Confronting an issue where the circuit courts are divided and the Second Circuit has been silent, Vermont’s Chief District Judge Geoffrey W. Crawford decided that bankruptcy courts lack “statutory and inherent powers” to impose punitive contempt sanctions.
The Sanctions in Bankruptcy Court
In three chapter 13 cases, the bankruptcy court had imposed a total of $375,000 in sanctions on a mortgage servicer for billing debtors for fees without first filing the required notices under Bankruptcy Rule 3002.1(c). Previously, the servicer had been “chastised” by a bankruptcy judge in North Carolina for violating the rule. In one of the three cases, the servicer had already agreed to pay a $9,000 sanction for sending erroneous mortgage statements for three years, but it did not halt the practice.
The bankruptcy judge said that the $9,000 sanction two years earlier had failed to achieve its intended remedial effect of deterring the servicer from sending out “inaccurate account statements.” Since she had given the servicer “an opportunity to bring its practices in line with the mandates of Rule 3002.1,” the bankruptcy judge felt that “the time has come for ‘the imposition of severe sanctions.’”
To read ABI’s report on the bankruptcy court opinion, click here.
The servicer appealed and won in Judge Crawford’s Dec. 18 opinion.
The Bankruptcy Court’s Limited Powers
To arrive at an award of $75,000, the bankruptcy judge had relied on Bankruptcy Rule 3002.1(i)(2), which authorizes the court to “award other appropriate relief.” For the remaining $300,000, the bankruptcy court used Section 105(a) and the court’s inherent powers.
Addressing whether the bankruptcy court indeed possessed power, Judge Crawford said that the circuits “have been deeply divided for many years on the question of whether bankruptcy courts have power to punish criminal contempts or impose punitive sanctions.” The Second Circuit, he said, has not addressed the question.
Judge Crawford then summarized the evolution of the bankruptcy court’s contempt powers under the Bankruptcy Rules, as influenced by the Supreme Court’s 1982 decision in Northern Pipeline. The current iteration of the rules governing contempt — Bankruptcy Rules 9020 and 9014 — impose procedural rules but “provide no source of substantive authority,” the judge said.
On the question of power, Judge Crawford said “that the prevailing trend in the development of bankruptcy law over recent years has been to place ever-tightening limits on bankruptcy courts’ contempt authority.” He said that “the better-reasoned authorities favor the narrower construction of the bankruptcy court’s statutory and inherent punitive sanction power.”
Judge Crawford was persuaded by the Ninth Circuit, which “held that neither Section 105 nor the bankruptcy court’s inherent authority were proper sources of authority for the imposition of a serious punitive sanction.” In re Dyer, 322 F.3d 1178 (9th Cir. 2003). He also found favor with the Fifth Circuit’s holding that bankruptcy courts lack constitutional power to exercise criminal contempt power. In re Hipp Inc., 895 F.2d 1503 (5th Cir. 1990).
Judge Crawford found fault with the logic of the First and Eighth Circuits, which were more liberal in vesting punitive power in bankruptcy courts.
Although the bankruptcy court may lack power in itself to address serious misconduct, Judge Crawford ended his opinion by mentioning that the district court has power to impose criminal contempt sanctions.
On remand, Judge Crawford said the bankruptcy court may “refer the matter to the district court” if it determines “that exercise of that authority would be appropriate.” Alternatively, he said, the bankruptcy court “may take steps to enforce its orders short of punitive sanctions of the scope and type imposed in these cases.”