Applying Zilog – Strict Liability Standard for Violation of Discharge Injunction
12/1/2015
First published in the Oregon State Bar Debtor-Creditor Newsletter Vol. XXXIV, No. 1In re Taggart, 522 BR 627 (Bankr D Or 2014)
Debtor Bradley Taggart was the managing member of the Sherwood Park Business Center, LLC (the LLC). The LLC sued Taggart asserting breach of fiduciary duty, expulsion, breach of contract, attorney’s fees, and declaratory relief. On the eve of trial, Taggart filed for bankruptcy relief under chapter 7. After the debtor’s bankruptcy had been completed and discharge entered, the remaining LLC members resumed litigation to expel him from the LLC and unwind a prior transfer of his LLC interest. The state court agreed, expelled the debtor, held the transfer null and void, and gave the remaining members the right to buy out the debtor’s interest. The remaining members then sought and obtained an attorney fee as an offset against the purchase price (the Supplemental Judgment). The debtor reopened his bankruptcy and filed a motion for contempt against the members and their attorney (collectively the defendants) for violating the discharge injunction.
The state court had determined that the debtor “returned to the fray” within the meaning of In re Ybarra, 424 F3d 1018 (9th Cir 2005), and thus entry of the Supplemental Judgment did not violate the discharge injunction. In Ybarra, the court explained that a debtor may be liable for attorney fees incurred prosecuting pre-petition claims if “the debtor has taken affirmative post-petition action to litigate a prepetition claim and has thereby risked the liability of these litigation expenses.” Id. at 1026. The bankruptcy court adopted the state court’s determination. The debtor appealed and the district court reversed.
On remand, the bankruptcy court analyzed whether the above-described actions violated the discharge injunction by applying the two-prong test set forth in In re Zilog, Inc., 450 F3d 966, 1007 (9th Cir 2006). Specifically, the court considered whether the defendants (1) knew that the discharge injunction applied, and (2) intended the actions that violated the discharge injunction. The defendants argued that the alleged violation was not willful because they had a good faith belief that the discharge injunction did not apply in the Supplemental Judgment proceedings based on the state court’s determination. Discussing the origins of the Zilog test, the court rejected that argument and concluded that a strict liability standard applies. If the defendants had notice of the discharge injunction, they knew it was “invoked” or “applied” in the action. Thus, the first prong of Zilog is satisfied. The defendants clearly intended the actions they took, so the second prong was also satisfied. The court concluded that the defendants willfully violated the discharge injunction.
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