Supremes Set Sanctions Rule for Bankruptcy Collections

WASHINGTON (CN) – Creditors can be held in contempt, the U.S. Supreme Court ruled Monday, if they go after debts that objectively appear to have been discharged in bankruptcy.

In the underlying case, the Ninth Circuit found that creditors should be let off the hook even when it is unreasonable for them to believe that the discharge order is not applicable to the debts they are trying to collect.

The Supreme Court vacated this decision unanimously this morning. “In our view,” Justice Stephen Breyer wrote, “a court may hold a creditor in civil contempt for violating a discharge order if there is no fair ground of doubt as to whether the order barred the creditor’s conduct.” (Emphasis in original.)

The case stems from an attempt by the Sherwood Park Business Center to collect a debt owed by Bradley Taggart after filed for bankruptcy under Chapter 7. 

Though the bankruptcy court held Sherwood in contempt on the basis that it was aware of Taggart’s discharge order, the Bankruptcy Appellate Panel vacated that sanction and the Ninth Circuit affirmed.

Breyer emphasized Monday that the standard “is generally an objective one.”

“The typical discharge order entered by a bankruptcy court is not detailed,” the opinion continues. “Under the fair ground of doubt standard, civil contempt therefore may be appropriate when the creditor violates a discharge order based on an objectively unreasonable understanding of the discharge order or the statutes that govern its scope.”

Taggart’s Dallas-based attorney Daniel Geyser said they wanted the high court to eliminate the use of the subjective good-faith standard, and “we accomplished that goal.” 

“The code’s discharge provisions are detailed and exhaustive; it is the unusual case where a creditor can identify a legitimate reason to doubt that the discharge applies,” Geyser said in an email. “The court’s new standard — ‘objective reasonableness’ — will thus protect debtors in the vast majority of cases, including this one.” 

Along with Portland, Oregon-based attorney Hollis K. McMilan, Mayer Brown attorney Nicole Saharsky represented Sherwood Park and co-respondent Shelley Lorenzen, executor of the estate of Stuart Brown. 

Saharsky emphasized that the initial ruling unfairly held her clients in contempt initially under a strict-liability standard. After today’s ruling, however, Saharsky said creditors will be able to “pursue legitimate debts that Congress decided survive bankruptcy while protecting debtors from harassment and minimizing the time and expense of bankruptcy proceedings.”   

“[Our clients] acted reasonably every step of the way, and they do not deserve to be held in contempt of court,” Saharsky said in an email. “We are confident that the Ninth Circuit will recognize that on remand.”  

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