The U.S. Supreme Court held in Taggart v. Lorenzen that a creditor can 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. Taggart v. Lorenzen, No. 18-489, 2019 U.S. LEXIS 3890 (June 3, 2019). The Court vacated and remanded the Ninth Circuit’s holding in 888 F.3d 438, 445 (9th Cir. 2018), which allowed creditors an “unreasonable belief” defense to alleged discharge violations. Under that standard, even a creditor that subjectively but unreasonably believed their actions were permissible despite the discharge injunction could not be sanctioned.
Supreme Court established a more moderate standard: civil contempt sanctions may be appropriate “when the creditor violates a discharge order based on an objectively unreasonable understanding of the discharge order or the statutes that govern its scope.” Thus, the Court found the middle ground between the “strict liability” standard Taggart proposed, requiring preapproval from the bankruptcy court to act, and the “even if unreasonable” defense to discharge violations advocated for by Taggart’s creditors.
The Court’s opinion allows a “good faith belief” defense so creditors do not risk contempt for any discharge violations, so long as they had a reasonable belief, even if mistaken, that their conduct was permissible. However, the Court did decide that an unreasonable mistake should not shield creditors from liability. It remains to be seen if the “no fair ground of doubt” standard for assessing discharge injunction violations can be extended to automatic stay violations. The application of the new standard is bound to create more caselaw, and further litigation, in the coming months and years.
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