Three months ago, the Fifth Circuit set aside the bankruptcy court’s imposition of $240,000 in contempt sanctions against an individual and others, holding that the award was damages for criminal contempt, which the bankruptcy court had no power to impose. A circuit judge dissented and would have upheld the award as civil contempt.

On July 1, a different panel in the Fifth Circuit upheld an award of $450,000 in civil contempt sanctions imposed by the same bankruptcy judge against the same individual. In the new opinion, Circuit Judge Leslie H. Southwick cited the Supreme Court for saying that contempt sanctions permit the court to “do rough justice.” Goodyear Tire & Rubber Co. v. Haeger, 581 U.S. 101, 110 (2017).

Evidently, the size of an award isn’t determinative or perhaps not even relevant in deciding whether a sanction is criminal rather than civil. The opinion three months ago was in Charitable DAF Fund LP v. Highland Capital Management LP (In re Highland Capital Management LP), 98 F.4th 170 (5th Cir. April 4, 2024). To read ABI’s report on the April decision, click here.

The Grounds for Contempt

To fend off appointment of a chapter 11 trustee, the corporate debtor’s chief executive resigned his positions as an officer, director and employee. In his place, three independent directors took over along with a chief restructuring officer.

Two months later, the debtor moved in bankruptcy court for a temporary restraining order and a preliminary injunction barring the former CEO from interfering with the debtor’s operations. The bankruptcy court entered an elaborately detailed temporary restraining order, or TRO, precluding the former CEO from interfering with the business or importuning any entity controlled by him from interfering.

One month after the TRO, the debtor moved in bankruptcy court to hold the former CEO in contempt of the TRO for interfering with the debtor’s sale of assets. After an evidentiary hearing, the bankruptcy judge found the former CEO in contempt and imposed $450,000 in compensatory civil sanctions. The district court affirmed. The former CEO appealed again.

Federal Rule 65(d)(1)

Judge Southwick began his discussion of the merits by saying that contempt citations are reviewed for abuse of discretion, although the scope of an injunction is a legal question subject to de novo review. Regarding the quantum of damages, however, the trial court is given “substantial deference.” Haeger, supra.

The first question revolved around Federal Rule 65(d)(1)(C), which requires an injunction to “describe in reasonable detail — and not by referring to the complaint or other document — the act or acts restrained . . . .” In other words, the rule prohibits an injunction from referring to outside documents, Judge Southwick said.

Judge Southwick noted that the rule only requires “reasonable detail.” Bowing to practical considerations, he said that the “complexity” resulting from the debtor’s 2,000 related entities “makes a higher level of detail impractical, especially given the danger of easy evasion were the terms crafted more narrowly.”

“Although not necessary to our holding,” Judge Southwick said that the Fifth Circuit “has deemed it relevant that a party could have, but did not, seek district court clarification.” Focusing on the TRO as an “equitable remedy,” he said, “it would be inequitable for us to reward this belated attack on the TRO’s clarity.”

Evidence of Violations

To justify a finding of civil contempt under Fifth Circuit precedent, Judge Southwick said there must be “clear and convincing evidence” that an order was in effect, that the order proscribed “certain conduct,” and that the contemnor “failed to comply.” Willfulness, he said, “is not required.” Again citing the Fifth Circuit, he said, “we review the bankruptcy court’s determination that such evidence exists only for an abuse of discretion.”

Reciting the former CEO’s own deposition testimony, Judge Southwick held that “the bankruptcy court did not abuse its discretion in concluding that clear and convincing evidence existed that [the former CEO] violated” two provisions in the TRO.

The Amount of the Sanction

Before deciding whether $450,000 was too much, Judge Southwick said that reimbursement of legal fees “is a permissible sanction.”

At the trial on the TRO violation, the debtor alleged there were six grounds of contempt, but the bankruptcy court only sustained two of the claims. To assess damages, the bankruptcy court reviewed the debtor’s attorneys’ time records.

From the approximately $1.25 million in time charges for the period in question, the bankruptcy judge “conservatively” estimated that some $366,000 was related to the TRO and the contempt motion.

Using “conservative math,” the bankruptcy court tagged on another $33,400 spent by debtor’s counsel in preparing for and conducting the contempt hearing. The bankruptcy judge raised the award to $450,000 to account for time spent by local counsel who worked on the matter but whose time records were not submitted.

To judge the efficacy of the sanction, Judge Southwick said that the bankruptcy judge “considered the probable effectiveness of the sanction, [the former CEO’s] financial resources and the burden of the sanction, and his willfulness in disregarding the TRO.”

Evaluating the size of the award, Judge Southwick again quoted Haeger in saying that the offended party “‘may recover only the portion of his fees that he would not have paid but for the misconduct.’ Haeger, 581 U.S. at 109.”

Judge Southwick read Haeger to mean that the “rule is flexible enough that a court may use estimates or decide that an entire category of expenses was incurred solely because of the misconduct at issue.” He held that the bankruptcy court “did not err in granting all fees for work done to protect the reorganization plan from [the former CEO’s] interference, without regard to which grounds for contempt ultimately proved successful.” He added that the bankruptcy court “was permitted to use estimates given its ‘superior understanding of the litigation,’” again quoting Haeger.

Concluding the opinion, Judge Southwick said that appellate review is conducted in “recognition of the goal of such awards everywhere: ‘to do rough justice.’ Id. (quoting Fox v. Vice, 563 U.S. 826, 838 (2011)). Complete accuracy is neither required nor expected.” He affirmed, saying that the “bankruptcy court’s judgments in these matters are entitled to our ‘substantial deference.’ Id.”