Taggart v. Lorenzen, The State Of Bankruptcy Contempt Power Eight Months Later

Bryan Cave Leighton Paisner

So you (allegedly) violated a bankruptcy court order. Whether the debtor alleges you violated the terms of a confirmed plan, failed to provide certain notices required by the bankruptcy rules, violated the discharge injunction, or any other court order, you may be wondering what potential redress the debtor may seek. Although many violations of bankruptcy court orders and rules do not provide for a private right of action, many debtors seek to have their rights vindicated (in the form of the greatest vindicator, cash) through an action for contempt. These civil and criminal contempt actions allow debtors to collect their damages caused by a violation of a court order, provide courts the means to coerce compliance with their orders, and allow courts to punish violators and vindicate their power. Eight months ago, however, the United States Supreme Court made it more difficult for courts to use this contempt power. In this post, I will give a brief refresher of Taggart v. Lorenzen and the various issues it raises for bankruptcy courts’ contempt power. In my next post, I will discuss how Taggart could incorporate other non-bankruptcy principals into the bankruptcy context.

As a quick reminder, in Taggart v. Lorenzen, the Supreme Court addressed uncertainty among the Circuit Courts regarding the proper standard for determining whether a creditor may be held in civil contempt for violation of a bankruptcy court order. 139 S. Ct. 1795, 1799 (2019). The creditor in Taggart violated the discharge injunction by obtaining a state court judgment on a pre-petition claim after the debtor’s discharge, and sought fees incurred after the debtor filed his bankruptcy petition. Id. at 1800. After initially finding in favor of the creditor, the bankruptcy court found that these post-petition fees were covered by the discharge injunction and found the creditor in contempt on remand from the district court. Id. The Bankruptcy Court adopted a standard akin to strict liability and stated that a creditor was liable for contempt if it was aware of the order and intended the actions which violated it. See id. The Bankruptcy Appellate Panel vacated these sanctions and the Ninth Circuit affirmed the panel’s decision. Id. In the Ninth Circuit’s opinion, the Court adopted a subjective standard that looked to whether the creditor had a good faith belief that the order did not apply to preclude a finding of contempt, even if that belief was unreasonable. Id. at 1800-01.

After granting certiorari, the Supreme Court declined to adopt both of these standards. Id. at 1799. Instead, in a unanimous decision, the Court looked to standards governing contempt outside of bankruptcy and found that a creditor is not liable for contempt when there is a fair ground of doubt as to whether the defendant’s actions are wrongful. Id. at 1804. In doing so, the Court noted that when a statutory term is transplanted from another source, it “brings the old soil with it.” Id. at 1801 (citing Hall v. Hall, 138 S. Ct. 1118, 1128 (2018)). The Court noted that outside the bankruptcy context, courts use civil contempt to “coerce the defendant into compliance with an injunction or compensate the complainant for losses” resulting from the non-compliance. Id. at 1801 (internal quotations omitted). In light of these objectives, the Court recognized that contempt is a “severe remedy” and principals of fairness mean that parties must have explicit notice as to what conduct is prohibited before being held in civil contempt. Id. at 1802.

Following the Supreme Court’s decision in Taggart, bankruptcy practitioners are left with several important questions and potential unintended consequences. First, is the fact that contempt in the bankruptcy context does not function like contempt in other non-bankruptcy cases. In contrast with non-bankruptcy courts, bankruptcy courts rely on their contempt power to enforce the provisions of the bankruptcy code. See e.g. 11 U.S.C. § 105; In re Skinner, 917 F.2d 444, 447 (10th Cir. 1990). If there is no private right of action to enforce a specific bankruptcy court order or provision of the bankruptcy code, then Bankruptcy Courts only have contempt power to ensure their orders are enforced. On the other hand, non-bankruptcy courts are not usually in a position to implement statutory provisions or continually review compliance with their orders. With a few exceptions, after a non-bankruptcy case is concluded, the matter is resolved and no further monitoring by the Court is required. A “fair ground of doubt” standard may curtail the Court’s ability to enforce provisions of the bankruptcy code under 11 U.S.C. § 105. In fact, bankruptcy courts have already cited Taggart to deny finding a creditor in contempt for violations of a discharge injunction. See e.g. In re Roth, 935 F.3d 1270, 1278 (11th Cir. 2019); Moore v. Automotive Finance Corp., Case No. 2:19-CV-223-ALB, 2019 WL 3323328, at *2 (M.D. Ala. July 24, 2019); In re Distefano, Case No. DK 18-05001, 2019 WL 7171323 at *4 (W.D. Mich. Oct. 30, 2019). Taggart, therefore, may curtail bankruptcy courts’ abilities to enforce the provisions of the bankruptcy code.

Second, is the question of what affect Taggart will have on resolution of matters of first impression or where there is conflicting authority. It seems that in most situations, a creditor will have a “fair ground of doubt” as to the applicability of bankruptcy court orders concerning unsettled matters. If a Debtor is unable to receive its actual damages and attorney fees through a contempt action for these cases, then many of these issues will go unresolved. Debtors (and other creditors) are unlikely to finance protracted litigation addressing alleged violations of various court orders when their relief will result in vindication of their rights in principal, but no financial redress or attorney fee award. For example, at the time this article was published, Taggart had only been cited in forty-nine cases according to Westlaw’s citing references page. To provide context, Fort Bend County, Texas v. Davis, a Title VII case decided on the same day, has been cited in 181 cases.[1] While this example is certainly not definitive, it could suggest that debtors could be avoiding bringing contempt actions under Taggart’s standard.

Finally, Taggart raises the question of just how much “old soil” from non-bankruptcy cases is carried over into the bankruptcy context. As I will explore more fully in a future post, the Supreme Court’s discussion of the justifications and objectives of contempt is remarkably similar to its discussion of punitive damages. There is a possibility that Taggart’s “old soil” may also include limitations the Court has placed on punitive damages as well.

Eight months later, Taggart still raises important

questions for both debtors and creditors regarding the effectiveness of any potential contempt action brought for alleged violations of bankruptcy court orders. Not only will parties need to weigh whether the conduct at issue actually violated a court order, they will also need to weigh other authorities to determine whether the creditor had a fair ground of doubt that the order covered the applicable conduct, analyze the possibility of financial recovery for the alleged violation, and determine whether a potential action is worth the time and cost. These new problems create additional barriers to bringing contempt suits and may be used by savvy practitioners to resolve contempt actions before litigation or on summary judgment.

[1] While the other two cases decided on June 3, 2019 have fewer citations than Taggart, these cases involved relatively narrow criminal law and administrative law issues that may make them inadequate comparisons. See Mont v. United States, 139 S. Ct. 1826 (2019); Azar v. Allina Health Services, 139 S. Ct. 1804 (2019).

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Bryan Cave Leighton Paisner

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