Line Between Civil & Criminal Contempt “Is Not Always Clear” — Non-Compensatory Sanctions Can’t Be Greater Than Needed to Ensure Compliance & Not So Excessive as to Be Punitive — Punitive Sanctions Require Callous Disregard (Good Quotes)

In re McLean (Green Point Credit, LLC v. McLean), 2015 U.S. App. LEXIS 12736 (11th Cir. July 23, 2015):

Green Point Credit, LLC and Green Tree Servicing LLC (collectively, "Green Tree") appeal the judgment the district court entered in its role as bankruptcy appellate court concerning an adversary proceeding that debtors Deborah and Eric McLean filed against Green Tree in the bankruptcy court. The district court affirmed the bankruptcy court's ruling that Green Tree violated the discharge injunction under 11 U.S.C. § 524(a)(2) by filing a proof of claim in the McLeans' instant bankruptcy proceeding to collect a debt that was discharged in their previous bankruptcy proceeding. The order also affirmed the bankruptcy court's award of both compensatory and non-compensatory sanctions to the McLeans.

This appeal presents a novel question: whether a creditor violates the discharge injunction under § 524(a)(2) by filing a proof of claim in a bankruptcy proceeding to collect a debt that was discharged in a previous bankruptcy proceeding. Green Tree asks us to answer this question in the negative or, in the alternative, to vacate the compensatory sanctions for lack of evidentiary foundation and the non-compensatory sanctions for being [*2]  impermissibly punitive. After careful review, and with the benefit of oral argument, we conclude that Green Tree violated the discharge injunction; however, we vacate both monetary awards and remand to the district court with instructions to vacate and remand to the bankruptcy court.

I.

The McLeans have twice met Green Tree in bankruptcy court. Their first encounter began in 2006, when the McLeans listed Green Tree as an unsecured creditor in their Chapter 13 petition in the Bankruptcy Court for the Middle District of Alabama. The bankruptcy court converted the petition to a Chapter 7 petition and subsequently discharged the debt, a deficiency of $11,018.00 on a sales contract for a mobile home, in its January 2009 discharge order. Green Tree received electronic notice of the discharge.

In June 2012, the McLeans filed a second Chapter 13 petition in the same bankruptcy court. This petition did not list Green Tree as a creditor. Despite the 2009 discharge order, Green Tree filed a proof of claim in the second proceeding for a debt in the amount of $11,018.03, representing the same deficiency that Green Tree had sought to recover in the [*3]  McLeans' first proceeding. The McLeans learned of this filing in a letter from the bankruptcy court informing them that their projected bankruptcy plan payments were going to double because of the filing.

According to the McLeans, this revised projection caused them emotional distress because they were unable to make the increased payments and expected to lose all their possessions as a result. The McLeans objected to the proof of claim on December 13, 2012 on the basis that the debt previously had been discharged.

On January 7, 2013, before the bankruptcy court ruled on the objection, the McLeans initiated an adversary proceeding against Green Tree with a complaint alleging that Green Tree's proof of claim violated 11 U.S.C. § 524(a)(2), which provides that a discharge order operates as an injunction against further debt collection activities by creditors. Four days after [*4]  the McLeans filed their complaint, Green Tree withdrew its proof of claim. Green Tree has since acknowledged that it filed the proof of claim in error, due to the failure of its automated electronic system to recognize that the McLeans' debt had been discharged. Still, the McLeans sought to recover actual damages for the emotional distress that the proof of claim caused before it was withdrawn and sanctions befitting of Green Tree's misconduct. The bankruptcy court sustained the McLeans' objection in the bankruptcy proceeding on January 16, 2013. After a trial in the adversary proceeding, the bankruptcy court found in favor of the McLeans, ruling that Green Tree violated the discharge injunction. The bankruptcy court awarded the McLeans compensatory sanctions for their emotional distress and a non-compensatory award that it labeled "coercive sanctions," which were designed to encourage Green Tree to correct any defects in its automated systems that could cause another such violation.

Green Tree appealed to the district court, which affirmed the bankruptcy court's judgment. The district court agreed with each of the bankruptcy court's [*5]  conclusions but took care to address the risk that the non-compensatory sanctions, which the bankruptcy court imposed after Green Tree withdrew its offending proof of claim, might have been of a punitive, rather than coercive, nature. Finding Green Tree acted with reckless disregard of the risk of violating the discharge injunction, the district court concluded that, even if there remained no contempt that Green Tree could have corrected before the bankruptcy court imposed them, the sanctions could be upheld as punitive. This appeal followed.

***

V.

We now review the sanctions imposed for Green Tree's contempt in violating the discharge injunction. Before addressing whether the district court's compensatory award was proper, we consider whether the bankruptcy court erred in imposing $50,000 in non-compensatory sanctions. Apart from its legal argument concerning the effect of a proof of claim, Green Tree does not contest that it was in contempt. Indeed, to find contempt, the bankruptcy court needed only to find that Green Tree was aware of the discharge injunction and intended the action that violated it, neither of which is disputed. See Hardy, 97 F.3d at 1390. Instead, the parties dispute the nature of the non-compensatory sanctions and whether they were appropriate in the light of Green Tree's withdrawal of its proof of claim prior to the adjudication of contempt. We conclude that these sanctions were punitive in nature and that the bankruptcy court erred by failing to afford Green Tree the due process that imposing [*19]  such sanctions requires.

We first address the nature of the non-compensatory sanctions. The line between civil and criminal contempt sanctions is not always clear, in part because "conclusions about the civil or criminal nature of a contempt sanction are properly drawn[] not from the subjective intent of . . . laws and [] courts[] but from an examination of the character of the relief itself." Int'l Union, United Mine Workers of Am. v. Bagwell, 512 U.S. 821, 828 (1994) (citation and internal quotation marks omitted). "Sanctions in civil contempt proceedings may be employed for either or both of two purposes: to coerce the defendant into compliance with the court's order, and to compensate the complainant for losses sustained." F.T.C. v. Leshin, 719 F.3d 1227, 1231 (11th Cir. 2013) (alteration and internal quotation marks omitted) (quoting Local 28 of Sheet Metal Workers' Int'l Ass'n v. EEOC, 478 U.S. 421, 443 (1986)), cert. denied, __ U.S. __, 134 S. Ct. 901 (2014). The bankruptcy court and district court characterized the non-compensatory sanctions as coercive sanctions, the sole purpose of which is typically to bring an end to an ongoing contempt. For this reason, they "cannot be any greater than necessary to ensure such compliance and may not be so excessive as to be punitive in nature." Jove, 92 F.3d at 1558 (internal quotation marks omitted). Punitive sanctions, by contrast, [*20]  take the form of a fixed fine and have no practical purpose other than punishment; it is immaterial to a court imposing such sanctions that a contemnor might be fully in compliance with the order in question at the time the sanctions are imposed. See Bagwell, 512 U.S. at 828-29. Because punitive sanctions are for offenses already completed, they take on the character of criminal punishment and render the contempt criminal in nature. Id. Keeping these differences in mind, "[i]n determining whether a sanction for contempt is coercive [rather than punitive], [we] must ask (1) whether the award directly serves the complainant rather than the public interest and (2) whether the contemnor may control the extent of the award." Hardy, 97 F.3d at 1390 (internal quotation marks omitted).

Whether the award is coercive or punitive determines the level of process that a court owes an alleged contemnor in prosecuting the contempt. "[T]he requirements of due process in a civil contempt proceeding are flexible, varying with the circumstances of each case." Mercer v. Mitchell, 908 F.2d 763, 769 n.11 (11th Cir. 1990).4 At most, due process requires only "skeletal" protections in civil contempt proceedings: a show-cause order providing notice and a hearing [*21]  in which the alleged contemnor, who may be represented by counsel, can introduce evidence rebutting the allegation of contempt and testify on its own behalf. Id. at 767. Conversely, "[c]riminal contempt is a crime in the ordinary sense," and so due process requires more stringent protections in criminal contempt proceedings. Bagwell, 512 U.S. at 826 (internal quotation marks omitted). In addition to the protections a court must afford in any contempt proceeding, an alleged contemnor must also be "presumed innocent, proved guilty beyond a reasonable doubt, . . . [and] afforded a jury trial for serious contempts." Young, 481 U.S. at 798-99 (citations omitted); see also Fed. R. Crim. P. 42.

4.  "For example, . . . when there are no disputed factual matters that require an evidentiary hearing, the court might properly dispense with the hearing prior to finding the defendant in contempt and sanctioning him." Mercer, 908 F.2d at 769 n.11.

Green Tree argues that by withdrawing its proof of claim it "purge[d]" its contempt as to the McLeans and became compliant with the discharge injunction. Appellants' Br. at 29-30; see Jove, 92 F.3d at 1558 (citing Local 28, Sheet Metal Workers' Int'l Ass'n v. EEOC, 478 U.S. 421, 444 (1986)). On that view, any sanctions the court imposed thereafter were punitive rather than coercive. We agree. Applying the [*22]  test we adopted in Hardy for determining the nature of sanctions for violations of the discharge injunction, we conclude that (1) the purpose of the non-compensatory sanctions was primarily to serve the public interest, and (2) Green Tree was unable to lift the sanctions through compliance. See Hardy, 97 F.3d at 1390. First, both the bankruptcy court and the district court justified the sanctions in terms demonstrating that their objective was to benefit other parties beyond the McLeans. The bankruptcy court sought "to encourage Green Tree [to] take a fresh look at [its] internal procedures to ensure that they are designed to prevent violations of § 524." McLean v. Green Point Credit LLC (In re McLean), No. 12-11045-WRS, 2013 WL 5963358, at *4 (Bankr. M.D. Ala. Nov. 8, 2013). Similarly, the district court concluded that non-compensatory sanctions were necessary to "coerce [Green Tree] to improve its computer system so as not to commit any more violations of the discharge injunction." McLean v. Greenpoint Credit LLC, 515 B.R. 841, 850 (M.D. Ala. 2014). Second, at the time the bankruptcy court issued the sanctions, Green Tree had already withdrawn its proof of claim, leaving no ongoing violation of the discharge injunction for Green Tree to rectify. As a result, Green Tree did not "carr[y] [*23]  the keys of [its] prison in [its] own pocket." See Bagwell, 512 U.S. at 828 (internal quotation marks omitted). The "flat, unconditional fine" of $50,000 that the bankruptcy court imposed was punitive. See id. at 829 (internal quotation marks omitted).

Having determined that the non-compensatory sanctions were punitive, we must vacate them. There is no indication in the record that the bankruptcy court employed the procedural protections owed to an alleged criminal contemnor. See Young, 481 U.S. at 798-99. Although bankruptcy courts enjoy broad discretion under § 105 to fashion their orders, the statute cannot abrogate an alleged criminal contemnor's fundamental right to a fair proceeding. We therefore direct that the case be remanded to the bankruptcy court so that it may decide how properly to dispose of the McLeans' request for non-compensatory sanctions in the light of Green Tree's withdrawal of its proof of claim.

Although we decline to decide the merits of the McLeans' request for this relief, we note that, in bankruptcy as well as other contexts, courts have "traditionally been reluctant to grant punitive damages absent some showing of reckless or callous disregard for the law or rights of others." Goichman v. Bloom (In re Bloom), 875 F.2d 224, 228 (9th Cir. 1989); see also Kolstad v. Am. Dental Ass'n, 527 U.S. 526, 548-49 (1999) (noting that, in various contexts, [*24]  a punitive award requires a party's "reckless disregard for the matter of whether its conduct was prohibited"). We interpret this reluctance as recognition that punitive sanctions are appropriate only where a party acted with sufficient notice concerning the legal import of its offending actions. See, e.g., BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 574-75 (1996). Because the bankruptcy court did not characterize the sanctions as punitive, it failed to perform any analysis pursuant to this principle. Although the district court recited the principle, it analyzed Green Tree's mens rea only with respect to the filing of its proof of claim, not with respect to the legal effect of filing the proof of claim vis-à-vis the discharge injunction. See McLean, 515 B.R. at 851 (citing Keen v. Premium Asset Recovery Corp. (In re Keen), 301 B.R. 749, 755 (Bankr. S.D. Fla. 2008)). We remind the bankruptcy court of the proper standard should it endeavor to impose punitive sanctions on remand.

VI.

We now turn to the compensatory sanctions, which the bankruptcy court imposed after finding that the McLeans suffered from emotional distress as a result of Green Tree's contempt. Under § 105, bankruptcy courts may impose compensatory sanctions for actual damages that a debtor incurs as a result of a creditor's violation of the [*25]  discharge injunction. Hardy, 97 F.3d at 1389-90. After the bankruptcy court issued its ruling, we held in another case that actual damages can include emotional distress in the materially similar context of a violation of the automatic stay under § 362. See Lodge v. Kondaur Capital Corp., 750 F.3d 1263, 1271 (11th Cir. 2014). It follows, then, that bankruptcy courts generally have authority to award compensatory sanctions for emotional distress caused by a violation of the discharge injunction.

As we did in Lodge, we "caution that not every willful violation of the [discharge injunction] merits compensation for emotional distress and that a standard governing such claims is necessary." Id. Accordingly, we hold that the Lodge standard for imposing such damages also governs the McLeans' request for compensatory relief. To recover damages for emotional distress, "a plaintiff must (1) suffer significant emotional distress, (2) clearly establish the significant emotional distress, and (3) demonstrate a causal connection between that significant emotional distress and the violation of the [discharge injunction]." Id.

We vacate the award of compensatory sanctions and direct the district court to instruct the bankruptcy court, upon remand, [*26]  to reconsider the McLeans' request for compensatory relief in the light of Lodge. Once more, we express no opinion about the merits of the request for relief.

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