Opinion
Case No. 97-18482-SSM
December 23, 1998
MEMORANDUM OPINION
A hearing was held in open court on December 15, 1998, on the motion of Brian F. Kenney, the chapter 11 trustee, to hold William G. Stern in civil contempt for violation of the automatic stay by attempting to exercise control over property of the bankruptcy estate. Mr. Stern, although served with the motion and notice of the hearing, did not appear.
Background and Facts
Nycal Corporation ("Nycal") is a holding company. It filed a voluntary petition under chapter 11 of the Bankruptcy Code in this court on November 13, 1997. Among its assets were 204,080 shares of Hydro Technology Ltd., which had been pledged as collateral to Channel Hotels and Properties Ltd. ("CHAPS"), which purportedly "foreclosed" on them the day prior to the chapter 11 filing. William G. Stern, who indirectly owned 25.8% of Nycal's shares, was the president, chief executive officer, and chairman of the corporation and was its designated representative during the seven months Nycal operated as a debtor in possession. On June 8, 1998, however, this court granted the motion of Interallianz Finanz AG, a creditor, to appoint a chapter 11 trustee, and on June 29, 1998, the appointment of Brian F. Kenney as chapter 11 trustee was confirmed. Exhibits offered by the trustee reflect that on July 20, 1998, he wrote to Mr. Stern stating, "I . . . must inform you that your employment with Nycal Corporation is terminated effective immediately." Subsequently, Mr. Stern wrote on September 11, 1998, to an Irish law firm requesting that the shares of Hydro Technology, Ltd. be delivered to him "on behalf of Nycal Corporation" and representing, "I confirm to you that I am the Chairman of the corporation and that its status is not affected by the Chapter 11 proceedings we instituted in November 1997." In correspondence dated that same date concerning a former subsidiary of Nycal, California Nickel Corp., Mr. Stern explained,
In June 1998 the Bankruptcy Court in Virginia appointed a Trustee to take over the affairs of Nycal. I still remain Chairman but am no longer an Executive Director of the company. The functions of Chief Executive Officer are presently carried out by the Court appointed Trustee, a Virginia lawyer.
In a subsequent letter to Mr. Kenney, Mr. Stern, although acknowledging that he "may have no effective rights of acting on behalf of the corporation for as long as the Trustee remains in position," asserted that he nevertheless remained entitled to represent himself as Nycal's "Chairman" — albeit "with full disclosure that the management of the company is in the hands of a Court appointed Trustee" — until his status as a "Director/Chairman" of the corporation was terminated by vote of the shareholders, by statute, or by an order of this court.
Conclusions of Law and Discussion I.
The filing of a bankruptcy petition creates an automatic stay of, among other actions,
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
11 U.S.C. § 362(a)(3). The stay is applicable by its terms "to all entities," 11 U.S.C. § 362(a), and is one of the most fundamental protections provided by the Bankruptcy Code. In re A.H. Robins, Inc., 63 B.R. 986, 988 (Bankr. E.D. Va. 1980). Violation of the automatic stay may be redressed as civil contempt under 11 U.S.C. § 105(a) or may be the basis for an award of damages under 11 U.S.C. § 362(h). Burd v. Walters (In re Walters), 868 F.2d 665 (4th Cir. 1989); Budget Service Co. v. Better Homes of Va., Inc., 804 F.2d 289 (4th Cir. 1986).
II.
In the large majority of chapter 11 business reorganization cases, existing management is not displaced, and debtor's management continues to operate the debtor's business as a "debtor in possession." 11 U.S.C. § 1101(1) and 1107. In appropriate circumstances, however, the court may appoint a trustee to operate the debtor's business. 11 U.S.C. § 1104 (a). As explained by a leading commentator,
Outside of bankruptcy, a corporation is managed by its directors, who are elected by the corporation's owner, the stockholders. Although directors are the ultimate managers of a corporation, the officers, who serve at the pleasure of the board, normally manage and operate the business on a day-to-day basis. Thus, insofar as the making of decisions concerning the operation of the business is concerned, a corporate debtor in possession acts through its directors and officers. In contrast, the appointment of a trustee short-circuits this prebankruptcy chain of command, transferring management functions and discretion to the trustee. The debtor corporation's directors are completely ousted and retain no management powers.
7 Collier on Bankruptcy ¶ 1108.02[1], at 1108-4 (Lawrence P. King, ed., 15th ed. rev. 1998) (emphases added). Additionally, the United States Supreme Court, in holding that the trustee, rather than the directors, of corporation in bankruptcy had the power to waive the corporation's attorney-client privilege with respect to prebankruptcy communications, observed:
Upon the commencement of a case in bankruptcy, all corporate property passes to an estate represented by the trustee. 11 U.S.C. § 323, 541. The trustee is "accountable for all property received," §§ 704(2), 1106(a)(1), and has the duty to maximize the value of the estate. . . . In contrast the powers of the debtor's directors are severely limited. Their role is to turn over the corporation's property to the trustee and to provide certain information to the trustee and to the creditors. § 521, 343. Congress contemplated that when a trustee is appointed, he assumes control of the business and the debtor's directors are "completely ousted." See H.R. Rep. No. 95-595, pp. 220-221 (1977).
Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 352-53, 105 S.Ct. 1986, 1993, 85 L.Ed.2d 372 (1985) (emphasis added) (citations omitted).
III.
Applying these principles to the case before the court, it is clear that Mr. Stern has violated the automatic stay by attempting to obtain possession of, and to exercise control over, property of the estate, namely the shares of stock in Hydro Technology Ltd. The fact that the shares of stock had been pledged to CHAPS does not make them any less the property of the bankruptcy estate. United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). Once the chapter 11 trustee was appointed, Mr. Stern, whether in his capacity as president and chief executive officer, or in his capacity as chairman of the board of directors, was "completely ousted" from his management role and no longer had any authority to demand possession of the debtor's property or to exercise control over it. His sole duty, rather, as the Supreme Court explained in Weintraub, was "to turn over the corporation's property to the trustee."
In his letter to the chapter 11 trustee, Mr. Stern sought to draw a fine line by suggesting that, in describing himself as "chairman" of Nycal, he was only stating his technical title, but always "with full disclosure that the management of the company is in the hands of a Court appointed Trustee." That assertion is utterly belied by his September 11, 1998, letter to the Irish law firm in which he not only did not disclose that a trustee had been appointed, but flatly stated, "I confirm to you that I am the Chairman of the corporation and that its status is not affected by the Chapter 11 proceedings. . . . A" The only conclusion any reasonable reader could draw from those words — and plainly the conclusion Mr. Stern intended to be drawn — was that his authority as "chairman" to act on behalf of the corporation was not affected by the chapter 11 proceedings. Accordingly, the court can only conclude that Mr. Stern, with full knowledge of Mr. Kenney's appointment, has willfully attempted to subvert the trustee's authority and to exercise control over property of the bankruptcy estate in violation of the automatic stay.
Unlike criminal contempt, the purpose of which is to punish actions which violate the dignity of the court, the purpose of civil contempt is remedial. In re Keene Corp., 168 B.R. 285, 288-89 (Bankr. S.D. N.Y. 1994). Appropriate sanctions for civil contempt may be coercive (where there is an ongoing failure to comply with a court order) or compensatory (where a party has suffered damages as a result such failure) or both. Id. In the present case, there is no suggestion that Mr. Stern presently has in his possession any property of the estate that he is refusing to turn over. Therefore a coercive sanction is not, at least on the present state of the record, appropriate. On the other hand, the trustee, in order to vindicate his right to exercise sole control over the property of the bankruptcy estate free from interference by Mr. Stern, has been put to the time, trouble, and expense of bringing the present motion. The court concludes, therefore, that a monetary sanction in the amount of $1,750.00, payable to the trustee within ten days, is appropriate.
A separate order will be entered adjudging Mr. Stern in civil contempt and imposing a monetary sanction in the amount of $1,750.00.