On April 23, 2018, the Ninth Circuit held in In re Taggart (the “Opinion”) that a creditor will not be held in contempt for violating the bankruptcy discharge injunction if it has a good-faith belief, even if unreasonable, that the discharge injunction does not apply to it. A copy of the Opinion is available here. This is one of very few instances where mistake of law may be an effective defense.
The Debtor, Bradley Taggart, was a property developer who co-owned a business center organized as a limited liability company (the “LLC”) with Terry Emmert and Keith Jehnke. Prior to his bankruptcy filing, Taggart transferred his membership interests in the LLC to his attorney, John Berman, in violation of Emmert and Jehnke’s right of first refusal. Emmert and Jehnke sued Taggart and Berman in state court (the “State Litigation”) for failing to allow them to exercise their right of first refusal. Just before the trial in the State Litigation began, Taggart filed for bankruptcy under chapter 7. The filing of Taggart’s bankruptcy petition triggered the “automatic stay,” staying the State Litigation.
On February 23, 2010, Taggart received his bankruptcy discharge, at which point the State Litigation resumed. Despite his bankruptcy discharge, the state court held that Taggart was a necessary party and did not dismiss him from the State Litigation. However, in light of his bankruptcy discharge, the parties agreed that no monetary judgment could be awarded against him. After trial, the state court held that the Debtor violated Emmert and Jehnke’s right of first refusal and it unwound Taggart’s prepetition transfer of his membership interests in the LLC and expelled him from the LLC. Emmert and Jehnke’s attorney, Stuart Brown (together with Emmert and Jehnke, the “Creditors”), filed a petition for attorneys’ fees, limiting the request for fees against Taggart to those fees incurred after his bankruptcy discharge, alleging that Taggart had “returned to the fray” – or willingly resumed litigation by participating in the State Litigation after obtaining his discharge. Taggart opposed the Creditors’ petition. He also filed a motion in the bankruptcy court to reopen his bankruptcy case, seeking to hold the Creditors in contempt for violating his discharge.
The state court ruled that Taggart could be held liable for attorneys’ fees that were incurred after his bankruptcy discharge because he had returned to the fray. Subsequent to the state court’s ruling, the bankruptcy court denied Taggart’s motion for contempt, finding that the state court had correctly decided that he had voluntarily resumed litigation. Taggart appealed the state court’s decision to the Oregon Court of Appeals and appealed the bankruptcy court’s decision to the district court. The district court reversed, holding that Taggart did not “return to the fray.” It then remanded the case to the bankruptcy court for a determination of whether the Creditors knowingly violated the discharge injunction in seeking attorneys’ fees. Continue Reading