$9.5 Million Chapter 11 Plan Injunction Violation Contempt Order follows Taggart v. Lorenzen, 139 S. Ct. 1795, 1799 (2019)
Seventh Circuit Upholds $9.5 Million in Sanctions for Violating a Plan Injunction
The Seventh Circuit upheld Bankruptcy Judge Timothy A. Barnes of Chicago and the $9.5 million in damages he imposed for “a knowing, intentional violation of the plan order” that the creditor had no “objectively reasonable basis to pursue.” This decision is a very clear message to overly aggressive creditors–the risk of pursuing claims with no “objectively reasonable basis” is high and expensive.
The decision by Bankruptcy Judge Barnes and the affirmance by the Seventh Circuit show it’s not good litigation strategy to violate an injunction in hopes of coercing the protected party to settle.
Creditor Violates a Plan Injunction
Before bankruptcy, a bonding company had issued bonds in favor of municipalities to secure the completion of residential projects being built by the debtor. The debtor indemnified the bonding company were it to be held liable on the bonds.
The debtor confirmed a liquidating chapter 11 plan and sold the development rights to a buyer. The development rights went to the buyer free and clear of all liens, claims and interests.
The bonding company filed a claim and voted in favor of the plan. The plan and the confirmation order contained injunctions prohibiting those who voted for the plan from pursuing claims.
Municipalities sued the bonding company for failure to complete the project. After confirmation, the bonding company sued the buyer that had purchased the debtor’s development rights free and clear. The bonding company reasoned that the buyer somehow became liable on the debtor’s discharged indemnification obligations, even though the development rights had been sold free and clear.
The purchaser filed a motion in bankruptcy court asking Judge Barnes to hold the bonding company in contempt of the plan and the confirmation order.
The Two Opinions
Bankruptcy Judge Barnes found the bonding company in contempt. In a second opinion, he imposed a sanction of more than $9.5 million in actual damages.
While the appeal was pending from the two orders, the Supreme Court handed down Taggart v. Lorenzen, 139 S. Ct. 1795, 1799 (2019), which held that a court “may impose civil contempt sanctions [for violating the discharge injunction] when there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.”
The district court remanded for Judge Barnes to decide whether a finding of contempt was proper under Taggart.
The Record Satisfied Taggart
On remand, Bankruptcy Judge Barnes said that the record was sufficient to decide whether the Taggart standard had been satisfied. Regarding liability, Judge Barnes said that the bonding company had “repeatedly and knowingly violated the terms” of the injunction in the plan. He also said that the bonding company “pursued claims that it knew were released on theories where it knew the law was settled against it.” The bonding company’s actions, he said, “unequivocally violate the injunction in the Plan and thus the court’s Confirmation Order.”
Bankruptcy Judge Barnes stuck to his guns, reinstated his original contempt findings and again imposed $9.5 million in sanctions against the bonding company. In re Kimball Hill Inc., 620 B.R. 894 (Bankr. N.D. Ill. Sept. 30, 2020).
The district court affirmed. The bonding company appealed again.
Jurisdiction
Although the bankruptcy court was enforcing its own confirmation order, the bonding company contended in the Seventh Circuit that the bankruptcy court lacked jurisdiction.
Circuit Judge Michael Y. Scudder made short shrift of the jurisdictional argument in his opinion on March 3. Finding jurisdiction, he said it was a “textbook example” of where “the bankruptcy court can interpret its own plan confirmation order to decide whether [the bonding company’s] claim against [the buyer] is one extinguished by the [confirmation] order.”
The Merits
Judge Scudder upheld the decision by Bankruptcy Judge Barnes that Taggart had been satisfied. The buyer, he said, “brought evidence of Fidelity’s ‘record of continuing and persistent violations’ of the plan confirmation order,” and the “bankruptcy court understood and applied Taggart’s teachings.”
More particularly, Judge Scudder said that the bonding company “ignored the confirmation order, which, by its terms, extinguished any rights to recover those liabilities outside of the bankruptcy proceedings.” The bonding company’s “contentions to the contrary border on frivolous,” he said, because the plan released the buyer. Judge Scudder affirmed.
Fidelity & Deposit Co. of Maryland v. TRG Venture Two LLC (In re Kimball Hill Inc.), 22-1724 (7th Cir. March 3, 2023).
