Opinion
05 Civ. 15 (MHD).
January 23, 2006
MEMORANDUM ORDER
We face a dispute as to the effect of a bankruptcy stay on a motion for civil contempt that was filed prior to the filing of the bankruptcy petition. Eschewing any broad holding, we conclude that in the particular circumstances of this case the bankruptcy stay should apply to the pending contempt motion.
The Pertinent History
By Memorandum and Order dated December 30, 2005, we granted a motion by plaintiff for a preliminary injunction. Serio v. Black, Davis Shue Agency, Inc., 2005 WL 3642217 (S.D.N.Y. Dec. 30, 2005). That injunction, issued on January 3, 2006, directed,inter alia, that defendant Black, Davis Shue Agency ("BDS") deposit into the registry of the court a sum of money exceeding 1.5 million dollars and that it do so by no later than January 6, 2006. The premise for that order was the court's conclusion that Frontier Insurance Company, on whose behalf plaintiff is suing, had an equitable interest in the funds and that defendant's past conduct and present financial condition posed a serious threat that it would dissipate this fund of money before plaintiff obtained what was likely to be a judgment in his favor requiring the surrender of the moneys in question to the estate of Frontier.
Defendant failed to comply with the injunctive order. Instead, it filed a notice of appeal and moved for a stay pending appeal. Plaintiff in turn filed a motion for civil contempt. By Memorandum and Order dated January 12, 2006, we denied defendant's stay motion and scheduled the briefing of plaintiff's contempt motion, with a hearing set for January 19, 2006.
On January 16, 2006, only hours before the scheduled commencement of the deposition of defendant's president, defendant filed a petition for reorganization in the Middle District of Pennsylvania under Chapter 11 of the Bankruptcy Code. Defendant has since asserted that it understands that the bankruptcy stay consequent to its Chapter 11 filing, see 11 U.S.C. § 362(c), precludes any further activity in this court with respect to the contempt motion. (See Jan. 17, 2006 letter to the Court from William D. Chapman, Esq.). Plaintiff has pressed the contrary view, and we have now had the benefit of full letter briefing on the question. (See Jan. 17 19, 2006 letters to the Court from William S. Gyves, Esq.; Jan. 18, 2006 letter to the Court from William D. Chapman, Esq.).
Analysis
Section 362(a)(1) of the Bankruptcy Code provides that the filing of a bankruptcy petition triggers a stay of judicial proceedings against the debtor "[e]xcept as provided in subsection (b) of this section. . . ." Subsection (b) specifies a series of circumstances to which the automatic stay does not apply. It is not disputed that the exceptions listed in subsection (b) do not encompass the pendency of plaintiff's contempt motion.
As we understand plaintiff's argument, he asserts that this case is governed by a body of caselaw recognizing a non-statutory exception to the bankruptcy stay provision for civil contempt motions, at least in some circumstances. In support of his contention that the stay does not apply here, plaintiff highlights prior decisions that have suggested that the district court retains authority to decide contempt motions designed to uphold the "dignity" of the court and to vindicate its authority to enforce its orders in the face of contumacious conduct. See, e.g., S.E.C. v. Bilzerian, 131 F. Supp.2d 10, 14-15 (D.D.C. 2001); International Distr. Centers, Inc. v. Walsh Trucking Co., 62 B.R. 723, 728-30 (S.D.N.Y. 1986). Some of these decisions have distinguished between contempt motions that seek to enforce a judgment — to which the stay does apply — and motions that seek "to `punish the debtor for contumacious conduct against the dignity of either the state or federal court.'" Id. at 729 (quoting inter alia Guaraglia v. Community Nat'l Bank Trust Co., 382 F. Supp. 758, 761 (E.D.N.Y. 1974); Meyerson v. Werner, 683 F.2d 723, 728 (2d Cir. 1982)). Plaintiff argues that its contempt motion is intended to uphold the dignity of the court by punishing defendant for failing to comply with the preliminary injunction.
Subsection (b) includes an exception to the stay for criminal contempt since it exempts "the commencement or continuation of a criminal action or proceeding." 18 U.S.C. § 362(b)(1).
We disagree. The purpose of the preliminary injunction that plaintiff seeks to enforce was to secure an anticipated judgment in the face of potential dissipation of assets by the defendant. The aim of the plaintiff's civil contempt motion is to compel compliance with the preliminary injunction, by forcing the defendant, on pain of continuing penalties, to transfer the specified financial assets into a sequestered account. Assuming the validity of the distinction between motions designed to achieve payment of a judgment and motions designed to validate the court's authority, but see, e.g., In re Cherry, 78 B.R. 65, 70 (E.D.Pa. 1987) (declining to recognize non-statutory exception to stay provision), we find that the current motion, as an abstract matter, does not fit easily in either category. Indeed, in substance it seems closer to a judgment-enforcement motion than to an application designed to enforce court orders not directly concerned with the enforcement of money judgments.Compare, e.g., Bilzerian, 110 F. Supp.2d at 13 (court order had required turnover of documents reflecting location of assets).
On a more practical level, we note that enforcement of the preliminary injunction here would strip the bankrupt's estate of control over a sizable financial asset, a result that can be viewed as in some tension with the goals of the bankruptcy proceeding, which require a marshaling of the debtor's assets and an orderly payment of claims in order of priority. In addition, it appears that the net effect would be to enable the plaintiff to secure a pre-petition debt, to the potential detriment of other creditors, an effect that further underscores the problematic impact of the relief. Cf., e.g., In re Dairy Mart Convenience Stores, Inc., 272 B.R. 66, 71 (S.D.N.Y. 2002), aff'd on other gds., 351 F.3d 86 (2d Cir. 2003).
Defendant points out, with some fairness, that this process mirrors the policy interests that triggered this court's earlier decision staying defendant's counterclaims in this court in deference to the authority of the state rehabilitation forum in which the estate of Frontier is now subjected to court and state agency supervision. See Serio v. Black, Davis Shue Agency, Inc., 2005 WL 2560390 (S.D.N.Y. Oct. 11, 2005).
We further note that, unless the plaintiff obtains a lifting of the stay in the bankruptcy court, see 11 U.S.C. § 362(d)(1) (authorizing lifting stay for "lack of an adequate protection of an interest in property"), we will be precluded during the pendency of the bankruptcy proceeding from determining the merits of plaintiff's claims against defendant. Hence, the possible future judgment that the deposit of funds is intended to secure will not be entered for the foreseeable future. Under these circumstances, and in view of the fact that the assets of the defendant will be subject to the supervision of the bankruptcy court, see 11 U.S.C. § 363, there appears to be little justification for ignoring the stay and proceeding now to attempt the enforcement of the court's January 3 order.
There is no question that if the court determined that the bankruptcy filing was a sham intended only to frustrate enforcement of the court's order, we would have the authority to impose contempt sanctions. See Meyerson, 683 F.2d at 728. Plaintiff has made no such showing.
Plaintiff also alludes to the notion that, apart from the defendant, the principals of BDS are responsible for compliance with the preliminary injunction order, and he suggests that the contempt motion should at least proceed against them. The difficulty with this notion is that the portion of the injunction at issue on the contempt motion requires a transfer of assets from the defendant, and in view of its bankruptcy petition any enforcement of that provision, whether through defendant or by way of coercion of its principals, would cause the same potential problems of coordination with the bankruptcy proceeding. Moreover, absent notice and a hearing, the trustee can only dispose of property of the debtor in the ordinary course of business, see 11 U.S.C. § 363(c)(1), and it is not clear that a transfer of funds to satisfy a post-filing contempt order would be viewed as within the ordinary course of business. Compare New York v. Mirant New York, Inc., 300 B.R. 174, 180 (S.D.N.Y. 2003) (court order adopting consent decree compelling compliance with environmental laws required no action by debtor).
CONCLUSION
For the reasons noted, we conclude that the section 362 stay applies to the current motion by plaintiff for an order of civil contempt.