Civil Contempt in Bankruptcy: Exploring the Limits of the Bankruptcy Courts’ Subject Matter Jurisdiction
Introduction
Many of us are familiar with the famous, albeit purportedly apocryphal, quote by former president Andrew Jackson, who, upon hearing of the Court’s decision in Worcester v. Georgia, 31 U.S. 515 (1832), is supposed to have famously declared of Chief Justice John Marshall: “John Marshall has made his decision; now let him enforce it!” See, e.g., Edwin A. Miles, After John Marshall’s Decision: Worcester v. Georgia and the Nullification Crisis, 39 J. Southern Hist. 519, 519 (1973). But See Paul F. Boller, Jr. & John George, They Never Said It: A Book of Fake Quotes, Misquotes, & Misleading Attributions 53 (1989).
Regardless of whether these words were ever uttered, the sentiment is clear: absent cooperation from the coordinate branches of the federal government, even the U.S. Supreme Court would be forced to rely on its contempt powers to enforce its rulings. What is perhaps less well-known about Andrew Jackson is that he was, at one time, on the receiving end of a federal court’s civil contempt power, a mark on his record he regretted until his dying days. Eberhard P. Deutsch, The United States Versus Major General Andrew Jackson, 46 A.B.A. J. 966, 971–72 (1960).
The contempt power in the United States is traceable to English courts, where it “was extant as far back as the 10th century.” Ronald Goldfarb, The History of the Contempt Power, 1961 Wash. U. L. Q. 1, 9 (1961) (citing Fox, The Nature of Contempt of Court, 37 L.Q. Rev. 191, 194 (1921)). There, it was long thought to be a power that “is inherent in the very nature of governmental bodies.” Id. at 2. See also William S. Parkinson, The Contempt Power of the Bankruptcy Court Fact or Fiction: The Debate Continues, 65 Am. Bankr. L.J. 591, 592 (1991) (citing Ex Parte Terry, 128 U.S. 289 (1888) (“The authority to impose sanctions has been described as inherent in federal courts.”)).
Some have attributed the migration of the contempt power to early American courts as a result of the “sometimes blind inheritance of common law in American legal attitudes.” Id. at 13. Nevertheless, the contempt power was enshrined in American jurisprudence beginning with the adoption of the Judiciary Act of 1789, which granted the power to “punish by fine or imprisonment” to all “courts of the United States.” An Act to Establish the Judicial Courts of the United States, ch. 20 § 17, 1 Stat. 73, 83 (1789).
Yet, bankruptcy courts have not always been considered “courts of the United States” for all purposes, chiefly by virtue of their status as Article I courts that, unlike Article III courts, are entirely creatures of statute. See, e.g., Plastiras v. Idell (In re Sequoia Auto Brokers, Ltd.), 827 F.2d 1281, 1287 (9th Cir. 1987) (“Congress did not give bankruptcy courts the full criminal contempt jurisdiction of courts of the United States.”). The power of a bankruptcy court to enforce obedience to its own orders is perhaps best enshrined in the statutory provisions of Section 362(k), which empowers a bankruptcy court to impose sanctions against any person or entity for willful violations of the automatic stay of Section 362(a), entitling the aggrieved party (most often the debtor) to recover (1) actual damages; (2) costs, including attorneys’ fees; and (3) punitive damages, but only “in appropriate circumstances.” However, sanctions under Section 362(k), the means by which courts enforce the automatic stay, are not identical to a finding of civil contempt; indeed, a finding of civil contempt by a bankruptcy court is wholly unnecessary to carrying out the statutory mandate of § 362(k). See, e.g., Budget Serv. Co. v. Better Homes of Va., Inc., 804 F.2d 289, 293 (4th Cir. 1986) (“We are also of opinion that a finding of civil contempt is not a necessary predicate in order to impose the sanctions of Sec. 362(h) [now § 362(k)].”). On the other hand, the discharge injunction of Section 524(a) lacks a similar statutory enforcement mechanism—it is in these and similar cases that a bankruptcy court must rely on the broader (and more nebulous) doctrine of civil contempt, through the equitable powers of Section 105(a), to give effect to a debtor’s discharge.
Nomenclature
Before examining the scope of the bankruptcy court’s contempt powers, it is first necessary to lay out briefly the contours of the contempt power.
In the broadest terms, contempt is defined as “[c]onduct that defies the authority or dignity of a court or legislature.” Contempt, Black’s Law Dictionary (10th ed. 2014). Contempt is classified into two categories based on where the misconduct occurs (“direct” or “indirect”), and is further divided into two categories (“civil” and “criminal”) based on the penalties sought against the putative contemnor.
Direct contempt is disobedience that occurs in the presence of the court and was traditionally punished summarily by the presiding judge. Indirect contempt occurs outside the presence of the court (for example, where the putative contemnor disobeys an order of the court). Additionally, criminal contempt is a purely criminal proceeding: it is punitive in nature, the standard of proof is “beyond a reasonable doubt,” and contemnors often have the right to a jury trial. See, e.g., 18 U.S.C. § 3691. On the other hand, civil contempt is a civil proceeding that is coercive and remedial in nature. While both criminal and civil contempt may result in imprisonment of the contemnor, the differing underlying purposes behind the two proceedings is key in distinguishing the permissible terms of imprisonment.
In a civil contempt context, imprisonment of the contemnor is intended to be coercive—it is designed to compel the contemnor to recognize the authority of the court and obey its directives. Thus, in such a situation, the contemnor is said to “hold the keys” to his own cell. Taylor v. Home Ins. Co., 646 F. Supp. 923, 930 (W.D.N.C. 1986) (citing In re Nevitt, 117 F. 448, 461 (8th Cir. 1902) and Shillitani v. United States, 384 U.S. 364, 370 (1966)) (“The difficulty the court is faced with is to fashion a remedy such that the defendant ‘holds the keys’ to his own release from the contempt.”). Because the contemnor is ostensibly in control of the duration of his or her own imprisonment, civil contempt empowers the court to imprison a contemnor for an indefinite period of time, provided that he or she is in fact capable of complying with the court’s order or “purging” the contempt. See, e.g., Adams Creek Assocs. v. Davis, No. 3A08-4 (N.C. Sept. 21, 2018) (per curiam) (vacating decision of North Carolina Court of Appeals and remanding the case for further remand to the trial court for “further findings of fact concerning defendants’ ability to comply with the removal of the structures as a condition of the 2011 Contempt Order. . . .”). For example, Melvin Davis and Licurtis Reels have been jailed for civil contempt in Carteret County, North Carolina for nearly eight years—since March 2011—for failure to comply with an order of the trial court. See Adams Creek Assocs. v. Davis, 810 S.E.2d 6, 10 (N.C. App. 2018). On the other hand, imprisonment for criminal contempt is designed to punish the contemnor and must be for a definite period of time.
The distinction between civil and criminal contempt in the bankruptcy context is of cardinal importance: bankruptcy courts lack the authority to preside over criminal contempt proceedings. See, e.g., Griffith v. Oles (In re Hipp, Inc.), 895 F.2d 1503, 1511 (5th Cir. 1990) (“[W]e hold that bankruptcy courts do not have inherent criminal contempt powers, at least with respect to the criminal contempts not committed in (or near) their presence.”). The federal statutes conferring criminal contempt authority, 18 U.S.C. §§ 401 & 402, grant this authority to “courts of the United States,” demonstrating another instance where bankruptcy courts are “courts of the United States” for some purposes, but not others. Accordingly, if a bankruptcy court wishes to initiate a criminal contempt proceeding against a putative contemnor, it must refer the matter to the district court. See, e.g., United States v. Shariati, 694 F. App’x 893, 894 (4th Cir. June 2, 2017) (“After a hearing, the bankruptcy court held Shariati in civil contempt and referred the matter to the district court to initiate criminal contempt proceedings.”).
The danger for a bankruptcy court or aggrieved party, then, is imposing a sanction that is nominally civil in nature but may be construed as effectively criminal, and thus in excess of the bankruptcy court’s subject matter jurisdiction (limited expressly to “civil proceedings” by 28 U.S.C. § 1334(b)). In fashioning remedies that will withstand appellate scrutiny, aggrieved parties and bankruptcy courts should consider whether sanctions imposed can be fairly considered “remedial” and “coercive” rather than “punitive.” In so doing, one should be mindful that the “measure of the court’s power in civil contempt proceedings is determined by the requirement of full remedial relief.” Cherry v. Arendall (In re Cherry), 247 B.R. 176, 187 (Bankr. E.D. Va. 2000) (citing McComb v. Jacksonville Paper Co., 336 U.S. 187, 193 (1949)).
Permissible Remedies for Civil Contempt
Several recent cases from bankruptcy courts in North Carolina are illustrative of the application of civil contempt in the bankruptcy context. While none involves the imprisonment of any person for an indefinite period for civil contempt, at least two illustrate the coercive powers available to the bankruptcy court as ancillary remedies in civil contempt proceedings.
In In re Belding-Miller, No. 15-50154, Dkt. No. 45 (Bankr. W.D.N.C. May 10, 2018), the United States Bankruptcy Court for the Western District of North Carolina imposed sanctions against an attorney for pursuing a collection action against a former chapter 7 debtor on a debt that was discharged in her prior bankruptcy case. Id. at 3–7. The Court found that the violation of the discharge injunction of § 524(a) was willful, as the attorney for the creditor had actual notice of the bankruptcy discharge, the debtor had raised the discharge as an affirmative defense in the state court suit, and the attorney had received a warning letter from counsel for the debtor (which he ignored). Id. at 8–9. Because the debtor was forced to reopen her bankruptcy case and seek sanctions to enjoin continued prosecution of the state court collection action, as well as miss two days of work, the Court ordered the attorney to pay $500 in actual damages to the debtor and $15,000 in reasonable attorneys’ fees incurred by counsel for the debtor in prosecution the sanctions motion. Id. at 9.
In In re Mendenhall, No. 17-04541-5-JNC, Dkt. No. 44 (Bankr. E.D.N.C. May 3, 2018), Dkt. No. 51 (May 10, 2018), and Dkt. No. 54 (May 15, 2018), the United States Bankruptcy Court for the Eastern District of North Carolina found an automotive finance company and its principal in civil contempt for repossessing the chapter 13 debtors’ automobile post-petition in violation of the automatic stay, refusing to return that vehicle, and refusing to appear before the Court to answer for their actions. Id., Dkt. No. 51 at 2–6. There, the Court ordered the contemnors to pay $6,700.96 to the debtors in actual damages, plus an additional $2,500.00 in civil penalties to the debtors, together with $2,800.00 in reasonable attorneys’ fees to counsel for the debtors. Id. at 10–11. When the contemnors, who were located in Charlotte, North Carolina, well over a hundred miles from the Court and in another judicial district, refused to appear before the Court or to pay the sanctions as ordered, the court issued a writ of body attachment (a warrant for civil arrest, which “all courts established by Act of Congress” may issue pursuant to 28 U.S.C. § 651(a)) directing the United States Marshals Service to take the principal of the automotive finance company into custody and produce him before the court at a stated date and time. Mendenhall, Dkt. No. 54 at 1. When the contemnors finally responded to the court and earnestly assured their presence at the forthcoming hearing, the court held the writ in abeyance. Id., Dkt. No. 61. Subsequently, the automobile was returned, the assessed sanctions were paid, and the writ was dissolved. Id., Dkt. No. 65.
In In re Zinn, No. 18-30066, Dkt. No. 146 (Bankr. W.D.N.C. Aug. 28, 2018), Dkt. No. 177 (Sept. 27, 2018), and Dkt. No. 182 (Oct. 11, 2018), the United States Bankruptcy Court for the Western District of North Carolina held the chapter 11 debtor in civil contempt for failing to disgorge unauthorized post-petition transfers he made to a credit card held by an entity he owned and controlled. Id., Dkt. No. 146 at 2–3. The Court ordered the debtor to repay the sum of $7,128.45 to the chapter 11 trustee within fourteen days in order to purge himself of civil contempt. Id. at 3. The debtor failed to pay the funds and, further, obstructed the chapter 11 trustee’s efforts to operate the entities he owned. Thereafter, the Court held the debtor in civil contempt a second time, upon motion of the trustee, based on the debtor’s repeated failures to cooperate with the chapter 11 trustee, including his failures to turn over account information and passwords related to several entities the trustee was attempting to operate that were property of the estate by virtue of the debtor’s 100% ownership of each. Id., Dkt. No. 177 at 3–6.
When the debtor, who apparently resided in Georgia, notwithstanding that his case was filed in North Carolina, again ignored the Court, the Court entered an Order and Writ of Body Attachment directing the United States Marshal’s Service to take the debtor into custody and present him before the Court. Id., D.E. 182 at 1. In directing the Marshals to take the debtor into custody, the Court opined that the debtor “apparently believes that geographic distance will enable him to ignore the orders of this tribunal.” Id. at 5. The debtor was taken into custody and transported to North Carolina, and although he lost “his freedom for the week during which he was in custody,” Id., D.E. 195 at 3, he only partially purged his civil contempt—he supplied the trustee with most (but not all) of the information required to operate his entities and refused to repay the unauthorized post-petition transfers, claiming unemployment and poverty. Id. at 2–3. In response, the Court granted the debtor’s bankruptcy estate a non-dischargeable judgment against him in the amount of the unauthorized post-petition fees as well as a similar non-dischargeable judgment to the attorney of a creditor to secure repayment of attorneys’ fees reasonably incurred in connection with the contempt portion of the debtor’s case. Id. at 4–5.
Conclusion
It appears well-settled that bankruptcy courts are not empowered to wield criminal contempt powers. In addition to the specific statutory remedies provided in § 362(k), bankruptcy courts may, however, wield the powers of civil contempt. In fashioning the “full remedial relief” that is the touchstone of a remedy for civil contempt, bankruptcy courts and those requesting such relief should be cautious to ensure that sanctions imposed are remedial or coercive—not punitive. While it appears exceedingly rare for a bankruptcy court to imprison indefinitely a contemnor for civil contempt, it is not necessarily beyond a court’s statutory authority. However, a simpler and cleaner expedient in extreme cases is simply to refer such matters to a district court where the full panoply of criminal contempt powers may be brought to bear upon a pugnacious contemnor. Following Mendenhall and Zinn, however, one thing remains clear: putative contemnors may run from impending sanctions, but they cannot hide.
Disclaimer: This blog post is not intended to be, nor should it be construed as, legal advice. This blog post does not form an attorney-client relationship between any reader and the author and/or Stubbs & Perdue, P.A. All views herein are solely the views of the author and do not necessarily represent the views of Stubbs & Perdue, P.A.