Business Law

In re Taggart, 980 F.3d 1340 (9th Cir. 2020)

The following is a case update written by Leonard Gumport analyzing a recent case of interest.

Summary

In Lorenzen v. Taggart (In re Taggart), 2020 U.S. App. LEXIS 40787 (9th Cir., Dec. 30, 2020), the United States Court of Appeals for the Ninth Circuit denied a petition for rehearing of its decision in In re Taggart, 980 F.3d 1340 (9th Cir. 2020) (“Taggart 4”), on remand from the decision of the United States Supreme Court in Taggart v. Lorenzen, 139 S. Ct. 1795 (2019) (“Taggart 3”), which reversed Lorenzen v. Taggart (In re Taggart), 888 F.3d 438 (9th Cir. 2018) (“Taggart 2”). In Taggart 4, the Ninth Circuit affirmed the result in, although not the reasoning of, the United States Bankruptcy Appellate Panel for the Ninth Circuit (“BAP”) in Emmert v. Taggart (In re Taggart), 548 B.R. 275 (9th Cir. 2016) (“Taggart 1”). A copy of Taggart 4 may be found here.

In Taggart 4, after nine years of legal proceedings, the Ninth Circuit ruled that Bradley W. Taggart (“Taggart”) was not entitled to civil contempt sanctions against Sherwood Park Business Center, LLC (“SPBC”), Terry W. Emmert (“Emmert”), Keith Jehnke (“Jehnke”), and their attorney (collectively, “SPBC Group”) for violating the discharge injunction in Taggart’s bankruptcy case. SPBC Group was not liable for civil contempt because SPBC Group had an objectively reasonable basis to conclude that the discharge injunction might not apply. 

Factual Background

Taggart, Emmert, and Jehnke owned membership interests in SPBC, an Oregon limited liability company. SPBC’s operating agreement restricted sale of membership interests, but Taggart transferred his 25% membership interest without complying with the sale restrictions.

In September 2008, in the Oregon Circuit Court (the “Circuit Court”), SPBC filed a complaint against Taggart and others, seeking to unwind Taggart’s transfer of his membership interest and to expel him from SPBC. Taggart answered the complaint and counterclaimed against SPBC, Emmert, and Jehnke for attorney’s fees based on an attorney’s fee clause in the operating agreement. Later, Emmert and Jehnke became co-plaintiffs with SPBC.

On the eve of trial, Taggart filed a chapter 7 petition in the U.S. Bankruptcy Court for the District of Oregon.  After Taggart received his discharge, the Circuit Court litigation continued. Taggart unsuccessfully sought to dismiss the complaint against him, but did not seek to dismiss his counterclaim for attorney’s fees.

The Circuit Court entered a judgment (the “Judgment”) against Taggart which, among other things, declared that Taggart’s transfer of his membership interest in SPBC was null and void and expelled Taggart from SPBC. After entry of the Judgment, SPBC Group’s attorney, Stuart M. Brown (“Brown”) filed a petition (the “Fee Petition”) in the Circuit Court for an award of post-discharge attorney’s fees and costs against Taggart and in favor of SPBC, Emmert, and Jehnke. At the same time, Brown requested the Circuit Court to rule that the Fee Petition did not violate the discharge injunction in Taggart’s bankruptcy case. Relying on Boeing N. Am., Inc. v. Ybarra (In re Ybarra), 424 F.3d 1018 (9th Cir. 2005) (“Ybarra”), Brown argued that the discharge injunction did not apply because Taggart had voluntarily “returned to the fray” of the litigation in the Circuit Court within the meaning of Ybarra. The Circuit Court agreed and entered a supplemental judgment (“Supplemental Judgment”) that awarded post-discharge attorney’s fees to SPBC against Taggart.

In July 2011, before entry of the Supplemental Judgment, Taggart reopened his bankruptcy case and filed a motion for civil contempt against SPBC Group. Taggart alleged that SPBC Group violated the discharge injunction by seeking an award of post-discharge attorney’s fees and costs against him. Taggart denied that his conduct in the Circuit Court constituted a return to the fray within the meaning of Ybarra. The bankruptcy court denied Taggart’s contempt motion.  

On appeal, the U.S. District Court for the District of Oregon reversed and remanded the bankruptcy court’s denial of Taggart’s motion for contempt sanctions. The District Court ruled that Taggart’s conduct in the Circuit Court was not sufficiently affirmative and voluntary to constitute a return to the fray within the meaning of Ybarra. (Later, the Oregon Court of Appeals came to the same conclusion in reversing the Supplemental Judgment against Taggart.)

On remand from the district court, the bankruptcy court applied a strict liability standard and awarded contempt sanctions against SPBC Group. The bankruptcy court ruled that SPBC Group’s understanding of the discharge injunction was legally irrelevant.  From the bankruptcy court’s award of contempt sanctions, a number of appeals followed. In 2016, in Taggart 1, the BAP reversed the contempt sanctions on the grounds that Taggart did not show that SPBC Group subjectively believed that the Fee Petition violated the discharge injunction. In 2018, in Taggart 2, the Ninth Circuit affirmed. Taggart petitioned for certiorari. On June 3, 2019, in Taggart 3, the Supreme Court reversed and remanded. For civil contempt, the Court decided, “neither a standard akin to strict liability nor a purely subjective standard is appropriate.” Id., 139 S. Ct. at 1799. “[C]ivil contempt may be appropriate if there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful.” In other words, “a court may hold a creditor in civil contempt for violating a discharge or if there is no fair ground of doubt as to whether the order barred the creditor’s conduct.” Id. at 1799 (emphasis in original). The absence of willfulness does not relieve from liability for civil contempt, but subjective intent is not “always irrelevant.” Id. at 1802.   

On remand, the Ninth Circuit in Taggart 4 again decided that Taggart was not entitled to civil contempt sanctions against SPBC Group. On December 30, 2020, the Ninth Circuit denied Taggart’s petition for rehearing.   

Reasoning

In Taggart 4, the Ninth Circuit stated that civil contempt is a “severe remedy,” and that, “correspondingly, the Supreme Court has set a significantly high hurdle for when it is imposed.” Taggart 4, 980 F.3d at 1347 (citing Taggart 3, 139 S. Ct. at 1802). The Ninth Circuit decided that the issue on remand from Taggart 3 was whether SPBC Group “had some – indeed, any – objectively reasonable basis for concluding that Taggart might have ‘returned to the fray’ and that their motion for post-petition attorney’s fees might have been lawful.” Taggart 4, at 1348 (emphasis and quotations in original).

The Ninth Circuit considered whether Ybarra gave SPBC Group any objectively reasonable basis to conclude that Taggart might have returned to the fray. Ybarra “ultimately held that the debtor had ‘returned to the fray’ by taking post-petition steps to ‘revive’ her pre-petition cause of action, which had already been settled and dismissed.” Taggart 4, at 1348 (quoting Ybarra, 424 F.3d at 1020-21, 1027). Under Ybarra, a debtor who continues to litigate pre-petition causes of action may be liable, notwithstanding a discharge, only if the debtor voluntarily pursues a whole new course of litigation, commences litigation, or voluntarily returns to the fray. Taggart 4, at 1348.

Taggart’s efforts to dismiss SPBC Group’s lawsuit did not suggest a return to the fray within the meaning of Ybarra. Taggart’s “inherently passive” failure to file a motion to dismiss his counterclaim did not constitute a reasonable basis to believe that Taggart returned to the fray. That conduct suggested that Taggart “was trying to avoid the fray,” not returning to it. Taggart 4, at 1348. Under Ybarra, a debtor is not always liable for post-discharge attorney’s fees and costs merely by continuing to litigate pre-petition claims. Ibid.

Other conduct by Taggart, however, gave SPBC Group an objectively reasonable basis to conclude that Taggart might have returned to the fray. Taggart appeared and argued at the post-trial hearing on the proposed Judgment. Taggart argued about the date of his expulsion for valuation purposes and the amount of prejudgment interest. It appeared from arguments made by Taggard that he, not his bankruptcy estate, would receive the proceeds from the forced sale of his membership interest. Taggart planned to use the sale proceeds to pay his non-dischargeable tax liabilities. Taggart 4, at 1348-1349. Similarly, the debtor in Ybarra stood to obtain a personal economic benefit from pursuing litigation post-discharge, because the debtor claimed an exemption in the litigation. See Taggart 4, at 1349-1350.  Thus, the SPBC Group had an objectively reasonable basis for believing that the discharge injunction did not apply and, hence, contempt sanctions were not justified.

The Ninth Circuit acknowledged that Ybarra was limited by In re Castellino Villas, A.K.F., LLC, 836 F.3d 1028, 1035 (9th Cir. 2016), but that case was not relevant because it was decided after the Fee Petition was filed. Taggart 4, at 1348 n.7.

Author’s Comments

The Supreme Court granted review in Taggart 3 to resolve a circuit split on the standard for civil contempt. Like the BAP in Taggart 1, the Ninth Circuit in Taggart 2 ruled that a subjective standard applied. Under the subjective standard, the alleged contemnor was not liable for civil contempt if he or she subjectively believed, even unreasonably, that the discharge injunction did not apply. The subjective standard stemmed from a footnote in ZiLOG, Inc. v. Corning (In re ZiLOG, Inc.), 450 F.3d 996 (9th Cir. 2006). Taggart 3 rejected the subjective test, and, on remand, Taggart 4 broadly construed the objective test as shielding an alleged contemnor who has an objectively reasonable basis to believe that his or her conduct might not be prohibited. The denial of contempt sanctions does not mean that a party who violates an injunction is entitled to keep the fruits of the violation. Although Taggart did not obtain contempt sanctions, he did obtain a ruling from the Oregon Court of Appeals that the discharge injunction required vacating the Supplemental Judgment.

The objective standard for civil contempt sanctions appears to be subject to a significant exception for bad faith litigation tactics as set forth in Chambers v. NASCO, Inc., 501 U.S. 32, 50 (1991). Citing Chambers, the Supreme Court in Taggart 3 stated: “Our cases suggest, for example, that civil contempt sanctions may be warranted when a party acts in bad faith.” Id., 139 S. Ct. at 1802.

A person unsure of the scope of a discharge injunction should consider filing an adversary proceeding for declaratory relief in the bankruptcy court that granted the debtor a discharge. See Sterling-Pacific Lending, Inc. v. Moser (In re Moser), 613 B.R. 721, 727 (9th Cir. B.A.P. 2020) (“Creditors are often well advised to seek the bankruptcy court’s guidance in order to avoid an inadvertent violation of the discharge injunction”). As set forth in Moser, the Supreme Court’s standard for civil contempt in Taggart 3 was crafted to limit the need for creditors to seek such declaratory relief. Moser, 613 B.R. at 728 n.3 (citing Taggart 3, 139 S. Ct. at 1803). The declaratory relief provided to SPBC Group by the Oregon Circuit Court did not prevent nine years of contempt litigation.

These materials were written by Leonard L. Gumport of Gumport Law Firm, PC in Pasadena (lgumport@gumportlaw.com). Editorial contributions were provided by Kit J. Gardner of Law Offices of Kit J. Gardner in San Diego (kgardner@gardnerlegal.com).

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