U.S. Supreme Court Bankruptcy Law Update 20:32, September 18, 2020

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U.S. Supreme Court Bankruptcy Law Update

Within the last year, the U.S. Supreme Court has definitively settled two topics that come up with considerable frequency in bankruptcy court. The Supreme Court’s decisions in Taggart v. Lorenzen, No. 18-489, and Ritzen Group, Inc. v. Jackson Masonary, LLC, No. 18-938, provide useful guidance to bankruptcy practitioners and bankruptcy trial courts regarding when a creditor may be held in civil contempt for violation of a discharge order, and the timeline for appeals when a bankruptcy court denies a creditor’s motion for relief from an automatic stay.

On June 3, 2019, the U.S. Supreme Court decided Taggart v. Lorenzen, No. 18-489, holding that a creditor may be held in civil contempt for violating a bankruptcy court’s discharge order when there is “no fair ground of doubt” as to whether the discharge order barred the creditor’s conduct.

A key feature to the bankruptcy process for consumers is a “discharge” that excuses a debtor that completes a bankruptcy from paying debts that incurred before the bankruptcy filing. Specifically, Section 524(a) of the Bankruptcy Code states that a discharge order “operates as an injunction” that bars creditors from collecting pre-discharged debt.

Courts enforce the discharge order against creditors with the threat of civil contempt. The confusion arises because it is not always clear if and when a creditor’s interaction with a debtor violates a discharge order, since most, but not all, debts may be discharged in bankruptcy. For example, student-loan debts, fraudulently incurred debts and domestic-support obligations are not discharged.

The facts of the underlying Supreme Court case are as follows. Bradley Taggart owned an interest in an Oregon company, when one of the company’s two other owners filed suit in Oregon state court, claiming that Taggart had breached the company’s operating agreement. Before trial, Taggart filed for bankruptcy under Chapter 7 of the Bankruptcy Code. At the conclusion of his bankruptcy proceeding, the Bankruptcy Court entered a discharge order that released Taggart from liability for most of his pre-bankruptcy debts. After the discharge order issued, the Oregon state court entered judgment against Taggart and awarded attorneys’ fees to his former business partners. Even though litigation over a business would normally be exempt from the discharge order, the state court’s order that Taggart pay his former business partners attorneys’ fees is considered a monetary judgment, which is not exempt from the discharge order. Therefore, when the former business partners tried to collect the attorneys’ fees, Taggart filed a motion for contempt and the bankruptcy court sanctioned the former business partners. The Ninth Circuit vacated the sanctions, holding, under a subjective standard, that a “creditor’s good faith belief” that the discharge order “does not apply precludes a finding of contempt even if the creditor’s belief is unreasonable.”

            The U.S. Supreme Court reversed the Ninth Circuit and held that whether a creditor should be held in contempt should be evaluated using an “objectively unreasonable” standard as to whether the creditors activities violated the discharge order. Taggart is the first time that the U.S. Supreme Court has addressed the standards for punishing creditors that violate a debtor’s bankruptcy discharge order and will help resolve litigation in this area going forward. 

            On January 14, 2020, the U.S. Supreme Court decided Ritzen Group, Inc. v. Jackson Masonry, LLC, No. 18-938, ruling that a bankruptcy court’s denial of a creditor’s motion for relief from an automatic stay constitutes a final order which must be immediately appealed.

            In Chapter 11 bankruptcy, a creditor’s right to collect a debt are automatically stayed once a debtor files a bankruptcy petition. The creditor must then obtain an order from the bankruptcy court granting relief from that automatic stay before it can attempt to collect from a debtor, whether through litigation or other informal means. See 11 U.S.C. § 362(a).

            In the underlying case, the Ritzen Group, Inc. sued Jackson Masonry, LLC in Tennessee state court for breach of a land-sale contract. Jackson filed for bankruptcy under Chapter 11 of the Bankruptcy Code. Ritzen moved for relief from the automatic stay, which barred its debt collection effort outside the umbrella of the bankruptcy case, and the bankruptcy court denied Ritzen’s motion. Ritzen did not immediately appeal the denial. The bankruptcy court then rejected Ritzen’s claim and confirmed Jackon’s plan for reorganization. Ritzen then appealed the bankruptcy court’s order denying it relief from the automatic stay. The District Court rejected Ritzen’s appeal as untimely under 28 U.S.C. § 158(c)(2) and Federal Rule of Bankruptcy Procedure 8002(a), which requires that an appeal from a bankruptcy order be filed within 14 days after entry of that order. The Sixth Circuit affirmed the District Court’s decision, and then the Supreme Court affirmed the Sixth Circuit’s decision.

Justice Ruth Bader Ginsburg wrote a concise opinion for a unanimous court resolving this specific, procedural question because of disagreements in the lower courts. The Court’s decision in Ritzen should be the final word on this topic for the foreseeable future. If a bankruptcy court denies a creditor’s motion for relief from an automatic stay, then the creditor must appeal that order within 14 days or the creditor forfeits its right to do so.

For more information about this article or questions regarding creditors’ rights in bankruptcy proceedings, please contact Chris Bryan (Chris Bryan, , 970-925-1936, ext. 802).