New “Fair Ground of Doubt” Standard for Alleged Discharge Violations: Proceed With Care | McGuireWoods LLP

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Due to the economic fallout from COVID-19, more bankruptcies are on the horizon, especially as government assistance programs expire and involuntary or voluntary moratoria on creditors’ actions end. [1] Creditors should be aware and prepared to avoid potential claims for alleged violation of the discharge order under the Bankruptcy Code and related ordinances.

In Taggart v. Lorenzen, the United States Supreme Court has unanimously ruled that a creditor can only be found in civil contempt for violating the release when “there is no just cause for doubt as to whether the order prohibited the conduct of the creditor. See 139 S. Ct. 1795, 1799-1804 (2019) (emphasis added). [2] This standard is objective and therefore rejects the use of strict liability in the analysis of alleged discharge violations. As such, a contempt conviction is unlikely when it is objectively unclear whether the actions of the alleged contemptors are to be considered a breach of the discharge or whether these actions comply with applicable and determinative case law.

Subsequent cases limit the actions of eligible creditors

A recent case brought up Taggart in a Chapter 11 case and an alleged breach of a discharge contained in a confirmation order. See Regarding Kimball Hill, Inc., n ° 08BK10095, 2020 WL 5834884 (Bankr. ND Ill. September 30, 2020). In Kimball Hill, the bankruptcy court confirmed a chapter 11 plan (the plan) containing an injunction as well as multiple releases (discharge of debtors and their directors, successors or assigns, affiliates, representatives, etc.). Identifier. at 4 o’clock. Following the confirmation of the plan, a successor to the assets of the debtors (the purchaser) filed a request for the recording of an order (I) executing the confirmation order; (II) order the dismissal of the claims of the state courts; (III) the award of damages and (IV) the award of related compensation. Identifier. to 1. [3] The buyer claimed that despite the entry of an order confirming the plan, a creditor (the surety) continued to demand 100 percent payment of its contingent unsecured debts. Identifier. Specifically, the surety continued his efforts to collect his claims against the buyer in at least five state lawsuits in addition to arguing the validity of his claims (and seeking payment) in bankruptcy court. See Regarding Kimball Hill, Inc., 2020 WL 5834884, at * 9. [4]

The bankruptcy court rejected the surety’s arguments and issued two opinions: (1) the surety violated the confirmation order by seeking, among other actions, to hold the buyer liable to the surety for his claims in at least five state lawsuits; and (2) the breaches of the surety justified the imposition of damages. Identifier. The surety filed notices of appeal in a timely manner with the district court. See generally Fid. & Deposit Co. of Maryland v. TRG Venture Two, LLC, N ° 19 C 389, 2019 WL 5208853 (ND Ill. October 16, 2019). Although the district court found no error or abuse of power in either Kimball I Where Kimball II, the district court nevertheless returned for a contempt decision pursuant to Taggart. User ID. to * 6 (explaining, because Kimball I and II were issued before Taggart, the bankruptcy court did not consider the surety’s actions to be “just cause for doubt”).

Following the referral, the bankruptcy court explained that the contempt of Taggart the standard was met because, among others, the surety never cited any instances where a surety was authorized to pursue potential and unliquidated claims. See, that is to say, Regarding Kimball Hill, Inc., 2020 WL 5834884, at * 12 (explaining the surety “provided that no finding of case law or supporting law [its] theories. “). [5] Therefore, there was no “good cause for doubt” as to the allegedly contemptible conduct of the surety. When faced with a control law that is contrary to a defendant’s arguments, the defendant’s attempts to overturn that law to avoid a verdict of contempt will fail. See ABI, Just Land of Doubt ‘Under Taggart Is not shown by the intention to overturn the previous one, La Rochelle’s Daily Wire (Oct 7, 2020).

Conclusion

Decisions in Kimball make it clear that creditors cannot argue that they have “good cause for doubt” where the contested actions are not: (i) supported by any case law; (ii) seek to create a new law; or (iii) attempt to reverse a control precedent. Taggart setting the appropriate standard is not a strict responsibility; however, the “good cause of doubt” standard does not allow creditors to pursue actions that are not supported by applicable law. Likewise, attempts to undermine a long-standing bankruptcy policy cannot be used to avoid a verdict of contempt of court. Taggart. [6] While the contempt analysis for 11 USC § 524 is now objective (and therefore more friendly to the defendant), parties should keep in mind that apparently permissible behavior may still be the subject of an objection. scrutiny if challenged.


1. American Bankruptcy Institute (ABI), Personal bankruptcies are expected to increase in 2021 when the stimulus ends, Newsroom (October 29, 2020) (“As stimulus checks and other forms of temporary relief run out, experts predict an increase in personal bankruptcy filings, which have so far been muted during the coronavirus pandemic. ”). Between April 2020 and July 2020, personal bankruptcy filings increased by approximately 40,000 and the total number of businesses seeking Chapter 11 protection in July 2020 increased by 52% compared to July 2019. See Economic Studies at Brookings, Bankruptcy and the coronavirus, DA Skeel, Jr., (October 26, 2020).

2. Detention Taggart rejected the application of: (i) the strict liability standard and (ii) the subjective standard of a creditor’s “good faith belief”. Identifier. in 1799. Notably, the Supreme Court is currently considering whether an entity passively retaining possession of the bankruptcy real estate has a positive obligation under the automatic stay to return such property to the debtor or trustee immediately after the filing of the petition for bankruptcy. bankruptcy. See the city of Chicago, Ill. against Fulton, 140 S. Ct. 680 (2019).

3. Prior to the buyer’s request, the surety filed several joint and several claims against the debtors; the regime administration objected to all but one as duplication. With respect to Kimball Hill, Inc., 565 BR 878, 884-86 (Bankr. ND Ill. 2017). The bankruptcy court upheld the objection filed by the plan administrator. Identifier.

4. In a similar, although distinguishable postTaggart In that case, a Chapter 7 debtor claimed the actions of one of his secured creditors with a lien on his vehicle raised policy concerns about the coercive effect of liens on worthless vehicles. In re Bentley, 607 BR 889, 894-95 (Bankr. ED Ky. 2019), confirmed, n ° 19-8026, 2020 WL 3833069 (BAP 6th Cir. 8 July 2020). The debtor alleged that the creditor had violated “the injunction of discharge[par[] attempting to collect discharged debts by refusing to release lien on his worthless motor vehicle until [the debtor] paid the entire balance due on his [] anticipated debt.Identifier. to * 3- * 4. The debtor in Bentley was based mainly on the conclusion of a non-controlling out-of-circuit case, Pratt v. GMAC, in which the debtor argued that “five material facts” made the actions of the obligee in question “objectively coercive”, violating 11 USC § 524 and justifying contempt Identifier. at * 4 & * 7 (citing 462 F.3d 14 (1st Cir. 2006)). In Bentley, the debtor could not overcome the long-standing federal policy that perfect liens under state law survive bankruptcy. In re Bentley, 2020 WL 3833069, at * 11- * 12. The BAP upheld the bankruptcy court’s decision in its entirety. User ID. to * 12 (“the Pratt court never indicated that the presence of the five “important” facts, without more, “made the behavior of a creditor despicable) (citing Johnson v. Home State Bank, 501 US 78 (1991)); see also In re Hrustanovic, 615 BR 224 (Bankr. WD Ky. 2020) (following In re Bentley, 607 BR 889). It is also important to note that the debtors in these cases were not relying on a determining precedent even if that precedent was distinguishable. As such, the creditor was not faced with the same concerns as those addressed in Kimball.

5. The cases on which the surety relied were either easily distinguishable or inapplicable. Identifier. at 12.

6 Regarding Kimball Hill, Inc., No. 08BK10095, 2020 WL 5834884 (Bankr. ND Ill. September 30, 2020); In re Bentley, 607 BR 889 (Bankr. ED Ky. 2019), confirmed, n ° 19-8026, 2020 WL 3833069 (BAP 6th Cir. 8 July 2020). See also In re Hrustanovic, 615 BR 224 (Bankr. WD Ky. 2020); In re Lucks, Case No. 20-42265, 2020 WL 5998162 (Bankr. ED Mich. 9 Oct. 2020) (following In re Bentley, 607 BR 889). See also ABI, ‘Fair Ground of Doubt’ Under Taggart Is not shown by the intention to overturn the previous one, La Rochelle’s Daily Wire (Oct 7, 2020).

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