In rе: MARK DINGLEY, Debtor. YELLOW EXPRESS, LLC; YELLOW LOGISTICS, LLC, Appellants, v. MARK DINGLEY, Appellee.
BAP No. NV-13-1261-KiJuTa
Bk. No. 3:13-bk-50648-BTB
UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
August 6, 2014
Honorable Bruce T. Beesley, Bankruptcy Judge, Presiding
ORDERED PUBLISHED; Argued and Submitted on January 24, 2014 at Las Vegas, Nevada
OPINION
Appearances:
Before: KIRSCHER, JURY and TAYLOR, Bankruptcy Judges.
Opinion by Judge Kirscher
Concurrence by Judge Jury
KIRSCHER, Bankruptcy Judge:
Yellow Express, LLC and Yellow Logistics, LLC (collectively, “appellants“) appeal from the bankruptcy court‘s order sanctioning appellants $1,500 for violation of the automatic stay. Following precedent
I. FACTS1
A. Prepetition Facts
In 2009, appellants filed an action in the Second Judicial District Court in Washoe County, Nevada, Case No. CV09-02392 against Mark Dingley (“debtor“) and two LLCs which he owned and controlled, M&M Tow & Trаnsport, LLC and Superior Tow and Transport Service, LLC (collectively, “the LLCs“). The operative first amended complaint (“state court action“) alleged claims for claim and delivery, unjust enrichment, negligence, conversion and constructive fraud against debtor and the LLCs (collectively, “defendants“), based on the tow, storage and disposition of a semi-truck and trailer which belonged to Yellow Express and was leased to Yellow Logistics. The state court action included no alter ego allegations.
Initially, defendants defaulted and, following a prove-up hearing, judgment was entered against them in the total sum of $300,000. Subsequently, defendants moved to set aside the default judgment, which was granted. The state court then ordered that a hearing be held on sanctions for thеir willful failure to appear for depositions. At the hearing on June 26, 2012, the state court ordered defendants to pay sanctions to appellants in a sum not to exceed $6000 for attorneys’ fees and court reporter costs. Appellants subsequently filed an affidavit, which fixed the sanctions at $4078.35.
Defendants did not pay the sanctions. On March 25, 2013, appellants filed an application for an order to show cause regarding contempt for defendants’ noncompliance with the June 26, 2012 order. On April 2, 2013, the state court judge issued the order to show cause (“OSC“), ordering defendants to appear on April 25, 2013, to show cause why they should not be held in contempt for nonpayment.
B. Postpetition Facts
On April 8, 2013, debtor filed a Chapter 72 proceeding in the Nevada bankruptcy court. Although his membership interest in the LLCs was disclosed in debtor‘s schedules, the LLCs did not file independent cases. Debtor scheduled appellants as creditors, and the court mailed notice of the filing of the bankruptcy case to appellants’ attorney Mark D. Wray (“Wray“) on April 11, 2013. On April 24, 2013, debtor‘s state court counsel advised Wray of the bankruptcy filing and the automatic stay provided by
Debtor‘s attorney responded that she did not have time to review his cases, but she continued to assert that the contempt hearing was a violation of the automatic stay and that the LLCs should get the benefit of debtor‘s stay because he listed his interest in them in his schedules. She then filed a Notice of Bankruptcy Filing in the state court on the same day. The state court responded to that Notice by vacating the hearing. On the following day, it issued an order requiring briefing from the parties on the applicability of the automatic stay to the contempt hearing. Appellants’ brief was due ten days after the order and defendants’ brief was due in another ten days.
Appellants filed their state court brief timely on May 1, 2013, repeating the arguments they made to debtor‘s counsel that the automatic stay did not apply to nondebtor co-defendants and that the contempt proceeding was excepted from the stay under Hooker and Dumas. Debtor did not file a brief in state court. Instead, on May 3, 2013, he filed a Motion to Enforce Stay and For Award of Mandatory Sanctions Pursuant to
In his Motion to Enforce Stay, debtor asserted that the prosecution of the contempt proceeding against him was a violation of
Appellants also contended that state court contempt proceedings were exempted from the automatic stay, citing again Hooker and Dumas and emphasizing to the bankruptcy court that debtor‘s papers did not address the holding of these cases. Finally, appellants noted that the only action they had taken which allegedly violated the stay was filing the brief in the state court pursuant to that court‘s request.
At the hearing in the bankruptcy court, debtor‘s counsel, contrary to the position she had initially taken with appellants’ counsel, conceded that the stay did not apply to the LLCs. However, she argued that it did apply to debtor and that appellants had violated that stay by filing their brief in state court, which urged that court to proceed against debtor. She attempted to distinguish the Ninth Circuit authority excepting contempt proceedings from the stay by arguing they involved bad behavior and “criminal contempt.” Dеspite arguments to the contrary from Wray, the bankruptcy court announced categorically that appellants could not proceed against debtor and that it was prepared to issue an order staying the state court action against him with no other relief granted.
Debtor‘s counsel then asserted that her client was broke and that she had incurred $1500 in attorney‘s fees to stop the affirmative action against him. After reading the brief which appellants had filed in state court,4 the court announced:
“The automatic stay in bankruptcy court does not shield Mr. Dingley from his willful disobedience of the Court‘s lawful order.”5 I find that you‘re in contempt of court for urging the district court to extract from Mr. Dingley money for an order that was entered prebankruptcy which is certainly dischargeable. He сan certainly be hauled into court for postbankruptcy conduct, but you cannot use the district court to try and recover money for contempt or otherwise that has occurred prior to the bankruptcy. I am awarding $1500 in sanctions against you.
Hr‘g Tr. (May 10, 2014) 16:11-22. On May 17, 2013, the bankruptcy court entered the Order on Debtor‘s Motion to Enforce Automatic Stay and For Award of Mandatory Sanctions Pursuant to
II. JURISDICTION
The bankruptcy court had jurisdiction over this proceeding under
III. ISSUES
A. Whether the bankruptcy court erred in ruling that appellants violated the automatic stay; and
B. Whether the bankruptcy court erred in awarding sanctions of $1500.
IV. STANDARDS OF REVIEW
A bankruptcy court‘s determination that the automatic stay was violated is a question of law subject to de novo review. Cal. Emp. Dev. Dep‘t v. Taxel (In re Del Mission Ltd.), 98 F.3d 1147, 1150 (9th Cir. 1996).
V. DISCUSSION6
A. The Automatic Stay and Sanctions for Willful Violation
The automatic stay of
(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title . . . operates as a stay, applicable to all entities, of--
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title; . . . .
[A]n individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.
Before imposing sanctions, the bankruptcy court must find that a violation of the stay was willful. The test for determining whether a violation of the automatic stay is willful is: (1) whether the appellants knew of the stay; and (2) whether the violation of the stay was intentional. Goichman v. Bloom (In re Bloom), 875 F.2d 224, 227 (9th Cir. 1989). “Intentional” does not mean a specific subjective intent to violate the stay. Pinkstaff v. United States (In re Pinkstaff), 974 F.2d 113, 115 (9th Cir. 1992). It is irrelevant whether the party believed in good faith that it had a right to the property at issue. In re Bloom, 875 F.2d at 227.
Willfulness is a question of fact reviewed for clear error. Safety Nat‘l Cas. Corp. v. Kaiser Aluminum & Chem. Corp. (In re Kaiser Aluminum Corp.), 303 B.R. 299, 303 (D. Del. 2003).
Appellants contend that the bankruptcy court erred: (1) because the stay did not apply to the state court civil contempt proceeding under applicable Ninth Circuit precedent; and (2) even if it did apply, the act of filing a brief in state court, which arguably had jurisdiction to determine whether the stay applied to its proceeding, was not a willful violation of the stay. We
B. Exclusive Jurisdiction of the Bankruptcy Court
As a preliminary matter, appellants assert that the state court had concurrent jurisdiction with the bankruptcy court to decide whether the stay applied to its proceeding, citing Fid. Nat‘l Title Ins. Co. v. Franklin (In re Franklin), 179 B.R. 913, 925 (Bankr. E.D. Cal 1995). Franklin is inapplicable to this issue as it dealt with subject matter jurisdiction of a non-core proceeding. To the contrary, the Ninth Circuit has definitively held that the applicability of the automatic stay is within the exclusive jurisdiction of the bankruptcy court. In Gruntz, 202 F.3d at 1083, the Ninth Circuit disregarded state court authorities and nonprecedential cases in ruling:
In sum, by virtue of the power vested in them by Congress, the federal courts have the final authority to determine the scope and applicability of the automatic stay. “The States cannot, in the exercise of control over local laws and practice, vest State courts with power to violate the supreme law of the land.”
Therefоre, only the bankruptcy court had jurisdiction to determine whether the automatic stay applied to the state court contempt proceeding; the state court did not have concurrent jurisdiction. Id. at 1082-83.
C. Automatic Stay and State Court Contempt Proceedings
The Ninth Circuit has created a bright-line rule on whether the automatic stay applies to state court contempt proceedings, whether they are based on nonpayment of a monetary sanction or some other behavior which violates a state court order: if the sanction order “does not involve a determination [or collection] of the ultimate obligation of the bankrupt nor does it represent a ploy by a creditor to harass him” the automatic stay does not prevent the proceeding from going forward. Hooker, 560 F.2d at 418.
Hooker was decidеd under the Bankruptcy Act of 1898 and interpreted the scope of the stay provided by Rule 401(a) of the former Federal Rules of Bankruptcy Procedure which applied to cases filed under the Act. The question posed to the Ninth Circuit was whether the district court where a contempt proceeding was pending “had jurisdiction” to proceed after a bankruptcy petition had been filed. The order violated was not dissimilar to the order in this case: a discovery sanction which directed the defendants to answer interrogatories and pay attorney‘s fees. The Ninth Circuit reasoned that the basic purpose of the stay was “to protect the bankrupt and to relieve the courts from pointless and needless litigation” over dischargeable debts. Id. at 417. Since the contempt proceeding at issue was ancillary to the underlying debt, the Ninth Circuit found the purpose of the stay was not implicated. Relying on old district court decisions7 and 1A Collier ¶ 11.02 at 1147-48, the Ninth Circuit noted that the question was not a jurisdictional one since the stay suspended, rather than dismissed, the nonbankruptcy case. Id. at 418. Thus not every aspect of the proceeding was to be suspended, and a proceeding addressing disobedience of a state court order made prior to the stay was not meant to be suspended. Id. Moreover, the Ninth Circuit reasoned that the proceeding did not
The same issue was first addressed under the Bankruptcy Act of 1978 (the Code) and its automatic stay provided by
Appellants cited these authorities to debtor‘s counsel and eventually to the bankruptcy court. Debtor‘s counsel tried to distinguish them by claiming the contempt proceedings at issue in those cases were criminal and the holdings did not apply to civil contempt. As noted above, this argument was erroneous. The bankruptcy court did not acknowledge them at all, turning aside the arguments:
You can‘t8 proceed against whatever distributions may come to Mr. Dingley from them [the LLCs], but you cannot proceed against Mr. Dingley. And even if Judgе Sattler orders you to proceed against Mr. Dingley, you will get a sanction from me because you‘ve violated – you will have violated the automatic stay, and the fact – and Judge Sattler, if he proceeds against Dingley, he has violated the automatic stay . . . .
Hr‘g Tr. (May 10, 2013) 13:1-8.
I find that you‘re in contempt of court for urging the district court to extract from Mr. Dingley money for an order that was entered prebankruptcy which is certainly dischargeable.
Other courts have followed Hooker and Dumas in this circuit. Most notably (and recently) the district court of Hawaii cited Hooker with approval in crafting a totality of the circumstances analysis of the “judicially created . . . exception to
This judicially-crafted exception has been narrowly construed even by the Ninth Circuit. In Bloom, the federal contempt proceeding arose out of a post-judgment deposition that Goichman scheduled in advance of a hearing on an exemption claim asserted by Bloom to a garnishment. 875 F.2d at 225. Bloom filed her bankruptcy petition after the date set for thе deposition, but prior to the scheduled date for the exemption claim hearing. Goichman was notified of the bankruptcy petition; Bloom attended neither the deposition nor the exemption claim hearing. The district court, after the hearing, denied the exemption claim. Goichman moved for contempt against Bloom for, among other things, her nonattendance at the deposition. The district court held another hearing and ordered Bloom to convey partnership assets to Goichman as security for the judgment and fined Bloom $500 for contempt for her failure to attend the deposition. The district court made a minute entry for the fine; however, the fine was not included in the final order.
After various procedural maneuvers in district court, which arе not relevant here, Bloom filed an adversary proceeding in the bankruptcy court asserting a stay violation. The bankruptcy court found Goichman violated the stay by proceeding in district court after the bankruptcy filing. The district court affirmed and the Ninth Circuit also affirmed. Since the district court relief sought by Goichman was ordering the appointment of a receiver, ordering compliance with the prepetition consent decree, striking the exemption claim and ordering the transfer of assets of the bankruptcy estate to himself, these proceedings did violate the stay. Id. at 226-27.
This limitation on the breadth of Hooker was followed in the unpublished decision of the Federal Circuit, In re Long, 318 F. App‘x 891, 894 (Fed. Cir. 2008), where the postbankruptcy contempt proceedings related to enforcement of the judgment not “improрer conduct during litigation.”
As noted in Debtor‘s brief, the Hooker/Dumas decisions have drawn sharp criticism in other bankruptcy courts. See Atkins v. Martinez (In re Atkins), 176 B.R. 998, 1005 (Bankr. D. Minn. 1994) (“With all due respect to the courts that rendered these decisions [Hooker and Dumas], . . . they are not well-founded.“); Dock C-Food, Ltd. v. Cherry (In re Cherry), 78 B.R. 65, 70 (Bankr. E.D. Pa. 1987) (“We would be inclined to recognize as exemptions from the power of the stay only those specifically set forth in
Other courts have attempted to distinguish Hooker and Dumas. These courts assert that if the contempt proceeding is to deter wrongful conduct such as showing disrespect to the court or filing a frivolous appeal, such contempt proceeding should be allowed to proceed, whereas if a creditor is merely attempting to collect money due under a court order it should be stayed. See In re Musaelian, 286 B.R. 781, 782 (Bankr. N.D. Cal. 2002). The Musaelian court said the state court “alone” would not be stayed if the contempt proceeding
Still other courts have excepted nonbankruptcy contempt proceedings arising from sanction orders by applying one of the statutory exceptions provided in
Although we recognize these different approaches to the issue before us, the precedent of this circuit is set by Hooker as followed post-Code by Dumas: a contempt action for nonpayment of court-ordered sanctions is exempted from the automatic stay unless the proceeding turns on the determination or collection of the underlying judgment. We acknowledge the strength of the points made in the concurrence. We ultimately determine, however, that it is for the Ninth Circuit to make the determination as to the continued validity of the Hooker bright-line test.
Applying this rule here, the contempt proceeding in the Nevada state court was not subject to the stay. Debtor had been ordered to pay attorney‘s fees and costs to Appellants due to his noncooperation with discovery. The relevant civil contempt proceeding arose from his nonpayment under that order. These facts parallel those in Hooker and Dumas which provide the rule of law.
Consequently, the bankruptcy judge erred when he found appellants willfully violated the automatic stay; in this context, no stay existed to violate.9 The sanction award also was error.
VI. CONCLUSION
For the reasons set forth above, we REVERSE the finding of a violation of the automatic stay and the order to pay sanctions.
Concurrence begins on next page.
JURY, Bankruptcy Judge, Concurring:
With reluctance, I concur with the Panel‘s decision reversing the bankruptcy court‘s deсision finding appellants in contempt for violating the automatic stay of
The issues decided by the Hooker court highlight just how undeveloped the concept of the stay in bankruptcy was at the time the decision was rendered. Rather than questioning whether a bankruptcy stay precluded a district court from conducting a contempt proceeding arising from noncompliance with discovery, the issue was initially posed as whether the district court had jurisdiction to issue the order of contempt after the bankruptcy pеtition was filed. The Ninth Circuit recognized the question was not jurisdictional because the stay merely “suspends the proceedings.” That the Circuit was even asked to consider a jurisdictional impact, however, illustrates how novel the stay concept was at the time.
Moreover, Hooker interpreted the impact of a stay provided by then Rule 401(a), a stay limited in scope when compared to the today‘s version of
The filing of a petition shall operate as a stay of the commencement or continuation of any action against the bankrupt, or the enforcement of any judgment against him, if the action or judgment is founded on an unsecured provable debt other than one not dischargeable under clause (1), (5), (6), or (7) of section 35(a) of this title.
At the time of its ruling, the court noted thаt no cases had discussed the precise scope of the Rule 401(a) stay. Hooker, 560 F.2d at 417 n.8. The court, however, was persuaded by the concept that the purpose of the Rule 401 stay was only to prevent adjudication or collection of the underlying unsecured debt, such that collateral proceedings like enforcement of discovery orders did not fall within that province. Thus, the court decided that continuing with the district court contempt proceeding did not violate the Rule 401 stay. This holding established the rule of law applied by the Panel in Dumas.
In the meantime, the Bankruptcy Act of 1978 was enacted and along with it came the automatic stay of
(1) the commencement or continuation, including the issuance or employment of process, of a judicial administrative, or other action or proceeding against the debtor that was or could have been commenced before the commеncement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
. . . [and] (6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title[.]
Clearly, the plain language of the statute today shows that the reach of the stay is much broader than that previously provided by Rule 401(a). Incredibly, at least to me, the Dumas Panel found the “present statute and the former rule are essentially similar.” In re Dumas, 19 B.R. at 677. Because of that perceived similarity, the Panel, without any discussion of the statutory exceptions then listed in
Since Hooker, Ninth Circuit case law has continually recognized and preserved the broad scope of the stay outlined in
[T]he automatic stay plays a vital role in bankruptcy. It is designed to protect debtors from all collection efforts while they attempt to regain their financial footing. As Congress stated: “The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his [or her] creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.”
Id. at 571 (emphasis in original).
In the context of determining that the power to interpret the scope of the automatic stay was exclusively held by the bankruptcy courts, the Circuit again emphasized the broad sweep of the stay in In re Gruntz, 202 F.3d at 1081-82:
The automatic stay is self-executing, effective upon the filing of the bankruptcy petition. . . . The automatic stay sweeps broadly, enjoining the commencement or continuation of any judicial, administrative, or other proceedings against the debtor, enforcement оf prior judgments, perfection of liens, and “any act to collect, assess or recover a claim against the debtor that arose before the commencement of the case.”
The cases which have echoed this interpretation of the breadth of the stay since Schwartz and Gruntz are legion and need not be cited here. However, more recent decisions emphasize the absolute power of the stay. See Sternberg v. Johnston, 595 F.3d 937, 943 (9th Cir. 2010) (“We have held on several occasions that the automatic stay imposes on non-debtor parties an affirmative duty of compliance” to remedy automatic stay violations.); Eskanos & Adler, P.C. v. Leetien, 309 F.3d 1210, 1215 (9th Cir. 2002) (“Consistent with the plain and unambiguous meaning of the statute, and consonant with Congressional intent, we hold that
More than just the scope of the stay is in play here, however. Whatever may have been the perceived scope of the stay before the enactment of the Code, Congress has since regulated the exceptions to the stay by statute. When the Bankruptcy Code took effect in 1978,
The legislative history of
Subsection (b) lists seven exceptions to the automatic stay. The effect of an exception is not to make the action immune from injunction. The court has ample other powers to stay actions not covered by the automatic stay. Section 105 . . . grants the power to issue orders necessary or appropriate to carry out the provisions of title 11. The district court and the bankruptcy court as its adjunct have all the traditional injunctive powers of a court of equity . . . . Stays or injunctions issued under these other sections will not be automatic upon the commencement of the case, but will be granted or issued under the usual rules for the issuance of injunctions. By excepting an act or action from the automatic stay, the bill simply requires that the trustee move the court into action, rather than requiring the stayed party to request relief from the stay. There are some actions, enumerated in the exceptions, that generally should not be stayed automatically upon the commencement of the case, for reasons of either policy or practicality. Thus, the court will have to determine on a case-by-case basis whether a particular action which may be harming the estate should be stayed.
S. Rep. 95-989 (1978), p. 51; H.R. Rep. 95-595 (1977) p. 321 (reprinted in 1978 U.S.C.C.A.N. 5787, 5837).
Congress thus flagged circumstances which it believed, for policy or practical reasons, should not be subject to the stay automatically, shifting the burden to the trustee or debtor to seek a stay if necessary to preserve the estate. Significantly, nowhere in
The oft-quoted maxim of statutory interpretation expressio unius est exclusio alterius also tells us that when a legislature “includes particular language in one section of a statute . . . it is generally presumed that [the legislature] acts intentionally and purposely in the disparate inclusion or exclusion.” Russello v. United States, 464 U.S. 16, 23 (1983). It is true that this principle does not apply “unless it is fair to suppose that Congress considered the unnamed possibility and meant to say no
While it is impossible to know if Congress in 1978 considered excepting contempt proceedings from the automatic stay and rejected that concept, it is logical and makes common sense to apply the maxim expressio unius est exclusio alterius here. Not including all contempt proceedings within the exclusions to the automatic stay is fully consistent with the legislative purpose behind the automatic stay, which is to stop collection actions against the debtor to give him or her breathing space. I do recognize that exceptions to the automatic stay are based on specific policies and that by allowing a contempt action to proceed the dignity of the court issuing the contempt could be upheld. After all, as opined by more than one court, a debtor should not be allowed to disrespect a court order without consequence by retreating behind the automatic stay of a bankruptcy that he or she voluntarily files. But I do not find this policy overcomes the plain language of the statutory exceptions listed in
Further, a bankruptcy court can always grant relief from stay for “cause” to allow the delinquent debtor to face his or her due before the court whose order he or she has disobeyed. The bright-line Hooker exception to the automatic stay for contempt proceedings fails to recognize that not all violations of court orders are of equal magnitude and show disrespect for the cоurt issuing the disobeyed order. Where, as here, the court order was to pay a sum of money to a party litigant for a discovery violation, I view this as an action more to collect money from the debtor than to compel compliance with a court order. Collection of money from the debtor arising from a prepetition debt is just the type of action intended to be stayed by
As noted above, Hooker and Dumas have drawn criticism from at least one bankruptcy court in the Ninth Circuit and courts in other jurisdictions for the same reasons I assert here. One bankruptcy court analyzed the different types of contempt actions I have highlighted above:
Every court faces two types of contempt proceedings: those resulting from a private squabble among litigants, where the role of the court is merely to enforce the law and move the litigation to conclusion, and those resulting from acts truly offensive to the court and tending to interfere with the administration of justice. An example of the former would be a discovery sanction; examples of the latter might include disrespectful conduct in court or the bringing of a frivolous appeal. In order for contempt proceedings to go forward after bankruptcy, there must be a direct, unattenuated need for them in order to deter wrongful conduct and not just collect money.
In re Musaelian, 286 B.R. at 782; see also In re Atkins, 176 B.R. at 1005; In re Cherry, 78 B.R. at 70. I agree with these bankruptcy courts that court-created exceptions to the automatic stay should not have survived the Bankruptcy Act of 1978. Accordingly, a party to a state court contempt proceeding, like all others subject to the § 362 stay, should be required to seek relief from the stay for cause, leaving the determination of whether the action should go forward to the discretion of the bankruptcy court. For all these reasons, I conclude that the stay imposed under § 362(a) should “automatically” apply to contempt proceedings in non-bankruptcy forums.