Supreme Court Unanimously Adopts an Objective Standard for Discharge Violations
In Taggart v. Lorenzen, the question before the court concerned the legal standard for holding a creditor in civil contempt when the creditor attempts to collect a debt in violation of the bankruptcy discharge order. The standard adopted in the Ninth Circuit was a “good faith belief” standard that accepted a subjective, good faith belief about the inapplicability of the discharge injunction as a defense to civil contempt. The debtor was proposing a strict liability standard that would allow for a contempt finding “regardless of the creditors’ subjective beliefs about the scope of the discharge order, and regardless of whether there was a reasonable basis for concluding that a creditor’s conduct did not violate the order.”
On June 1, 2019, the Supreme Court released an 11-page opinion authored by Justice Breyer which simultaneously rejected the Ninth Circuit’s “good faith belief” standard and the debtor’s suggested strict-liability standard. Instead, the Court’s held unanimously that the bankruptcy court “may impose civil contempt sanctions when there is no objectively reasonable basis for concluding that the creditor's conduct might be lawful under the discharge order.”
Reading the Court’s opinion, the decision was deeply rooted in both precedent and equity. Justice Breyer cited, California Artificial Stone Paving Co. v. Molitor, an 1885 Supreme Court opinion that held “where there is [a] fair ground of doubt to as to the wrongfulness of the defendant’s conduct” civil contempt should not be found. California Artificial Stone Paving Co. v. Molitor, 113 U.S. 609, 618 (1885). Additionally, Justice Breyer cited Schmidt v. Lessard, where the Court stated, “the principles of ‘basic fairness requir[e] that those enjoined receive explicit notice’ of ‘what conduct is outlawed’ before being held in civil contempt. Schmidt v. Lessard, 414 U.S. 473, 476 (1974).
Also, worth noting, Justice Breyer mentioned, relating to the automatic stay, that the word “willful” in Section 362(k)(1) is not normally a word the law associates with strict liability. Parenthetically, the Court said, “[w]e need not, and do not, decide whether the word ‘willful’ supports a standard akin to strict liability.” This could potentially be Justice Breyer’s attempt to lay the foundation for doing away with the strict liability standard of automatic stay violations. Thus, this might be an area worth keeping an eye on.
The Court clearly would like to make the standard in these cases consistent with traditional civil contempt principles. That standard is an objective one where there is not a “fair ground of doubt” as to whether the creditor's conduct might be lawful under the discharge order. The Court thinks this standard strikes the balance between the interests of the creditors and debtors, but only time will tell.