This article was first published in the summer 2014 issue of NABTalk, the publication of the National Association of Bankruptcy Trustees.
We are all familiar with the often-repeated policy that: “The principal purpose of the Bankruptcy Code is to grant a ‘fresh start’ to the ‘honest but unfortunate debtor.’” Marrama v. Citizens Bank of Massachusetts 549 U.S. 365, 367, 127 S.Ct. 1105, 1107 (U.S. 2007). But what are a trustee and creditors to do when faced with a debtor who is neither honest nor unfortunate? What if your case involves a debtor who is uncooperative, deceitful, suffers from chronic memory lapses when under oath, has an attitude problem, attempts to hide assets, routinely operates in bad faith, or, is just plain difficult? Among the debtor’s duties set forth in § 521 of the Code is a requirement that the debtor shall “cooperate with the trustee as necessary to enable the trustee to perform the trustee’s duties under this title.” 11 U.S.C. § 521(a)(3). Often, a difficult debtor will consider part or all of § 521 more of a suggestion (if not outright optional) than a mandate. This article will focus on the use of contempt as a tool for coercing a debtor to comply with the obligations imposed by the Bankruptcy Code and denial of discharge as a remedy for debtors who do not find the threat of contempt persuasive.
CONTEMPT AS A TOOL FOR COERCING COMPLIANCE
Debtors and prisons have gone hand in glove (or iron shackle) for a long time, at least as far back as 451 B.C.E. under Roman law, which permitted imprisonment of debtors (after which time, if the debtor had not repaid the debt he would either be sold into slavery or executed). Jayne S. Ressler, Civil Contempt and the Bankruptcy Abuse and Consumer Protection Act of 2005: An examination of Debtor incarnation in the Modern Age, 37 Rutgers L.J. 355, 357 (2006). In the United States today, although imprisoning debtors on account of a debt is statutorily prohibited, 28 U.S.C. § 2007, debtors can indirectly be imprisoned for failure to pay a debt through the use of civil or criminal contempt. Ressler at 368. While both civil and criminal contempt can result in prison time, the primary distinction between civil and criminal is the purpose of the prison time. Criminal contempt serves a punitive purpose and so imprisonment for criminal contempt will usually be for a finite period of time imposed as a punishment. Civil contempt is intended to be strictly coercive, and to that end, an order of civil contempt is not for a specific period of time, but for as long as it takes for the debtor to comply. E.g. the debtor holds to keys to his own cell, and will be released upon compliance. Ressler at 371.
So what are the steps that lead a difficult debtor to jail? Unlike the game of Monopoly, bankruptcy judges are loath to pass out “go directly to jail cards,” which means that trustees and creditors have to build their case one step at a time. Often, the place to start is with a request for voluntary compliance, such as a letter or e-mail to debtor’s counsel, or directly to the debtor if he is pro se, requesting something: turnover of documents, appearance at a continued 341 meeting, a date for visiting and access to real property. In the voluntary request, always include a specific deadline for compliance. Once that deadline has passed with no response from the debtor, the next step is to file a motion asking the court to direct the debtor take the action that was not done voluntarily, for example appear and produce documents for a 2004 exam (Bankruptcy Rule 2004) or allow the trustee and his professionals access to real or personal property (Bankruptcy Rule 7034). In the proposed order, be as specific as possible about what the debtor is being directed to do and the timeframe in which he has to do it. Once the order has been entered and the debtor again fails to comply, the next step is to file a motion to show cause why the debtor ought not be held in civil contempt for failure to comply with the court order. Schedule a hearing for the motion, and include a notice of hearing with the motion. The proposed order should direct the debtor to appear at the hearing and show cause why he ought not be held in civil contempt. Set a deadline prior to the hearing for the debtor to file a response to the show cause motion explaining either that in the interim he has complied or explaining any reason he might have justifying the failure to comply. It is also appropriate in the motion to ask for an award of the attorneys’ fees and costs associated with bringing the show cause motion as a sanction.
When the court holds the hearing on the motion to show cause, it will decide whether a finding of civil contempt is appropriate. Contempt proceedings in bankruptcy are addressed by Rule 9020, which, since amendments in 2001, provides only that such motions are governed by Rule 9014’s contested matter provisions. Section 105 of the Bankruptcy Code provides that “[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. § 105(a). The Fourth Circuit has interpreted this subsection to empower bankruptcy courts to issue civil contempt orders.Burd v. Walters (In re Walters), 868 F.2d 665, 669-71 (4th Cir. 1989), see also, Musika v. Adkins (In re Butler), 1995 U.S. App. LEXIS 22248, No. 95-1354, No. 95-1906 (4th Cir. Aug. 15, 1995) (finding that a district court order of house arrest pending compliance with a turnover order and civil contempt order stemming from failure to comply with the turnover order was within the discretionary power of the district court). To establish contempt, the movant must show: (1) the existence of a valid decree of which the alleged contemnor had actual or constructive knowledge; (2) that the decree was in the movant’s “favor;” (3) that the alleged contemnor by its conduct violated the terms of the decree, and had knowledge (at least constructive) of such violations; and (4) that the movant suffered harm as a result. JTH Tax, Inc. v. H&R Block E. Tax Servs., 359 F.3d 699, 705 (4th Cir. 2004); In re Hercules Enter., Inc., 387 F.3d 1024 (9th Cir. 2004) (In order to find civil contempt, “the bankruptcy court had to find that he violated a specific and definite order and that he had sufficient notice of its terms and the fact that he would be sanctioned if he did not comply.” Bankruptcy court had power to sanction for civil contempt, but not to make such sanction nondischargeable in future bankruptcies.). In re Stasz, 387 B.R. 271 (B.A.P. 9th Cir. 2008) (Failure to comply with repeated orders to appear at a Rule 2004 exam justified order of contempt and award of attorney fees as sanctions.)
It is at this point, if faced with an especially hostile debtor, that the trustee or creditor can ask the court to enter an order directing the U.S. Marshal Service to assist, either by accompanying the trustee on a visit to the debtor’s property, or otherwise detain the debtor as necessary to induce compliance. To this end, Bankruptcy Rule 2005 allows for apprehension and removal of a debtor to compel attendance for examination.
The case of In re Todd Allen Fulcher, 2010 Bankr. LEXIS 2621, 2010 WL 3087488, Case No. 10-00169-8-RDD (Bankr. D. N.C. Aug. 3, 2010), is not only an entertaining read, but also an efficient roadmap for the route from a debtor’s non-compliance to a debtor’s confinement. Mr. Fulcher was ordered to appear at a 341 meeting. Instead: “While staying with [a friend] for few days, the Debtor developed a plan to go to Florida with Kelli Cox, his girlfriend. He purchased a camper to drive to Florida.” About this plan, he testified that, “he did not know why he was going to Florida.” He did not appear at the 341 meeting, because he “stated that he overslept and did not wake up until 4:00 p.m. or 5:00 p.m. on April 1, 2010,” and he lied to a U.S. Marshal about surrendering himself. The court ordered the debtor to be apprehended by the U.S. Marshal Service and confined until his meeting of creditors or until trustee obtained evidence necessary for the administration of the debtor’s individual and corporate bankruptcy cases. The court noted that Rule 2005(c) requires that the conditions of release be governed by the policies and provisions of 18 U.S.C. § 3146(a) and (b). Section 3146 provides that failing to appear is an offense in and of itself and that the penalty for doing so may not exceed one year. The court also found that 28 U.S.C. § 1826 applied, “as a result of [the debtor] repeatedly failing to comply with orders and instructions of this Court.” Id. at *3,citing In re Younger, 986 F.2d 1376, 1378 (11th Cir. 1993) (finding that confinement in a bankruptcy case is permitted but limited to the length of the bankruptcy case or eighteen months, whichever is less). Mr. Fulcher later pled guilty to bankruptcy fraud.
Although bankruptcy courts have the authority to issue order of civil contempt, the district court and the U.S. Attorney will have to be involved when an order for criminal contempt is sought, as the Court explained in Rosen v. Rood (In re Rood), 2009 U.S. Dist. LEXIS 99867, 2009 WL 3614851, Misc. No. DKC 09-0186 (D. Md. Oct. 27, 2009). In Rosen v. Rood, the debtor was accused of violating a preliminary injunction prohibiting him from directly or indirectly transferring or receiving money or property without further court order. The court explained that the procedure for pursuing criminal contempt must involve referral to the U.S. Attorney, because in a criminal matter the defendant had the right to be prosecuted by an independent prosecutor. The court found that the chapter 7 trustee was not an independent prosecutor to sufficiently afford the debtor this Constitutional protection. The court looked to the procedure under former Rule 9020 that had been followed in In re Finney, 167 B.R. 820 (E.D. Va. 1994), where a bankruptcy court order became final after ten days, after which the matter could proceed before the district court only as to punishment. The Rosen court concluded that this Rule had been amended because of concern that it fell short of providing sufficient due process for the debtor. Thus, a trustee or creditor in bankruptcy cannot seek criminal contempt without the involvement of the U.S. Attorney as an independent prosecutor.
DENIAL OF DISCHARGE WHERE DEBTOR FAILED TO FIND CONTEMPT SUFFICIENTLY COERCIVE
When civil contempt, criminal contempt, and/or the assistance of the United States Marshal service is not quite persuasive enough to motivate a difficult debtor to comply with the Bankruptcy Code or a court order, a potential remedy is denial of discharge under 11 U.S.C. § 727. In this regard, it is important to calendar and extend the deadline for objecting to discharge, because even if an adversary proceeding is not ever filed, keeping the deadline open can often put the debtor in a more cooperative frame of mind than he might be in after the discharge has been entered. When drafting a motion to extend the deadline to object to discharge, it is a good idea to extend it not only for the trustee or creditor, but also for the Office of the United States Trustee, in case that office decides to become involved.
The District Court recently upheld the Bankruptcy Court’s denial of discharge in Moore v. Robbins, 2014 WL 930852, *2 (D.D.C., March 11, 2014). In that case, the chapter 7 trustee sought denial of the debtors’ discharge because after he had secured the assistance of the U.S. Marshal Service in obtaining access to real property, the debtors returned to the real property and changed the locks in order to prevent the trustee and his realtor from having continued access. This required the chapter 7 trustee to obtain a second order directing the U.S. Marshal’s Service to assist in giving access to the property. In that discharge trial, straight forward questions such as, “Please state your names for the record” resulted in the following:
When the hearing commenced, the appellants stated their appearances as “Cecilia ... the executive and beneficiary for the legal person, Maria Ford Moore,” and “Johnny, the executor, administrator and beneficiary of the legal name, Johnny Andrews Moore Trust.” Id. at 2:10–19, ECF No. 5. Mrs. Moore objected to the attorney for the appellee calling her a debtor because Mrs. Moore stated she was “not a debtor. [She was] a charter guardian.” Id. at 10:17–21.
Moore v. Robbins, 2014 WL 930852, *2 (D. D.C., March 11, 2014). Mrs. Moore explained the following in her opening statement: “Judas betrayed Christ for a few pieces of silver ... the United States Government and the state of the trustees, of the trust created under this public law, one which place all property
of the people into the U.S. Government and state, and that these possessions are a trust to be used as a credit line, okay?” Id. at *2. Notwithstanding, or perhaps in part supported by this type of conduct in the courtroom, “[t]he Bankruptcy Court found that the appellants, at the very least, were aware of its orders to cooperate with the Chapter 7 trustee and allow access to the appellants’ property when they chose to change the locks on their property.”Id. at *6. The District Court found that this conclusion was not clearly erroneous and that it, “was a willful violation of the Bankruptcy Court’s order to the appellants to cooperate with the trustee,” sufficient to merit denial of discharge.
The U.S. Trustee was also successful in United States v. Sieber (In re Sieber), 489 B.R. 531 (Bankr. D. Md. 2013), where it brought an adversary proceeding seeking denial of the debtor’s discharge pursuant to § 727(a) and alleging that the debtor concealed and transferred assets, failed to produce adequate records, and made false oaths in the bankruptcy case. In that case, like Mrs. Moore, the debtor also made his own opening statement. He said, “The testimony is going to show that the only thing they’re able to prove is that there was conflicting testimony at different times in the proceeding. Yes, that is stipulated to and the testimony will show that that is stipulated to. There is nothing in the world wrong with that. People change their testimony in the course of trials and in the course of litigation and the course of friendships and business all the time with just cause to do so.”Id. at 543. The debtor repeatedly attempted to explain away previous inconsistent statements by claiming that “his prior representation was made to the ‘best of his knowledge and belief at the time.’“Id. at 543. The Bankruptcy Court was not persuaded. It concluded: “The Debtor’s failure to fulfill the duties of a debtor in bankruptcy, his failure to be truthful in representing the facts, his failure to seek court authorization to undertake certain actions, and his failure to disclose transactions during the course of his bankruptcy case has resulted in the denial of his discharge.” Id.
In cases with difficult debtors, civil contempt, criminal contempt, the assistance of the U.S. Marshal Service, and denial of discharge will be important tools and remedies for trustees and creditors.