Government Agencies In Contempt Over Obligations That Were Discharged by the Bankruptcy Court

The decisions demonstrate that creditors, including municipal entities, may be held in civil contempt for knowingly violating a discharge order and may be required to compensate debtors for actual damages, attorney fees, emotional damages, and, in appropriate circumstances, punitive damages.

In Taggart v. Lorenzen, 587 U.S. 554 (2019), the U.S. Supreme Court established the standard for holding a creditor in civil contempt for violating a bankruptcy discharge order. The case arose from a Chapter 7 discharge order that released a debtor from most prebankruptcy debts. After the discharge, a state court awarded attorney fees to the creditors in another matter, and the bankruptcy court later held the creditors in civil contempt for attempting to collect those fees in violation of the discharge order.

The Ninth Circuit reversed, applying a subjective standard under which a creditor’s “good faith belief,” even if objectively unreasonable, could shield the creditor from civil contempt. The Supreme Court rejected that approach, holding that civil contempt is appropriate when there is “no fair ground of doubt” as to whether the discharge order barred the creditor’s conduct. Put differently, a creditor may be held in contempt when there is no objectively reasonable basis to conclude that its conduct might be lawful.

In re Graves: Repeated Post-Discharge Collection Efforts Can Render the Creditor’s Conduct Unlawful

In re Graves, 2026 WL 1494513 (Bankr. E.D. Cal. May 28, 2026), presents an instructive example of the consequences that can follow when a creditor continues collection efforts after a bankruptcy discharge and then relies on an objectively unreasonable interpretation of the discharge order.

Facts

In this case, the Graves lived with their adult children in Placer, California. Before filing for bankruptcy, they incurred a $3,264 CalFresh overpayment obligation based on unreported household income (referred to in the case as the “CalFresh debt”).

Placer County classified the overpayment as an “Inadvertent Household Error,” meaning it resulted from an unintentional household mistake rather than criminal conduct. The county also determined that the Graves and their children, all of whom were over 18, were jointly and severally liable for the overpayment.

The Bankruptcy Proceeding

In November 2021, the Graves filed a joint Chapter 7 bankruptcy petition. The trustee later filed a no-asset report, and no deadline was set for creditors to file proofs of claim. The Graves received their discharge order in early 2022, and the case was closed. However, they had not listed the county as a creditor in their original bankruptcy schedules.

Long-settled law of the Ninth Circuit provides that a discharge in a “no-asset-no-bar-date” case is good against the world, including omitted creditors. The reason section 523(a)(3) does not apply is that it remains “timely” for the omitted creditor to file a proof of claim, even after the case is closed. If the case is later reopened, as often happens to administer omitted assets, a claims bar date will be fixed.

About a year later, after the County attempted to collect the debt, the Graves reopened the bankruptcy case and amended their schedules to include the CalFresh debt. They also notified the County of their bankruptcy discharge. The County nevertheless continued to dispute whether the debt had been discharged, asserting that the discharge was ineffective because the discharge order did not identify the County as a creditor.

In response to numerous continued collection efforts, the Graves eventually pursued an administrative appeal. At the hearing, they presented the administrative law judge (ALJ) with the two-page bankruptcy discharge order, along with other documents. Although the ALJ was shown the amended schedule listing the Cal Fresh debt, the ALJ accepted the County’s argument that the debt had not been discharged because the discharge order did not identify the County as a creditor. The County then demanded immediate payment and threatened a tax intercept. The Graves moved for sanctions in the reopened bankruptcy case.

Judge Klein, who presided over the bankruptcy case, firmly rejected the County’s position. He analyzed the County’s conduct under the standard set forth in Taggart. The relevant question was not merely whether the creditor acted in good faith but whether the creditor had an objectively reasonable basis for concluding that its conduct might be lawful.

The court held that the County did not have a reasonable basis and identified the major error in the County’s approach: The County repeatedly treated the discharge as though the creditor’s name must appear in the discharge order in order for the injunction to apply.

The court emphasized that a Chapter 7 discharge order does not list individual creditors. Instead, the Official Form B-318 Chapter 7 discharge order merely grants the discharge under 11 U.S.C. § 727, while section 524(a)(2) supplies the order’s legal effect by operating as an injunction against the collection of discharged debts. The court therefore concluded that the County’s demand for a discharge order specifically naming Placer County as a creditor imposed a “phantom” requirement that bankruptcy law does not recognize and that the County has no authority to impose an additional requirement on an official bankruptcy form.

The court’s analysis reflected strong disapproval of the County’s conduct. Judge Klein catalogued 13 separate examples of conduct that he described as “continuing and persistent contumacy.” He was especially troubled by the County’s repeated disregard of the discharge order simply because it did not name the County as a creditor.

The County could have limited its argument to the ALJ to the correct proposition that the adult children were not protected by the Graves’ bankruptcy discharge and allowed the ALJ to resolve any remaining issues. Under 11 U.S.C. § 524(e), a debtor’s discharge does not affect the liability of any other person.

Accordingly, the Graves’ bankruptcy discharge did not automatically bar the county from pursuing collection against the Graves’ adult children. The County failed to keep those issues separate. Rather than limiting its collection efforts to the children, the County continued to challenge the Graves’ discharge order. That position marked a significant escalation, in the court’s analysis.

Judge Klein characterized the County’s direct challenge to the discharge order as “egregious civil contempt.” In his view, the County was no longer attempting to resolve a collection issue; it was affirmatively advancing a baseless argument that contradicted established bankruptcy law. This argument-together with the County’s insistence that the debtors had not proven the existence of the discharge, the County’s failure to consult the readily available bankruptcy docket, the County’s rejection of the amended schedules, and the County’s imposition of phantom documentation and notice requirements, among other factors-left no objectively reasonable basis for the Court to conclude that the creditor’s conduct might be lawful under the discharge order.

The court imposed $39,000 in sanctions to “coerce the County into compliance with the bankruptcy discharge,” calculated at $3,000 per violation, and awarded $5,000 in emotional distress damages, to remedy the civil contempt of the County, “with at least thirteen examples of bankruptcy discharge violations,” which “evince continuing and persistent contumacy.”

In re Thomas: A Creditor Cannot Violate a Discharge Order and Later Claim Self-Help to Avoid Contempt

In re Thomas, 177 F.4th 493 (3d Cir. 2026), arose from a long-running dispute between the debtor and the City of Philadelphia.

The Bankruptcy Proceeding

The debtor filed for Chapter 13 bankruptcy protection in 2004 and identified the City as a creditor holding secured claims against three properties. The City received notice of multiple bankruptcy filings, filed proofs of claim, and was notified of both the confirmation hearing and the confirmed plan. The debtor ultimately paid more than $23,000 under the plan. In 2009, the bankruptcy court entered a discharge order, and the City received a copy of that order. In 2013, in a post-discharge adversary proceeding concerning one of the properties, the bankruptcy court stated that the City had not received constitutionally adequate notice of the bankruptcy plan (which was incorrect since the City had actual notice dating back to 2004). The City relied on that incorrect ruling to justify collection efforts involving the other properties.

The debtor moved to hold the City in contempt, arguing that the City’s post-discharge collection efforts violated the discharge injunction.

The Appellate Decision

After several rounds of litigation and appeals, the Third Circuit reviewed the case to determine that the City would be held in civil contempt with respect to its continuing efforts to collect against one of the properties, which violated the discharge order.

Under Pennsylvania law, a debtor must establish by clear and convincing evidence that (1) a valid court order existed, (2) the city knew of the order, and (3) the city disobeyed the order. Having determined that the debtor satisfied the first two elements, the court applied the Taggart standard to determine whether the City disobeyed the order, inquiring if there was any “fair ground of doubt” as to whether the discharge order prohibited the city’s conduct. Judge Bove, who wrote the opinion, observed that the standard is generally objective and that a creditor’s subjective good faith is not relevant to the inquiry.

The Third Circuit held the City in contempt based on four considerations: (1) “the City had no reasonable basis to violate the discharge order on the theory that a due process violation had occurred earlier in the case”; (2) the 2013 decision that was incorrect “arose in the context of allegations relating to a different property based on arguments that nobody had made”; (3) “the City’s unilateral extension of the ruling (from 2013) was made worse by the fact that the City only pressed the due process argument in response to [the debtor’s] contempt allegations”; and (4) “the City’s reliance on the Bankruptcy Court’s 2013 ruling is, at most, suggestive of subjective good faith,” but “good faith alone is not a meritorious response to [the debtor’s] showing on the contempt elements,” as “[t]he City’s violation of the discharge resulted from a conscious choice that was ‘not technical or inadvertent.”‘

In finding the City in civil contempt and remanding the case to determine the scope of the violation and to calculate damages, the court in Thomas, like the court in Graves, reinforced that subjective good faith by the municipal creditor is irrelevant. To avoid contempt, a creditor must have an objectively reasonable basis to believe that its conduct is lawful.

Practical Application after Graves and Thomas

Together, Graves and Thomas provide important practical guidance for creditors evaluating a potential discharge injunction issue. When a bankruptcy discharge order has been entered, a creditor must carefully evaluate the facts underpinning the creditor’s knowledge of any potential assets in light of the discharge order and evaluate whether, under the Taggart standard, a court is likely to determine the existence of a “fair ground of doubt” as to whether the creditor has an objectively reasonable basis to believe that the discharge order does not prohibit the contemplated post-judgment conduct. If there is any doubt that the contemplated post-discharge enforcement action may be the subject of the discharge order, the creditor may decide to file a motion in the bankruptcy court proceeding to determine whether such conduct is permissible, before proceeding with the contemplated action.

Author’s note: I gratefully acknowledge the contributions of Long Luu, law clerk, who served as a summer fellow with the firm.