As a result of the economic fallout of COVID-19, more bankruptcies are on the horizon, especially as government aid programs expire and involuntary or voluntary moratoriums on creditor action come to an end. [1] Creditors should be aware and prepared to avoid potential claims for alleged violation of the discharge injunction under the Bankruptcy Code and related orders.
In Taggart v. Lorenzen, the United States Supreme Court unanimously held that a creditor may be found in civil contempt for violating the discharge only where “there is no fair ground of doubt as to whether the order barred the creditor’s conduct.” See 139 S. Ct. 1795, 1799-1804 (2019) (emphasis added). [2] This standard is objective and so, rejects the use of strict liability in analyzing alleged discharge violations. As such, a contempt finding is unlikely when it is objectively unclear whether the alleged contemptors’ actions should be considered violative of the discharge or that such actions comply with applicable, controlling case law.
Subsequent Cases Limit Permissible Creditor Actions
A recent case addressed Taggart in the context of a chapter 11 case and an alleged violation of a discharge contained in a confirmation order. See In re Kimball Hill, Inc., No. 08BK10095, 2020 WL 5834884 (Bankr. N.D. Ill. Sept. 30, 2020). In Kimball Hill, the bankruptcy court confirmed a chapter 11 plan (the plan) containing an injunction as well as multiple releases (releasing the debtors and their administrators, successors or assigns, affiliates, representatives, etc.). Id. at *4. Following plan confirmation, a successor to the debtors’ assets (the purchaser) filed a motion for entry of an order (I) enforcing the confirmation order; (II) directing dismissal of state court claims; (III) awarding damages and (IV) granting related relief. Id. at *1. [3] The purchaser asserted that despite entry of an order confirming the plan, one creditor (the surety), continued to seek 100 percent payment for its contingent, unsecured claims. Id. Specifically, the surety continued its efforts to recover on its claims against the purchaser in at least five state court actions in addition to litigating the validity of its claims (and seeking payment thereon) before the bankruptcy court. See In re Kimball Hill, Inc., 2020 WL 5834884, at *9. [4]
The bankruptcy court rejected the surety’s arguments and issued two opinions: (1) the surety violated the confirmation order by, among other actions, seeking to have the purchaser held liable to the surety for its claims in at least five state court lawsuits; and (2) the surety’s violations warranted the imposition of damages. Id. The surety timely filed notices of appeal to the district court. See generally Fid. & Deposit Co. of Maryland v. TRG Venture Two, LLC, No. 19 C 389, 2019 WL 5208853 (N.D. Ill. Oct. 16, 2019). Although the district court did not find any error or an abuse of discretion in either Kimball I or Kimball II, the district court nevertheless remanded for a determination of contempt pursuant to Taggart. Id. at *6 (explaining, because Kimball I and II were issued prior to Taggart, the bankruptcy court did not consider the surety’s actions under “a fair ground of doubt”).
Following remand, the bankruptcy court explained that contempt under the Taggart standard was satisfied because, inter alia, the surety never cited any case wherein any surety was permitted to pursue contingent, unliquidated claims. See, i.e., In re Kimball Hill, Inc., 2020 WL 5834884, at *12 (explaining surety “provided no holding from case law or statute to support [its] theories.”). [5] Accordingly, there was no “fair ground of doubt” regarding the surety’s allegedly contemptable conduct. In the face of controlling law that is contrary to a defendant’s arguments(s), attempts by the defendant to reverse such law to avoid a contempt finding will fail. See ABI, ‘Fair Ground of Doubt’ Under Taggart Isn’t Shown by Intending to Overturn Precedent, Rochelle’s Daily Wire (Oct. 7, 2020).
Conclusion
The decisions in Kimball make it clear that creditors may not argue that they have a “fair ground of doubt” when the challenged actions are not: (i) supported by any case law; (ii) seeking to create new law; or (iii) attempting to overturn controlling precedent. Taggart establishes the appropriate standard is not strict liability; however, the “fair ground of doubt” standard does not provide creditors a free pass on actions that are not supported by applicable law. Similarly, attempts to undermine longstanding bankruptcy policy cannot be relied upon to avoid a finding of contempt under Taggart. [6] Although the contempt analysis for 11 U.S.C. § 524 is now objective (and therefore, more defendant-friendly), parties should remain mindful that seemingly permissible conduct may still become the subject of considerable scrutiny if it is challenged.
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1. American Bankruptcy Institute (ABI), Personal Bankruptcies Expected to Rise in 2021 as Stimulus Ends, Newsroom (Oct. 29, 2020) (“As stimulus checks and other forms of temporary relief run out, experts are projecting an increase in personal bankruptcy filings, which have so far been muted during the coronavirus pandemic.”). Between the months of April 2020 and July 2020, personal bankruptcy filings increased by about 40,000 and total businesses seeking chapter 11 protection in July 2020 rose by 52 percent compared to July 2019. See Economic Studies at Brookings, Bankruptcy and the Coronavirus, D.A. Skeel, Jr., (Oct. 26, 2020).
2. The holding in Taggart rejected application of: (i) the strict liability standard and (ii) the subjective standard of a creditor’s “good faith belief.” Id. at 1799. Notably, the Supreme Court is currently considering whether an entity passively retaining possession of bankruptcy estate property has an affirmative obligation under the automatic stay to return that property to the debtor or trustee immediately upon filing of the bankruptcy petition. See City of Chicago, Ill. v. Fulton, 140 S. Ct. 680 (2019).
3. Prior to the purchaser’s motion, the surety filed multiple joint and several claims against the debtors; the plan administer objected to all but one as duplicative. In re Kimball Hill, Inc., 565 B.R. 878, 884-86 (Bankr. N.D. Ill. 2017). The bankruptcy court sustained the objection filed by the plan administer. Id.
4. In a similar, although distinguishable, post-Taggart case, an individual chapter 7 debtor claimed the actions of one of his secured creditor with a lien over his vehicle raised policy concerns regarding the coercive effect of liens on worthless vehicles. In re Bentley, 607 B.R. 889, 894-95 (Bankr. E.D. Ky. 2019), aff’d, No. 19-8026, 2020 WL 3833069 (B.A.P. 6th Cir. July 8, 2020). The debtor alleged the creditor violated “the discharge injunction . . . by [] attempting to collect discharged debts by refusing to release its lien on his valueless motor vehicle until [the debtor] paid the full balance due on its [] prepetition debt.” Id. at *3-*4. The debtor in Bentley primarily relied on the conclusion of one non-controlling out-of-circuit case, Pratt v. GMAC, wherein the debtor argued “five material facts” rendered the creditor’s actions at issue “objectively coercive,” violating 11 U.S.C. § 524, and warranting contempt Id. at *4 & *7 (citing 462 F.3d 14 (1st Cir. 2006)). In Bentley, the debtor could not overcome longstanding federal policy that liens perfected under state law survive bankruptcy. In re Bentley, 2020 WL 3833069, at *11-*12. The BAP affirmed the bankruptcy court’s decision in its entirety. Id. at *12 (“the Pratt court never indicated that the presence of the five ‘material’ facts, without more,” made a creditor’s behavior contemptable) (citing Johnson v. Home State Bank, 501 U.S. 78 (1991)); see also In re Hrustanovic, 615 B.R. 224 (Bankr. W.D. Ky. 2020) (following In re Bentley, 607 B.R. 889). It is also important to note that the debtors in those cases were not relying on controlling precedent even if such precedent was distinguishable. As such, the creditor did not face the same concerns addressed in Kimball.
5. The cases on which the surety relied were either easily distinguishable or inapplicable. Id. at 12.
6 In re Kimball Hill, Inc., No. 08BK10095, 2020 WL 5834884 (Bankr. N.D. Ill. Sept. 30, 2020); In re Bentley, 607 B.R. 889 (Bankr. E.D. Ky. 2019), aff’d, No. 19-8026, 2020 WL 3833069 (B.A.P. 6th Cir. July 8, 2020). See also In re Hrustanovic, 615 B.R. 224 (Bankr. W.D. Ky. 2020); In re Loucks, Case No. 20-42265, 2020 WL 5998162 (Bankr. E.D. Mich. Oct. 9, 2020) (following In re Bentley, 607 B.R. 889). See also ABI, ‘Fair Ground of Doubt’ Under Taggart Isn’t Shown by Intending to Overturn Precedent, Rochelle’s Daily Wire (Oct. 7, 2020).