Bradley Taggart v. Shelley Lorenzen
888 F.3d 438
9th Cir.2018Background
- Bradley Taggart filed Chapter 7 bankruptcy and received a discharge; he owned a 25% interest in Sherwood Park Business Center, LLC (SPBC).
- SPBC members Terry Emmert and Keith Jehnke sued Taggart and his attorney Berman in state court, seeking to void a transfer and to recover attorneys’ fees under the operating agreement.
- After Taggart’s discharge, the state court allowed fee petitions against Berman and post-discharge fees against Taggart based on a theory that Taggart had "returned to the fray." Taggart contested that fees were discharged.
- Taggart reopened his bankruptcy and sought contempt sanctions in bankruptcy court against the Creditors for seeking fees in state court in violation of the §524 discharge injunction.
- The bankruptcy court found the Creditors knowingly violated the discharge and imposed contempt sanctions; the BAP reversed, concluding the Creditors held a subjective good-faith belief the injunction did not apply.
- The Ninth Circuit affirmed the BAP: a creditor’s subjective good-faith belief (even if unreasonable) that the discharge injunction is inapplicable precludes a finding of knowing contempt, so the contempt sanctions were reversed.
Issues
| Issue | Taggart's Argument | Creditors' Argument | Held |
|---|---|---|---|
| Whether creditors knowingly violated the §524 discharge injunction by seeking post-petition attorneys’ fees | Creditors knew of the discharge and pursued fees anyway; knowledge of the injunction’s applicability can be inferred | Creditors had a subjective good-faith belief—based on state-court rulings—that the discharge did not bar post-petition fees ("returned to the fray") | Reversed B.Ct contempt: subjective good-faith belief (even if unreasonable) precludes finding of knowing violation |
| Whether a creditor’s subjective belief is relevant to contempt analysis | Knowledge of bankruptcy + pursuit of claim suffices for contempt | Subjective belief about inapplicability of discharge is dispositive to willfulness prong | The subjective belief is relevant and can bar contempt under Zilog standard |
| Whether this court must resolve cross-appeal about whether creditors actually violated the injunction | Contempt reversal notwithstanding, Taggart seeks affirmance on violation finding | Creditors cross-appealed district-court finding they violated the injunction; asked to withdraw cross-appeal given later precedent | Court did not reach cross-appeal; declared it withdrawn per parties’ request and need not decide actual violation |
| Standard of review for BAP reversal of contempt order | BAP applied incorrect legal standard; bankruptcy court’s contempt should stand | BAP correctly applied Zilog: subjective good faith belief prevents willfulness finding | Ninth Circuit affirms BAP; bankruptcy court abused discretion by ignoring Zilog |
Key Cases Cited
- In re Zilog, 450 F.3d 996 (9th Cir. 2006) (a creditor’s subjective good-faith belief that discharge does not apply precludes finding of willful contempt)
- In re Bennett, 298 F.3d 1059 (9th Cir. 2002) (two-part contempt test requires creditor knew injunction applied and intended violating acts)
- In re Dyer, 322 F.3d 1178 (9th Cir. 2003) (abuse-of-discretion standard for contempt; discussion of stay/discharge knowledge)
- In re Filtercorp, 163 F.3d 570 (9th Cir. 1998) (de novo review of BAP decisions)
- United States v. Hinkson, 585 F.3d 1247 (9th Cir. 2009) (standards for abuse of discretion review)
- In re Castellino Villas, A. K. F. LLC, 836 F.3d 1028 (9th Cir. 2016) (addressing when a debtor’s post-petition actions constitute a "return to the fray" for fee-liability purposes)