Walking on Eggshells: Life Post-Taggart

When the Supreme Court handed down Taggart v. Lorenzen,[1] practitioners held their breath knowing that the decision could drastically change the landscape of sanctions law in bankruptcy courts. In the decision, the Supreme Court clarified the standard for holding a creditor in civil contempt for violating the discharge injunction afforded by 11 U.S.C. § 524(a)(2). But Taggart left unanswered questions: Has the sanctions landscape changed? Does Taggart inform the standard for stay violations? Plan violations? This article discusses the Taggart decision and addresses the case’s implications in turn.

The Case.

Mr. Taggart became embroiled in state court litigation relating to an entity in which he had an ownership interest. During this litigation, he filed chapter 7 bankruptcy and obtained his general discharge.

After this discharge, the state-court litigation continued and the other parties to the state court action sought—and obtained—an order awarding post-discharge attorneys’ fees against the debtor.[2] The debtor moved for contempt in his bankruptcy case, but the bankruptcy court—applying governing Ninth Circuit precedent—found that the debtor had “returned to the fray” in state court and, therefore, an award of post-discharge attorneys’ fees did not violate the discharge injunction.[3] On appeal, the district court found that the debtor had not “returned to the fray” and remanded the matter.[4]

The bankruptcy court, deciding the case on remand, applied a “strict liability” standard and held the creditors in civil contempt. Specifically, the bankruptcy court found that the creditors knew of the debtor’s discharge injunction and took the actions that intentionally violated the discharge injunction.[5] The state court plaintiffs appealed. The Ninth Circuit reversed the ruling and held that a “subjective good faith standard” was applicable to civil contempt proceedings.[6]

The Supreme Court rejected the reasoning of the lower courts and instead held that the proper standard for holding a creditor in civil contempt is the absence of “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 unlawful.”[7]

Has the Sanctions Landscape Changed?

Historically, the general contempt standard has been an objective one, where the subjective beliefs of the contemnor are typically unavailing to avoid a finding of contempt.[8] However, the Supreme Court has not always held subjective intent to be irrelevant. In Chambers v. NASCO, Inc.[9], the Court noted that sanctions may be warranted where a party acts in bad faith. And, in Young v. United States, the Court found that a party’s good faith may be considered in determining an appropriate sanction.[10] It is clear, however, that the “no fair ground of doubt” standard adopted in Taggart has its roots in objective reasonableness.

The Bankruptcy Code provides authority for the court to hold a party in contempt at 11 U.S.C. § 105(a) and § 524(a)(2).[11] Indeed, the contempt powers of the bankruptcy court—as provided for in the Code—find their roots in traditional principles from the “old soil” of prior law. The “no fair ground of doubt” standard has been applied to civil contempt outside of bankruptcy for more than 150 years.[12] The Supreme Court noted that civil contempt powers in bankruptcy are rooted in this same non-bankruptcy law.

Does Taggart Apply to Stay Violations?

On its face, no, Taggart does not purport to set the standard for sanctions in cases involving violations of the automatic stay. In addressing the standard championed by the petitioner, the Court scrutinized Taggart’s argument that “lower courts often have used a standard akin to strict liability to remedy violations of automatic stays.”[13] However, the Court found that the statutory framework supporting remedies for stay violations “differs from the more general language in [11 U.S.C. §] 105(a)” that provides the remedy for violation of the discharge injunction.[14] By contrast, 11 U.S.C. § 362(k)(1) provides a remedy for “an individual injured by any willful violation of [the] stay.”[15] The Court also found that the purpose of the automatic stay and the discharge injunction differ: “A stay aims to prevent damaging disruptions to administration of a bankruptcy case in the short run, whereas a discharge is entered at the end of the case and seeks to bind creditors over a much longer period.”[16]

The standard applicable to stay violations is not entirely settled. Courts have construed the “willfulness” language in Section 362(k) to mean simple intent to do the actions that constituted the violation (rather than intent to violate the stay).[17] In effect, such a standard functions similarly to strict liability. In the Eleventh Circuit, a defendant may be held in contempt where he “[1] knew that the automatic stay was invoked and (2) intended the actions which violated the stay.”[18] Other courts have applied the Taggart standard, finding a stay violation only if there was “no fair ground of doubt” about whether the conduct violated the stay.[19]

The Supreme Court in Taggart did not address the meaning of “willful” in the context of a stay violation, although Justice Breyer noted that “the automatic stay provision uses the word willful, a word that typically does not associate with strict liability but whose construction is often dependent on the context in which it appears.”[20] Despite this teaser, practitioners are left looking to their respective circuits for guidance on the sanctions standard in stay violation cases.

Does Taggart Apply to Violations of other Orders such as the Plan?

Again, on its face, Taggart applies only to violations of the discharge injunction. However, shortly after Taggart was handed down, a few bankruptcy courts looked to the objective standard defined in Taggart to inform the general sanctions landscape.

At least one bankruptcy court has held that the standard in Taggart is applicable in deciding whether to impose sanctions when a party violates a court order that is injunctive in nature.[21] In an opinion issued just weeks after Taggart, the bankruptcy court in In re Gravel applied Taggart to the violation of “Debtor Current Orders” which were entered to enjoin a certain class of creditors from seeking to collect “(i) any prepetition mortgage arrearage that the Order declared to be cured, (ii) any postpetition amounts that the Order declared to be paid, or any (iii) fees or expenses that were not properly noticed pursuant to Rule 3002.1(b) and (c).”[22] To be sure, discharge orders and the orders entered in Gravel serve the similar purpose of enjoining collection activity, which may be an important characteristic supporting the application of Taggart in this and future cases.

Other courts have applied Taggart even more broadly. In Deutsche Bank Trust Co. v. Gemstone Sols. Grp., Inc.[23], the bankruptcy court applied the no “fair ground of doubt” standard to violations of a confirmation order.[24] However, Taggart is not the universal standard for every sanctions order. Indeed, a bankruptcy court recently imposed sanctions against an attorney under the court’s inherent powers due to the attorney’s willful failure to comply with a discovery order.[25]

Conclusion.

Post-Taggart, bankruptcy courts should apply the objective “no fair ground of doubt” standard when assessing whether a party should be sanctioned for violating the discharge injunction. However, a practitioner cannot assume that the objective Taggart standard applies in cases where the violation relates to either the automatic stay or another court order. A variety of standards—objective, subjective, or even strict liability—may apply in those instances and practitioners should be aware that the Taggart standard may not apply uniformly when a bankruptcy court is considering sanctions.


[1] 139 S. Ct. 1795 (2019).

[2] Taggart at *1800.

[3] Id.

[4] Id.

[5] Id. at *1800, *1801.

[6] Id. at *1801.

[7] Id. at *1799 (emphasis added).

[8] Id. at *1802.

[9] 501 U.S. 32 (1991).

[10] 481 U.S. 787 (1987).

[11] Taggart at *1801.

[12] Id.

[13] Id. at *1803.

[14] Id. at *1804.

[15] (emphasis added).

[16] Taggart at *1804.

[17] In re Olsen, BAP No. EP 16-058, 2017 Bankr. LEXIS 2402 (1st Cir. B.A.P. July 19, 2017).

[18] Jove Engineering, Inc. v. Internal Revenue Service, 92 F.3d 1539, 1555 (11th Cir. 1966) (reversing district court’s finding that there was no willful violation where “there was no malice and nothing approaching arrogant defiance or reckless disregard . . . [a] computer was, perhaps, not finely tuned.” ) (internal citations omitted).

[19] See, e.g., Suh v. Anderson, BAP NO. CC019-1233-STaF, 2020 Bankr. LEXIS 714, n3 (9th Cir. B.A.P. March 16, 2020) (“[W]e assume that the contempt standard applied to the discharge violation in Taggart also applies to the violation of the automatic stay.”).

[20] Taggart at *1804 (internal citations omitted).

[21] In re Gravel, 601 B.R. 873 (Bankr. Vt. 2019).

[22] Gravel at *889.

[23] Case No. 19-30258-KLP, 2020 Bankr. LEXIS 1377, (Bankr. E.D. Va. May 26, 2020).

[24] Gemstone at *28 (“Under Taggart, if there is a ‘fair ground of doubt’ as to whether Defendants’ conduct was a violation of the Confirmation Order, then a finding of contempt is not permitted.”).

[25] In re Markus, 619 B.R. 552 (Bankr. S.D.N.Y. 2020).

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