Assume the following facts: Hubby is a reasonably successful land developer. When he separates from his devoted wife and two children, he is overwhelmed by guilt and agrees to pay temporary support four times the amount of his legal obligation. Shortly thereafter, his land development encounters problems due to his construction lender running short of funds. He files for reorganization under Chapter 11[i] in an effort to ease his monstrous support payments and to buy time to work things out with the lender. The Bankruptcy Judge becomes convinced that the Chapter 11 has little chance for success given the market conditions and that, in any event, the case should be dismissed and not refiled until the conclusion of the divorce.[ii] By the time of that dismissal Hubby is behind about $60,000 in support payments. Two months after the bankruptcy dismissal the divorce is granted, and at that time Hubby owes another $30,000. Hubby tries to find a bankruptcy lawyer to refile his Chapter 11, but he doesn’t have sufficient funds to pay a new retainer and his prior lawyer is disqualified because Hubby didn’t fully pay him so he is now a creditor and can’t be the lawyer.[iii] Hubby’s EX then files an enforcement action in the divorce court seeking judicial help in getting her support payments. Hubby has no where to turn so he calls an old acquaintance to help him refile the Chapter 11 in order to at least have the benefit of the automatic stay incident to all bankruptcy cases and attempt to formulate a plan of reorganization that will fully pay EX and salvage his land development. His new lawyer, who we will call Sam Rooster, appears at the contempt hearing and advises Judge Canary, an associate judge, that a bankruptcy has been filed. Rooster specifically advises that the judge can hold Hubby in criminal contempt and put him in jail if he finds that Hubby’s failure to abide by the prior court orders was intentional and willful.[iv] He also explains that the judge can find Hubby guilty of civil contempt and order him to pay the deficits from non bankruptcy assets if there are any, and put him in jail if he fails to comply. The hearing goes forward, and Rooster puts on evidence that Hubby currently has no funds, no income, and no one to borrow from. Undaunted, Judge Canary, contrary to clear precedent, states that he is well versed on bankruptcy law and later enters a written civil and criminal contempt order requiring payment unrestricted as to the source of funds and irrespective of Hubby’s current ability to pay. Rooster now racks his brain and decides that the proper course of action is to file a motion in the Bankruptcy Court to void the contempt order and to hold the proponents of the state proceeding in contempt for violating the automatic stay. And he does so. His alternative is to contest the contempt order in state court relying on the judge’s error in failing to consider that Hubby is unable to currently comply, but that approach is considerably more complex than the route he chooses. Hubby’s EX is represented by an astute and successful matrimonial lawyer with the unlikely name of Jo Canas Hilton. She recruits a well known and equally astute bankruptcy lawyer name Wesley Ponderous to fight the good fight in the bankruptcy court. But it’s a lay down – a no brainer. Judge Canary’s contrary order is too broad and clearly violates the automatic stay, and the proponents are in contempt. Procedural difficulties arise, however, when the United States Trustee, we’ll call her Auntie Sam, uncovers that Hubby’s credit counseling did not occur within 180 days of the filing of the second Chapter 11, and she moves to dismiss the case.[v] While authorities are split on the effect of filing a bankruptcy petition without the necessary counseling, most Bankruptcy Courts have concluded that the case must either be dismissed or stricken.[vi] Not to be outdone Ponderous argues that because the current Chapter 11 is the second one filed in a one year period the automatic stay terminates 30 days after the second bankruptcy is filed relying on 11 USCA § 362(c)(3). Thus, he says, the stay is gone and questions concerning its violation are moot. Meanwhile Hubby is broke, has not complied with the state court contempt order, and is subject to immediate imprisonment. Because of Ms Hilton’s scheduled vacation the Motion to Void cannot be heard before the Motion to Dismiss, and the case is dismissed. The effect of this second dismissal effectively abrogates any benefit from Hubby immediately refiling because he would then be a three time filer in a one year period, and there is no automatic stay.[vii] Ponderous now argues that the Bankruptcy Court no longer has jurisdiction to hear the Motion to Void relying on modestly relevant Fifth Circuit authority.[viii] Rooster, showing some resourcefulness of his own, reminds the Bankruptcy Court that President Clinton was found in contempt of court orders long after the lawsuit was dismissed, and provides the bankruptcy court with other authorities to the same effect – a court always maintains jurisdiction to deal with violations of its orders.[ix] At the hearing on Hubby’s Motion to Void, the Bankruptcy Court observes that it has jurisdiction and that the stay was likely violated, but relief is denied because Hubby has shown no damages from the violation.
[i] 11 USCA § 1101, et seq.
[ii] This type of discretionary authority was more plainly vested in the Bankruptcy Courts when Congress adopted the 2005 Amendments to the Bankruptcy Code. See 11 USCA § 1012(b).
[iii] See 11 USCA § 327(a), which is applicable to debtors in possession. See 11 USCA § 1107.
[iv] See e.g., Ex Parte Chambers, 898 S.W.2d 257, 260 (Tex. 1995); Ex parte Price, 741 W.W.2d 366, 367 (Tex. 1987).
[v] The requirement for credit counseling was also imposed by the 2005 Amendments. See 11 USCA § 109(h)(1).
[vi] See In re Salazar, 339 B.R. 622 (S.D. Tex. Bankr. 2006) (stricken); In re Jones, 352 B.R. 813 (S.D. Tex. Bankr. 2006)(dismissed). See generally, Sherp, To Strike or Dismiss, 60 Baylor L. Rev. 317 (2008). The effect of these two approaches is significantly different. If stricken the case never existed, and the debtor is more or less free to refile without any real repercussions. If dismissed the debtor becomes a multiple filer if he does so during the next twelve months. Some bankruptcy courts have taken a more proactive approach and permitted the debtor to cure the deficit. See In re Anderson, 391 B.R. 758 (S.D. Tex. Bankr. 2008); In re Valdez, 335 B.R. 801 (S.D. Fla. Bankr. 2005)
[vii] See 11 USCA § 362(c)(4)(A). The court may, however, grant a stay upon a request by a party in interest. Id at § 362(c)(4)(B)
[viii] Modest in the sense that the argument can be made without blushing. See In re Querner, 7
F.3d 1199 (5th Cir. 1993)(bankruptcy court decision to maintain jurisdiction after dismissal is analyzed the same as a decision to exercise pendant jurisdiction after dismissal of the federal claim); In re Smith, 866 F.2d 576 (3rd Cir. 1989)(after dismissal the bankruptcy court has discretion to maintain jurisdiction over unresolved adversary proceedings); In re Petty, 848 F.2d 654 (5th Cir. 1988)(after dismissal bankruptcy court has no jurisdiction to resolve pending bankruptcy issues).
[ix] See Cooter & Gell v Hartmarx Corp., 496 U.S. 384, 375-76 (1990)(“Like imposition of costs, attorney’s fees, and contempt sanctions, the imposition of a Rule 11 sanction **** may be made after the principle suit has been terminated.”) Jones v Clinton, 36 F.Supp.2d 1118 (E.D. Ark 1999); Llarena v Borcia, 1999 U.S. Distr. Lexis 13124 (N.D. Ill. 1999)
What does Rooster do now? Of course Hubby still has no money, so he calls me for help. After he explains the situation to me I tell him his course is clear. Hubby is no doubt headed to jail, and Rooster can then request reconsideration in the Bankruptcy Court demonstrating that if Hubby suffered no damages before he certainly has now. I also suggest that he segregate his attorney’s fees to isolate his charges for pursuing the Motion to Void -- charges that would not have been incurred but for the state court unrestricted contempt order. No matter, I tell him, that Hubby would never pay me or him. So Hubby goes to jail, and Rooster marches back to the Bankruptcy Court to secure his righteous release.
What happens at the reconsideration hearing demonstrates the malleability of the law and perhaps the conscience of the court. After all no one likes a husband who fails to pay for the support of his children. The Judge refuses to award damages because ex wife’s conduct, as well as that of her lawyer Hilton, was not willful and intentional. He further abstains from voiding the contempt order, leaving it to the state court to cure its errors. Both decisions are likely incorrect, and the Judge may have simply decided to require Hubby to work harder in the court system if he wants any relief.[i] Rooster then calls me again to report these events and to solicit better advice. Rooster, I tell him, the solution is obvious. Quit and help me write a law review article.
[i] Had canary not claimed to be an expert in bankruptcy matters we might excuse his actions on this same basis. He did, and we won’t.
- Canary’s first error was in finding that Hubby was in both criminal and civil contempt and then providing him with the keys to his cell if he pays the past due support. A fine or community supervision is the only penalty that can be imposed for criminal contempt other than imprisonment. See Tex. Gov. Code § 21.002(f) and Tex. Fam. Code § 157.165. So an order providing a money key is one of civil, not criminal contempt. See Ex parte Werblud, 536 S.W.2d 542, 545 (Tex. 1976): In re Lausch, 177 S.W.3d 144, 153 (Tex. Civ. App. Hous (1st Distr.) – 2005, original proc.). Federal bankruptcy law is the same. See In re Hass, 2004 Bankr. Lexis 2216 *8-9 (E.D. Va. Bankr. 2004); In re Marloney, 204 B.R. 671 (E.D.N.Y. Bankr. 1996). A confounding issue might arise if Hubby had been found in criminal contempt and placed on community supervision, and the terms of the community supervision required payment of child support. See Tex. Fam. Code § 157.211(4). No doubt this type of order would be interpreted as one of criminal contempt, but the payment requirement would still not pass muster.[i] Rooster did not include this type of order in his recitation of things that the associate judge could do. Rooster refuses to answer whether he was being clever or just ignorant.
[i] Fines in criminal cases do not violate the automatic stay, but orders of restitution where the underlying obligation is a civil debt do violate the stay. See generally, In re Kolton, 1990 Bankr. Lexis 1331 (W.D. Tex. Bankr. 1990).
Canary’s second error was in failing to determine whether Hubby could somehow raise the money to make the required payments. The fact that Hubby had money at some point in the past is irrelevant. See In re Gawerc, 165 S.W.3d 314, 315 (Tex. 2005)(“prior ability to pay may be relevant to a criminal contempt sanction but not to whether the contemnor had the ability to purge himself of civil contempt”) .[i] Under the Family Code the inability to comply with a child support order is an affirmative defense, and the pervasive proof required for this affirmative defense is set out in the Code. See Tex. Fam. Code § 157.008(c). Nevertheless, provision must be made for Hubby to purge himself of the contempt by either paying the money or establishing that he is unable to do so.[ii]This is the process that Rooster found exceedingly complex under the associate judge system now in use in most Texas counties. Under that system an oral or written announcement by the associate judge containing the substance of a decision must be appealed de novo to the Referring Court within 7 working days of the announcement.[iii] See Tex. Fam. Code § 201.015. Even if such an appeal is filed the order of the associate judge is in full force and effect until changed. Id. at § 201.013(a). Failure to seek a de novo review will usually insulate the associate judge’s fact findings from further review by the Referring Court; although the Code also provides that the Referring Court may adopt, modify, remand or hold a hearing even in the absence of a request for review. See Id. at § 201.014. Special provision is made for orders of incarceration. Such an order issued by an associate judge must be presented to the Referring Court for consideration on the day the incarceration occurs, and if the Referring Court cannot act on the order within 3 days the contemnor must be released. Id. at § 201.013(c). In practice, however, the associate judge will recommend an order, and, in the absence of a request for de novo review, the Referring Court will approve it without any further consideration. Relief is available by appeal or by habeas corpus or mandamus if the condemned is not yet imprisoned[iv]. Rooster’s decision to direct his efforts to the Bankruptcy Court was the correct one.
[i] State law cases are all over the map on this issue. Of course the burden is on the condemnor to prove his inability to pay by a preponderance of the evidence. Tex. Fam. Code § 157.006. The pervasive proof required is set out in the Family Code. See Tex. Fam. Code § 157.008(c). Even if Rooster had failed to raise the issue at the contempt hearing that would not foreclose his client’s right to raise the issue in a Motion for Release or by Habeas Corpus once he was confined. See In re Coronado, 2009 Tex. App. Lexis 2474, *17 (Tex. App. C.C – 2009, original proc.). Proof required in a Habeas Corpus proceeding is considerably higher (conclusive evidence), Ibid, than in a Motion filed in the trial court (preponderance of the evidence).
[ii] See Note 15, below.
[iii] The order of the associate judge is in most cases just a recommendation to the Referring Court, but it is none the less treated as an order. See Tex. Fam. Code § 201.007.
[iv] See In re Long, 904 S.W.2d 623, 625 (Tex. 1999).
BANKRUPTCY ISSUES
- The automatic stay arises when a bankruptcy is filed, except in the case of a three time filer in a one year period. See 11 USCA § 362(a) and § 362(c)(4). The stay prohibits the initiation or prosecution of any proceeding to establish or collect anything from the debtor or his property. Exceptions to the stay are listed in § 362(b). Included are the prosecution of criminal proceedings (§ 362(b)(1)), the prosecution of support orders against assets that are not part of the bankruptcy estate (§ 362(b)(2)(B)), and prosecution of actions to establish child support obligations (§ 362(b)(2)(A)). The stay terminates when an order of discharge is granted or denied. See 11 USCA § 362(c)(2)(C). There are a number of circumstances where the Bankruptcy Court can modify the stay to permit a creditor to proceed with collection efforts against estate assets. See 11 USCA § 362(d). Most notably these include secured creditors who seek to foreclose on a secured asset.
- All debts are eliminated or modified by a reorganization plan except those that are non-dischargeable. A family support obligation is non-dischargeable. 11 USCA § 523(a)(5).
- Any action taken in violation of the stay is void or voidable depending on the location of the case. The distinction here is more dialectic than real.[i] Intentional conduct is not necessary for a violation of the stay to occur. All that is required is that the proponent know of the stay and that his actions which violated the stay were intentional. Presumably this satisfies the statutory threshold that the conduct be willful. See e.g., In re Knaus, 889 F.2d 773, 775 (8th Cir. 1989); In re Johnston, 321 B.R. 262, 275 (D. Arizona 2005); but see University Medical Center v Sullivan, 122 B.R. 919 (E.D. Pa. 1990), affirmed, 973 F.2d 1065 (3rd Cir. 1992), a decision that has been roundly criticized. Indeed, punitive damages are available for egregious conduct. See 11 USCA § 362(k). See Knaus, supra, at 775.
[i] Because Congress included the word “annul” in the powers of the Bankruptcy Court to deal with the automatic stay some courts have reasoned that the stay should be regarded as voidable instead on void. See In re Coho Resources, Inc. 345 F.3d 338, 344 (5th Cir. 2003). The reasoning is that if the stay is void the ability to annul it would be superfluous. This conclusion places the burden on the debtor to take action to set aside any action thought to violate the stay. In practice, the debtor would normally file a Motion to Void the violating action in any event. But this conclusion creates considerable confusion when dealing with contempt for violating the stay. Other courts have taken a more disciplined approach and declared a stay violation void. This conundrum is discussed in Sikes v Global Marine, Inc., 881 F.2d 176, 178-79 (5th Cir. 1989). - A state court contempt order that does not restrict the assets that are to be used to pay the debt violates the stay. See In re Haas, supra, 2004 Bankr. Lexis at *8-9.
- While most bankruptcy practitioners think the stay evaporates after 30 days where there are two filings in a one year period, they are guilty of glossing over the language in the statute. 11 USCA §362(c)(3) states:
If a single or joint case is filed by or against who is an individual under Chapters 7, 11, or 13 and a single or joint case of the debtor was pending within the preceding 1 – year period but was dismissed, other than a case refilled under a Chapter other than 7 after a dismissal under 707(b) --
(A) the stay under subsection (a) *** Shall terminate with respect to the debtor on the 30th day after the filing of the later case.
It must be admitted that the provision is written in Congressional gibberish, but a refiling Under Chapter 11 does not invoke the thirty day limitation. - The Bankruptcy Court ought not abstain from declaring a state court order void. Only when a state law issue is inextricably intertwined with the stay should the Bankruptcy Court consider abstaining.[i]
[i] Perhaps the most thoughtful decision on this issue of abstention is In re Fullwood, 171 B.R. 424 (S.D. Ga. Bankr. 1994). The facts in Coho demonstrate the type of case where abstention is appropriate.
Well this is the unadulterated law. It didn’t do Hubby or Rooster much good, but maybe it will help you better understand the rules of the road. Just maybe you will appear before a judge other than the Contrary Canary.
[1] 11 USCA § 1101, et seq.
[2] This type of discretionary authority was more plainly vested in the Bankruptcy Courts when Congress adopted the 2005 Amendments to the Bankruptcy Code. See 11 USCA § 1012(b).
[3] See 11 USCA § 327(a), which is applicable to debtors in possession. See 11 USCA § 1107.
[4] See e.g., Ex Parte Chambers, 898 S.W.2d 257, 260 (Tex. 1995); Ex parte Price, 741 W.W.2d 366, 367 (Tex. 1987).
[5] The requirement for credit counseling was also imposed by the 2005 Amendments. See 11 USCA § 109(h)(1).
[6] See In re Salazar, 339 B.R. 622 (S.D. Tex. Bankr. 2006) (stricken); In re Jones, 352 B.R. 813 (S.D. Tex. Bankr. 2006)(dismissed). See generally, Sherp, To Strike or Dismiss, 60 Baylor L. Rev. 317 (2008). The effect of these two approaches is significantly different. If stricken the case never existed, and the debtor is more or less free to refile without any real repercussions. If dismissed the debtor becomes a multiple filer if he does so during the next twelve months. Some bankruptcy courts have taken a more proactive approach and permitted the debtor to cure the deficit. See In re Anderson, 391 B.R. 758 (S.D. Tex. Bankr. 2008); In re Valdez, 335 B.R. 801 (S.D. Fla. Bankr. 2005)
[7] See 11 USCA § 362(c)(4)(A). The court may, however, grant a stay upon a request by a party in interest. Id at § 362(c)(4)(B)
[8] Modest in the sense that the argument can be made without blushing. See In re Querner, 7
F.3d 1199 (5th Cir. 1993)(bankruptcy court decision to maintain jurisdiction after dismissal is analyzed the same as a decision to exercise pendant jurisdiction after dismissal of the federal claim); In re Smith, 866 F.2d 576 (3rd Cir. 1989)(after dismissal the bankruptcy court has discretion to maintain jurisdiction over unresolved adversary proceedings); In re Petty, 848 F.2d 654 (5th Cir. 1988)(after dismissal bankruptcy court has no jurisdiction to resolve pending bankruptcy issues).
[9] See Cooter & Gell v Hartmarx Corp., 496 U.S. 384, 375-76 (1990)(“Like imposition of costs, attorney’s fees, and contempt sanctions, the imposition of a Rule 11 sanction **** may be made after the principle suit has been terminated.”) Jones v Clinton, 36 F.Supp.2d 1118 (E.D. Ark 1999); Llarena v Borcia, 1999 U.S. Distr. Lexis 13124 (N.D. Ill. 1999)
[10] Had canary not claimed to be an expert in bankruptcy matters we might excuse his actions on this same basis. He did, and we won’t.
[11] Fines in criminal cases do not violate the automatic stay, but orders of restitution where the underlying obligation is a civil debt do violate the stay. See generally, In re Kolton, 1990 Bankr. Lexis 1331 (W.D. Tex. Bankr. 1990).
[12] State law cases are all over the map on this issue. Of course the burden is on the condemnor to prove his inability to pay by a preponderance of the evidence. Tex. Fam. Code § 157.006. The pervasive proof required is set out in the Family Code. See Tex. Fam. Code § 157.008(c). Even if Rooster had failed to raise the issue at the contempt hearing that would not foreclose his client’s right to raise the issue in a Motion for Release or by Habeas Corpus once he was confined. See In re Coronado, 2009 Tex. App. Lexis 2474, *17 (Tex. App. C.C – 2009, original proc.). Proof required in a Habeas Corpus proceeding is considerably higher (conclusive evidence), Ibid, than in a Motion filed in the trial court (preponderance of the evidence).
[13] See Note 15, below.
[14] The order of the associate judge is in most cases just a recommendation to the Referring Court, but it is none the less treated as an order. See Tex. Fam. Code § 201.007.
[15] See In re Long, 904 S.W.2d 623, 625 (Tex. 1999).
[16] Because Congress included the word “annul” in the powers of the Bankruptcy Court to deal with the automatic stay some courts have reasoned that the stay should be regarded as voidable instead on void. See In re Coho Resources, Inc. 345 F.3d 338, 344 (5th Cir. 2003). The reasoning is that if the stay is void the ability to annul it would be superfluous. This conclusion places the burden on the debtor to take action to set aside any action thought to violate the stay. In practice, the debtor would normally file a Motion to Void the violating action in any event. But this conclusion creates considerable confusion when dealing with contempt for violating the stay. Other courts have taken a more disciplined approach and declared a stay violation void. This conundrum is discussed in Sikes v Global Marine, Inc., 881 F.2d 176, 178-79 (5th Cir. 1989).[1] Perhaps the most thoughtful decision on this issue of abstention is In re Fullwood, 171 B.R. 424 (S.D. Ga. Bankr. 1994). The facts in Coho demonstrate the type of case where abstention is appropriate.
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