SCOTUS to Consider Creditors’ Collection Acts Post-Bankruptcy

Jan. 4, 2019, 8:16 PM

The U.S. Supreme Court agreed to decide whether a creditor’s collection action against a bankruptcy debtor after the bankruptcy was wrapped up can subject the creditor to sanctions, even where the creditor had a good-faith belief that it wasn’t doing anything wrong in going after the debtor in court post-bankruptcy.

Normally, debtors are protected from collection actions after a court discharges or wipes out their debts in bankruptcy. A creditor that violates the bankruptcy injunction can be penalized.

The U.S. Supreme Court will decide whether a creditor’s subjective understanding that a collection action taken against a post-bankruptcy debtor didn’t violate the injunction against such acts is sufficient to prevent that creditor from being penalized for violating the bankruptcy injunction.

The high court said that it will review the opinion of the U.S. Court of Appeals for the Ninth Circuit holding that a creditor’s good faith belief that its acts aren’t in violation of the discharge injunction—even if it’s unreasonable—will insulate the creditor from liability for the violation.

The question spotlights a core tenet of bankruptcy—the law that prevents creditors from pursuing debtors for debts that were discharged, or wiped out, in bankruptcy—retired bankruptcy judges, bankruptcy law professors, and consumer advocates say.

Bradley Weston Taggart was sued by business associates for selling his interest in a limited liability company without honoring a right of first refusal belonging to his associates. Before the trial, Taggart filed a Chapter 7 liquidation case, which automatically stayed the lawsuit against him. He eventually received his discharge, which wiped out any financial obligation he may have owed his former partners, Taggart said in court filings.

The former partners continued the lawsuit against another defendant. The state court wouldn’t dismiss Taggart from the suit because it decided he was a necessary party. The plaintiffs couldn’t get a money judgment against him, however, because of the discharge.

The plaintiffs ultimately prevailed and sought an award of attorneys fees against Taggart. They filed a motion with the state court asking permission first, the defendants said in their brief.

Taggart sought sanctions for violating the discharge injunction, a court order that wipes out his pre-petition debt. The Ninth Circuit said that he wasn’t entitled to damages, because the plaintiffs thought they weren’t violating the injunction. Even if their belief wasn’t reasonable, it was sufficient to prevent sanctions against them, the court said.

The Ninth Circuit’s decision creates a conflict among federal appeals courts, one that even the Ninth Circuit acknowledged in its ruling, Taggart said.

“The Ninth Circuit’s decision, if allowed to stand, will eviscerate the Code’s key mechanism for enforcing the discharge injunction,” Daniel Geyser, Taggart’s attorney, told Bloomberg Law.

“Creditors can always come up with some pretextual reason for saying they believed their actions were authorized, and debtors can scarcely afford the extra proceedings to expose a pretext for what it actually is,” he said.

A group of retired bankruptcy judges and bankruptcy law professors filed a friend-of-the-court brief in support of Taggart’s position, as did the National Consumer Bankruptcy Rights Center and the National Association of Consumer Bankruptcy Attorneys.

“The Ninth Circuit decision greatly weakens the effectiveness of the bankruptcy discharge—the central benefit of bankruptcy for debtors—and it is essential for the proper operation of bankruptcy that the discharge be fully effective,” Eugene Wedoff told Bloomberg Law. Wedoff, one of the former judges filing the brief, is a past president of the American Bankruptcy Institute.

Because of the lower court’s ruling, “in the Ninth Circuit, but not in other circuits, the simple discharge injunction is now expensive and complicated to enforce,” the professors and former judges said. The decision rewards ignorance of the law, they said.

Mayer Brown LLP, counsel for Taggart’s former partners, didn’t respond to a request for comment.

The case is Taggart v. Lorenzen, U.S., 18-489, petition granted 1/4/19.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bloomberglaw.com

To contact the editor responsible for this story: Seth Stern at sstern@bloomberglaw.com

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