The automatic stay of § 362(a) of the Bankruptcy Code is one of a debtor’s most powerful tools and protections, because it stays all proceedings and collection efforts. Under § 362(b), however, a debtor may not use the automatic stay to bar the commencement or continuation of a criminal action or proceeding. The reason for this prohibition goes to the very core of the Bankruptcy Code – offering a fresh start to the honest but unfortunate debtor. What if, however, a debtor is found in civil contempt of court? Although not a criminal offense, a recent decision out of the Middle District of Florida held that a debtor may not use the bar of the automatic stay to prevent the civil court from enforcing a punitive civil contempt order.
In the case of In re Burgess, Judge Williamson was faced with a truly contemptible debtor. Prior to filing his petition, the debtor was incarcerated by a state court for submitting a fraudulent fact information sheet that he provided to a creditor attempting to collect a judgment against him. Importantly, the debtor was incarcerated on contempt charges as a punishment for continuous failure to heed the court’s orders or to pay his fines for contempt. The debtor requested his release to house arrest, and when it was denied he filed for bankruptcy protection.
Judge Williamson found that § 362(b)’s denial of stay protection for criminal proceedings applied equally to civil contempt proceedings, but only when the contempt proceeding is punitive in nature. To read § 362 otherwise “would allow unscrupulous debtors to violate the rights of others with impunity.” If the contempt order, instead, is merely intended to coerce a debtor to pay a fine, rather than punishing the debtor for noncompliance, Judge Williamson indicated that the automatic stay may apply.
What is the takeaway for lenders and their counsel? Civil contempt penalties, especially for corporations, may be quite steep, which means that they can diminish the bankruptcy estate significantly, perhaps even before the plan is confirmed and the estate administered.