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A Supreme Slap on the Wrist for Careless Creditors

On behalf of Cohn Lifland Pearlman Herrmann & Knopf LLP | Jan 28, 2020 |

A U.S. Supreme Court ruling issued in the summer of 2019, Taggart v. Lorenzen, 587 U.S. __ (2019), will hold creditors’ feet closer to the fire. In its unanimous decision, authored by Justice Breyer, the Supreme Court decided that creditors are not immune to civil contempt charges for pursuing debts already discharged in bankruptcy. Its ruling overturned a Ninth Circuit Court decision that effectively gave creditors, who were already engaged in collection actions, a pass for presuming that formal bankruptcy discharge orders do not apply to them.

The facts of this case involved a dispute between partners in a real estate venture. After two partners filed suit against the remaining members, Petitioner Taggart filed for Chapter 7 bankruptcy, and thereafter received a discharge. After the conclusion of the bankruptcy, the respondents continued the state court action, and included the Petitioner in the continued proceedings. The state court found in favor of the respondents, and allowed any party to petition for attorneys fees. After the respondents filed an application for fees against Petitioner Taggart, Petitioner Taggart requested that the bankruptcy court hold the Respondents in contempt for their violation of the discharge order. The bankruptcy court held the company in contempt only to see their sanction vacated by the Bankruptcy Panel, finding that the respondents had a good faith belief that the discharge order did not apply to the claim for attorneys’ fees. The Ninth Circuit affirmed the ruling.

The majority opinion admitted that discharge orders in bankruptcy courts traditionally lack detail. However, given that “Congress has carefully delineated which debts are exempt from discharge,” it may be appropriate to find that a party has committed civil contempt when a creditor has continued to engage in collection attempts based on “an objectively unreasonable understanding of the discharge order or the statutes that govern its scope.”

To put it simply, a collector who is aware of a Chapter 7 or Chapter 13 filing should be “hands-off” and should discontinue collection efforts. Unless it has an objectively reasonable basis to think that the ischarge order did not apply to its debt, the agency can be held in civil contempt for going against a legal discharge order. However, the offending party’s good faith, even though it will not protect them from a finding of civil contempt, may help determine the appropriate sanction.

Cohn Lifland’s creditors’ rights attorneys can help navigate this field of law, and can lend clarity in whether you can collect on your debt.