If contempt proceedings were enjoined by the automatic stay, the non-bankruptcy court cannot proceed even if the contempt sanctions were not to be imposed until after conclusion of the bankruptcy, the Second Circuit ruled in a nonprecedential opinion.
Before bankruptcy, the district court entered a $13.4 million judgment for compensatory damages against an individual for violating the Federal Trade Commission Act. Believing that the man had substantial assets but was not paying the judgment, the FTC filed a motion seeking coercive incarceration for contempt.
Shortly before the contempt hearing in district court, the man filed a chapter 7 petition and immediately filed a suggestion of bankruptcy. The district judge first ruled that the contempt proceedings were an exercise of police or regulatory power and thus not subject to the automatic stay in Section 362(a).
Next, the district judge entered a second order holding the debtor in contempt and ordering his coercive incarceration. At the FTC’s request, the district judge stayed enforcement of incarceration until after conclusion of the bankruptcy.
The debtor appealed and won in a per curiam opinion on June 26.
Reversing the district court, the appeals court cited Section 362(b)(4), which provides that the automatic stay does not apply to proceedings by a governmental unit to enforce police or regulatory powers, “including the enforcement of a judgment other than a money judgment. . . .” [Emphasis added.]
The circuit court said that the purpose of the contempt proceedings “was simply to enforce a money judgment that had already been entered” before the debtor’s bankruptcy. Even though the FTC had filed the contempt motion before bankruptcy, the appeals court said that “once the automatic stay was in place, the district court was prohibited from disposing of the request while [the debtor’s] bankruptcy remained pending.”
The appeals court therefore vacated the district court’s orders holding the debtor in contempt and ruling that the automatic stay did not apply.
A footnote may be the most important part of the opinion. The appeals court said that delaying enforcement of the contempt judgment until after bankruptcy makes “no difference in our analysis.” In other words, simply compelling a debtor to defend a proceeding violates the stay.
Questions
Will the debtor now seek damages from the FTC for willful violation of the automatic stay under Section 362(k)? If the debtor seeks a citation for contempt, a recent decision of the Supreme Court will come front and center. See Taggart v. Lorenzen, 139 S. Ct. 1795, 204 L. Ed. 2d 129 (June 3, 2019). For ABI’s discussion of Taggart, click here.
Taggart held that the bankruptcy court “may impose civil contempt sanctions when there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.” [Emphasis added.]
The first question is: What does the appeals court’s reversal say about “objectively reasonable basis”? Was the continuation of the contempt proceeding objectively reasonable as a matter of law, just because the district court (mistakenly) believed the stay did not apply?
The second question is: Does Taggart, dealing with contempt of the discharge injunction, also apply to violations of the automatic stay? Hint: Some smart people have said that Taggart does not apply when Section 362(k) is the standard for a contempt finding, rather than the nonstatutory contempt standard for Section 524 discharge violations.
If our readers have answers to the questions, please pass them along. With regard to the first question, keep this in mind: The district court’s order holding the automatic stay to be inapplicable was a terse, handwritten memo endorsement that cited Section 362(b)(4) with no analysis. Does an incorrect conclusion by a judge with no analysis always means that the moving party’s position was objectively reasonable?
If contempt proceedings were enjoined by the automatic stay, the non-bankruptcy court cannot proceed even if the contempt sanctions were not to be imposed until after conclusion of the bankruptcy, the Second Circuit ruled in a nonprecedential opinion.
Before bankruptcy, the district court entered a $13.4 million judgment for compensatory damages against an individual for violating the Federal Trade Commission Act. Believing that the man had substantial assets but was not paying the judgment, the FTC filed a motion seeking coercive incarceration for contempt.
Shortly before the contempt hearing in district court, the man filed a chapter 7 petition and immediately filed a suggestion of bankruptcy. The district judge first ruled that the contempt proceedings were an exercise of police or regulatory power and thus not subject to the automatic stay in Section 362(a).
Next, the district judge entered a second order holding the debtor in contempt and ordering his coercive incarceration. At the FTC’s request, the district judge stayed enforcement of incarceration until after conclusion of the bankruptcy.