Taggart v. Lorenzen

Whether, under the Bankruptcy Code, a creditor's good-faith belief that the discharge injunction does not apply precludes a finding of civil contempt.

Respondents brought suit for the alleged transfer of interest in a limited liability company in violation of Respondents' contractual right of first refusal. Before trial, Petitioner filed for Chapter 7 bankruptcy, received discharge, and sought dismissal from the litigation. The trial court refused dismissal, and Respondents ultimately sought attorney’s fees from Petitioner for his post-bankruptcy participation in the case. Petitioner sought to hold Respondents in contempt for violating the discharge injunction. A bankruptcy court ultimately held Respondents in contempt for willfully violating the discharge injunction. The Bankruptcy Appellate Panel reversed, and the Ninth Circuit affirmed based on the conclusion that Respondents believed in good faith that the discharge injunction did not apply. Petitioner argues that the Ninth Circuit’s decision openly created conflict with multiple circuits, two bankruptcy appellate panels, and lower court decisions which all reject the proposition that subjective intent excuses a discharge violation. Petitioner further argues that the Ninth Circuit erred in its decision for three reasons: first, the decision violates the basic principle that good faith cannot provide relief from civil contempt; second, U.S.C. 105(a) asks the binary question of whether violation of the discharge injunction occurred or did not occur, therefore good faith is irrelevant to civil contempt; third, Congress created the Bankruptcy Code to provide debtors a fresh start, suggesting no reason to make a debtor suffer the consequence of an alleged good-faith error by a creditor who could have first sought leave of the bankruptcy court before pursuing judgment.