The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:
The District Court for the District of Utah (the Court) recently ruled that that automatic stay imposed by Bankruptcy Code § 362 did not bar a federal district court contempt proceeding from going forward after the contemnor filed a chapter 7 bankruptcy. Pizzella v Paragon Contractors Corp., 2022 WL 1224975 (D. Utah, April 26, 2022).
To view the opinion, click here.
In 2015 the United States Department of Labor filed a motion for order to show cause (OSC) why Brian Jessop (Jessop) and Paragon Contractors should not be held in contempt for their 2012 violation of the Court’s 2007 Permanent Injunction barring illegal use of child labor. This OSC resulted in an order compelling Jessop and Paragon to pay about $1 million in compensatory sanctions to child laborers for back wages. Because the bulk of that sum remained unpaid, in August 2021 the Court issued an Order Appointing Receiver (Receivership Order) to assist in enforcing payment of the monetary sanction.
In December 2021 the receiver filed a motion for OSC as to why Jessop and Paragon should not be held in contempt for violating the Receivership Order. On the eve of the scheduled March 2022 hearing on the OSC, Jessop filed a chapter 7 bankruptcy. He then objected to the hearing going forward based on the automatic stay. Despite this objection the Court held the hearing and found Jessop and others in contempt. Further hearings in the contempt matter took place, with the Court ruling that the automatic stay did not prevent it from proceeding with the OSC. In this written Memorandum Decision, the Court explained why the stay did not apply.
The Court based its decision on the Tenth Circuit ruling in ClearOne Communications, Inc. v Bowers, 509 F. App’x 798 (10th Cir2013), where the circuit found that a district court did not violate the automatic stay by holding a postpetition contempt hearing which found a chapter 7 debtor liable for a party’s fees and costs incurred while attempting to enforce a court order. The circuit noted that “Congress could not have meant for [the] bankruptcy stay to strip the federal courts of their inherent power to enforce their orders in civil contempt proceedings.” Id.
Both the circuit in ClearOne and the Court here reasoned that the civil contempt proceedings were necessary to uphold the “dignity of the court” as well as punish the contemnor for violation of a lawful order. The Court noted the remedial nature of the punishment in civil contempt, finding that such order was more than just a monetary judgment but was an intended sanction for misbehavior. It also consulted other nonbinding decisions which similarly distinguished contempt proceedings from those subject to the automatic stay, resting its final conclusions on the right of a federal court to manage its own affairs and assure that its orders were obeyed.
I write on this decision because it reminds me of the Ninth Circuit BAP’s published decision in In re Dingley, 514 B.R. 591 (9th Cir. BAP 2014), where I wrote a concurrence. Id. at 600. The BAP was compelled to reverse a bankruptcy court decision which had found a violation of the automatic stay when a state court proceeding to enforce a collection order proceeded notwithstanding the stay. A Bankruptcy Act case from the 70’s, David v. Hooker 560 F. 2d 412 (9th Cir. 1977), which had been followed in a scantly reasoned BAP decision under the new Bankruptcy Code, Dumas V. Atwood, 19 B.R. 676 (9th Cir. BAP 1982), created precedent which the BAP had to follow. However, for many reasons articulated in my concurrence, I thought the Ninth Circuit should revisit that authority, in hopes of bringing its authority in line with the current concept of the automatic stay. The Ninth Circuit affirmed the BAP, In re Dingley, 852 F. 3d 1143 (9th Cir. 2017), but it used a different tack to do so; my concurrence’s reasoning was not addressed. I will not repeat those arguments here, as any reader can read them in the published opinion, but I remain concerned that allowing another court’s civil contempt to go forward in face of the automatic stay is antithetical to Congressional intent. I do not see this issue being resolved by well-reasoned precedent in the near future.
This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.