Citing Ninth Circuit precedent from cases under the Bankruptcy Act, the Ninth Circuit BAP reluctantly held that a pre-petition state court civil contempt proceeding is exempt from the automatic stay of sec. 362 of the Bankruptcy Code. The decision of the BAP is Yellow Express, LLC v. Mark Dingley (In re: Dingley), 514 B.R. 591 (9th Cir. BAP 2014).
Pre-petition Yellow Express brought an action against the debtor and two LLCs he owned and controlled seeking judgment on various causes of action. The debtor and his LLCs failed to appear for depositions, and the state court imposed sanctions against them. When the debtor and his LLCs failed to pay the sanctions, Yellow Express filed an application for an order to show cause why the defendants should not be held in contempt for failure to pay the sanctions. The state court entered an order requiring the defendants to appear in court to show cause why they should not be held in contempt for failing to pay the discovery sanctions. Following the issuance of the Order to Show Cause and the date of the contempt hearing, Dingley filed a personal bankruptcy case, but neither of the LLCs filed bankruptcy. The debtor’s state court and bankruptcy counsel notified Yellow Express’ attorney of the bankruptcy filing, asserting the contempt hearing could not proceed in light of the bankruptcy filing. Yellow Express’ attorney replied that Ninth Circuit authority excepted a state court contempt proceeding from the automatic stay, relying on the David v. Hooker, Ltd., 560 F.2d 412 (9th Cir. 1977) andDumas v. Atwood (In re Dumas), 19 B.R. 676 (9th Cir. BAP 1982). The state court vacated the contempt hearing, but requested the parties submit briefing on the applicability of the stay to the contempt hearing. Yellow Express’ attorney submitted its brief as ordered by the state court, with its brief arguing that the contempt proceeding could proceed against the debtor.
The debtor filed a motion in the bankruptcy court to enforce the automatic stay, contending the automatic stay prevented the state court from proceeding with the contempt action against the debtor and seeking sanctions against Yellow Express for willful violation of the stay for filing its state court brief asserting that the stay did not apply to the contempt proceeding. Yellow Express responded, again contending the contempt action was excepted from the stay under prior Ninth Circuit precedent. The bankruptcy court ruled that the contempt proceeding was stayed by the bankruptcy filing and further imposing sanctions against Yellow Express, finding it violated the stay by urging the state court to proceed with the contempt hearing, which was designed to force the debtor to pay the discovery sanctions which had been imposed pre-petition.
On appeal, the BAP reversed, albeit reluctantly. The BAP noted that the Ninth Circuit has created a bright-line rule on whether the automatic stay applies to state court contempt proceedings: 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 contempt proceeding from going forward. Hooker, 560 F.2d at 418. Hooker also involved a state court discovery sanction, directing the debtor to answer interrogatories and pay attorney’s fees. The Ninth Circuit in Hooker held the automatic stay suspends, but does not dismiss, pre-petition state court actions, and that not every aspect of a pre-petition state court action is suspended by the stay. Specifically, the Ninth Circuit ruled that a proceeding addressing the debtor’s disobedience of a state court order issued prior to the automatic stay is not suspended by the stay, as such proceedings are not an “attempt in any way to interfere with the property which had passed to the control of the bankruptcy court; it sought merely to vindicate its dignity which had been affronted by the contumacious conduct of a person who ignored its order.” Id. Following enactment of the Bankruptcy Code, the Ninth Circuit BAP inDumas, relying on Hooker, held that a bankruptcy filing does not stay a sentencing hearing on a pre-petition state court contempt action for violating a subpoena.
The BAP also noted that other courts had interpreted Hookeras creating a judicially-crafted exception to the automatic stay of sec. 362(a). KuKui Gardens Corp. v. Holco Capital Group, 675 F. Supp. 2nd 1016 (D. Haw. 2009); Lowery v. McIlroy & Millian (In re Lowery), 292 B.R. 645, (Bankr. E.D. Mo. 2003). The BAP further noted that other courts have criticized Hooker and Dumas, stating that there should be no judicially-created exceptions to the automatic stay. In addition, the BAP referred in its opinion to other courts which had distinguishedHooker and Dumas, finding that a state court civil contempt proceeding can be justified if it is brought solely to deter wrongful conduct such as showing disrespect to the court, but is not justified if a creditor is using it merely to collect money due. See In re Musaelian, 286 B.R. 781 (Bankr. N.D. Cal. 2002). Finally, the BAP noted that two courts, including the Ninth Circuit, have excepted pre-petition contempt proceedings under one of the statutory exceptions found in sec. 362(b). Alpern v. Lieb, 11 F.3d 689 (7th Cir. 1993); Berg V. Good Samaritan Hosp. (In re Berg), 230 F. 3d 1165 (9th Cir. 2000).
The BAP ultimately reached its decision to reverse the bankruptcy court based on the precedent of Hooker andDumas, ruling that a contempt action for nonpayment of court-ordered sanctions is not stayed by the automatic stay of sec. 362 unless the contempt proceeding turns on the determination or collection of the underlying debt. The concurring opinion stated that, while Hooker is binding, its creation of the judicially-crafted exception to the automatic stay for state court contempt proceedings, is inconsistent with the modern breadth of the automatic stay and at odds with the plain language of the statute. The majority opinion saw merit in the concurrence’s statement, but stated that it is up to the Ninth Circuit to determine whether Hooker remains valid law.