Argument analysis: Justices close out 2018 term with a spirited discussion about sanctions for violating bankruptcy discharge

It was a far cry from the census case or deep disagreement about proper methods of capital punishment, but the justices heard oral argument yesterday afternoon in Taggart v. Lorenzen, concluding the argument calendars for October Term 2018.

As explained in my preview, this case involves the discharge that a debtor receives at the conclusion of a bankruptcy proceeding, which excuses the debtor’s obligation to pay the debts that the discharge covers and bars creditors from later efforts to collect those debts. A creditor that attempts to collect a debt that has been discharged in bankruptcy faces the risk that the bankruptcy court will hold the creditor in contempt. Remarkably, the Supreme Court has never addressed the standard for deciding when a contempt sanction is appropriate. Taggart presents that question, asking whether a creditor can be held in contempt for violating the discharge even if it believed in good faith that the discharge did not apply to its efforts to collect the debt.

The particular dispute here is quite involved, but for purposes of the argument a few details should suffice. All agree that the creditors attempted to enforce a debt against Bradley Taggart after his bankruptcy; the justification is a lower-court doctrine that when a debtor “returns to the fray” of litigation with the creditor, the discharge no longer applies. In this case, the state courts in which the litigation occurred concluded that the “return to the fray” doctrine applied, which would make the creditors’ activity permissible. The federal courts, though, ultimately disagreed: The U.S. Court of Appeals for the 9th Circuit concluded that the creditors’ activity was wrongful, but that the creditors could not be held in contempt because they believed in good faith that the discharge did not apply.

From the moment Daniel Geyser, representing Taggart, began his argument, discussion was dominated by a group of justices who could not accept the idea that a court could hold a creditor in contempt if the creditor reasonably believed its conduct did not violate the discharge. Justice Brett Kavanaugh made the point most emphatically and at greatest length. As he put it:

[T]he statute says that the [discharge] order operates as an injunction, and the traditional rules of contempt for injunctions suggest that a reasonable, good faith belief that you weren’t violating the order is sufficient. So why shouldn’t that just follow squarely from the text referring to “operates like an injunction.” ….

[I]t’s a severe sanction. So before someone’s found to be liable … you would want some clear intent, and if they had a reasonable, good faith belief that they weren’t violating it, that’s not usually something that we’d say “tough” and still impose the sanctions.

That sentiment was expressed widely across the bench. Justice Samuel Alito, for example, asked Geyser if he could offer any “justification for holding somebody in contempt for doing something that two state courts have held was not a violation?” Justices Stephen Breyer, Sonia Sotomayor and Neil Gorsuch seemed to react in the same way.

That is not to say the argument was entirely one-sided. There was a lone voice on the other side of the matter – Chief Justice John Roberts, who seemed to see the case entirely from the perspective of the bankrupt unable to get free of creditors even after a bankruptcy proceeding. For Roberts, it made sense that a creditor pursuing a bankrupt should seek guidance from the bankruptcy court if it has any doubt about the coverage of the discharge. For example, he interrupted the argument of Assistant to the Solicitor General Sopan Joshi, arguing for the federal government as a “friend of the court” on behalf of neither party,  to comment:

I appreciate that you’re representing the largest creditor in the country, but I don’t see why it is so hard for a creditor, if he has any doubt, to go … get a clean ticket, a clean bill of health, instead of … going after the newly released debtor who … is supposed to get a fresh start and all of a sudden there are the same people who were … hounding him before.

Again, talking with Nicole Saharsky, who represented the creditors, Roberts acknowledged that the “safe-harbor” rule he supported would “have some chilling effect on creditors, and it doesn’t surprise me that creditors don’t like that.” But that did not trouble him at all, he explained, because of the salutary effects of the rule: “[I]t seems to me perfectly reasonable to have them bear the risk – have them make a careful choice.”

After the argument, several things seem clear. For one thing, it seems clear that none of the justices would affirm the reasoning of the 9th Circuit that a creditor is protected as long as it has a subjective belief that the discharge does not apply, even if that belief is unreasonable. The justices spent a long time debating what the standard for a “reasonable” belief should be, and that seems likely to be the approach the majority will take, which presumably would result in a remand for the court of appeals to apply the new standard.

Also, there is a pretty good chance the court will be divided. Roberts could simply go along with a majority, but his strong views at argument suggest he would make the effort to document a dissent.

Editor’s Note: Analysis based on transcript of oral argument.