Amicus Curiae Brief — Taggart v. Lorenzen, 139 S. Ct. 782 (2019) (No. 18-489)

No. 18-489

|n the Supreme Court of the United States

BRADLEY WESTON TAGGART,

Petitioner,

Vv.

SHELLEY A. LORENZEN, et al.,

Respondents.

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR THE STATES OF CALIFORNIA,

ALASKA, COLORADO, CONNECTICUT, FLORIDA, HAWAI'I,

IDAHO, ILLINOIS, INDIANA, IOWA, KANSAS, MAINE,

MARYLAND, MICHIGAN, MINNESOTA, NEBRASKA, NORTH

DAKOTA, OHIO, OREGON, PENNSYLVANIA, SOUTH

DAKOTA, TENNESSEE, UTAH, VERMONT, VIRGINIA,

WASHINGTON, AND THE DISTRICT OF COLUMBIA

AS AMICI CURIAE IN SUPPORT OF RESPONDENTS

XAVIER BECERRA MOLLY K. MOSLEY

Attorney General of California Sup. Deputy Atty. General

EDWARD C. DUMONT ROBERT E. ASPERGER

Solicitor General CRAIG D. Rust

JANILL L. RICHARDS KARLI EISENBERG*

Principal Deputy Sol. General Deputy Attorneys General

DIANE S. SHAW STATE OF CALIFORNIA

Senior Assistant Atty. General DEPARTMENT OF JUSTICE

1300 I Street, Suite 125

(Additional counsel listed on Sacramento, CA 94244-2550

signature page) (916) 210-7913

Karli. Eisenberg@doj.ca.gov

*Counsel of Record

March 28, 2019

i

QUESTION PRESENTED

Whether, under the Bankruptcy Code, a creditor's

good-faith belief that the discharge injunction does not

apply precludes a finding of civil contempt.

‘3

TABLE OF CONTENTS

Page

ee ni ccenacinnridsomsipalanbaninds 1

Introduction and Summary of Argument................. 2

Ba sricsrciuribaedinatuianicdtimisensiidieinntuningescninniiiies 4

|. Whether an obligation has been discha

is often unclear and subject to reasonable dis-

pute—particularly for the types of

obligations owed to the government .................. 4

ll. A strict liability standard would <<

chill the use of state taxing and

et and finds no support in t

I a inlarmninntsonenenle 12

Ill. A standard of objective reasonableness

accounts for the interests of both debtors

and creditors, consistent with the Code........... 17

i eee 23

ill

TABLE OF AUTHORITIES

CASES

Bull v. United States

Be ye SIE ictechicirnctiesiciediiiohiniamnionintioniabe

California Artificial Stone Paving Co. v.

Molitor

ee ee ST I ccintcenentcenesahenccscntsnencioces

First State Bank of Roscoe v. Stabler

914 F.3d 1129 (8th Cir. 2019).....................

Hawkins v. Franchise Tax Bd. of

California

769 F.3d 662 (9th Cir. 2014) 0000.0...

In re Beback

2013 WL 5156706

(Bankr. M.D. Fla. Sept. 12, 2013)...............

In re Brewer

Adv. No. 19-01070-MER

I,

In re Brown

Adv. No. 17-3016

Be ene

In re Browne

358 B.R. 139 (Bankr. D. N.J. 2006)............

In re Camilli

94 F.3d 1330 (9th Cir. 1996)...............0....

Page

iv

TABLE OF AUTHORITIES

(continued)

Page

In re Chateaugay Corp.

Fs. fs | Ree ees 11

In re Damm

2001 WL 34065016

I I I 14

In re Ehrig

308 B.R. 542

nO, I 9

In re Hassanally

208 B.R. 46 (B.A.P. 9th Cir. 1997).......000000000 oe. 12

In re Hayes

2009 WL 8466788

FRB eS 0 eee 9

In re Jensen

995 F.2d 925 (9th Cir. 1993).................... 11, 12, 14

In re Jones

of FT | renee 8

In re Kuhar

391 B.R. 733 (Bankr. E.D. Pa. 2008)..................... 9

In re Marriage of Rossin

91 Cal. Rptr. 3d 427

I , 6

In re Martin

542 B.R. 479 (B.A.P. 9th Cir. 2015)................00000. 9

v

TABLE OF AUTHORITIES

(continued)

In re Robinson

228 B.R. 75 (Bankr. E.D.N.Y. 1998)..........

In re Saint Catherine Hosp. of Ind., LLC

800 F.3d 312 (7th Cir. 2015)...

In re Schmiedel

236 B.R. 393 (E.D. Wis. 1999)......00.00.........

In re Watts

Pa: © CI tes cia nticccnstnihisianstiiesicla sinc

Latino Officers Ass'n City of New York,

Inc. v. City of New York

558 F.3d 159 (2nd Cir. 2009) .....00000000000.....

Maness v. Meyers

SED DD, GE TO os eecececccerscscesesserscovesnsse

NLRB v. Express Pub. Co.

See Re PD IE sasicsnesisscesisccnsesteasesecsensetse

Ohio v. Kovacs

OU I i

Swift v. United States

BEF SAA, CEU QUOD vxnccsscsccessccssessesseneeronsooee

United States v. Stanley

595 F. App’x 314 (5th Cir. 2014)................

vi

TABLE OF AUTHORITIES

(continued)

Page

Vertex Distrib., Inc. v. Falcon Foam

Plastics, Inc.

689 F.2d 885 (9th Cir. 1982)............0...00000... 20, 21

Young v. United States

I a i ceeeeesamiiias &

Statutes

11 U.S.C.

aac ten nae latabaaitie 11

ES EEE SESE NIT wee R aay Se ey EE 8

TTI ncaa sdchantsdyiteiniiepecanisieindanieneteaondianedanl 8

SE ee a ae eee a RRC es 5, 13, 19

SIT lini cnn cea vcesniacsnnlieipeniatisnanievieanenaniaaasnilaiaaaas 5,8

Sp ITIIUIT snc ends deeictibipseiseinosianeaadsaidigtabs 5, 16

ins, au sin ates ts cipaiblaniiadenianantaeds 8

ST csi oso sich centaahidecaneenineimeisipeasinantll 8,9

niet decdciltsagaiednptedianianmeabiabeliaiiie 10

8 SRE eee eee 16, 19

STITT ssc crriceniegtitguctaitietectanveanttentaeduidipuenebt 17

iia iincelincks al enipaiidueeiinnaliameibatsd 5, 10, 16

SI acini sas acide havea ouigatenienbeseulaniaeanl 5, 10

SETI ininsiicsleccrshnepdicinekhdetiidiaianubovedabaiebsesediiiianiniall 16

Tc ca elias cemtageaimnsiatiel 5, 10

SIT hina icccnnecasciicceéecneindbiseiabeedidizdvonianill 5, 10

I tein icon bieremendiammmansnennianinninitiiis 5, 10

ie IIE os. cacsénesncosocsanisensonsekaennentcutesens 5, 10

§ 5623(a)(19)(B) (iii) ......... cece eeeeeeeeeeeeeseeeeeeeeeeee 5, 10

III (iii ceincertints cenasiseapinmsnapaeiatassinnibeuias 16

Vil

TABLE OF AUTHORITIES

(continued)

Page

ORs ds conkseinehbrincincuciesaoubatiouusannickie 19

Be -- ccvcsvadinsiies sells ein tndcdeernendonionsdiaeinictvevesnmee 4

SPI ici cnsias sc acctuunsods sundendssanttetpenesitipSieidessadeds 6

Be I ics cist marnasadbviceseudernigliceeeseabcdaenjainbeaashaselenaa 5

28 U.S.C.

IER SRE Sa atin mnie ior 17, 18

RULES

Federal Rules of Bankuptcy Procedure

BI IE cic iae vicenicasiin cxaesncacecipseteobenvainbiasacatiiiedaiideniodenad 17

Rule 4007 original advisory committee notes..... 18

RE RARER Roe PPM Pi RS re SNM 22

EE ARS ERR LT ee ERR SS RS 22

EIR IRIE SRS et ROO ere vee Posy inom 15

REET T SPT aay OI EA en Re A SA 15

GEESE STE SESE eet oe Sena a EO TRS 16

ICES TNS CR RRS Fe” CI: RS A eh ore A 22

Federal Rules of Civil Procedure

Rule 8 advisory committee’s note

II sr schiicaderconibccesacuisternrcenstenssanse 18

OTHER AUTHORITIES

Cal. Dep’t of Tax & Fee Admin., Bank-

ruptcy — Frequently Asked Questions

(FAQs), https://www.cdtfa.ca.gov

Negal/bankruptcy-fag. htm ..............0...0 cccceeceeeeeeee 10

vill

TABLE OF AUTHORITIES

(continued)

Page

Cal. Dep’t of Tax & Fee Admin.,

Compliance Policy & Proc. Manual

§ 740.150,

https://www.cdtfa.ca.gov/taxes-and-

fees/manuals/cpm-07 .pdfy............ cece ccee cee ee eee e ees 10

Cal. Dep’t of Toxic Substances Control,

2016 Programs and

Accomplishments Report (2017),

https://www.dtsc.ca.gov/Information

Resources/upload/DTSC-2016-

Accomplishments-Report.pdf............................... 14

Cal. Franchise Tax Board, Do I Need to

File?,

https://www.ftb.ca.gov/individuals/fil

eRtn/index.shtml?WT.mc_id=Forms_

Sidebar_Completing Requirement ....................... 9

Official Form 318, Order of Discharge,

https://www.uscourts.gov/sites/defaul

a ceoieaensensentadubinnsin 5

Robert E. Ginsberg et al., Ginsberg &

Martin on Bankruptcy § 11.06{A]

in RTE Matin 2 ESR nd 16

ix

TABLE OF AUTHORITIES

(continued)

Page

United States Courts, Bankruptcy Cases

Commenced, Terminated and

Pending (period ending Dec. 31,

2010), https://www.uscourts.

gov/sites/default/files/statistics_im-

RE a OO ee 7

United States Courts, Bankruptcy Cases

Commenced, Terminated and

Pending (period ending Dec. 31,

2018), https://www.uscourts.

gov/sites/default/files/data_tables/bf_

BRIER SES A Ty EN EO 7

United States Courts, Bankruptcy Court

Miscellaneous Fee Schedule,

https://www.uscourts.gov/services-

forms/fees/bankruptcy-court-

miscellaneous-fee-schedule............................0000++ 15

United States Courts, Table BAPCPA

1X — Bankruptcy Abuse Prevention

and Consumer Protection Act

(BAPCPA) (period ending Dec. 31,

2017), https://www.uscourts.gov/

sites/default/files/data_tables/bapcpa

Ek EE Hl cdcndistienssiencionbiceenateesiiatccgeinesiniones 7

l

INTERESTS OF AMICI STATES

States routinely interact with large numbers of in-

dividuals and businesses in carrying out their taxing

and regulatory responsibilities. For example, States

enforce injunctive orders, and they collect overdue per-

mit and license fees, costs for clean up of contaminated

sites, and income, sales, use, and property taxes from

a wide variety of entities. Tax collection in particular

is the “lifeblood of government[.]” Bull v. United

States, 295 U.S. 247, 259 (1935).

The amici States have a significant interest in pro-

tecting their sovereign power to regulate and tax, con-

sistent with legitimate constraints imposed by the

Bankruptcy Code. Consistent with their strong inter-

est in consumer protection, the States respect the im-

portant public purposes served by a bankruptcy

discharge, which functions as an injunction against

actions to collect debts within the scope of the dis-

charge and thus provides debtors with a fresh

start. At the same time, not all obligations are debts,

and not all debts are discharged in bankruptcy. Debts

expressly excepted from discharge include many tax

obligations, a type of debt that is uniquely owed to gov-

ernments. And in many cases, legal and factual com-

plexities can lead to reasonable differences of opinion

about whether a discharge applies to specific debts, or

whether a particular obligation is even a debt at all.

It is of substantial importance to the States that

bankruptcy courts apply the correct standard in deter-

mining whether a creditor’s actions are subject to civil

contempt sanctions for violation of a discharge. The

standard should account for the interests of both debt-

ors and creditors as reflected in the Bankruptcy Code.

It should not chill or penalize States’ reasonable post-

2

discharge regulatory and collection efforts, or effec-

tively expand discharge protections beyond what the

Code provides.

INTRODUCTION AND

SUMMARY OF ARGUMENT

Whether a bankruptcy discharge applies to a par-

ticular obligation is not always clear. Among other

things, the effect of certain statutory exceptions from

discharge may depend on the application of complex

law to disputed facts. Further, it may be unclear

whether an obligation constitutes a claim relating to a

debt under the Bankruptcy Code and, if so, whether

the timing of that claim brings it within the scope of

the discharge. Other circumstances, such as the effect

of state community property laws, may further com-

plicate matters.

The challenges facing creditors seeking to interpret

and apply a discharge are particularly acute for States,

whose taxing and regulatory responsibilities intersect

with thousands of bankruptcies each year.! While

States undertake reasonable efforts to comply with

the terms of bankruptcy discharges, in many cases

reasonable minds may differ about whether an obliga-

tion, including a debt, has been discharged. In some

number of cases, reviewing courts will eventually hold

that States have attempted to collect discharged debts.

' For ease of reference, the States in this brief use “creditor”

broadly to include state regulatory agencies holding obligations

that are not traditional claims for monies owed, such as those

relating to cleanup of contaminated sites. In some instances,

such obligations may be debts that may be discharged in bank-

ruptcy. See discussion at p. 11, infra.

3

If, as petitioner argues, a strict liability standard

applies to violation of bankruptcy discharges, the pro-

spect of significant sanctions, including attorneys’ fees,

will unduly chill creditors in their efforts to collect

debts and take other actions that Congress did not in-

tend to be affected by a discharge. This result would

be particularly troubling for States, impairing the ex-

ercise of core sovereign prerogatives related to matters

such as tax collection and environmental protection.

Petitioner’s proposed solution—requiring creditors

to file actions in bankruptcy court seeking an advance

determination of whether a specific obligation, has

been discharged—is infeasible, particularly for States,

and would cause States to write-off debts that, while

not discharged, would not be cost-effective to collect

given that additional expense. That result is not re-

quired by, or even consistent with, the Bankruptcy

Code.

In contrast, a standard that protects creditors from

contempt sanctions where their actions are objectively

reasonable comports with the text and structure of the

Code. Among other things, a standard of objective rea-

sonableness: is consistent with Congress’s decision to

make only a few of the many exceptions from dis-

charge subject to an express advance-determination

requirement; respects the right of creditors to seek a

determination with respect to discharge in state court,

as part of state collection or enforcement actions; and

is consistent with traditional civil contempt standards,

as applied to technical court orders involving compli-

cated law and facts. The objective reasonableness

standard presents no obstacle to sanctioning preda-

tory debt collection practices, or limits to liability for

such practices. Such a standard properly protects

both debtors’ and creditors’ interests under the Code.

4

In this case, respondents’ view that attorneys’ fees

incurred post-bankruptcy were not discharged was ob-

jectively reasonable. Accordingly, the judgment below

should be affirmed.

ARGUMENT

I. WHETHER AN OBLIGATION HAS BEEN Dis-

CHARGED IS OFTEN UNCLEAR AND SUBJECT TO

REASONABLE DISPUTE— PARTICULARLY FOR THE

TYPES OF OBLIGATIONS OWED TO THE GOVERN-

MENT

Petitioner emphasizes the automatic, injunctive ef-

fect of a bankruptcy discharge—noting that it serves

as a total prohibition on the collection of discharged

debts and provides the debtor with a “fresh start.”

Pet. Br. 4; see 11 U.S.C. § 524(a)(2). But a discharge

has that effect only for debts that are within its scope.

By congressional design, not all obligations are debts,

and not all debts are subject to discharge.

The language of a typical, summary discharge or-

der is generally of little assistance in determining

whether it prohibits collection of a particular debt.

The two-page form Chapter 7 discharge order contains

an “Explanation of Bankruptcy Discharge” that pro-

vides at the most general level that: “{c]reditors can-

not collect discharged debts”; “[m]ost debts are

discharged”; but “[s]ome debts are not discharged,” in-

cluding “debts for most taxes,” “debts for most fines,

penalties, forfeitures, or criminal restitution obliga-

tions,” “debts that are domestic support obligations,”

“debts for most student loans,” and “some debts which

5

the debtors did not properly list.” The form further

states that “[t]his is only a general summary of the

bankruptcy discharge ... .”

Creditors seeking to determine whether a particu-

lar obligation has been discharged must interpret the

applicable bankruptcy provisions and apply the law to

the relevant facts. Section 523 of the Code sets out 19

exceptions from discharge, some of which are complex

and conditional, and all but three of which are self-ef-

fectuating. 11 U.S.C. § 523(a)(1)-(19). Congress pro-

vided a number of discharge exceptions that apply to

matters of critical, and in some cases unique, im-

portance to government entities, including the States.

These include’ taxes (§523(a)(1)); penalties

(§ 523(a)(7), (a)(14A));_ restitution (§ 523(a)(13),

(a)(19)(B)(iii)); other sanctions imposed in criminal

proceedings (§ 523(a)(4), (a)(7), (a)(13)); domestic sup-

port obligations (which may sometimes be owed to a

government agency) (§ 523(a)(5)); and penalties im-

posed for violations oof securities laws

(§ 523(a)(19)(A)Gi)). If an exception does not apply, a

creditor must then evaluate whether the relief it seeks

constitutes a “claim” under the Bankruptcy Code, and,

if so, whether that claim “arose” before bankruptcy

and therefore is discharged, or instead after bank-

ruptcy, in which case the claim remains due. Ohio v.

Kovacs, 469 U.S. 274, 278 (1985); 11 U.S.C. § 727(b).

State law may add an additional layer of legal com-

plication. Community property law, for example, can

create unpredictability about the scope of discharge

2 Official Form 318, Order of Discharge, https://www.uscourts.

gov/sites/default/files/form_b318_0.pdf.

6

orders, because creditors (including States) are au-

thorized to pursue the separate property of a debtor's

non-filing spouse. See 11 U.S.C. § 541(a)(2) (bank-

ruptcy estate includes non-filing spouse’s interest in

community property, subject to additional conditions).

Distinguishing between community property and sep-

arate property depends on complex standards set by

state law as applied to particular factual circum-

stances. See, e.g., In re Marriage of Rossin, 91 Cal.

Rptr. 3d 427, 431, 433 (Cal. Ct. App. 2009) discussing

various factors relevant to property characterization

under California community property law and varying

standards of appellate review); see also In re

Schmiedel, 236 B.R. 393, 400 (E.D. Wis. 1999) (declin-

ing to award sanctions for creditor’s alleged violation

of discharge because “the complexities of the interplay

between community property rules, state judgment

lien statutes and bankruptcy law make [creditors

hesitancy to release their rights understandable’).

Disputes over the scope of discharge orders, includ-

ing whether one of the exceptions applies, are thus of-

ten complex, and their ultimate resolution by the

courts can be difficult to predict.? The challenges

these circumstances present for those seeking to com-

ply with discharge orders (and avoid contempt) are

‘In this case, for example, two different judges (a state court

judge and the bankruptcy judge, an expert in this field) deter-

mined that the creditors had not violated the terms of the debtor's

discharge because the debtor had “returned to the fray.” Pet.

App. 6a-8a. According to petitioner, the creditors should none-

theless be held in contempt and liable for well over $100,000 be-

cause the reviewing court ultimately disagreed. Pet. Br. 6 n.1, 7.

7

magnified for States, given the large number of bank-

ruptcy filings and the volume and diversity of States’

potential claims. In recent years, the number of new

bankruptcy petitions filed across the country has

ranged from nearly 800,000 to over 1.5 million. ‘

States and their agencies must assess their interests,

if any, in each of these cases (assuming they receive

notice). A larger State, for example, may have unpaid

tax claims in tens of thousands of bankruptcy cases

per year, making it infeasible to engage in detailed

fact-finding and investigation.° Smaller States face

proportionally similar challenges. And the amount of

debt at issue is substantial: In 2017, individual debt-

ors reported approximately $10 billion in non-dis-

chargeable debt, or just under 10 percent of their total

liabilities.° (As these figures are debtor-reported, the

true amount of non-dischargeable debt may be even

higher.)

‘ United States Courts, Bankruptcy Cases Commenced, Termi-

nated and Pending (period ending Dec. 31, 2018),

https: //www.uscourts.gov/sites/default/files/data_tbles/bf_f_12

31.2018.pdf; (period ending Dec. 31, 2010), https://www.

uscourts.gov/sites/default/files/statistics_import_dir/1210_f pdf.

5’ More than 68,000 bankruptcy cases were filed in California

alone during 2018, and California state taxing authorities would

have had claims in a significant percentage of those cases. See

United States Courts, Bankruptcy Cases Commenced, Termi-

nated and Pending (period ending Dec. 31, 2018),

https://www.uscourts.gov/sites/default/files/data_tbles/

bf_f_1231.2018.pdf.

® United States Courts, Table BAPCPA 1X - Bankruptcy Abuse

Prevention and Consumer Protection Act (BAPCPA) (period end-

ing Dee 31, 2017), https://)www.uscourts.gov/sites/de-

fault/files/data_tables/bapcpa_1x_1231.2017. pdf (subtracting

total liabilities from total Net Scheduled Debt).

8

As the examples below illustrate, States and state

agencies often face significant challenges in determin-

ing whether obligations to governments fall within the

scope of a discharge.

State taxing authorities regularly rely on several

discharge exceptions that exclude certain state taxes

and fees from discharge, thereby protecting the public

fisc. See 11 U.S.C. § 523(a)(1). Some of the exceptions

might appear to be relatively clear, such as the excep-

tion for income or excise taxes for which the debtor

was required to file a return in the three years prior to

the bankruptcy. 11 U.S.C. § 507(a)(8)(A), (E); id.

§ 523(a)(1)(A). But factual and legal disputes can and

do occur even in this context. For example, state agen-

cies must often determine whether an amount owed

by a debtor is a tax that is nondischargeable, or in-

stead a fee that is subject to discharge. See, e.g., In re

Camilli, 94 F.3d 1330, 1331-1332 (9th Cir. 1996) (dis-

tinguishing between nondischargeable “excise taxes”

and dischargeable “fees”). Additionally, state agencies

must determine whether and for how long the three-

year “look-back” period is tolled because of a bank-

ruptcy stay. See, e.g., In re Jones, 657 F.3d 921, 923-

924 (9th Cir. 2011); Young v. United States, 535 U.S.

43, 46 (2002).

Other tax-related discharge exceptions are also far

from straightforward. One example is the exception

from discharge for tax liabilities “with respect to which

a return, or equivalent report or notice . . . was not

filed or given.” 11 U.S.C. § 523(a)(1)(B). In general,

under state laws, an individual debtor need not file a

personal tax return unless he or she receives a certain

9

minimum amount of income.? When no return is filed,

States must make estimates about income earned and

taxes due (if any) using the best information available,

such as any forms submitted to the State showing pay-

ments to the debtor. See, e.g., In re Hayes, 2009 WL

8466788, at *1 (B.A.P. 1st Cir. Aug. 3, 2009) (State re-

sorted to bank statements to determine whether

debtor had a filing requirement where debtor failed to

file returns); Jn re Ehrig, 308 B.R. 542, 550 (Bankr.

N.D. Okla. 2004) (IRS had to “devote[] resources to

gathering income information and filing a substitute

for a return” where debtor had failed to file his own

return).

Under a strict liability standard, application of this

exception would regularly present a significant risk

for States because, by definition, the exception oper-

ates where a State has imperfect information. While

a state agency may believe, based on the available in-

formation, that the debtor had an income tax filing re-

quirement, it may turn out that the debtor did not.

See, e.g. In re Hayes, 2009 WL 8466788, at *1 (factual

dispute over whether debtor had sufficient income to

trigger filing requirement); cf. In re Kuhar, 391 B.R.

733, 736 (Bankr. E.D. Pa. 2008) (dispute over whether

case should be dismissed as a result of debtor’s failure

to file return, where debtor contended she had no fil-

ing requirement). Questions also arise often as to

what constitutes a “return” for purposes of

§ 523(a)(1)(B). See, e.g., In re Martin, 542 B.R. 479,

483-491 (B.A.P. 9th Cir. 2015).

’ See, e.g., Cal. Franchise Tax Board, Do I Need to File?,

https://www.ftb.ca.gov/individuals/fileRtn/index.shtm!?WT.mc_

id=Forms_Sidebar_Completing_Requirement.

10

Another challenging exception applies to taxes

“with respect to which the debtor made a fraudulent

return or willfully attempted in any manner to evade

or defeat such tax.” 11 U.S.C. § 523(a)(1)(C). The facts

that the States rely on to demonstrate fraud will rou-

tinely be disputed, and it is impossible for a State to

predict with certainty how a reviewing court will ulti-

mately view the evidence. See, e.g., United States v.

Stanley, 595 F. App’x 314, 318-319 (5th Cir. 2014)

(whether debtor possesses “the requisite mental state”

under § 523(a)(1)(C) requires an analysis of “the total-

ity of the circumstances,” which can include a detailed

investigation of debtor’s financial history); Hawkins v.

Franchise Tax Bd. of California, 769 F.3d 662, 668-669

(9th Cir. 2014) (§ 523(a)(1)(C) requires specific intent

to commit fraud).

Similar interpretive challenges affect a wide vari-

ety of other state agencies holding debts that may fall

under an exception—such as child support obligations

(§ 523(a)(5)), criminal restitution (§ 523(a)(13),

(a)(19)(B)(iii)), penalties for violation of federal securi-

ties laws (§ 523(a)(19)(A)(i)), and penalties imposed for

abuse of other persons (§ 523(a)(4), (a)(7), (a)(13),

(a)(14A)).8 And disputes over whether these excep-

tions apply frequently lead to litigation. See, e.g., In-

diana v. Brown (In re Brown), Adv. No 17-3016

* Many state agencies—particularly those involved in taxation—

have sophisticated procedures in place to analyze whether dis-

charge exceptions apply, and to stop collections on liabilities that

have been discharged. See, e.g., Cal. Dep't of Tax & Fee Admin.,

Compliance Policy & Proc. Manual § 740.150,

https: //www.cdtfa.ca. gov/taxes-and-fees/manuals/cpm-07. pdf.

Cal. Dep't of Tax & Fee Admin., Bankruptcy — Frequently Asked

Questions (FAQs), https://www.cdtfa.ca.gov/legal/bankruptcy-

faq. htm.

11

(Bankr. N.D. Ind. 2017) (dispute regarding whether

penalty imposed for improperly receiving unemploy-

ment benefits is dischargeable).

Even determining whether an obligation owed to

a government is a bankruptcy “claim,” when that

claim arose, and thus whether the claim is within the

scope of a discharge can be difficult. 11 U.S.C. § 101(5)

(defining “claim”); cf. Ind. Family & Soc. Serv. Admin.

vu. Saint Catherine Hosp. of Ind., LLC, (In re Saint

Catherine Hosp. of Ind., LLC), 800 F.3d 312, 316-318

(7th Cir. 2015) (dispute over date on which State’s

claim relating to fee imposed on hospital arose). De-

termining claim status may be particularly complex in

cases involving contaminated sites and environmental

cleanup. See, e.g., In re Chateaugay Corp., 944 F.2d

997 (2d Cir. 1991) (order seeking to remedy ongoing

pollution not a claim). And questions about the rele-

vant date of a claim are especially common in the en-

vironmental arena. See, e.g., In re Jensen, 995 F.2d

925 (9th Cir. 1993) (per curiam).? In many situations,

a state environmental regulatory agency may be

aware of potential contamination, and may have be-

gun investigation and cleanup, making a precise de-

termination of when the State’s claim arose difficult.

See, e.g., id. (explaining the variety of approaches used

to discern when a claim for environmental response

costs arose). Courts have declined to draw bright

® See also, e.g., In re Browne, 358 B.R. 139, 145 (Bankr. D. N.J.

2006) (declining to impose sanctions on motor vehicle agency for

attempting to collect DUI surcharges for prepetition violations

where agency relied on “ample precedent stating that the date of

conviction was relevant to determining whether a claim arose

prepetition and, thus, was discharged”).

12

lines, and have described the intersection of environ-

mental laws and the Bankruptcy Code as “somewhat

messy,” making “conflict and confusion . . . almost in-

evitable.” Jd. at 927-928. To further complicate mat-

ters, the test for determining whether a state

environmental claim exists and when it arose varies

among the circuits. See, e.g., In re Hassanally, 208

B.R. 46, 51 (B.A.P. 9th Cir. 1997) (discussing different

tests applied in various jurisdictions).

Reasonable minds can and often do disagree on

whether a particular obligation is a debt that has been

discharged in bankruptcy. In those cases, no amount

of due diligence can preclude the possibility that a

court may later disagree with a State’s reasonable and

informed determination. Where a court does find a

creditor's action to be in violation of a discharge, it al-

ways has the power to require compliance going for-

ward, and to prevent collection of the debt. The

question in this case is whether and in what circum-

stances the creditor can be held in contempt and sub-

jected to sanctions.

Il. ASTRICT LIABILITY STANDARD WOULD IMPROP-

ERLY CHILL THE USE OF STATE TAXING AND Po-

LICE POWERS AND FINDS NO SUPPORT IN THE

BANKRUPTCY CODE

Holding creditors strictly liable for violating dis-

charge orders, as petitioner advocates (see Pet. Br. 11,

15-16), would improperly interfere with States’ core

sovereign prerogatives to tax and regulate.

Under a strict liability regime, even where a State

had a reasonable and well-supported position that an

obligation was not discharged, the State would be sub-

13

ject to automatic sanctions for its actions if a court ul-

timately held to the contrary. Sanctions to compen-

sate for attorneys’ fees can range into the hundreds of

thousands of dollars per case—as petitioner seeks

here. Even a successful defense of a State’s discharge

determination can cost States a substantial amount in

litigation costs and expenses. Under a strict liability

rule, States would likely often find that the economic

costs and risks of pursuing taxes and other legitimate

debts, believed in good faith and with sound basis to

be nondischarged, would greatly exceed the potential

benefits. The precise cost of a strict-liability rule is

difficult to estimate, but such a rule could certainly re-

sult in States writing off, in the aggregate, a substan-

tial amount in obligations to the public fisc that

Congress intended would remain collectable even af-

ter a bankruptcy discharge. See generally 11 U.S.C.

§ 523.

A strict liability standard would also chill enforce-

ment by state environmental protection agencies.

Where the status of an environmental obligation may

be subject to dispute, and the State has knowledge of

a discharge order involving a potentially responsible

party, the issuance of a simple letter detailing that

party's potential liability for environmental cleanup

could trigger sanctions. The mere threat of a contempt

action can be a serious deterrent to a state environ-

mental agency, as any such action would divert its

staff and resources away from its core mission.'” See,

'° The California Department of Toxic Substances Control, for ex-

ample, is responsible for assessing fees on entities that generate,

store, transport, or dispose of hazardous waste, and is responsible

for overseeing investigation and cleanup at hundreds of different

14

e.g., Brewer v. Ind. Dep't of Natural Res. (In Re

Brewer), Adv. No. 19-01070-MER (Bankr. D. Colo.

2019) (owner of oil wells arguing that bankruptcy dis-

charge invalidated entire settlement agreement with

the Indiana Department of Revenue, including non-

monetary obligations, such as agreement’s require-

ment to plug wells). A strict liability rule would make

it more expensive and risky for States to pursue non-

discharged environmental cleanup obligations under

federal and state environmental laws, and would re-

sult in polluters avoiding their fair share of the

cleanup costs at these sites. This is not what Congress

intended in enacting the Bankruptcy Code. See Jen-

sen, 995 F.2d at 928 (observing that objectives of envi-

ronmental cleanup laws and bankruptcy laws should

be reconciled if possible); see also In re Damm, 2001

WL 34065016, at *3-4 (Bankr. C.D. Ill. (2001) (fines

sought by state environmental agency are excepted

from discharge not to deprive debtor of fresh start, but

to “punish him for engaging in quasi-criminal conduct,

to uphold the dignity and authority of the court, and

to deter others from engaging in similar conduct”).

A strict liability approach to contempt would also

encourage debtors’ attorneys to seek sanctions in a

greater number of cases, even where a State’s view

that an obligation is not discharged is objectively rea-

sites. The Department's Brownfields Cleanup Program “oversees

restoration of approximately 1,700 sites in California that are in

different stages of investigation and cleanup. There are 98 sites

in California on the federal National Priorities List (NPL), under

the Superfund program.” Cal. Dep't of Toxic Substances Control,

2016 Programs and Accomplishments Report, p. 9 (2017),

https:/Awww.dtsc.ca. gov/InformationResources/upload/DTSC-

2016-Accomplishments-Report. pdf.

15

sonable. Such a rule could encourage potentially re-

sponsible parties and their counsel to adopt sharp lit-

igation tactics rather than working with government

authorities to correct a problem. See, e.g., In re Be-

back, 2013 WL 5156706, at *3 (Bankr. M.D. Fla. Sept.

12, 2013) (refusing to award fees for violation of dis-

charge order where doing so would encourage motions

brought for sole purpose of obtaining fees); In re Rob-

inson, 228 B.R. 75, 85 (Bankr. E.D.N.Y. 1998) (reduc-

ing fees awarded for violation of the automatic stay

under § 362(h) for same reason).

Petitioner argues that any party holding an obliga-

tion that might be covered by discharge should first

seek an advance determination on that issue from the

bankruptcy court, rather than simply proceeding with

collection or, where court intervention is necessary, di-

rectly filing an enforcement action in the normal fo-

rum. Pet. Br. 11. But that proposal would impose

substantial costs and burdens—particularly on States,

whose taxing and regulatory responsibilities intersect

with a large volume of bankruptcies.'' To obtain a

pre-collection ruling addressing discharge from the

bankruptcy court, a creditor must file an adversary

proceeding in the bankruptcy case, which is essen-

tially a new lawsuit, and pay a $350 filing fee. Fed. R.

Bankr. P. 7001(6), 7007.'2 States filing such actions

would be subject to discovery and associated costs.

'‘! The proposal would, of course, substantially burden the bank-

ruptcy courts with matters that are not currently litigated, or are

litigated elsewhere, consistent with the Bankruptcy Code.

!2 United States Courts, Bankruptcy Court Miscellaneous Fee

Schedule, _https://www.uscourts.gov/services-forms/fees/bank-

ruptcy-court-miscellaneous-fee-schedule.

16

Fed. R. Bankr. P. 7026. Where the debtor is not a res-

ident of the State, the State would often be required to

pay travel expenses and hire out-of-state counsel in

addition to normal litigation costs. Requiring a State

to proactively litigate every tax debt that might be

subject to a discharge would require a disproportion-

ate commitment of resources in relation to the poten-

tial recoveries. Again, States would likely write off a

significant number of non-discharged tax debts simply

because the amount involved in individual cases

would not warrant the additional cost of litigation.'’

And such forced pre-determination litigation similarly

would interfere with state environmental cost-recov-

ery and enforcement actions.

Petitioner's advance-determination proposal is,

moreover, contrary to Congress’s decision to make 16

of the 19 discharge exceptions self-effectuating. |“

Only three discharge exceptions require an advance

determination by the bankruptcy court to be effective.

See 11 U.S.C. § 523(a)(1)-(19) (listing the exceptions);

id. §523(c) (requiring that three exceptions—

§ 523(a)(2), (4), (6)—be asserted within a limited time

after the case is filed or they are forfeited); see also

'8 While petitioner objects that “innocent debtors” emerging from

bankruptcy should not have to “absorb the costs of creditor mis-

takes” (Pet. Br. 3), the Code contemplates that debtors will often

have obligations that are not extinguished. The substantial costs

to States that would result from petitioner's overbroad rule would

fall to state taxpayers—a result that is neither just nor consistent

with the Code.

'4 Congress has repeatedly added new exceptions to discharge,

the first in 1984, with 10 more added since 1990. Robert E. Gins-

berg et al., Ginsberg & Martin on Bankruptcy § 11.06[A] (5th ed.

2018).

17

Fed. R. Bankr. P. 4007.'° While a creditor may elect

to seek a discharge determination in bankruptcy court

on self-effectuating exceptions, 11 U.S.C. § 523(d),

nothing in the Code or the Rules requires that it do so.

Indeed, as discussed below, other courts have concur-

rent jurisdiction to resolve discharge disputes as they

arise—for example, in state-court enforcement ac-

tions. See 28 U.S.C. § 1334(b); see also p. 18, infra.

None of these adverse results serves the letter or

spirit of the Code.

Ill. ASTANDARD OF OBJECTIVE REASONABLENESS

ACCOUNTS FOR THE INTERESTS OF BOTH DEBT-

ORS AND CREDITORS, CONSISTENT WITH THE

CODE

The States agree with respondents and the United

States that traditional standards for judging civil con-

tempt should apply to asserted violations of a bank-

ruptcy discharge. Specifically, where a creditor's view

that an obligation is not covered by a discharge is “ob-

jectively reasonable,” the creditor should not be held

in contempt or subject to sanction where a court ulti-

mately comes to a different conclusion. See Resp. Br.

34-36; U.S. Amicus Br. 20 (“[W]here there is an objec-

tively reasonable dispute about whether a particular

debt is discharged, . . . a creditor’s attempt to collect

that debt cannot subject it to civil contempt.”); see also

id. at 11, 23. The States offer the following additional

arguments in support of that result.

\6 Even for these three exemptions, the advance-determination

requirement is forfeited if the debtor fails to properly notify the

creditor. See § 523(a)(3)(B).

18

1. The text and structure of the Bankruptcy Code

support the use of an objective reasonableness stand-

ard. See generally Resp. Br. 16-18; U.S. Amicus Br.

23, 26. As noted above, such a standard properly ac-

counts for Congress’s decision to include 16 self-effec-

tuating exceptions to the discharge injunction, and to

require an advance determination by the bankruptcy

court for only three exceptions. See pp. 5, 16, above.

A reasonableness standard also respects the stat-

utory right of creditors to seek from a nonbankruptcy

court a determination resolving whether a debt has

been discharged—generally in the context of a state-

court collection or enforcement action. Under 28

U.S.C. § 1334(b), district courts have “original but not

exclusive jurisdiction of all civil proceedings arising

under title 11,” including discharge determinations.

(emphasis added). State courts therefore have concur-

rent jurisdiction to determine whether there is or was

a debt or other legal obligation and, if so, whether it

has been discharged. As the advisory committee

notes, “[t]he issue whether a claim was excepted from

discharge may be determined either in the court that

entered the discharge or—in most instances—in an-

other court with jurisdiction over the creditor's claim.”

Fed. R. Civ. P. 8 advisory committee’s note (2010

Amendment); see also Fed. R. Bankr. P. 4007 original

advisory committee notes (jurisdiction over discharge-

ability of debts “is held concurrently by the bank-

ruptcy court and any appropriate nonbankruptcy

forum”); U.S. Amicus Br. 27. If a creditor proceeding

in state court obtains a ruling that its claim or action

is excepted from discharge, the creditor’s subsequent

actions to collect payment or enforce regulatory laws

should be considered objectively reasonable as a mat-

ter of law.

19

In addition, a standard that would preclude sanc-

tions where the creditor’s actions are objectively rea-

sonable is consistent with the Code’s approach to fee

awards. In only one instance does Congress allow

debtors to seek compensation for responding to a cred-

itor’s requests for a discharge determination. Under

Section 523(d), if a creditor “requests a determination

of dischargeability” on a fraud-based complaint (that

is, a complaint under the exception set out in Section

523(a)(2)), but the debtor prevails, the bankruptcy

court shall award the debtor its costs and attorneys’

fees only where the creditor’s position was not “sub-

stantially justified”’—in other words, where it was un-

reasonable.'®

2. Astandard of objective reasonableness also ac-

counts for the difference between a summary dis-

charge injunction, on the one hand, and a court order

that specifies in detail the scope and nature of the con-

duct being enjoined. See generally U.S. Amicus Br. 18.

As noted above (p. 4), the form discharge order is only

two pages long, and operates by reference to the Bank-

ruptcy Code. While Section 524 enjoins any attempt

to collect on a “discharged” debt, it defines the scope of

that injunction solely by cross-reference to the lengthy

list of exceptions set out in Section 523. Determining

whether one of those exceptions applies to a given

claim or obligation can be a complex endeavor, as the

applicable law is “complicated.” JA 62; JA 60-62 (out-

lining numerous exceptions to the bankruptcy court's

statutory injunction); see also pp. 4-12, supra.

‘6 The section further provides that the court ‘shall not award

such costs and fees if special circumstances would make the

award unjust.” Jd. Congress did not extend the fee provision to

the two other discharge exceptions that must be resolved in the

bankruptcy court, or to any of the 16 self-effectuating exceptions.

20

In general, one may not be held in contempt of an

injunction that is overly broad, or merely requires

compliance with the law. See generally NLRB v. Ex-

press Pub. Co., 312 U.S. 426, 435-436 (1941); see also

Swift v. United States, 196 U.S. 375, 396 (1905)

(Holmes, J.) (“We cannot issue a general injunction

against all possible breaches of the law.”). Bankruptcy

discharges are of course not so broad as to be unen-

forceable, but their complicated, technical nature

must affect how courts gauge contempt.

Cases addressing contempt in other areas involv-

ing technical orders and complicated law and facts

may provide guidance. In such cases, courts regularly

hold that a party’s actions reflecting an objectively

“reasonable interpretation” of the court’s statutory

discharge injunction do not result in contempt. See,

e.g., California Artificial Stone Paving Co. v. Molitor,

113 U.S. 609, 618 (1885) (“contempt is a severe rem-

edy, and should not be resorted to where there is fair

ground of doubt as to the wrongfulness of the defend-

ant’s conduct”); Vertex Distrib., Inc. v. Falcon Foam

Plastics, Inc., 689 F.2d 885, 889 (9th Cir. 1982) (de-

fendant not in contempt of consent judgment entered

in trademark infringement suit where plaintiff failed

to establish that defendant's interpretation was un-

reasonable); Latino Officers Ass’n City of New York,

Inc. v. City of New York, 558 F.3d 159, 164 (2nd Cir.

2009) (applying “fair ground of doubt” standard to vi-

olation of order incorporating settlement agreement in

employment discrimination case); see U.S. Amicus Br.

10. While a court might clarify its prior order and di-

rect a party subject to the order to change its conduct

in the future, it normally will not impose sanctions for

past conduct that was taken reasonably and in good

faith.

21

Further, amici States agree with respondents and

the United States that, while a creditor's purely sub-

jective good faith belief that a debt has not been dis-

charged should not, standing alone, insulate it from

contempt, the circumstances that give rise to the cred-

itor’s belief are relevant to whether it is objectively

reasonable. Resp. Br. 23-27; U.S. Amicus Br. 11.

Many cases discussing whether a party facing con-

tempt acted in “good faith” may be interpreted as

courts exploring the reasonableness of the defending

party's actions. See, e.g., Maness v. Meyers, 419 U.S.

449, 465-466 (1975) (reversing contempt sanctions

where alleged contemnor exercised “good faith” in re-

fusing to produce court-ordered materials because

they might tend to incriminate a witness in other pro-

ceedings); Jn re Watts, 190 U.S. 1, 29 (1903) (reversing

contempt citation where contemnor acted in “good

faith”); Vertex, 689 F.2d at 889; First State Bank of

Roscoe v. Stabler, 914 F.3d 1129, 1140 (8th Cir. 2019)

(“Sanctions generally should be unavailable where a

creditor acts without knowledge of the injunction or in

good faith reliance on the belief that their actions are

permissible.” (emphasis added)). In other words,

where a creditor makes a good faith effort to under-

stand the relevant facts and law, the creditor’s conclu-

sion about whether an obligation is discharged is very

likely to be objectively reasonable.

3. Finally, a standard protecting a creditor acting

on an objectively reasonable basis does not offend the

“fresh start” purpose of the Code. Debtors’ interests

remain amply protected.

If a debtor believes that a creditor is acting, or even

threatening to act, in a way that violates a discharge

injunction, the debtor may immediately invoke the

bankruptcy court’s authority to bar the creditor from

22

proceeding further, and may do so without payment of

a filing fee. Fed. R. Bankr. P. 4007(a), (b). If the cred-

itor has acted in bad faith, Rule 9011 allows the court

to impose sanctions.

In short, the standard of objective reasonableness

requires creditors to take appropriate steps to under-

stand the relevant law and facts. That requirement

protects debtors from creditor overreaching. At the

same time, a reasonableness standard respects the le-

gal limits of the discharge, allowing creditors to con-

tinue to collect debts that the discharge is not intended

to cover. The standard thus gives full effect to both

sides of the balance of interests struck by Congress in

the Bankruptcy Code.

23

CONCLUSION

The judgment of the court of appeals should be af-

firmed.

Respectfully submitted,

XAVIER BECERRA

Attorney General of California

EDWARD C. DUMONT

Solicitor General

JANILL L. RICHARDS

Principal Deputy Solicitor General

DIANE S. SHAW

Senior Assistant Attorney General

MOLLY K. MOSLEY

Sup. ty Attorney General

ROBERT E. ASPERGER

CRAIG D. RUST

KARLI EISENBERG

Deputy Attorneys General

March 28, 2019

(CUunsel listing continues on next page)

KEVIN G. CLARKSON

Attorney General

State of Alaska

PHIL WEISER

Attorney General

State of Colorado

WILLIAM TONG

Attorney General

State of Connecticut

KARL A. RACINE

Attorney General

District of Columbia

ASHLEY MOopy

Attorney General

State of Florida

CLARE E. CONNORS

Attorney General

State of Hawai‘

LAWRENCE G. WASDEN

Attorney General

State of Idaho

KWAME RAOUL

Attorney General

State of Illinois

Curtis T. HILL, JR.

Attorney General

State of Indiana

24

TOM MILLER

Attorney General

State of lowa

DEREK SCHMIDT

Attorney General

State of Kansas

AARON M. FREY

Attorney General

State of Maine

BRIAN E. FROSH

Attorney General

State of Maryland

DANA NESSEL

Attorney General

State of Michigan

KEITH ELLISON

Attorney General

State of Minnesota

DOUG PETERSON

Attorney General

State of Nebraska

WAYNE STENEHJEM

Attorney General

State of North Dakota

DAVE YOST

Attorney General

State of Ohio

ELLEN F. ROSENBLUM

Attorney General

State of Oregon

JOSH SHAPIRO

Attorney General

Commonwealth of

Pennsylvania

JASON RAVNSBORG

Attorney General

State of South Dakota

HERBERT H. SLATERY III

Attorney General

State of Tennessee

25

SEAN D. REYES

Attorney General

State of Utah

THOMASJ. DONOVAN, JR.

Attorney General

State of Vermont

MARK R. HERRING

Attorney General

Commonwealth of

Virginia

ROBERT W. FERGUSON

Attorney General

State of Washington