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Civil and Criminal Contempt
in Bankruptcy Court
by
Clifford J. White III
Assistant United States Trustee - Greenbelt, Maryland
The number of bankruptcy filings has exploded in recent years to reach
more than 1.4 million in fiscal year 1998. Although the number of chapter 11
cases has dipped, the volume of consumer cases continues to grow and, with the
increased filings, so have problems associated with keeping order in the court.
In many jurisdictions, overworked bankruptcy judges have to cope with thousands
of diverse cases, ranging from complex business reorganizations to small
consumer cases that involve pro se debtors or, worse yet, non-attorney
petition preparers whose knowledge of and respect for the rules are often
glaringly deficient. With so many matters to juggle, the need has never been
greater for bankruptcy courts to insist upon prompt compliance with judicial
orders that protect the integrity of the system and the rights of all parties to
a bankruptcy case.
An important arrow in the quiver of bankruptcy courts to uphold the
rule of law is the power to hold parties in civil, or even criminal, contempt of
court. By holding recalcitrant debtors, creditors, lawyers, and other parties in
contempt of court, bankruptcy judges may impose appropriate penalties to
vindicate the authority of the court, to compensate victims of the contemnors'
acts of commission or omission, and to compel compliance with lawful court
orders.
Civil Contempt
It is generally accepted that bankruptcy judges have the power to
enforce their orders by finding violators in civil contempt of court. The
purpose of civil contempt may be either coercive or remedial. Civil contempt
penalties are not punishments, but rather are means by which to bring a party
into compliance with a court order or to force the contemnor to compensate the
victim of his acts that were committed in disregard of a court order.
A court need consider only two factors in determining whether to hold a
party in civil contempt: whether the alleged contemnor had notice of the court
order and whether that person complied with the order. Courts have held that the
contemnor's intent or state of mind is irrelevant. Given the seriousness of the
civil contempt finding and the penalties that may be imposed on the violator,
the court should be satisfied by "clear and convincing" evidence that a party
has committed civil contempt. Furthermore, the court may not impose a civil
contempt penalty if the contemnor can prove an inability to comply (e.g.,
impecunious contemnor cannot pay a fine) or if the underlying order is later
found to be invalid.
The Federal Rules of Bankruptcy Procedure (Fed. R. Bankr. P.) set out
the procedures a court must follow in civil contempt matters. Although contempt
committed in the presence of the judge may be summarily disposed of by the
judge, other instances of contempt require more deliberate steps. Under Fed. R.
Bankr. P. 9020(b), before finding a party in contempt, the court must issue a
written notice that provides specific details about the alleged acts of
contempt, states the time and place of the hearing on the charges, and allows a
reasonable response time. The judge is disqualified from hearing a contempt
charge involving disrespect or criticism of that judge.
A bankruptcy court order of contempt does not become effective for 10
days. The contemnor may object to the finding by filing exceptions with the
district court that will consider the matter de novo. The district court
may confine itself to the record below or take additional evidence. If
objections are not filed, the bankruptcy court order "shall have the same force
and effect as an order of contempt entered by the district court . . . ." Fed.
R. Bankr. P. 9020(c).
Although civil in nature, penalties for civil contempt may be severe.
Civil contempt penalties have been imposed for a wide variety of violations,
including failure to attend § 341 meetings, failure to disgorge fees, and
violation of other court orders. Fines are commonly imposed. If, however, the
court finds that the contemnor is unable to pay a monetary penalty, the court
may be creative. For example, attorneys who fail to disgorge fees have been
enjoined from practicing before the court that issued the disgorgement order
until the fees are refunded.
Insofar as the purpose of civil contempt is to coerce compliance, the
court may impose a regimen of escalating penalties. For example, if the
contemnor pays a fine but still disregards a court order, the court may impose
additional fines. A contemnor who continues to violate a court order may even be
incarcerated. It is increasingly agreed that bankruptcy judges may order the
United States Marshal to take contemnors into custody and even to incarcerate
them until they purge themselves of contempt. As long as the civil contemnor
possesses the "keys to the jailhouse door," he may remain in custody.
In addition to civil contempt, bankruptcy courts sometimes avail
themselves of other similar remedies. For example: Fed. R. Bankr. P. 9011, which
is nearly identical to Fed. R. Civ. P. 11, provides for sanctions against
parties who sign and file court papers; 11 U.S.C. § 349 has been used by some
courts to penalize debtors whose cases are dismissed (such as by enjoining
refiling for a period of time or by denying the discharge of debts in any future
cases); and 28 U.S.C. § 1927 allows federal courts to sanction attorneys who "vexatiously"
protract litigation.
Criminal Contempt
The power of a bankruptcy court to find a party in criminal contempt of
court remains unsettled. Case law appears to be evolving, however, to permit
bankruptcy courts to impose sanctions that may be characterized as criminal in
nature.
Criminal contempt differs from civil contempt in numerous material
respects. The key distinction between civil and criminal contempt is that
contemnors are punished by criminal contempt sanctions. Once criminal
contempt has been committed, the defendant cannot terminate the sanction by
purging herself of the contempt.
Contempt of court is a crime under 18 U.S.C. § 401. Case law establishes
at least three elements of the crime: the court must have issued a reasonably
specific order; the contemnor must have violated the order; and the contemnor
must have acted willfully. Unlike in civil contempt, a criminal contempt
conviction will be upheld even if the underlying order is later invalidated. The
rationale for this principle is that criminal contempt vindicates the authority
of the court.
A final key difference between civil and criminal contempt is that criminal
contempt requires the same "beyond a reasonable doubt" standard of proof that is
required for any other criminal conviction.
Although some courts and commentators have cast doubt on the power of a
bankruptcy court to venture into the arena of criminal contempt, the Bankruptcy
Rules clearly contemplate that bankruptcy judges will exercise criminal contempt
powers. The notice requirement in Fed. R. Bankr. P. 9020(b) expressly requires
that the alleged contemnor be informed in writing of whether the contempt
charged is criminal or civil.
Those convicted of criminal contempt are sentenced under Sentencing
Guideline § 2J1.1. Under that Guideline, the court is directed to apply
whichever Guideline applies to an analogous crime. This means, for example, that
a judge may look to Sentencing Guidelines covering such matters as obstruction
of justice or fraud depending upon the nature of the acts committed.
No authority supports the power of a bankruptcy judge to impose a
criminal sentence of incarceration. In the case of In re Finney, the
bankruptcy court conducted the criminal contempt trial, found the defendant to
be in criminal contempt, and then referred the matter to the district court for
sentencing. Under Fed. R. Bankr. P. 9020(c), the defendant also had 10 days
within which to file exceptions before the bankruptcy court judgment was final.
This procedure has been followed in at least one other case.
Many special issues are presented by criminal contempt proceedings. The
defendant may be entitled to a jury trial, which can only be held in district
court. It is generally accepted that a defendant has a right to a jury trial
before a conviction for any crime other than a petty offense (i.e., a crime
carrying a penalty of six months or less). In addition, the defendant may be
entitled to court-appointed counsel. Moreover, because a defendant is protected
against double jeopardy, the courts and prosecutors should narrowly tailor the
contempt charge so that it is not used to defeat a later indictment on other
related charges. The double jeopardy problem might be more likely to arise for
the unwary who convince a judge to impose a civil sanction that is later found
to be a punishment. In In re Power Recovery Systems, Inc., the United States
Court of Appeals for the First Circuit stated expressly that a higher court is
not bound by a bankruptcy court's label on its own judgment. 950 F.2d 798, 802
(1st Cir. 1991).
There are effective alternatives to seeking criminal contempt sanctions
in bankruptcy court. For example, the government could ask the bankruptcy court
to conduct an evidentiary hearing and to certify its findings to the district
court for de novo consideration. In addition, the wrongdoer can be separately
indicted for his contumacious acts.
United States Trustee (UST) attorneys are instructed to consult with the
United States Attorney's office before initiating or even participating in any
criminal contempt proceedings. Furthermore, in light of the minefield of special
issues that attach to any contempt action, UST attorneys are well advised to
consult with their United States Attorney counterparts about civil contempt
actions and potential sanctions as well.
Conclusion
Debtors ranging from large financial services companies to consumers who
have reached the end of their financial ropes walk through the doors of
bankruptcy courts each day. With a full plate of issues before them on matters
as diverse as tax liability and curing arrearages on home mortgages, bankruptcy
judges play a crucial role in both the commercial and consumer realms of our
economy. Given these broad responsibilities, bankruptcy courts should fully
exercise their powers as federal courts.
United States Attorneys, United States Trustees, and other prominent
litigants in the federal bankruptcy system should ask bankruptcy courts in
appropriate instances to utilize the power of contempt to effect the purposes of
the Bankruptcy Code and to do justice. Federal government lawyers, in
particular, have a responsibility to assist the court in bringing and
prosecuting contempt actions. As just described, the use of the contempt powers
can inure to the benefit of the courts, as well as of the vast majority of
diligent and honest litigants who rely upon the bankruptcy court to provide a
"fresh start" for debtors and an efficient means for repaying creditors.
Bankruptcy Basics - For Cases Filed on or after October 17, 2005 (pdf)
Bankruptcy
Basics - For Cases Filed before October 17, 2005 (pdf)
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