The Supreme Court handed down a few significant decisions in 2019 and had an active docket of bankruptcy cases compared to previous years, where it only considered a limited number of bankruptcy cases. Here is a summary of those important cases and some equally important ones on the docket for 2020.
In Taggart v. Lorenzen, No. 18-489, 587 US _ (June 3, 2019), the Supreme Court held that a court may only hold a creditor in civil contempt for a violation of a discharge order if there are no fair grounds of doubt as to whether the order bars the creditor’s conduct when there has been an alleged violation of the automatic stay. A creditor’s subjective belief that it was in compliance with an order will not insulate it from civil contempt if that belief was objectively unreasonable.
The Supreme Court also ruled on Mission Products Holdings Inc. v. Tempnology LLC, No. 17-1657, 587 US __ (May 20, 2019), addressing the rejection of executory contracts under 11 USC § 365. The Court held that while the rejections can be breaches of the contracts, a breach does not necessarily cause a rescission since the term “breach” is not defined in the bankruptcy code. Instead, you must then look to controlling state court contract law. As a result, the decision will preserve the right for creditors to seek rejection damages.
Upcoming in 2020, the Supreme Court will review a case which deals with payments made by parents for their children’s college tuition. The First Circuit Court of Appeals in In Re Palladino, No. 17-1334 (1st Cir. Nov. 11, 2019), held that parents who paid college tuition on behalf of their adult children do not receive “reasonably equivalent value” and therefore have no defense to a preference action by a trustee. Many trustees around the country have proceeded to file preference litigation against colleges in the parents’ bankruptcy actions. The circuit courts are split as to whether the parents receive reasonably equivalent value for tuition payments, a defense schools can use under 11 USC § 547 when defending against preference actions.
The Supreme Court may also decide issues concerning violations of the automatic stay for retaining “property of the estate.” Circuit courts remain split on the question of whether a creditor is required to return collateral or garnished funds that were obtained pre-petition.
If you have questions about these decisions or bankruptcy matters, please contact Sandford L. Frey. Sandy is a Partner with Leech Tishman in the firm’s Bankruptcy and Creditors’ Rights Practice Group. Sandy is based in Leech Tishman’s Pasadena office and can be reached at 626.796.4000 or via email at firstname.lastname@example.org.