Starting now, all creditors must exercise more caution when trying to collect against discharged bankruptcy debtors, because a creditor’s good faith belief that the discharge injunction did not apply is no longer a viable defense. On Monday, June 3, 2019, the U.S. Supreme Court clarified the standard for awarding sanctions against a creditor for violation of the discharge injunction, unanimously holding that a court may hold a creditor in civil contempt for violating a discharge order if there is “no fair ground of doubt” that the discharge order barred the creditor’s conduct. Taggart v. Lorenzen, 587 U.S. __ (2019).
Bradley Taggart (“Taggart”) owned an interest in an Oregon company called Sherwood Park Business Center (“Sherwood”). In 2007, Sherwood and some of the other owners filed a lawsuit against Taggart in state court, claiming that Taggart had breached Sherwood’s operating agreement. On the eve of the state court trial, Taggart filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. At the conclusion of his bankruptcy case, Taggart received an order granting him a discharge under Section 727 of the Bankruptcy Code “from all debts that arose before the date of the order for relief” (subject to certain exceptions that are not relevant here). Section 524 of the Bankruptcy Code explains that a discharge order “operates as an injunction” that bars creditors from collecting any debt that has been discharged. In Taggart’s case, any damages that would have resulted from the state court litigation were subject to the discharge.
Continue Reading Creditor Beware: Supreme Court Rejects “Good Faith” Defense to Violations of Bankruptcy Discharge Orders