By Michael L. Moskowitz and Michele K. Jaspan
We previously reported that there is a split between the First and Ninth Circuits regarding the applicability of the good faith defense when a creditor violates the “discharge injunction.” In Lorenzen v. Taggart, the Ninth Circuit held that a creditor’s good faith belief that an action does not violate the discharge injunction precludes a finding against the creditor for contempt. Conversely, the First Circuit, in IRS v. Murphy, widened the split when it found that the government employee who knew debtor received a discharge could be held in contempt, even though the government had a good faith belief the action did not violate the discharge injunction.
Simply put, Taggart makes it virtually impossible to recover sanctions for a discharge injunction violation. The Ninth Circuit held that a good faith belief the stay does not apply precludes a finding of contempt, even if the creditor’s belief is unreasonable. This means if debtor provides actual notice to the creditor of the discharge and the creditor still violates the injunction, as long as creditor still believes the discharge does not apply, they will not be held accountable even if their belief was without merit.
Recently, the Appeals Court denied a petition for rehearing in Taggart. Despite numerous amicus briefs urging rehearing submitted by legal professionals, law professors and bar associations, as well as a former judge, the circuit court was not persuaded. Debtor’s counsel in Taggart may file a petition for certiorari in the Supreme Court. We will continue to monitor this issue. In the interim, should you, your colleagues, or your clients have any questions, please reach out to any member of our team.
About Weltman & Moskowitz, LLP, A New York and New Jersey Business, Bankruptcy, and Creditors’ Rights Law Firm:
Founded in 1987, Weltman & Moskowitz, LLP is a highly regarded business law firm concentrating on creditors’ rights, bankruptcy, foreclosure, and business litigation. Michael L. Moskowitz, a partner with the firm, focuses his practice on business and bankruptcy litigation, as well as creditors' rights, foreclosure, adversary proceeding litigation, corporate counseling, M&A, and transactional matters. Michael can be reached at (212) 684-7800, (201) 794-7500 or mlm@weltmosk.com. Michele Jaspan is an associate of the firm. Michele can be reached at mkj@weltmosk.com.
