Adam Law Group Blog

Supreme Court Issues Decisions About Bankruptcy Discharge Violations

In 2019, the Supreme Court issued a unanimous opinion establishing the standard that courts must follow to hold a creditor in civil contempt for violation of a bankruptcy discharge. Arriving at its decision, the Supreme Court rejected both the subjective and strict liability standards. As a result, courts are now permitted to hold a creditor in contempt for violating a discharge order only when there are no fair grounds of doubt as to whether the creditor’s conduct during discharge is lawful.

How the Case Arose

The case of Taggart v. Lorenzen involved a debtor who transferred interest in a corporation in violation of the company’s operating agreement and shareholder’s right of first refusal. Both the company and its shareholders initiated legal action against the debtor in state court. 

Before trial, the debtor sought Chapter 7 bankruptcy relief and obtained a bankruptcy discharge of all debts arising before the petition. Later, when a judgment was issued against the debtor, shareholders filed a petition seeking attorney’s fees after the debtor had filed for bankruptcy. 

In response, the debtor initiated legal action against the company and the shareholders on the basis that they had violated the bankruptcy discharge order. Asked to consider whether the violation justified civil contempt sanctions, the bankruptcy court applied a strict liability standard. 

Under the standard that the bankruptcy court applied, civil contempt sanctions are justified where a creditor is aware of the discharge and intended to violate the discharge injunction. The court found that because the shareholders were aware of the discharge and intended to file a petition, they were in civil contempt. The Bankruptcy Appellate Panel, however, disagreed and vacated the sanctions. The Ninth Circuit later affirmed the Bankruptcy Appellate Panel’s decision. As a result, the debtor appealed to the Supreme Court, which agreed to hear the case.

The Supreme Court’s New Standard

The Supreme Court ultimately rejected both of these standards. Instead, the court looked at the language of the Bankruptcy Code and the longstanding principle that when a statutory term is transplanted from another legal source, it carries the “old soil” with it. 

Ultimately the court reasoned that a discharge order operates as an injunction and permits a bankruptcy court to enter any order appropriate or necessary to carry out the code’s provisions. 

The Supreme Court rejected the Ninth Circuit’s subject standard because it relies too heavily on state of mind, which is nearly impossible to prove. The Supreme Court found that a creditor may be held in civil contempt for violating discharge injunctions only where there is no fair ground of doubts as to whether the creditor’s conduct was lawful under the discharge order.

Speak with an Experienced Bankruptcy Lawyer Today

This case emphasizes a simple but unfortunate point in a bankruptcy case: Even when a discharge order exists, creditors can end up harassing someone who has obtained a bankruptcy discharge. In these situations, it is important to remember that you have rights. Contact an experienced bankruptcy lawyer at Adam Law Group today.