Bradley Taggart v. Shelley Lorenzen , 888 F.3d 438 ( 2018 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
IN RE BRADLEY WESTON TAGGART, No. 16-35402
Debtor,
D.C. No.
3:12-cv-00236-
SHELLEY A. LORENZEN, Executor of MO
Estate of Stuart Brown; TERRY W.
EMMERT; KEITH JEHNKE; SHERWOOD
PARK BUSINESS CENTER, LLC,
Appellants,
v.
BRADLEY WESTON TAGGART,
Appellee.
Appeal from the United States District Court
for the District of Oregon
Michael W. Mosman, Chief District Judge, Presiding
2 IN RE TAGGART
IN RE BRADLEY WESTON TAGGART, No. 16-60032
Debtor,
BAP No.
15-1158
BRADLEY WESTON TAGGART,
Appellant,
v.
SHELLEY A. LORENZEN, Executor of
Estate of Stuart Brown; TERRY W.
EMMERT; KEITH JEHNKE; SHERWOOD
PARK BUSINESS CENTER, LLC,
Appellees.
IN RE BRADLEY WESTON TAGGART, No. 16-60033
Debtor,
BAP No.
15-1119
BRADLEY WESTON TAGGART,
Appellant,
v.
TERRY W. EMMERT; KEITH JEHNKE;
SHERWOOD PARK BUSINESS CENTER,
LLC; SHELLEY A. LORENZEN,
Executor of Estate of Stuart Brown,
Appellees.
IN RE TAGGART 3
IN RE BRADLEY WESTON TAGGART, No. 16-60039
Debtor,
BAP No.
15-1119
SHELLEY A. LORENZEN, Executor of
the Estate of Stuart Brown,
Appellant,
v.
BRADLEY WESTON TAGGART,
Appellee.
IN RE BRADLEY WESTON TAGGART, No. 16-60040
Debtor,
BAP No.
15-1119
TERRY W. EMMERT; KEITH JEHNKE;
SHERWOOD PARK BUSINESS CENTER,
LLC,
Appellants,
v.
BRADLEY WESTON TAGGART,
Appellee.
4 IN RE TAGGART
IN RE BRADLEY WESTON TAGGART, No. 16-60042
Debtor,
BAP No.
15-1158
SHELLEY A. LORENZEN, Executor of
Estate of Stuart Brown,
Appellant,
v.
BRADLEY WESTON TAGGART,
Appellee.
IN RE BRADLEY WESTON TAGGART, No. 16-60043
Debtor,
BAP No.
15-1158
TERRY W. EMMERT; KEITH JEHNKE;
SHERWOOD PARK BUSINESS CENTER,
LLC, OPINION
Appellants,
v.
BRADLEY WESTON TAGGART,
Appellee.
Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Kirscher, Jury, and Faris, Bankruptcy Judges, Presiding
IN RE TAGGART 5
Argued and Submitted October 3, 2017
Portland, Oregon
Filed April 23, 2018
Before: Edward Leavy, Richard A. Paez,
and Carlos T. Bea, Circuit Judges.
Opinion by Judge Bea
SUMMARY *
Bankruptcy
The panel affirmed the Bankruptcy Appellate Panel’s
opinion reversing the bankruptcy court’s order entering
contempt sanctions against creditors for knowingly violating
the discharge injunction in a Chapter 7 case.
The panel held that the creditors did not knowingly
violate the discharge injunction because they had a
subjective good faith belief that the discharge injunction did
not apply to their state-court claim for post-petition
attorneys’ fees. The creditors’ subjective good faith belief,
even if unreasonable, insulated them from a finding of
contempt. The panel concluded that it therefore need not
reach the creditors’ cross-appeal from the district court’s
holding that they violated the discharge injunction.
*
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
6 IN RE TAGGART
COUNSEL
John Martin Berman (argued) and Damon J. Petticord,
Tigard, Oregon, for Bradley Weston Taggart.
Janet M. Schroer (argued), Hart Wagner LLP, Portland,
Oregon; James Ray Streinz, Streinz Law Office, Portland,
Oregon, for Shelley Lorenzen.
Hollis Keith McMilan (argued), Hollis K. McMilan P.C.,
Portland, Oregon, for Terry W. Emmert, Keith Jehnke, and
Sherwood Park Business Center LLC.
OPINION
BEA, Circuit Judge:
This case arises out of a complex set of bankruptcy
proceedings. Appellant Bradley Taggart was a real estate
developer who owned a 25% interest in Sherwood Park
Business Center, LLC (“SPBC”). Appellees and Cross-
Appellants Terry Emmert and Keith Jehnke also each owned
a 25% interest in SPBC. In 2007, Taggart allegedly
transferred his share of SBPC to his attorney in this action,
John Berman.
When Emmert and Jehnke learned that Taggart had
transferred his interest in SPBC to Berman, they sued
Taggart and Berman in Oregon state court, asserting that the
transfer breached SPBC’s operating agreement because
Taggart did not provide the notice required to allow Emmert
and Jehnke to exercise their right of first refusal to buy
Taggart’s interest at the agreed upon price. The state court
action also sought attorneys’ fees pursuant to the operating
IN RE TAGGART 7
agreement. Taggart filed an answer to the state court action,
sought to dismiss the action, and filed a counterclaim for
attorneys’ fees pursuant to the operating agreement.
On November 4, 2009, shortly before trial in the state
court action, Taggart filed a voluntary Chapter 7 Bankruptcy
petition (the “Petition”). The state court action was stayed
pending the resolution of Taggart’s bankruptcy Petition. On
February 23, 2010, Taggart received his discharge in the
bankruptcy proceedings.
After the discharge, Emmert and Jehnke, represented by
attorney Stuart Brown, continued the state court action
against Berman and Taggart. As part of the litigation, Brown
served Taggart with a subpoena for a deposition. Taggart,
represented by Berman, moved for a protective order that
would allow him not to appear at the deposition, but the state
trial court never ruled on the motion. Nonetheless, Taggart
appeared for his deposition.
Prior to trial, Berman moved on Taggart’s behalf to
dismiss the claims against Taggart in light of the bankruptcy
discharge. The state court denied the motion, finding that
Taggart was a necessary party to Emmert and Jehnke’s
claims seeking to expel Taggart from SPBC, but the parties
agreed that no monetary judgment would be awarded against
Taggart. Taggart did not appear at or participate in the trial,
but Berman orally renewed his motion to dismiss on
Taggart’s behalf at the close of evidence. The state court
once again denied the motion.
After trial, the state court issued findings of fact and
conclusions of law that unwound the transfer of Taggart’s
interest in SPBC to Berman and expelled Taggart from
SPBC. Brown submitted a proposed judgment, to which
8 IN RE TAGGART
Berman objected. Taggart appeared at the hearing for entry
of the judgment and provided testimony and argument.
Following the hearing, the state court entered a judgment
that allowed any party to petition for attorneys’ fees. The
litigation regarding attorneys’ fees spawned a complex,
interrelated web of litigation in both state and federal court.
First, Brown filed a petition for attorneys’ fees in state
court on behalf of SPBC, Emmert, and Jehnke. Brown’s fee
petition sought to recover fees against both Berman and
Taggart, but limited the request for fees against Taggart to
those fees that had been incurred after the date of Taggart’s
bankruptcy discharge. In the fee petition, Brown alerted the
state court to the existence of Taggart’s bankruptcy
discharge and argued that Taggart could still be held liable
for attorneys’ fees incurred after Taggart’s discharge
because Taggart had “returned to the fray.” That is, SPBC,
Emmert, and Jehnke claimed Taggart had willingly engaged
in opposing them in the state court action after Taggart
obtained his bankruptcy discharge. Taggart opposed
Brown’s petition for attorneys’ fees, arguing his bankruptcy
discharge barred any claim for attorneys’ fees, whether they
were incurred before or after his discharge in bankruptcy.
While the attorneys’ fee petition was pending in state
court, Taggart moved the bankruptcy court to reopen his
bankruptcy proceeding. The day the bankruptcy court
reopened Taggart’s bankruptcy proceeding, Taggart filed a
motion seeking to hold Brown, Jehnke, Emmert, and SPBC
(collectively, the “Creditors”) in contempt for violating the
discharge by seeking an award of attorneys’ fees against him
in the state court action.
Meanwhile, the state trial court issued a ruling awarding
attorneys’ fees to SPBC, but not Jehnke and Emmert. The
IN RE TAGGART 9
state court ruled that Taggart could be held liable for
attorneys’ fees that were incurred after his bankruptcy
discharge because he had “returned to the fray.” 1 Taggart
appealed the state court’s determination to the Oregon Court
of Appeals. See Sherwood Park Bus. Ctr., LLC v. Taggart,
341 P.3d 96 (Or. Ct. App. 2014).
Subsequently, the bankruptcy court denied Taggart’s
motion for contempt, finding that the state court had
correctly decided the issue: whether Taggart had indeed
“returned to the fray.” Taggart appealed the bankruptcy
court’s ruling to the district court. The district court
reversed, finding that Taggart’s actions were insufficient to
constitute a “return to the fray” and, as a result, the discharge
injunction barred the attorneys’ fee claim. The district court
remanded to the bankruptcy court for a determination of
whether the Creditors “knowingly violated the discharge
injunction in seeking attorney fees.” 2
On remand, the bankruptcy court found the Creditors had
knowingly violated the discharge injunction by seeking
attorneys’ fees in the state action and entered an order
holding them in contempt. Following further proceedings,
the bankruptcy court awarded sanctions against SPBC,
1
Whether Taggart had “returned to the fray” was significant because
if a debtor “returns to the fray” by engaging in post-bankruptcy petition
litigation, a creditor may seek an attorneys’ fee award if the new
litigation was not within the “fair contemplation of the parties” prior to
the bankruptcy petition. See In re Castellino Villas, A. K. F. LLC,
836 F.3d 1028, 1034–37 (9th Cir. 2016).
2
Emmert, Brown, Jehnke, and SPBC filed a notice of appeal of the
district court’s decision. This court dismissed the appeal because the
district court’s ruling was not a final order.
10 IN RE TAGGART
Emmert, Jehnke, and Brown’s estate, 3 pursuant to the
court’s contempt ruling.
The Creditors appealed the bankruptcy court’s contempt
ruling to the Bankruptcy Appellate Panel (“BAP”). On
appeal, the BAP reversed the bankruptcy court’s finding of
contempt. The BAP reasoned that the Creditors could not be
held in contempt unless they “knowingly” violated the
discharge injunction. Because the BAP found that the
Creditors had a good faith belief that the discharge
injunction did not apply to their attorneys’ fee claim, it
concluded that they had not “knowingly” violated the
discharge injunction.
In the meantime, the Oregon Court of Appeals reversed
the state trial court’s ruling regarding attorneys’ fees. See
Taggart, 341 P.3d at 102–04. In line with the district court,
the Oregon Court of Appeals held that Taggart’s actions
were not sufficiently affirmative or voluntary to constitute a
“return to the fray.” Id. As a result, the court concluded that
the discharge injunction barred the recovery of attorneys’
fees. Id.
Ultimately, the Creditors were barred from pursuing
attorneys’ fees against Taggart by the rulings of both the
district court and the Oregon Court of Appeals.
Additionally, due to the BAP’s ruling, the Creditors were not
liable for sanctions for knowingly violating the discharge
injunction by seeking attorneys’ fees against Taggart in the
state court litigation.
3
Brown passed away in 2013. Shelley Lorenzen represents Brown
in this litigation as the executor of his estate.
IN RE TAGGART 11
Taggart filed a notice of appeal challenging the BAP’s
decision to reverse the bankruptcy court’s contempt findings
against the Creditors. The Creditors filed a notice of cross-
appeal challenging the district court’s ruling that Taggart had
not returned to the fray in the state court litigation.
I
We begin with Taggart’s appeal, in which he argues that
the BAP committed reversible error when it held that the
Creditors could not be held in contempt because they did not
knowingly violate the discharge injunction. A discharge
under Chapter 7 of the bankruptcy code “discharges the
debtor from all debts that arose before the date of the”
bankruptcy petition. 11 U.S.C. § 727(b). Once issued, the
discharge “operates as an injunction against the
commencement or continuation of an action . . . to collect,
recover or offset any such debt as a personal liability of the
debtor.” 11 U.S.C. § 524(a)(2). A bankruptcy court may
enforce the discharge injunction by holding a party in
contempt for knowingly violating the discharge. In re Zilog,
Inc., 450 F.3d 996, 1007 (9th Cir. 2006).
In this case, after the district court concluded that
Taggart had not “returned to the fray,” it remanded the case
to the bankruptcy court for a determination of whether the
Creditors should be held in contempt. The bankruptcy court
determined that the Creditors were aware of the discharge
order, but proceeded with their efforts to recover attorneys’
fees from Taggart. The bankruptcy court concluded that it
was irrelevant whether the Creditors held a subjective good
faith belief that the discharge injunction did not apply to their
claim. As a result, the bankruptcy court held that the
Creditors had committed a knowing violation of the
discharge injunction and it held them in contempt.
12 IN RE TAGGART
On appeal, the BAP reversed. The BAP concluded that
the Creditors had a subjective good faith belief that their
claim was exempt from the discharge injunction. In light of
this good faith belief, the BAP held that the Creditors did not
“knowingly” violate the discharge injunction, even though
an actual violation had occurred.
We review the BAP’s decisions de novo. In re
Filtercorp, Inc., 163 F.3d 570, 576 (9th Cir. 1998). The
bankruptcy court’s decision to impose contempt sanctions is
reviewed for an abuse of discretion. In re Dyer, 322 F.3d
1178, 1191 (9th Cir. 2003). A bankruptcy court abuses its
discretion if its decision is based on an incorrect legal rule,
or if its “application of the correct legal standard was
(1) ‘illogical,’ (2) ‘implausible,’ or (3) without ‘support in
inferences that may be drawn from the facts in the record.’”
United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir.
2009) (quoting Anderson v. City of Bessemer, 470 U.S. 564,
577 (1985)).
“The standard for finding a party in civil contempt is well
settled: The moving party has the burden of showing by clear
and convincing evidence that the contemnors violated a
specific and definite order of the court. The burden then
shifts to the contemnors to demonstrate why they were
unable to comply.” In re Bennett, 298 F.3d 1059, 1069 (9th
Cir. 2002) (quoting F.T.C. v. Affordable Media, 179 F.3d
1228, 1239 (9th Cir.1999)). As noted above, a bankruptcy
court may hold a party in contempt for knowingly violating
the discharge injunction. Zilog, 450 F.3d at 1007. We have
adopted a two-part test for determining the propriety of a
contempt sanction in the context of a discharge injunction:
“[T]o justify sanctions, the movant must prove that the
creditor (1) knew the discharge injunction was applicable
IN RE TAGGART 13
and (2) intended the actions which violated the injunction.”
Bennett, 298 F.3d at 1069.
Only the first prong of the test is at issue here. To satisfy
the first prong, knowledge of the applicability of the
injunction must be proved as a matter of fact and may not be
inferred simply because the creditor knew of the bankruptcy
proceeding. Zilog, 450 F.3d at 1007–08; see also Dyer,
322 F.3d at 1191–92 (rejecting an attempt to infer
knowledge of the automatic stay based on knowledge of the
bankruptcy proceedings in the context of a contempt
ruling). 4 Additionally, the creditor’s good faith belief that
the discharge injunction does not apply to the creditor’s
claim precludes a finding of contempt, even if the creditor’s
belief is unreasonable. Zilog, 450 F.3d at 1009 n.14 (“To the
extent that the deficient notices [from the bankruptcy court
and opposing counsel] led the [creditors] to believe, even
unreasonably, that the discharge injunction did not apply to
their claims because they were not affected by the
bankruptcy, this would preclude a finding of willfulness.”).
In this case, the bankruptcy court abused its discretion by
concluding that the Creditors knowingly violated the
discharge injunction. Specifically, the bankruptcy court
abused its discretion by applying an incorrect rule of law.
See Hinkson, 585 F.3d at 1262. The bankruptcy court held
that a good faith belief that the discharge injunction was
4
Although Dyer dealt with a violation of the automatic stay, rather
than a violation of the discharge injunction, the sanctions at issue were
not imposed under the bankruptcy code provision that specifically allows
sanctions for a violation of the automatic stay, 11 U.S.C. § 362(h). Dyer,
322 F.3d at 1189. Rather, sanctions were imposed under the bankruptcy
court’s 11 U.S.C. § 105(a) contempt authority, thereby invoking the
standard that applies when there is a violation of the discharge
injunction. Id.
14 IN RE TAGGART
inapplicable to the Creditors’ claims was irrelevant for
purposes of determining whether there was a “knowing”
violation of the discharge injunction. This holding conflicts
with Zilog, where we stated that even an unreasonable belief
that the discharge injunction did not apply to a creditor’s
claims would preclude a finding of contempt. 450 F.3d at
1009 n.14.
It is true, as Taggart points out, that language from our
prior opinions in Bennett and Dyer appears to be somewhat
in tension with Zilog. 5 However, neither Bennett nor Dyer
held that a creditor’s subjective good faith belief that the
discharge injunction is inapplicable is irrelevant to the
contempt analysis. In fact, Bennett expressly states that the
creditor must know that the discharge injunction is
“applicable” to the creditor’s claims, and Dyer cited that
holding with approval. Bennett, 298 F.3d at 1069; Dyer,
322 F.3d at 1192. Regardless, Zilog’s statement of the law
is clear, directly addresses the question at issue in here, and
is binding on this court.
In this case, as the BAP found, the Creditors possessed a
good faith belief that the discharge injunction did not apply
to their claims based on their contention that Taggart had
“returned to the fray,” and Taggart does not contend
otherwise. Much like the creditors in Zilog relied on
statements by the debtor’s counsel and the bankruptcy court
in concluding that their claims were not impacted by the
discharge injunction, the Creditors relied on the state court’s
5
Taggart specifically highlights language from Dyer, which states:
“In determining whether the contemnor violated the stay, the focus ‘is
not on the subjective beliefs or intent of the contemnors in complying
with the order, but whether in fact their conduct complied with the order
at issue.’” 322 F.3d at 1191 (quoting In re Hardy, 97 F.3d 1384, 1390
(11th Cir. 1996)).
IN RE TAGGART 15
judgment that the discharge injunction did not apply to their
claim for post-petition attorneys’ fees. Although the
Creditors—like the creditors in Zilog—were ultimately
incorrect, their good faith belief, even if unreasonable,
insulated them from a finding of contempt. Zilog, 450 F.3d
at 1009 n.14. As a result, the BAP did not err when it
reversed the contempt sanctions entered by the bankruptcy
court against the Creditors.
II
Because we have determined that the Creditors cannot
be held in contempt for any alleged violation of the discharge
injunction, we need not reach the arguments raised in the
Creditors’ cross-appeal regarding the district court’s holding
that the Creditors violated the discharge injunction by
seeking an attorneys’ fee award in the state court litigation. 6
Even if the Creditors did violate the discharge injunction—
and we express no opinion as to whether they did or did
not—they cannot be held in contempt for that alleged
violation. As discussed above, they acted pursuant to their
good faith belief that, due to Taggart’s “return to the fray,”
the discharge injunction did not apply to their claims. As a
6
After the district court’s decision in this case, but before the parties
completed their briefing in our court, another Ninth Circuit panel issued
an opinion in In re Castellino Villas, A. K. F. LLC, 836 F.3d 1028, 1034
(9th Cir. 2016). Lorenzen’s briefing to this court recognized the
Castellino Villas opinion and noted that, in Lorenzen’s view, Castellino
Villas commands resolution of whether Creditors violated the discharge
against the Creditors. At the time of briefing in this case, Castellino
Villas had been decided, but could have been reheard by an en banc panel
of this court or overturned or modified by the Supreme Court. Lorenzen
requested that we deem her cross-appeal withdrawn if Castellino Villas
was not overturned or modified. Because Castellino Villas has neither
been overturned nor modified, we grant Lorenzen’s request to withdraw
her cross-appeal. Therefore, we do not address it.
16 IN RE TAGGART
result, we decline to reach the issues raised by the Creditors’
Cross-Appeal.
III
In light of the above, we AFFIRM the BAP’s opinion
reversing the bankruptcy court’s order entering contempt
sanctions against the Creditors.