Commercial Litigation and Arbitration

Despite Bankruptcy Court’s Inability to Impose Criminal Contempt for Acts Outside Its Presence, Injunction of State Court Case Upheld — Elements of Civil Contempt — Civil vs. Criminal Contempt

In the Matter of Lothian Oil, Inc. (Grossman v. Belridge Grp.), 2013 U.S. App. LEXIS 9353 (5th Cir. May 8, 2013):

Appellants/Cross-Appellees-the Anti-Lothian Bankruptcy Fraud Committee, Israel Grossman, and other individuals and entities-challenge a bankruptcy court's order enjoining their prosecutions of two state-court actions. The bankruptcy court reasoned that the state-court actions violated the plan injunction in the bankruptcy proceeding of debtor Lothian Oil, Inc. and its related corporate entities. The bankruptcy court later entered a contempt judgment against Appellants/Cross-Appellees after finding that they had failed to comply with the court's injunction order. On appeal, the district court affirmed the injunction relating to the later of the two state-court actions, reversed the injunction relating to the earlier one, and reversed the contempt judgment. Appellants/Cross-Appellees appeal the district court's affirmance of the injunction of the later state-court action. Appellees/Cross-Appellants Belridge Group and the Lothian debtors appeal the reversal of the injunction of the earlier state-court action and the reversal of the contempt judgment. For the following reasons, we find that the bankruptcy court did not err in enjoining both state-court actions and imposing sanctions. We accordingly affirm in part and reverse in part the district court's decision. ***

V. Contempt

After finding that Anti-Lothian repeatedly violated its injunction order, the bankruptcy court issued a contempt judgment holding Anti-Lothian in civil contempt and imposing sanctions. The district court reversed the contempt judgment after determining that the LEaD II action should not have been enjoined. It found that "[t]he Bankruptcy Court's finding that the LEAD II Lawsuit violated the Plan Injunction was erroneous and so any contempt judgment against appellants for prosecuting the LEAD II Lawsuit must be reversed." It reversed the entire contempt judgment because the bankruptcy court's contempt finding and calculation of the sanctions' amount was partially based on Anti-Lothian's continued prosecution of the LEAD II action. Because we affirm the bankruptcy court's injunction order, we similarly affirm its contempt judgment.

A. Contempt Power

"It is settled law that the power to punish for contempt is an inherent power of the federal courts and that it includes the power to punish violations of their own orders." In re Bradley, 588 F.3d 254, 265 (5th Cir. 2009) (internal quotation marks and citation omitted). While bankruptcy courts as non-Article III courts lack the power to impose criminal contempt sanctions for conduct committed outside the presence of the court, they retain the power to impose civil contempt under § 105 of the Bankruptcy Code. Id. at 266. "A bankruptcy court's assessment of monetary sanctions for contempt is reviewed for abuse of discretion." Id. at 261. A court "abuses its discretion if it awards sanctions based on an erroneous view of the law or on a clearly erroneous assessment of the evidence." Connor v. Travis Cnty., 209 F.3d 794, 799 (5th Cir. 2000) (internal quotation marks and citation omitted).

B. Contempt Judgment

We begin by observing that Anti-Lothian's conduct satisfied the elements necessary for imposing a civil contempt sanction. To hold a party in civil contempt, a court must find "(1) that a court order was in effect, . . . (2) that the order required certain conduct by the respondent, and (3) that the respondent failed to comply with the court's order." FDIC v. LeGrand, 43 F.3d 163, 170 (5th Cir. 1995). The bankruptcy court expressly enjoined Anti-Lothian from further litigating the LEaD II and Kings County actions. Anti-Lothian proceeded to file numerous additional pleadings in both actions in contravention of the injunction order. While it is true that "a bankruptcy court's inherent power to punish bad-faith conduct does not extend to actions in a separate state court proceeding," here the imposition of sanctions was appropriate because the state-court actions were intertwined with the bankruptcy court's orders and included issues previously resolved by the bankruptcy court. In re Case, 937 F.2d 1014, 1023-24 (5th Cir. 1991) (reversing sanctions award where "[t]he conduct of the parties in the state action [could not] be said to affect the exercise of the judicial authority of the bankruptcy court or limit the bankruptcy court's power to control the behavior of parties and attorneys in the litigation before it").

Footnote 15. Even if we accepted Anti-Lothian's contention that it was acting in good faith, this would not excuse its conduct. See Chao v. Transocean Offshore, Inc., 276 F.3d 725, 728 (5th Cir. 2002) ("Good faith is not a defense to civil contempt; the question is whether the alleged contemnor complied with the court's order.").

In seeking to avoid this result, Anti-Lothian only disputes the imposition of sanctions, not the sanctions' amount. It raises two arguments rejected by the district court. First, Anti-Lothian argues that the contempt judgment was an improper criminal sanction. Second, Anti-Lothian contends that the contempt judgment constitutes impermissible fee shifting. Neither argument has merit. In determining whether a contempt judgment imposed a criminal or civil sanction, we consider the primary purpose for which the contempt order was entered:

If the purpose of the sanction is to punish the contemnor and vindicate the authority of the court, the order is viewed as criminal. If the purpose of the sanction is to coerce the contemnor into compliance with a court order, or to compensate another party for the contemnor's violation, the order is considered purely civil.

In re Bradley, 588 F.3d at 263 (internal quotation marks and citation omitted).

Here, the bankruptcy court's contempt judgment included both remedial and coercive components. The contempt judgment served a remedial purpose because it sought to "partially reimburse" Lothian for costs incurred as a result of the state-court actions through its imposition of a $500,000 sanction against Anti-Lothian's then-attorneys, and a $100,000 sanction in Belridge Group's favor. The contempt judgment also served a coercive purpose by imposing a $10,000 sanction for every additional pleading in the state-court actions. This theoretically should have persuaded Anti-Lothian to first obtain leave from the bankruptcy court before filing additional pleadings in the state-court actions. The sanctions' failure to do so does not alter the contempt judgment's civil nature.

Turning to Anti-Lothian's second argument, parties generally bear their own litigation costs. See In re Jack/Wade Drilling, Inc., 258 F.3d 385, 390 n.4 (5th Cir. 2001). However, one exception to this rule is for willful disobedience of a court order. Chambers v. NASCO, Inc., 501 U.S. 32, 45 (1991). Given Anti-Lothian and its attorneys' decision to ignore the injunction order, we have little difficulty in concluding that this exception applies here.

We thus hold that the bankruptcy court did not abuse its discretion in imposing sanctions on Anti-Lothian-and its former attorneys Grossman and Sokol-for continuing to prosecute the LEaD II and Kings County actions in violation of the court's injunction order.

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