Bankruptcy

• Publication year: 2020

Bankruptcy

John T. Laney III

Nicholas Greer

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Bankruptcy

by Honorable John T. Laney, III^* and Nicholas Greer^**

This year's Bankruptcy Law Article surveys both opinions and recent legislation that will have an impact on the practice of bankruptcy law in the United States Court of Appeals for the Eleventh Circuit.¹ The decisions in this article come from the Supreme Court of the United States, the United States Court of Appeals for the Eleventh Circuit, the United States District Courts located in the Eleventh Circuit, as well as the United States Bankruptcy Courts located in the Eleventh Circuit. Throughout the survey period, January 1, 2019 to December 31, 2019, countless decisions related to bankruptcy law have been handed down by these courts; this article will focus on and address those decisions found in the Eleventh Circuit and the Supreme Court that the authors feel will have the greatest impact on bankruptcy law.

Additionally, this year saw new bankruptcy legislation passed by Congress and enacted into law. This Article will discuss the most impactful of the new legislation: a new subchapter of Chapter 11 that establishes what many believe will be a quicker and more efficient process for qualifying small business debtors and their reorganization plans.

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I. CASES

A. Taggart and the "objectively reasonable basis" for civil contempt

Perhaps the most important bankruptcy case from the survey period, Taggart v. Lorenzen,² comes from the Supreme Court of the United States. Taggart considers the standard a court should follow when determining whether "a court may hold a creditor in civil contempt for attempting to collect a debt that a discharge order has immunized from collection."³ Taggart centered on a Chapter 7⁴ debtor, Bradley Taggart. Taggart owned an interest in a company, Sherwood, and liquidated the interest at some point prior to filing for bankruptcy under Chapter 7 of the Bankruptcy Code. This resulted in Sherwood bringing claims against Taggart for violation of their operating agreement.⁵ After Taggart received a discharge under § 727,⁶ Sherwood sought to recover for Taggart's violation of the operating agreement in an Oregon state court. The Sherwood defendants received a verdict in state court and then sought a new claim for attorney's fees.⁷ Under the United States Court of Appeals for the Ninth Circuit precedent, a former debtor who has received a discharge order would be protected from post-petition attorney's fees for prepetition litigation "unless the discharged debtor 'returned to the fray' after filing for bankruptcy."⁸ The Oregon state court determined that Taggart had indeed returned to the fray and, as a result, awarded nearly $45,000 in attorney's fees to Sherwood.⁹ Taggart, with his bankruptcy discharge in hand, returned to the United States Bankruptcy Court for the District of Oregon to seek damages against the Sherwood defendants for contempt for violating Taggart's discharge injunction, believing that his actions did not constitute "returning to the fray."¹⁰ The bankruptcy court agreed with the state trial court, concluding that there was no violation by Sherwood of Taggart's discharge and that Taggart had returned to the fray and, therefore, was liable for the attorney's fees.¹¹

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Upon appeal, the United States District Court for the District of Oregon agreed with Taggart and remanded the case back to the bankruptcy court. The bankruptcy court held Sherwood in civil contempt by applying a "strict liability" standard, finding that Sherwood "had been 'aware of the discharge'" and "'intended the actions which violate[d]' it."¹² On appeal, both the Bankruptcy Appellate Panel for the Ninth Circuit and the United States Court of Appeals for the Ninth Circuit vacated the decision of the bankruptcy court.¹³ The Ninth Circuit utilized a different standard for contempt, holding that "a 'creditor's good faith belief' that the discharge order 'does not apply to the creditor's claim precludes a finding of contempt, even if the creditor's belief is unreasonable.'"¹⁴ Using this standard, Sherwood's "good faith belief" that Taggart's discharge "did not apply" to Sherwood's claims invalidated the civil contempt sanctions and thus, the Ninth Circuit affirmed the vacation by the Bankruptcy Appellate Panel.¹⁵ At this point, Taggart filed a petition for certiorari to ask the Supreme Court whether "a creditor's good-faith belief that the discharge injunction does not apply precludes a finding of civil contempt."¹⁶

The Supreme Court decided to hear the case and sought to determine the "legal standard for holding a creditor in civil contempt when the creditor attempts to collect a debt in violation of a bankruptcy discharge order."¹⁷ The Court then looked to § 524¹⁸ and § 105,¹⁹ two separate provisions of the bankruptcy code, for direction.²⁰ Section 524 states that a "discharge order 'operates as an injunction against the commencement or continuation of an action . . . or an act, to collect, recover or offset' a discharged debt."²¹ When the Supreme Court reconciled that provision with § 105, which authorizes a court to issue orders and judgments necessary to carry out the Bankruptcy Code, the Court determined that a bankruptcy court does indeed have the authority to impose civil contempt sanctions "when there is no

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objectively reasonable basis for concluding that the creditor's conduct might be lawful under the discharge order."²²

The Supreme Court also employed a "long-standing interpretative principle" by considering that "when a statutory term is 'obviously transplanted from another legal source,' it 'brings the old soil with it.'"²³ Looking at historical context, the Court held that the language found in the aforementioned provisions such as "operates as an injunction" or to "carry out" brings the "old soil" that is the "potent weapon" of civil contempt.²⁴ That "old soil" represents the traditional use of civil contempt as a means to control the conduct of parties before the court.²⁵ Therefore, the Supreme Court reasoned that despite the Bankruptcy Code's not explicitly granting unlimited authority to hold creditors in civil contempt, the use of such language incorporates the "old soil" that is the traditional use of civil contempt.²⁶ Justice Breyer then considered Taggart's argument: that a finding of civil contempt would be proper when the creditor was aware of the discharge order and still chose to act in a manner that violated the order.²⁷ The Court ultimately determined that such a standard was too close to strict liability as it would employ foregoing a creditor's subjective beliefs about the discharge order and disregard the potential existence of a reasonable basis for the creditor's conduct.²⁸

The Court concluded the opinion by stating that the Ninth Circuit "erred in applying a subjective standard for civil contempt" and then ruling that "a court may hold a creditor in civil contempt for violating a discharge order where there is not a 'fair ground of doubt' as to whether the creditor's conduct might be lawful under the discharge order."²⁹ Thus, the Supreme Court rejected the strict liability standard for civil contempt and instead announced a standard that considers whether there was an objectively reasonable rationale for creditor's conduct in terms of violating a discharge order.³⁰

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B. In re Thompson and the "lack-of-knowledge" requirement

One important case in the Eleventh Circuit during the Survey period, Thompson v. Gargula,³¹ featured the United States Trustee's seeking revocation of a discharge after learning that the Debtor had failed to report the acquisition of estate property.³² The United States Court of Appeals for the Eleventh Circuit essentially whittled the case down to one question: "whether a 'lack-of-knowledge' requirement that is explicitly contained in one subsection of the bankruptcy statute, 11 U.S.C. § 727(d)(1),³³ can be read into the adjacent subsection of the same statute, 11 U.S.C. § 727(d)(2),³⁴ thereby barring revocation."³⁵ Choosing not to rewrite the bankruptcy code, the Eleventh Circuit instead affirmed the decisions of both the United States Bankruptcy Court for the Northern District of Georgia and the United States District Court for the Northern District of Georgia and did not read the "lack-of-knowledge" requirement into a subsection that did not already include such language.³⁶

The Debtors initially filed a Chapter 13³⁷ petition, then five months later voluntarily converted their case to Chapter 11,³⁸ then almost two years later voluntarily converted their case to a Chapter 7. While the case was making its way through the judicial process, a former employee of the Thompsons "submitted a fraud referral to the Trustee" that alleged the "stockpiling" of cash, trips, and plastic surgeries.³⁹ Just over a year after receiving a discharge, the Trustee filed an adversary proceeding against the Debtors requesting the revocation of their discharge as a result of her investigation into the fraud referral. The Trustee asserted that the financial reports filed by the Debtors were "incomplete, inaccurate, or erroneous."⁴⁰ The Debtors, however, moved for summary judgment on the matter arguing that the "Trustee was on notice of the alleged fraud before the bankruptcy court entered the discharge, barring the Trustee's claim for revocation."⁴¹ Using § 727(d),

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⁴² the bankruptcy court denied in part and granted in part the Debtor's motion for summary judgment.⁴³ Section 727(d) states that a court "shall revoke a discharge . . . if—"

(1) such discharge was obtained through the fraud of the debtor, and the requesting party did not know of such fraud until after the granting of such discharge; [or]
(2) the debtor acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or

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