Civil Contempt for Discharge Injunction Violations: A New Standard That Brings the 'Old Soil' with It

In looking to its own 1885 case, the Court held that civil contempt “should not be resorted to where there is [a] fair ground of doubt as to the wrongfulness of the defendant's conduct.” Id. at 1802 (citing California Artificial Stone Paving Co. v. Molitor, 113 U.S. 609, 618, 5 S. Ct. 618, 28 L. Ed. 1106 (1885) (emphasis added)). This fair ground of doubt for civil contempt standard is rooted on notions of fairness that a creditor should receive notice of what is enjoined before being held in civil contempt. The standard is objective; a party's subjective belief that it is complying with an order does not insulate from civil contempt if that belief is objectively unreasonable. Id. But that does not mean that subjective intent is irrelevant. For example, a party's bad faith may warrant imposition of civil contempt sanctions whereas a party's good faith may assist in determining a presumably lesser sanction.

But the Ninth Circuit departed from the traditional notions of civil contempt. The subjective standard relied too heavily on “difficult-to-prove” states of mind that may lead to creditors attempting to collect discharged debts on shaky grounds. Id. at 1803. But the Supreme Court also reject the standard adopted by the majority of bankruptcy and circuit courts which imposed sanctions if the creditor was aware of the discharge order and intended the actions that violated the order. The Court explained that this standard would operate much like strict liability and impose discharge injunction sanctions irrespective of a creditor's reasonable good faith beliefs. Id. The Court disagreed that such a standard is fair to creditors who could seek an advance determination, finding that advance determinations would belie the purpose of the discharge injunction and possibly alter who decides whether a debt has been discharged from state courts to bankruptcy courts, usurping state court concurrent jurisdiction.

SCOTUS Declines to Consider Automatic Stay Issues

The SCOTUS opinion of course left something for another day: what effect, if any, this opinion has on the contempt standard for stay violations. Under Bankruptcy Code §362 “an individual injured by any willful violation” of an automatic stay “shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages.” 11 U.S.C. §362(k)(1). Bankruptcy practitioners may have been under the false assumption that the standard for determining contempt liability for a violation of the discharge injunction is the same as the test applied for determining willfulness for violations of the automatic stay. This is because some bankruptcy courts, like the Eleventh Circuit in In re Hardy, for example, held that the two-pronged test to determine willfulness in violating the automatic stay under Bankruptcy Code §362 is “likewise applicable to determining willfulness for violations of the discharge injunction of §524.” 97 F.3d at 1390. Under this test, if the creditor: 1) knew that the automatic stay was invoked; and 2) intended the actions which violated the stay a creditor may be held liable for contempt. Id. (citing Jove Engineering, Inc. v. Internal Revenue Service, 92 F.3d 1539 (11th Cir. 1996)). This standard is precisely what that the debtor in Taggart urged the Supreme Court to adopt in line with the standard applied by the bankruptcy court in finding a violation of the discharge injunction. Taggart v. Lorenzen, 139 S. Ct. at 1803. But the Supreme Court declined to do so and clarified that neither the standard, nor the purpose are the same.

Although the debtor in Taggart argued that Bankruptcy Code §362 has been interpreted to apply a standard akin to strict liability to bolster his argument that such a standard should be applied for discharge injunction violations under Bankruptcy Code §524, the Supreme Court emphasized the distinction in both the language and purpose of both sections. The statutory language in Bankruptcy Code §362(k)(1) that says that “an individual injured by any willful violation” of an automatic stay “shall recover” differs from the more general language in §105(a). Id. at 1804. The Supreme Court also noted that “[t]he purposes of automatic stays and discharge orders also differ: A stay aims to prevent damaging disruptions to the administration of a bankruptcy case in the short run, whereas a discharge is entered at the end of the case and seeks to bind creditors over a much longer period.” Id. The Supreme Court reasoned that the differences in both the language and purpose undermined Taggart's proposal for the Court to adopt the same standard applied for violations of the automatic stay.

Significantly, the Supreme Court noted that the term “willful” typically does not associate with strict liability but is a term “whose construction is often dependent on the context in which it appears.” Id. (citing Safeco Ins. Co. of America v. Burr, 551 U.S. 47, 57, 127 S. Ct. 2201, 167 L. Ed. 2d 1045 (2007)). “We need not, and do not, decide whether the word 'willful' supports a standard akin to strict liability.” Taggart v. Lorenzen, 139 S. Ct. at 1804. This leaves open what effect, if any, the Supreme Court's ruling has on violations of the automatic stay under Bankruptcy Code §362.

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Stephanie Lieb, Esq. is a shareholder at Trenam Law (Tampa). She practices in the firm's Bankruptcy, Creditors' Rights and Insolvency practice and is board certified in bankruptcy law. She may be reached at [email protected] or 813-227-7469. Dana L. Robbins is an attorney at Burr & Forman (Tampa), and formerly a law clerk to Hon. Caryl E. Delano, U.S. Bankruptcy Judge for the Middle District of Florida. She may be reached at [email protected] or 813-367-5760.