The US Court of Appeals for the Fourth Circuit recently ruled that the US Supreme Court’s decision in Taggart v. Lorenzena case alleging violation of a Chapter 7 dismissal order, settled a civil contempt proceeding for violating a confirmed Chapter 11 reorganization plan.
Under taggart, 139 S.Ct. 1795 (2019), “civil contempt should not be resorted to where there is reasonable doubt as to the unlawfulness of the accused’s conduct.” The taggart Standard is objective, and “a party’s subjective belief that it would ordinarily obey an order will not protect it from civil contempt where that belief was objectively unreasonable.”
A copy of the report in Gordon Beckhart, Jr. v. Newrez, LLC is available at: Link to Opinion.
Two borrowers (“debtors”) filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Act. The bankruptcy court upheld a debtor debt restructuring plan that included several properties with substantial mortgage balances.
Pursuant to the confirming order, the debtors were able to retain ownership of one of the mortgaged properties, a North Carolina beach house (“Property”), while the creditor (“Creditor”) retained a security interest in the entire outstanding mortgage balance. The order confirmation included a date when the first payment was due, but no payment amount or how the payment would be calculated. The order also provided that the debtors were entitled to “ten days’ written notice” before the creditor could “exercise its state judicial remedies with respect to the security” should the debtors default.
A few years later, the defendant (“servicer”) took over administration of the debtor’s account. Servicer believed that the account was overdue due to the missed payments prior to the bankruptcy proceedings and responded by sending letters and reminders to the debtors showing increasing amounts owed and overdue. Debtors tried unsuccessfully to correct the account.
Five years later, the servicer acknowledged that the previous servicer “did not adjust the loan in accordance with the confirmed Chapter 11 plan.” Two weeks later, however, Servicer began foreclosure proceedings on the property.
Upon learning of the foreclosure proceedings, the debtors filed a summary petition in bankruptcy court, alleging that Servicer violated the confirmation order by defaulting on the account and attempting to foreclose on the property, even though the debtors were in the Paid on time as part of the confirmed plan. Servicer argued that (1) his actions were justified under the confirmation order; and alternatively (2) the terms of the order were confusing and ambiguous so that they could not be disregarded.
The bankruptcy court found Servicer in contempt and imposed sanctions, noting that “[a] A finding of civil contempt is justified where clear and compelling evidence demonstrates four factors set out in the preamble to the court.taggart decision Ashcraft vs. Conoco, Inc.218 F.3d 288, 301 (4th circle 2000).
Servicer appealed and the court overturned. The district court concluded that the taggart Standard applied, and “The Contempt Order of the Bankruptcy Court f[ell] far from “hit it as a servicer”, ha[d] reasonable doubts regarding the unclear conditions of the order confirmation.”
The debtors appealed to the Fourth Circuit, arguing with it taggart did not apply to violations of Chapter 11 confirmation orders, and that the bankruptcy court applied it correctly regardless taggart Default.
The Fourth Circle disagreed, holding that there was nothing in it taggart Analysis to suggest that it was limited to violations of Chapter 7 dismissal orders, or to show that the judgment was based on considerations unique to Chapter 7.
As you may remember, in taggartthe United States Supreme Court considered the standard for “hold”.[ing] a civilly disregarded creditor for attempting to collect a debt “immunized from collection” by a relief order registered under Chapter 7 of the Bankruptcy Act. 139 S.Ct. 1795, 1799 (2019).
When deciding taggart, the U.S. Supreme Court first discussed the general provisions of the bankruptcy law, which provide that an relief order “acts as an injunction,” 11 USC § 524(a)(2), and that a court “may issue any order, proceeding or judgment necessary or appropriate to give effect to the provisions of this title.” § 105(a). See taggart, 139 S.Ct. at 1801. The Supreme Court concluded that these general statutory provisions contain “traditional principles of equity practice” that “have long governed how courts enforce injunctions,” including “the potent weapon of civil contempt.” ID. (quotes omitted). The Supreme Court emphasized that “[t]The bankruptcy code … does not give courts full powers to civilly contempt creditors.” ID.
That taggart The court ruled that the standard of civil contempt “is generally objective” and that such orders are inadequate “where there is a reasonable doubt as to the unlawfulness of the accused’s conduct.” ID. about 1801-02. The Supreme Court concluded that “[t]These traditional civil disregard principles apply directly to the bankruptcy relief context.” ID. around 1802, 1804.
The Fourth Circuit ruled that the standard in taggarta case involving alleged violation of a Chapter 7 relief order, governed civil contempt proceedings under Chapter 11. The court found that the power of a bankruptcy court to enforce its own orders was derived from the same statutes and general principles relied on by the Supreme Court in taggart.
In that ruling, the Fourth Circuit disagreed with the debtors’ argument that the bankruptcy court taggart Default in stating that Servicer is despised. The written order of the bankruptcy court was not mentioned taggart nor his standard without fair cause of doubt. Instead, the order of the bankruptcy court stated: “[a] A finding of civil misconduct is warranted when there is evidence of “the four factors discussed in a previous case taggart and had nothing to do with bankruptcy. As a result, the Fourth Circuit was unable to determine that the bankruptcy court applied the correct legal standard.
The appeals court also contradicted Servicer’s contention that the trial court erred in overturning the bankruptcy court’s order. First, the Fourth Circuit found that the trial court erred in appearing to give dominant weight to Servicer’s request for and reliance on outside counsel, because the Fourth Circuit has long held that counsel “no defense” versus “civil contempt”. Regarding Walters868 F.2d 665, 668 (4th Circle 1989).
The Court of Appeal found that this was further affirmed taggart where the Supreme Court stated that “[t]Lack of individuality does not relieve civil contempt.” 139 S.Ct. around 1802. Under taggart“A party’s subjective belief that it will comply with an order will not normally protect them from civil contempt when that belief was objectively unreasonable,” but evidence that they relied on counsel may be considered in the determination whether the party’s behavior was objectively unreasonable.
The Fourth Circuit ruled that the proper remedy was for the bankruptcy court to review the contestation petition to the correct legal standard, including any additional findings of fact required. The Court of Appeal emphasized that any sanction imposed by the lower court must be supported by sufficient documentary evidence of the type and amount.
In summary, the Fourth Circuit ruled that when a court is considering whether or not to give a creditor civil immunity for breach of a Chapter 11 debt restructuring plan, taggart also applies.
Therefore, the Fourth Circuit overturned the trial court’s order and remanded the case, with instructions to overturn the bankruptcy court’s order and to pursue further proceedings consistent with the appellate court’s opinion.