SLG Client Alert: Supreme Court Rules Today on Standards Applicable to Bankruptcy Discharge Violations

Note: The following is a general discussion on the specified topic or issue and may not be relied on as legal advice in any specific case or matter you encounter. You should review any applicable case, or matter with counsel experienced in this area of law and should not generally rely on the discussion in this Alert.

Date: June 3, 2019
To: All Scheer Law Group Clients and Affiliates
From: Spencer Scheer
Subject: Supreme Court Rules Today on Standards Applicable to Bankruptcy Discharge Violations. Good and Bad news for Lenders

Creditors were hoping that the U.S. Supreme court would uphold the 9th Circuit’s standard for determining whether a creditor violated the Bankruptcy discharge injunction. While this did not happen, the news is not all bad.

The case at issue is Taggart v. Lorenzen, 18-489 (Sup. Ct. June 3, 2019).

The Taggart case dealt with the standard applicable to claiming damages for violation of the bankruptcy discharge injunction (Section 105 (a)). In essence, when a debt is discharged in bankruptcy, a creditor is permanently enjoined from collecting on it. Violations result in citations for contempt and can occur for anything from harassing phone calls to sending monthly payment statements. Damage awards in exceeding seven figures are often levied against Lenders found to violate the injunction.

However, the appeals court (9th Circuit) previously held that “the creditor’s good faith belief that the discharge injunction does not apply to the creditor’s claim precludes a finding of contempt, even if the creditor’s belief is unreasonable (i.e. subjective). If this standard of examining a creditor’s conduct was upheld it would have tipped the balance of proof dramatically to the debtor, who would be required to prove a subjective intention by the creditor to violate the injunction. A tough row to hoe.

The Court rejected the Ninth Circuit’s “good faith belief” standard. Recognizing that creditors often have the upper hand when dealing with debtors, Judge Breyer said that the rule proposed by the circuit court “may too often lead creditors who stand on shaky legal ground to collect discharged debts, forcing debtors back into litigation (with its accompanying costs) to protect the discharge that it was the very purpose of the bankruptcy proceeding to provide.”

On the other hand, Breyer also rejected a strict-liability standard that would authorize 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 the creditor’s conduct did not violate the order.” This is good news for lenders.

The Court distinguished the standard applicable to automatic stay violations, which allows actual damages, attorney’s fees and event even punitive damage claims (See Section 362(k)(1)), for any willful violation. Therefore, it can be argued that the decision also supports the argument that there is no strict liability for stay violations and that there must at least be willful/intentional action to hold the creditor liable. No certainty, however, as this was not the holding in the case, and is dicta only. It does give some fuel to the argument, however and should not be disregarded by a Lender facing a stay violation claim.

Please call or email if you have questions about this seminal case.

Spencer Scheer