As a result of the economic fallout of COVID-19, more bankruptcies are on the horizon, especially as government aid programs expire and involuntary or voluntary moratoriums on creditor action come to an end. [1] Creditors should be aware and prepared to avoid potential claims for alleged violation of the discharge injunction under the Bankruptcy Code and related orders.
In Taggart v. Lorenzen, the United States Supreme Court unanimously held that a creditor may be found in civil contempt for violating the discharge only where “there is no fair ground of doubt as to whether the order barred the creditor’s conduct.” See 139 S. Ct. 1795, 1799-1804 (2019) (emphasis added). [2] This standard is objective and so, rejects the use of strict liability in analyzing alleged discharge violations. As such, a contempt finding is unlikely when it is objectively unclear whether the alleged contemptors’ actions should be considered violative of the discharge or that such actions comply with applicable, controlling case law.
Subsequent Cases Limit Permissible Creditor Actions
A recent case addressed Taggart in the context of a chapter 11 case and an alleged violation of a discharge contained in a confirmation order. See In re Kimball Hill, Inc., No. 08BK10095, 2020 WL 5834884 (Bankr. N.D. Ill. Sept. 30, 2020). In Kimball Hill, the bankruptcy court confirmed a chapter 11 plan (the plan) containing an injunction as well as multiple releases (releasing the debtors and their administrators, successors or assigns, affiliates, representatives, etc.). Id. at *4. Following plan confirmation, a successor to the debtors’ assets (the purchaser) filed a motion for entry of an order (I) enforcing the confirmation order; (II) directing dismissal of state court claims; (III) awarding damages and (IV) granting related relief. Id. at *1. [3] The purchaser asserted that despite entry of an order confirming the plan, one creditor (the surety), continued to seek 100 percent payment for its contingent, unsecured claims. Id. Specifically, the surety continued its efforts to recover on its claims against the purchaser in at least five state court actions in addition to litigating the validity of its claims (and seeking payment thereon) before the bankruptcy court. See In re 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, among other actions, seeking to have the purchaser held liable to the surety for its claims in at least five state court lawsuits; and (2) the surety’s violations warranted the imposition of damages. Id. The surety timely filed notices of appeal to the district court. See generally Fid. & Deposit Co. of Maryland v. TRG Venture Two, LLC, No. 19 C 389, 2019 WL 5208853 (N.D. Ill. Oct. 16, 2019). Although the district court did not find any error or an abuse of discretion in either Kimball I or Kimball II, the district court nevertheless remanded for a determination of contempt pursuant to Taggart. Id. at *6 (explaining, because Kimball I and II were issued prior to Taggart, the bankruptcy court did not consider the surety’s actions under “a fair ground of doubt”).
Following remand, the bankruptcy court explained that contempt under the Taggart standard was satisfied because, inter alia, the surety never cited any case wherein any surety was permitted to pursue contingent, unliquidated claims. See, i.e., In re Kimball Hill, Inc., 2020 WL 5834884, at *12 (explaining surety “provided no holding from case law or statute to support [its] theories.”). [5] Accordingly, there was no “fair ground of doubt” regarding the surety’s allegedly contemptable conduct. In the face of controlling...
