under which parties cannot be insulated from a finding of civil contempt based on their subjective good faith.” The bankruptcy court employed a strict liability standard which the USSC rejecting finding such a standard would “risk additional federal litigation, additional costs, and additional delays” and “interfere with a chief purpose of the bankruptcy laws.”
- The USSC explained a discharge order “operates as an injunction” so it looked at the objective standard employed when a party violated an injunction. Ultimately, the USSC remanded the case with the following holding: “[A] court may hold a creditor in civil contempt for violating a discharge order if there is no fair ground of doubt as to whether the order barred the creditor’s conduct. In other words, civil contempt may be appropriate if there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful.” Taggart, 139 S. Ct. at 1799.