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Summarizing by Shane Ramsey

Lorenzen v. Taggart

Case Type:
Case Status:
16-35402 (9th Circuit, Apr 23,2018) Published
The bankruptcy court abused its discretion by concluding creditors knowingly violated the discharge injunction because a belief, even an unreasonable one, the discharge injunction did not apply precludes a finding of contempt. The creditors relied on a state court judgment that the discharge injunction did not apply to their claim for post-petition attorneys’ fees. Though wrong, the creditors' good faith belief insulated them from a finding of contempt.
Procedural context:
The bankruptcy court concluded creditors knowingly violated the discharge injunction and entered contempt sanctions against the creditors. The creditors appealed, and the Bankruptcy Appellate Panel reversed. The Ninth Circuit Court of Appeals affirmed the BAP opinion.
The debtor, a real estate developer, owned an interest in a business center. He transferred his interest in the center to an attorney. Other investors learned of the transfer and filed suit against the debtor in state court alleging the transfer violated the center's operating agreement and seeking attorney's fees. Shortly before the matter went to trial, debtor filed chapter 7 bankruptcy. After the debtor received a discharge, the state court matter resumed. After trial, the state court unwound the transfer and expelled the debtor from the entity. The state court also allowed parties to petition for attorneys' fees. The creditors sought to recover fees from the debtor that were incurred post-discharge. Debtor's attorney argued that the bankruptcy discharge barred a claim for attorney's fees. Debtor filed a motion to reopen his bankruptcy case, which the bankruptcy court granted. He then filed a motion for to hold the creditors in contempt for violating the discharge injunction by seeking attorneys' fees against him in the state court action. The bankruptcy court denied the motion. Debtor appealed, and the district court reversed and found the discharge injunction barred the attorneys' fee claim. The district court remanded to the bankruptcy court to determine if the creditors knowingly violated the discharge injunction. The bankruptcy court found the creditors did, held them in contempt, and awarded sanctions. The creditors appealed, and the BAP reversed. The BAP explained the creditors could only be held in contempt if they "knowingly" violated the discharge injunction. The BAP found the creditors had a good faith belief the discharge injunction did not apply to their claim for attorneys' fee and, therefore, they did not knowingly violate the discharge injunction. Debtor appealed.
Edward Leavy, Richard A. Paez, and Carlos T. Bea

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