In re: Bradley Weston Taggart
548 B.R. 275
| 9th Cir. BAP | 2016Background
- Taggart (debtor) transferred his 25% SPBC membership interest prepetition; the transfer was later unwound in state court and Taggart filed Chapter 7 on the eve of trial and received a discharge.
- Post-discharge, SPBC (through counsel Brown) resumed the state-court action and sought post-discharge attorneys’ fees under the operating agreement, invoking the Ninth Circuit’s Ybarra “returned to the fray” doctrine.
- The state court ruled Taggart had "returned to the fray" under Ybarra and awarded SPBC post-petition fees (denying fees for two individual members); Taggart had reopened his bankruptcy and sought contempt sanctions in bankruptcy court for violation of the discharge injunction (§ 524).
- The bankruptcy court initially denied Taggart’s contempt motion, finding Taggart had returned to the fray; the district court reversed and remanded to determine whether appellants knowingly violated the discharge injunction.
- On remand the bankruptcy court applied Zilog’s two-part test but used a stricter Hardy-derived standard for the first prong (knowledge), found appellants willfully violated the discharge injunction, and awarded sanctions.
- The BAP reversed: it held the bankruptcy court applied the wrong legal standard for actual knowledge (it should require proof that the contemnors knew the injunction applied to their claim per Zilog), and vacated the contempt judgment and sanctions.
Issues
| Issue | Plaintiff's Argument (Taggart) | Defendant's Argument (Appellants) | Held |
|---|---|---|---|
| Whether appellants willfully violated the discharge injunction by seeking post-discharge attorneys’ fees | Appellants knew discharge existed and nonetheless sought fees; strict liability for pursuing fees post-discharge warrants contempt | Appellants sought a judicial determination (Ybarra) that fees fell outside the discharge; they lacked actual knowledge that the discharge applied to their fee claim | Reversed: bankruptcy court erred — must show actual knowledge that the injunction applied to the claim (Zilog); seeking a Ybarra determination is proper and reliance on a state-court ruling insulates appellants from contempt absent proof they knew the discharge applied |
| Proper standard for "actual knowledge" in discharge-contempt cases | Taggart: knowledge of entry of discharge suffices | Appellants: must know the injunction was applicable to their specific claim; subjective belief matters | Held: Zilog requires evidence defendant knew injunction applied to their claim; court erred by using Hardy/strict-liability test |
| Whether seeking state-court declaration on scope of discharge was misconduct | Taggart: pursuing fees in state court post-discharge violated §524(a)(2) | Appellants: seeking a Ybarra ruling is equivalent to seeking declaratory relief on scope and is permissible | Held: Seeking a Ybarra determination is proper procedure and not per se a discharge violation; reliance on a facially valid state-court decision is a defense absent proof of knowledge of its inapplicability |
| Whether state-court award insulated appellants from contempt after later reversal | Taggart: a state-court ruling cannot avoid contempt if it was legally wrong | Appellants: they relied on the state-court determination and had no actual knowledge the injunction applied | Held: A party acting in reliance on a court’s ruling is not automatically willful; the bankruptcy court improperly disregarded reliance and applied wrong standard |
Key Cases Cited
- In re Ybarra, 424 F.3d 1018 (9th Cir.) (postpetition fees treated as postpetition debt where debtor voluntarily and affirmatively "returned to the fray")
- In re Zilog, Inc., 450 F.3d 996 (9th Cir.) (actual knowledge for discharge-contempt requires proof the contemnor knew the injunction applied to their claim)
- In re Dyer, 322 F.3d 1178 (9th Cir.) (distinguishes knowledge requirements for contempt and automatic stay; actual knowledge required for contempt)
- In re Hardy, 97 F.3d 1384 (11th Cir.) (articulates a strict/ objective focus for stay/discharge violations often cited for intent analyses)
- In re Bennett, 298 F.3d 1059 (9th Cir.) (adopts two-part test for willful violation: knowledge and intent)
- In re Pavelich, 229 B.R. 777 (9th Cir. BAP) (state courts may construe discharge and determine whether a debt is within the discharge)