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Violation of Stay Based on Court’s Contempt Power

June 9, 2014 by  
Filed under Blog

11 U..S.C. 362(k) only applies to individuals. However, the court’s contempt power, whose origins predate 11 U.S.C. 362, are fully adequate to deal with an entity that violates the automatic stay. It is well established in the Ninth Circuit that the only significant difference between a wilful violation under 362(k) and civil contempt under 105(a) is that 362(k) has an element of mandatory award of damages, while the award under civil contempt remains in the court’s discretion:

“The primary difference between proceeding on the basis of the language of § 362(h) on one hand, and civil contempt on the other, is the mandatory nature of an award of damages as to the former compared to the permissive nature of such an award under the latter.” In re Goodman at 620. In the case of In re Dyer, 322 F.3d 1178(9th Cir. 2003), the 9thCircuit explained in detail why violating the automatic stay constitutes civil contempt in virtually all cases: “The standard for finding a party in civil contempt is well settled: The moving party has the burden of showing by clear and convincing evidence that the contemnors violated a specific and definite order of the court.” Bennett,298 F.3d at 1069. Because the “metes and bounds of the automatic stay are provided by statute and systematically applied to all cases,” Jove Eng’g v. IRS (In re Jove Eng’g), 92 F.3d 1539,1546 (11th Cir. 1996), there can be no doubt that the automatic stay qualifies as a specific and definite court order. In determining whether the contemnor violated the stay, the focus “is not on the subjective beliefs or intent of the contemnors in complying with the order, but whether in fact their conduct complied with the order at issue.” Hardy v. United States (In re Hardy), 97 F.3d 1384,1390 (11th Cir. 1996) (internal citations omitted); accord McComb v. Jacksonville Paper Co.,336 U.S. 187,191,69 S.Ct. 497, 93 L.Ed. 599 (1949) (Because civil contempt serves a remedial purpose, “it matters not with what intent the defendant did the prohibited act.”). The threshold standard for imposing a civil contempt sanction in the context of an automatic stay violation therefore dovetails with the threshold standard for awarding damages under § 362(h). Pace,67 F.3d at 191 (incorporating the willfulness standard of § 362(h) as explicated by Pinkstaff v. United States (In re Pinkstaff),974 F.2d 113115 (9th Cir. 1992)). Under both statutes, the threshold question regarding the propriety of an award turns not on a finding of “bad faith” or subjective intent, but rather on a finding of “willfulness,” where willfulness has a particularized meaning in this context: “[W]illful violation” does not require a specific intent to violate the automatic stay. Rather, the statute provides for damages upon a finding that the defendant knew of the automatic stay and that the defendant’s actions which violated the stay were intentional. Pace,67 F.3d at 191; see also Pinkstaff,974 F.2d at 115; Hardy, 97 F.3d at 1390; cf. Bennett,298 F.3d at 1069 (describing standard for imposing civil contempt sanctions under § 105(a) for violation of discharge injunction).

In re Dyer 322 F.3d 1178, 1191 (9th Cir. 2003) (bold emphasis added). In re Dyer explains that the only difference in proving civil contempt for violating the automatic stay is that the defendant must know not only of the bankruptcy but also the existence of the automatic stay. This is a distinction without a difference in most cases especially if the contemptor is represented by an attorney.  Under established principles of agency, an attorney’s knowledge of the bankruptcy stay is imputed to his clients. For example, a willful stay violation was found in the case of In re Robinson, 228 B.R. 75 (Bankr. E.D. N.Y. 1998) which imputed notice of a bankruptcy to a creditor based on the creditor’s attorney’s receipt of notice. The Robinson Court expressly stated that “an attorney’s knowledge of a bankruptcy filing may be imputed to the client.” Id. at 82 (citing Bryan v. Land (In re Land), 215 B.R. 398, 404 (BAP 8th Cir. 1997) and In re Feldman, 196 B.R. 678, 684-5 (Bankr. S.D.N.Y. 1995)). See also In re Winthrow, 93 B.R. 436 (Bankr. W.D. N.C. 1988) In re Shealey, 93 B.R. 176 (Bankr. W.D. N.C. 1988). Further there is no valid basis for ignoring the plain language of a statue such as 11 U.S.C. 362. The Supreme Court has been very clear on this point: “The Bankruptcy Code standardizes an expansive (and sometimes unruly) area of law, and it is our obligation to interpret the Code clearly and predictably using well established principles of statutory construction.” RadLAx Gateway Hotel, L.L.C. v. Amalgamated Bank, 132 S.Ct. 2065, 182 L.Ed.2d 967, (2012)citing United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 240–241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989).The Ninth Circuit has also repeatedly explained that

“[t]he scope of protections embodied in the automatic stay is quite broad, and serves as one of the most important protections in bankruptcy law.” Eskanos, 309 F.3d at 1214; see Stringer v. Huet (In re Stringer ), 847 F.2d 549, 552 (9th Cir.1988) (“Congress clearly intended the automatic stay to be quite broad. Exemptions to the stay, on the other hand, should be read narrowly….”).

Sternberg v. Johnston 595 F.3d 937, 943 (9th Cir. 2010).

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