Restructuring

Contributed by Rich Mullen
Questions concerning the authority of bankruptcy judges (and magistrates, too) have been all the rage. Of course, we all are familiar with Stern v. Marshall and the trail of judicial inquiry into the constitutional authority of bankruptcy courts it has left behind.  There remain, however, other less glamorous limitations to the power of bankruptcy judges.  A recent decision from the Eastern District of Louisiana, In re Ho, No. 11 Civ. 1512, 2012 WL 405092 (E.D. La. Feb. 8, 2012), reminds us of one such limitation.  In reversing the bankruptcy court’s order finding debtor’s counsel in contempt of court and directing debtor’s counsel to pay a fine of $500, the district court held that the bankruptcy court did not have power to hear and decide questions of criminal contempt.
In re Ho arises from a chapter 13 bankruptcy case and a plan modification proposed by the debtor.  While the bankruptcy court was amenable to the plan modification, it orally requested that debtor’s counsel include specific language in the amended plan.  The debtor’s counsel filed the amended plan but not to the bankruptcy court’s satisfaction.  The bankruptcy court found that the amended plan did not comply with the court’s previous ruling and advised the debtor’s counsel of the deficiency.  After waiting a month, the bankruptcy court sua sponte entered an order to show cause commanding the debtor’s counsel to demonstrate why the bankruptcy court should not reconsider its approval of the plan modification.
At the hearing, the debtor’s counsel (to no avail) explained that he believed he electronically filed a second amended plan that sufficiently corrected the deficiencies of the original plan and the amended plan.  He stated that the second amended plan apparently failed to upload properly, and that he did not know of his failure to file a second amended plan until he received the bankruptcy court’s order to show cause.  Dismissing the argument, the bankruptcy court remarked:

Okay, $500 fine for failure to file the document into the record even after the Order to Show Cause has been filed.  No excuse for not having done it.  I could have reviewed it by this point.  The Trustee could have commented on it.  We could be done.  Instead we’re going to have a whole other round of this because you haven’t done what you needed to do even after the Court advised you that you hadn’t.  No excuse.

On the very next day, the bankruptcy court entered an order holding the debtor’s counsel in contempt and fining him $500 to be paid into the bankruptcy court’s registry.  The debtor’s counsel appealed to the district court.
The district court reversed the bankruptcy court’s ruling, holding that the bankruptcy court’s order and fine had to be construed in the nature of criminal contempt, and that the bankruptcy court did not have power to enter a criminal contempt order.  In making its decision, the district court found that the contempt order was “patently intended to be punitive” because it did not serve to coerce debtor counsel’s future actions in that the fine was not conditioned on debtor counsel’s future actions.  The district court also stated that the order was meant to “vindicate the court’s authority” by imposing a fine, sua sponte, that was to be paid to the bankruptcy court as opposed to another party.
The district court relied on a Fifth Circuit case, In re Hipp, Inc., for the proposition that bankruptcy courts do not have power—inherent or statutory—to hear and decide questions of criminal contempt.  The question of whether a bankruptcy court has such power, however, has not been clearly answered across circuits.  While the Eighth and Ninth Circuits have also stated that bankruptcy courts cannot issue criminal contempt sanctions, the First and Tenth Circuits have suggested that bankruptcy courts can appropriately exercise criminal contempt powers.  Recognizing the conflict, the Second and Seventh Circuits have deferred the question, acknowledging that whether bankruptcy judges have criminal contempt powers is a “serious” and “unsettled” question.
The drafters of the Federal Rules of Bankruptcy Procedure also have struggled with this question.  In 1987, the drafters of Bankruptcy Rule 9020 recognized that “bankruptcy judges may not have the power to punish for contempt.”  Ultimately, Bankruptcy Rule 9020 was repealed in 2001, and from then on contempt motions fell under Bankruptcy Rule 9014, which governs contested matters.  In making this change, the drafters noted that “[i]ssues relating to the contempt power of bankruptcy judges are substantive and are left to statutory and judicial development, rather than procedural rules.”
Broadly speaking, the implication from In re Ho and other case law discussing the criminal contempt powers of bankruptcy courts is that one need be mindful of the operative jurisdiction because courts have answered the question differently.  There has yet to be a Supreme Court case providing any attempted resolution, thus making this issue hot fodder for legal academics, but the question of bankruptcy courts’ criminal contempt power is still interesting nonetheless.  We will be on the lookout for new cases in this area of the law and will, of course, report back on future developments.