Another Circuit Rules That Taggart Standard For Contempt


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In a decision that could have significant ramifications in
bankruptcy cases, a divided panel of the U.S. Court of Appeals for
the Second Circuit ruled in 2021 that the standard articulated by
the U.S. Supreme Court in Taggart v. Lorenzen, 139 S. Ct.
1795 (2019), for the imposition of contempt sanctions due to a
violation of the bankruptcy discharge injunction in a chapter 7
case, also applied to contempt sanctions imposed for repeated
violations of bankruptcy court orders declaring a home mortgage
current. SeePHH Mortgage Corp. v. Sensenich (In re
Gravel)
, 6 F.4th 503 (2d Cir. 2021), reh’g en banc
denied
, No. 20-1 (2d Cir. Nov. 1, 2021), petition for
cert. denied
, No. 21-1322 (U.S. June 13, 2022).

In 2022, the Fourth Circuit expanded the reach of
Taggart even further. In Beckhart v. Newrez LLC,
31 F.4th 274 (4th Cir. 2022), a three-judge panel of the Fourth
Circuit ruled that “Taggart also applies when a court
is considering whether to hold a creditor in civil contempt for
violating a plan of reorganization of debts entered under Chapter
11.” More broadly, the court wrote, “Nothing about the
Supreme Court’s analysis in Taggart suggests it is
limited to violations of Chapter 7 discharge orders … or
that the Court’s decision turned on considerations unique to
the Chapter 7 context.”

Given these holdings, two circuit courts of appeals have now
concluded that Taggart casts a wider net in bankruptcy
than the language of that opinion might have suggested.

Taggart

In Taggart, the Supreme Court ruled that a bankruptcy
court may hold a creditor in civil contempt for attempting to
collect on a debt that has been discharged in bankruptcy “if
there is no fair ground of doubt as to whether the [discharge]
order barred the creditor’s conduct.” Taggart,
139 S. Ct. at 1801.

Taggart left open the question of whether the
“fair ground of doubt” standard should apply to
violations of other bankruptcy court orders or provisions of the
Bankruptcy Code, such as a chapter 11 plan confirmation order, a
discovery order, or the automatic stay. Many courts have weighed in
on the issue, with mixed outcomes. See, e.g., Deutsche Bank
Trust Co. Americas v. Gymboree Group, Inc.
, 2021 WL 3618229,
*11 (E.D. Va. Aug. 16, 2021) (“Because there is fair ground
for doubt concerning the requirements of the 2017 Plan and related
disbursements, the record does not warrant a finding of
contempt”); In re Jeong, 2020 WL 1277575 (B.A.P. 9th
Cir. Mar. 16, 2020) (applying the Taggart standard in
upholding a bankruptcy court order granting a chapter 7
trustee’s request for contempt sanctions for a willful
violation of the stay); In re GL Master Inc., 2022 WL
34686, *2 (Bankr. C.D. Cal. Jan. 3, 2022) (applying the
Taggart standard in ordering contempt sanction for willful
and repeated violations of discovery orders); In re GYPC,
INC.
, 634 B.R. 983, 991 (Bankr. S.D. Ohio 2021) (“The
court will apply the Taggart standard in determining
whether any stay violations committed by Eastport entitle GYPC to
damages under a civil contempt theory”); Tate v. Fairfax
Village I Condominium
, 2020 WL 634293 (Bankr. D.D.C. Feb. 10,
2020) (citing Taggart in finding a willful violation of
the stay in a chapter 13 case and imposing sanctions under section
362(k)(1) of the Bankruptcy Code). But seeIn re
Franklin
, 614 B.R. 534, 546 n.19 (Bankr. M.D.N.C. 2020) (in a
chapter 13 case involving a request for automatic stay violation
sanctions under section 362(k), noting the distinction between a
discharge injunction and the automatic stay and stating that
“[e]ven if the standard in Taggart applied to §
362(k), no reasonable creditor objectively could have believed [the
creditor’s] actions in this case did not violate the automatic
stay”); In re Spiech Farms, LLC, 603 B.R. 395, 408
n.22 (Bankr. W.D. Mich. 2019) (in a chapter 7 case, stating that
“[t]his court does not read Taggart to change the
Sixth Circuit’s standard for determining whether a creditor can
be held in contempt for violating the automatic stay”);
see also Fid. & Deposit Co. of Maryland v. TRG Venture II,
LLC
, 2022 WL 952737, *2 n.1 (N.D. Ill. Mar. 30, 2022)
(declining to address whether the Taggart standard should
apply to contempt for violation of an injunction in a chapter 11
plan and a confirmation order where the issue was not raised on
appeal).

Gravel

Gravel involved debtors in three separate chapter 13
cases filed in the U.S. Bankruptcy Court for the District of
Vermont and the company originating and servicing the home
mortgages (the “originator”) for all of those debtors.
The originator repeatedly violated Rule 3002.1 of the Federal Rules
of Bankruptcy Procedure (the “Bankruptcy Rules”), which
requires a mortgage lender to file a notice itemizing all fees,
expenses, or charges incurred in connection with a mortgage during
a bankruptcy case.

In two of the three Vermont cases, the bankruptcy court had
entered an order (a “current order”) declaring that the
debtors were current on all pre- and post-bankruptcy payments,
fees, and charges. Less than a month after the court issued the
current orders, however, the originator began listing in the
debtors’ statements fees allegedly incurred during the periods
encompassed by the orders, but did not include those fees in the
amounts due. In those two cases, the originator had not filed the
notices required by Bankruptcy Rule 3002.1. There was no current
order in the third case, but the originator listed fees in that
debtor’s statements (but did not include the fees in the amount
due), without filing a Bankruptcy Rule 3002.1 notice.

For violating the rule, the bankruptcy court imposed $75,000
(i.e., $1,000 for each of the 25 violations in all three cases) in
sanctions under Bankruptcy Rule 3002.1. In addition, invoking its
“authority … to impose punitive sanctions on parties
who violate court orders,” the court imposed a total of
$300,000 in sanctions for violation of the two current orders.
Reasoning that it “may hold a creditor in contempt for that
party’s violation of an injunction order,” the court
applied the Taggart contempt standard and “impos[ed]
punitive sanctions” on the originator for its violation of the
orders.

The district court reversed on appeal, ruling that the $375,000
in sanctions exceeded the bankruptcy court’s “statutory
and inherent powers.” The district court remanded the case to
the bankruptcy court, which later imposed the same $75,000 in
sanctions for violating Bankruptcy Rule 3002.1, but reduced the
punitive sanctions for violating the current orders to
$225,000.

The Second Circuit granted the originator’s request for a
direct appeal of the second sanctions order. A divided three-judge
panel of the Second Circuit vacated and reversed the second
sanctions order.

Initially, the majority explained that a bankruptcy court’s
“narrowly circumscribed” contempt power derives from a
court injunction—an equitable remedy—and section 105(a)
of the Bankruptcy Code, which authorizes the court to issue
“any order, process, or judgment that is necessary or
appropriate to carry out the provisions of [the Bankruptcy
Code].”

The majority concluded that the originator “did not, as a
matter of law, violate” the current orders because those
orders specifically prohibited the originator “from disputing
that the debtors are current (as set forth herein) in any other
proceeding” but “did not enjoin the recording of expired
fees on the statements” sent to the debtors. Gravel,
6 F.4th at 511.

In so ruling, the majority applied the contempt standard
established in Taggart. “Without an express
injunction [barring the originator from sending out statements
reflecting expired fees],” the majority wrote, there was a
“fair ground of doubt as to whether the listed fees can form
the basis for contempt.” Id. According to the
majority, the bankruptcy court “could have crafted an order
that would have forbidden the conduct” at issue. Id.
at 513.

The majority also held that the $75,000 sanction for failure to
file Bankruptcy Rule 3002.1 notices “went beyond the relief
authorized by that rule,” and that, given the absence of any
finding of bad faith below, it was “dubious” whether the
bankruptcy court “could exercise its inherent power to do that
which is unavailable under powers expressly defined” in
Bankruptcy Rule 3002.1. Id. at 516.

The dissent agreed with the majority’s holding that the
current orders “did not clearly and unambiguously
prohibit” the originator’s conduct for which the
bankruptcy court imposed $225,000 in sanctions, but disputed
vacatur of the $75,000 sanction, reasoning that either Bankruptcy
Rule 3002.1 or the bankruptcy court’s inherent powers
authorized the sanction.

On April 4, 2022, the chapter 13 trustee filed a petition
seeking U.S. Supreme Court review of the Second Circuit’s
decision. The Supreme Court denied the petition on June 13, 2022.
See Sensenich v. PHH Mortgage Corp., No. 21-1322 (U.S.
June 13, 2022).

Beckhart

In August 2009, Gordon and Stella Beckhart (the
“debtors”) filed for chapter 11 protection in the Eastern
District of North Carolina. At the time of the bankruptcy filing,
the debtors were in arrears to the tune of nearly $23,000 under a
loan secured by real property owned by them in North Carolina.

The debtors proposed a chapter 11 plan under which the mortgage
loan would be reinstated. The servicer of the loan (together with
its successor, the “servicer”) objected to the plan,
stating that it failed to make any provision for the payment of
prepetition arrearages or the application of postpetition principal
or interest payments. The servicer also voted to reject the plan,
but the bankruptcy court confirmed the plan over its objection.

The confirmation order provided that, “[e]xcept as modified
herein, the [debtors] shall continue to pay the creditor’s
claim according to the original loan terms.” The order
specified the date on which the first payment would be due after
confirmation, but did not state the amount or how it would be
calculated. The order also provided that, in the event of a
default, the debtors would be entitled to 10 days’ written
notice before the lender could exercise its state court remedies
with respect to the property. The servicer did not appeal the
confirmation order.

The debtors began making the monthly payments on the date
specified in the confirmation order and continued to do so in
accordance with the terms of the mortgage. Nearly four years after
confirmation of the plan, the servicer informed the debtors that
their account was past due in the amount of approximately $50,000.
After several attempts to resolve the dispute over the course of
the next five years failed, the servicer served the debtors with a
notice of foreclosure in January 2020.

The debtors then filed a motion in the bankruptcy court for
civil contempt and sanctions against the servicer and the lender
(collectively, the “defendants”). After an evidentiary
hearing, the bankruptcy court entered an order finding the
defendants to be in civil contempt and directing them to pay
monetary sanctions in the amount of approximately $115,000 to the
debtors.

The defendants appealed the contempt order to the district
court, which reversed. According to the district court, the
defendants “established a fair ground of doubt with regard to
the unclear terms of the confirmation order, and the bankruptcy
court’s contempt order falls far short of meeting the
Taggart standard for imposing the serious finding of civil
contempt against appellants.” Newrez, LLC v.
Beckhart
, 2021 WL 3361707, *2 (E.D.N.C. July 6, 2021),
vacated and remanded, 31 F.4th 274 (4th Cir. 2022).
Notably, the district court stated:

The Court is not convinced by [the debtors’] argument that
the discharge order referenced in Taggart is different
from the confirmation order at issue here, thus making the case
inapplicable here. Regardless of the name of the document, both
orders concern payment or repayment with regards to the declaration
of bankruptcy and an outstanding amount owed at the time of the
filing, and the similarities between the documents far outweigh the
differences.

Id. According to the district court, the confirmation
order was confusing because it did not expressly address what
amount the debtors would owe on the loan as of the confirmation
date or how the pre- and postpetition arrearages would be repaid,
if at all. In addition, the court noted, by adopting a reading that
seemed consistent with the contractual terms of the loan and that
was objectively reasonable, the defendants acted in good faith.
Finally, the district court stated that the defendants “were
repeatedly advised by counsel that they could collect the amounts
due from appellees under the original mortgage contract.”
Id. at *3.

The debtors appealed to the Fourth Circuit.

The Fourth Circuit’s Ruling

A three-judge panel of the Fourth Circuit held that the standard
adopted in Taggart applies when a court is considering
whether to hold a creditor in civil contempt for violating a
chapter 11 plan of reorganization. Because it concluded that
neither the bankruptcy court nor the district court properly
applied the Taggart standard, the panel vacated the
district court’s ruling and remanded the case below.

Writing for the panel, U.S. Circuit Court Judge Toby Heytens
explained that, because the Supreme Court’s analysis was based
on “traditional principles of equity practice” that have
“long governed how courts enforce injunctions,” the scope
of Taggart is clearly not limited to violations of chapter
7 discharge orders and “governs civil contempt under Chapter
11 of the Bankruptcy Code as well.” Beckhart, 31
F.4th at 277 (citations omitted). He acknowledged that chapter 11
reorganizations differ in many ways from chapter 7 liquidations but
wrote that “a bankruptcy court’s authority to enforce its
own orders—regardless of which chapter of the Bankruptcy Code
those orders were issued under—derives from the same statutes
and the same general principles the Supreme Court relied on in
Taggart.” Id. at *3.

According to Judge Heytens, the bankruptcy court did not apply
the Taggart standard at all but, rather, a four-factor
test for civil contempt articulated in a Fourth Circuit
nonbankruptcy decision that long predated Taggart. The
Fourth Circuit panel went on to state that the district court
misapplied the Taggart standard in overturning the
bankruptcy court’s contempt order. In particular, the district
court erroneously granted controlling weight to the defendants’
reliance on the advice of counsel as a sufficient defense to civil
contempt. According to Judge Heytens, this is contrary to
long-standing Fourth Circuit law as well as the Supreme Court’s
statement in Taggart that “‘[t]he absence of
willfulness does not relieve from civil contempt.'”
Id. (quoting Taggart, 139 S. Ct. at 1802). Judge
Heytens noted, however, that “while relying on the advice of
outside counsel is not a complete defense in and of itself, it may
still be considered in appropriate circumstances as a relevant
factor under the Taggart standard.” Id. at
*3 n.*.

Having concluded that both lower courts “erred in analyzing
the threshold question of whether [the defendants] may be held in
civil contempt at all,” the Fourth Circuit held that the
district court’s ruling should be vacated and the case should
be remanded to the bankruptcy court “to reconsider the
contempt motion under the correct legal standard.”
Id.

Outlook

In Gravel and Beckhart, two circuit courts of
appeals appear to have definitively answered a major question left
unanswered by Taggart—namely, whether the “fair
ground of doubt” standard applies to contempt for violation of
bankruptcy court orders other than orders discharging chapter 7
debtors. Other lower courts have also adopted this expansive
interpretation of Taggart. By declining to review the
Second Circuit’s ruling in Gravel, the Supreme Court
passed up the opportunity to weigh in on the issue.

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