Supreme Court Sets Civil Contempt Standard for Creditors in Bankruptcy Cases

 Posted on June 10, 2019 in Bankruptcy

A recent U.S. Supreme Court ruling established that creditors can be held in civil contempt for violating a bankruptcy discharge order unless there is “fair ground of doubt” as to the violation. A chapter 7 bankruptcy discharge will clear a debtor from having to repay most of their debts incurred before filing for bankruptcy. A discharge does not apply to certain debts, such as student loans or debts incurred due to fraud. Otherwise, a creditor is not allowed to ask a debtor to repay debts from before the discharge order and could be punished for knowingly violating the order. While not a landmark Supreme Court decision, lower courts will likely cite the ruling during disputes between debtors and creditors after a bankruptcy discharge.

Case Details

Taggart v. Lorenzen is an Oregon case involving a business investor who had received a bankruptcy discharge to protect him from repaying his creditors. Litigation continued over the ownership of the debtor’s business interests, and the court ordered the debtor to pay the creditors’ legal fees at the end of the case. The debtor filed for an order of contempt, claiming that the creditors violated the discharge order by trying to collect legal fees. This case became a larger argument about what constitutes a creditor being in civil contempt of a discharge order:

• The bankruptcy court found the creditors in contempt based on a strict liability standard, which holds that creditors cannot take action after a discharge order without court approval; but
• An appellate court overturned that ruling and used a subjective standard that creditors are not in contempt as long as they have a good-faith belief that their actions do not violate the discharge order, even if that belief is unreasonable.

The Supreme Court vacated the appellate court ruling, rejecting both sides’ arguments in favor of what it believes to be a more reasonable objective standard. Creditors must have an objective reason to believe that they are allowed to take collection action against a debtor after a discharge order, but requiring creditors to clear all actions with a court is unreasonable.

Contact a Chicago Creditor’s Rights Lawyer

Though the Supreme Court rejected strict liability in bringing civil contempt, creditors still have a heavy burden to prove that they are allowed to take action against a debtor after a discharge order. It is important for creditors to use all of their means to collect a debt before the debtor files for bankruptcy. A Chicago creditor’s rights attorney at Dimand Walinski Law Offices, P.C., can explain the legal tools you have available to retrieve outstanding debts. To schedule a consultation, call 312-704-0771.

Source:

https://www.supremecourt.gov/opinions/18pdf/18-489_p8k0.pdf