Bankruptcy – Standard for Chapter 11 contempt is clarified

Where the Supreme Court previously addressed the proper standard for holding a creditor in civil contempt for attempting to collect a debt that a Chapter 7 discharge order has immunized from collection, that rule also applied in a Chapter 11 case. The analysis was not limited to violations of Chapter 7 discharge orders and did not turn on considerations unique to the Chapter 7 context.

Background

In Taggart v. Lorenzen, 139 S. Ct. 1795 (2019), the Supreme Court addressed the proper standard for “hold[ing] a creditor in civil contempt for attempting to collect a debt that a discharge order” entered under Chapter 7 of the Bankruptcy Code “has immunized from collection.” The threshold question here is whether the standard adopted in 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.

In 2009, Gordon and Stella Beckhart filed a voluntary petition for relief under Chapter 11. The bankruptcy court confirmed a reorganization plan for the Beckharts’ debts. Under the confirmation order, the Beckharts maintained possession of the beach house, with the creditor retaining a secured claim for the total outstanding mortgage balance.

Several years later, Shellpoint took over as loan servicer on the Beckharts’ account. Although the Beckharts had been making regular monthly payments under the confirmation order, Shellpoint initially believed the account was past due because of the payments missed before the bankruptcy proceedings. Shellpoint ultimately commenced foreclosure proceedings on the beach house.

The Beckharts filed an emergency motion for contempt in the bankruptcy court. According to the Beckharts, Shellpoint had violated the confirmation order by placing their account in default and seeking to foreclose on the property when the Beckharts had been paying on time since the bankruptcy. After hearing argument and testimony, the bankruptcy court found Shellpoint in contempt and awarded sanctions to the Beckharts.

Shellpoint appealed the contempt order to the district court, which reversed. Concluding that “the Taggart standard” applied, the district court determined that “the bankruptcy court’s contempt order [fell] far short of meeting” it because Shellpoint “[had] established a fair ground of doubt with regard to the unclear terms of the confirmation order.”

Standard

The Beckharts first argue that Taggart does not apply to violations of Chapter 11 confirmation orders. The court disagrees. 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.

The Beckharts may be right that Chapter 11 reorganization proceedings differ in many ways from Chapter 7 liquidations. But 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. And those principles make clear that the logic of Taggart applies broadly and cannot be confined to Chapter 7 bankruptcy in the way the Beckharts seek.

Merits

The court likewise disagrees with the Beckharts’ assertion that the bankruptcy court actually applied the Taggart standard in finding Shellpoint in contempt. Although Taggart was discussed at the contempt hearing, the court’s written order does not mention Taggart or its no-fair-ground-of-doubt standard. Rather, the bankruptcy court’s order states that “a finding of civil contempt is warranted when there is a demonstration … of” four factors discussed by this court in a decision that long predated Taggart and did not even involve bankruptcy.

At the same time, the court disagrees with Shellpoint’s assertion that the district court committed no error in overturning the bankruptcy court’s contempt order. For one thing, the district court erred in appearing to grant controlling weight to the fact that Shellpoint had requested and received legal advice from outside counsel.

But this court had squarely held—long before Taggart—that advice of counsel “is not a defense” to “civil contempt.” And Taggart reaffirmed this approach when explaining that “the absence of wilfulness does not relieve from civil contempt.” As a result, the district court erred when concluding that Shellpoint’s reliance on the advice of outside counsel was seemingly dispositive as a defense to civil contempt.

Vacated and remanded with instructions.

Beckhart v. Newrez LLC (Lawyers Weekly No. 001-064-22, 8 pp.) (Toby J. Heytens, J.) Case No. 21-1838. April 15, 2022. From E.D.N.C. at Wilmington (Terrence W. Boyle, J.) Ciara Louise Rogers for Appellants. Richard Aaron Chastain for Appellees. 4th Cir.