Charles M. Tatelbaum, Tripp Scott

The June 3 opinion by the U.S. Supreme Court in the case of Taggart v. Lorenzen, Executor of the Estate of Brown, provided much-needed guidance in a previously amorphous and uncertain area of the law: determining when a bankruptcy court may hold a creditor in civil contempt for attempting to collect a on a debt that a discharge order immunized from collection. The court in Taggart held that a bankruptcy court may hold a creditor in civil contempt for violating a discharge order if there is “no fair ground of doubt” as to whether the order barred the creditor's conduct; relying on traditional principles of common law contempt in asserting that parties cannot be insulated from a finding of civil contempt based on their subjective good faith while further holding that that a bright-line “strict liability”-like approach is too punitive in nature.

The case concerned Radley Weston Taggart, who invested in a company called Sherwood. Taggart's attempt to sell Sherwood precipitated a dispute between him, other members of the business and the business itself, with the other owners of Sherwood and Sherwood itself arguing that his attempt to sell the business was wrongful. When Taggart filed for bankruptcy, it stayed the litigation for a period. When his bankruptcy case concluded and the litigation resumed, Taggart sought to have the case dismissed on the grounds that he was relieved of his obligations to the creditors (his former fellow owners of the business).

The state court, arguing that it could enter an order clarifying title to the business without violating Taggart's discharge in his bankruptcy case, did not dismiss the litigation notwithstanding Taggart's attempt to do so. Accordingly, the state court entered a judgment that effectively expelled Taggart from the business and, additionally, ordered Taggart to pay the creditors' attorney fees and costs. Taggart immediately returned to the bankruptcy court that granted him a discharge; seeking to have the creditors who continued the litigation in state court held in contempt for violating the bankruptcy discharge on the grounds that his being ordered by the state court to pay the creditors' attorney fees was inconsistent with the discharge of his obligations to the business in the bankruptcy court.

The bankruptcy court denied his request; at which time Taggart appealed the bankruptcy court ruling to the district court, which disagreed with the bankruptcy court; arguing that because Taggart had not voluntarily reentered the litigation (or, to use the words of the line of cases upon which the court relied, “returned to the fray” of the litigation after receiving the discharge). When the case was eventually reviewed by the U.S. Court of Appeals for the Ninth Circuit, it held that the bankruptcy court could not hold the creditors in contempt so long as they had a “good faith belief” that the discharge did not preclude the litigation against Taggart, even if that belief was objectively unreasonable; a finding which did not sit well with any of the nine justices on the Supreme Court.

Most discharge disputes arise in consumer bankruptcies when creditors of the debtor argue that a particular debt was not discharged by a bankruptcy proceeding. The analysis that follows these disputes is usually relatively straightforward: the consumer creditor that sought to collect on a debt would be held in contempt. The procedural history of Taggart produced a situation that is far from typical. Firstly, it involved not a consumer and his various creditors, but seemingly shrewd business persons in an acrimonious battle in which each side was jockeying for a larger share of ownership of an enterprise. As a result, the lessons to be gleaned from the court's analysis of these particular facts can be instructive for creditors and their attorneys alike in their dealings with financially distressed individuals or businesses that have been granted a discharge under the code.

The Supreme Court's holding in Taggart creates an objective standard for creditors and their professionals; particularly those who are unfamiliar with the nuances of the Bankruptcy Code and the policies that underlie many of its debtor-protective mechanisms. In essence, the iteration of the “no fair ground of doubt” standard provides interested parties with an express pronouncement of the court that can be used to properly navigate the tenuous balancing act of, on the one hand, complying with their ethical obligation to seek to extend, modify or reverse existing law (when appropriate) with the legitimate interest of the judicial system (and society at large) in ensuring that subjective beliefs grounded in conjecture or even ignorance of bankruptcy law are not accepted or, worse yet, rewarded by the courts when deciding whether a particular creditor action was violative of a discharge order.

This effect, in turn, is beneficial for creditors and their professionals who are now armed with a clearer conception of what a court may consider to be a violation of a discharge order in that the mistakes of counsel are typically chargeable to the client even where the client merely relies, in good faith, on attorney advice. Additionally, as discharge orders are brought before lower courts post-Taggart, the interpretation of the “no fair ground of doubt” standard will begin to provide more certainty for creditors' rights attorneys and their clients.

In sum, the Supreme Court's “no fair ground of doubt” objective criteria therefore appears to strike a nice balance between the policy concerns of creditors and debtors and the judicial system as a whole in discharge injunction situations.

Charles M. Tatelbaum is a director and Kadeem G. Ricketts is an associate at Tripp Scott in Fort Lauderdale.