More Fallout from Taggart

In my Amicus Brief supporting the Debtor’s request for a rehearing en banc in In re Taggart, 888 F.3d 438, 443 (9th Cir. 2018), I said:

In its opinion, the [Taggart] panel held,

“the creditor’s good faith belief that the discharge injunction does not apply to the creditor’s claim precludes a finding of contempt, even if the creditor’s belief is unreasonable.” [emphasis added] 888 F.3d at 444

The statement is an incremental extension of a footnote in the Ninth Circuit case of ZiLog, Inc. v. Corning (In re ZiLog, Inc.), 450 F.3d 996 (9th Cir. 2006), a case easily distinguishable from Taggart on the facts. The statement disrupts the long-standing rule that a creditor who receives notice of the debtor’s discharge and still pursues the debtor for discharged debts may not plead ignorance of the discharge as a defense. The statement, if allowed to stand, will forever be treated by creditors as a blackletter rule which will quickly come to be known as the Taggart Rule. Creditors, using the above statement will respond to discharge violations by saying, “Taggart says we win!” “We weren’t sure about the discharge injunction and therefore we win because the Ninth Circuit said so!” There will be little reason to even have an evidentiary hearing regarding the creditor’s good faith belief because the Ninth Circuit said that even if the subjective good faith belief is unreasonable, there can be no consequences to violating the discharge.

My prediction is coming true.  The 9th Circuit BAP has even extended this to the automatic stay, reversing a ruling by Judge Sheri Bluebond who had awarded some $400,000 in fees for violating the automatic stay.  The BAP said in Ress Financial Corp v. Beaumont 1600, LLC (In re The Preserve, LLC), Adv. No. 2:13-ap-01406-BB, unpublished (9th BAP Sept 7, 2018),

In other words, in a contempt proceeding, knowledge of the stay may not be inferred simply because the creditor knew of the bankruptcy. Id.; see also In re Taggart, 888 F.3d at 444-45.  Even an unreasonable belief that the stay does not apply to a creditor’s claims would preclude a finding of contempt. See id. at 444 (applying rule to violation of the discharge injunction, citing In re Zilog, 450 F.3d at 1009 n.14). (memorandum at page 21)

And a good faith belief that the stay does not apply precludes a finding of contempt, even if the creditor’s belief is unreasonable. See In re Taggart, 888 F.3d at 444. (memorandum at page 24)

In remanding, the BAP did not rule that damages were not available.  It acknowledged that damages including attorneys fees are mandatory under section 362(k) but it distinguished between a 362(k) violation and civil contempt.

The standard for awarding damages for civil contempt, however, varies from the standard for awarding damages under § 362(k).  First, damages are mandatory under § 362(k), while they are discretionary under the court’s contempt power.  Johnston Environmental Corp. v. Knight (In re Goodman), 991 F.2d 613, 620 (9th Cir. 1993).  Second, under § 362(k), a party with knowledge of bankruptcy proceedings is charged with knowledge of the automatic stay, but in the contempt context, the party must know of the stay and that the stay applies to its conduct.  In re Dyer, 322 F.3d at 1191-92.  In other words, in a contempt proceeding, knowledge of the stay may not be inferred simply because the creditor knew of the bankruptcy.

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