At least in the Ninth Circuit, and perhaps also in the Seventh, civil contempt proceedings are exempt from the automatic stay so long as they are “intended to effectuate the court’s public policy interest in deterring litigation misconduct.”
The April 3 opinion from the Ninth Circuit resuscitates the appeals court’s pre-Code law, which had been criticized by the circuit’s Bankruptcy Appellate Panel as being “not consistent with the modern breadth of the automatic stay” and “at odds with the plain language of Section 362(b).”
A state court had imposed $4,000 in discovery sanctions on an individual. Just before a contempt hearing in state court for failure to pay sanctions, the individual filed a chapter 7 petition.
At the direction of the state court, the beneficiary of the sanction award filed papers arguing that the contempt proceedings were not subject to the automatic stay in light of David v. Hooker, Ltd., 560 F.2d 412 (9th Cir. 1977), where the Ninth Circuit held that civil contempt proceedings were not subject to the automatic stay under the then-applicable Federal Rules of Bankruptcy Procedure, which preceded Section 362, adopted a year later.
The then-debtor prevailed on the bankruptcy court to impose $1,500 in sanctions for violating the automatic stay. Having been sanctioned for pursuing sanctions, the creditor appealed and won a reluctant reversal in the BAP.
The BAP said it was bound by Hooker, which held that contempt proceedings are not halted by the automatic stay unless they are designed to collect the ultimate obligation or intended to harass.
One of the three judges on the BAP panel went further and questioned whether Hooker was still good law.
The debtor appealed and lost in an opinion by Circuit Judge Richard R. Clifton that reached the same result as Hooker, albeit on a different theory.
Following the circuit’s post-Code precedent, In re Berg, 230 F.3d 1165 (9th Cir. 2000), Judge Clifton said that civil contempt proceedings can fall under Section 362(b)(4), which exempts government regulatory actions from the automatic stay. He held that civil contempt proceedings are not stayed when “intended to effectuate the court’s public policy interest in deterring litigation misconduct.”
On the other hand, the exception will not apply to contempt proceedings “intended either to protect the government’s pecuniary interest in the debtor’s property or to adjudicate private rights.”
Judge Clifton said that Berg was controlling. Like Berg, which dealt with a frivolous appeal, he said that the present case was similarly aimed at “deterring litigation misconduct.”
In support of invoking the governmental regulatory exception, Judge Clifton cited Alpern v. Lieb, 11 F.3d 689 (7th Cir. 1993), for the proposition that the Seventh Circuit exempts contempt proceedings under FRCP 11 if designed to deter litigation misconduct.
Other than Berg and Alpern, Judge Clifton said he could find no published circuit court decisions applying the governmental regulatory exemption to civil contempt proceedings.