Opinion
Case No. 95-14268-AM
January 30, 1996
Roy B. Zimmerman, Esquire, Alexandria, VA, Of Counsel for debtor
MEMORANDUM OPINION
Before the court is the debtor's motion to reconsider and to amend an order previously entered by this court on December 13, 1995, adjudging the debtor's ex-husband, David Bart Edelen, in civil contempt. A hearing on the motion to reconsider was held on January 23, 1996, at which the debtor was present by counsel and Mr. Edelen appeared pro se. For the reasons stated in this opinion, the court declines to amend the order and directs the clerk to transmit Mr. Edelen's objections to the contempt order to the District Court for hearing and determination as required by F.R.Bankr.P. 9020(c) and 9033(b).
For his part, Mr. Edelen has filed timely objections under F.R.Bankr.P. 9020(c) to the order. As discussed below in this opinion, such objections cannot be ruled upon by this court but must be heard and determined by the United States District Court.
Findings of Fact
The underlying facts giving rise to the present controversy were orally stated by the court on the record at a hearing held on December 12, 1995, and are restated here only to the extent necessary to place the present motion in context. Essentially, the debtor and Mr. Edelen had been divorced as a result of a decree entered by the Circuit Court of Fairfax County, Virginia in May 1994. A portion of the divorce decree required the sale of the real estate jointly-owned by the parties. The parties owned two parcels of real estate. One, the former marital residence, has been foreclosed upon. The other, a beach house in Bethany Beach, Delaware, is valued by the debtor at $299,000 and is subject to a mortgage with a balance of approximately $158,211. Mr. Edelen located willing purchasers, John and Patricia Dahlberg, who offered to purchase the property for $225,000. When the debtor refused to sign the contract, Mr. Edelen obtained an order from the Fairfax County Circuit Court requiring her to sign.
At the hearing, Mr. Edelen testified that the debtor had intentionally allowed the deed of trust to go into default, and that the property had been purchased at the foreclosure sale by her boyfriend, with whom she was currently living in the house.
In the interim, Mr. Edelen obtained a judgment against the debtor for $67,888 for contribution after he satisfied a joint obligation of the parties from his own funds. The judgment was recorded as a lien against the debtor's interest in the Delaware real estate within 90 days of the bankruptcy filing. Because of Mr. Edelen's judgment lien against his former wife's interest, he would have received all of the sales proceeds after payment of the mortgage and closing costs and she would have received none.
The contract called for settlement on September 18, 1995, but was rescheduled for September 25, 1995, after the debtor failed to sign and return documents that the settlement attorney had mailed her. The debtor did not appear at settlement on September 25th, and Mr. Edelen obtained an order from the Fairfax County Circuit Court on the morning of September 27th, 1995, requiring her to sign the deed by the next day and to reimburse him $77 for service of process and Federal Express fees related to her noncompliance. That afternoon, the debtor filed a voluntary chapter 7 petition in this court. The debtor noticed for September 29th a motion for reconsideration of the September 27th order. At the September 29th hearing, Mr. Edelen made an impromptu motion to hold the debtor in contempt for not having complied with the September 27th order, and the court apparently threatened to jail the debtor unless she signed the deed and paid Mr. Edelen the $77, both of which she did. The deed has not been recorded, however, because the acknowledgement was apparently deficient. Mr. Edelen was apparently advised of the deficient acknowledgement around October 10, 1995. Shortly afterward, he filed with the Fairfax County Circuit Court a petition for a rule to show cause why the debtor should not be held in contempt for not complying with the September 27, 1995, order. Apparently the state court did not immediately act on the petition because Mr. Edelen had failed to sign it under oath. On October 18, 1995, he signed the petition under oath, and on October 31, 1995, the state court issued a rule to show cause returnable to November 3, 1995. At that hearing, he asked the court to jail the debtor unless she executed a sufficient deed. The debtor's bankruptcy and domestic relations attorneys both appeared at the hearing and successfully argued that any action was stayed under § 362 of the Bankruptcy Code. Accordingly, the Circuit Court took no action but continued the matter generally. That same day the debtor filed a motion in this court to have Mr. Edelen held in civil contempt for violation of the automatic stay.
Debtor's counsel represented that it also was not recorded because he telephoned the settlement attorney in Delaware and advised him that any transfer of the debtor's interest in the property occurring post-petition was void.
This court set an evidentiary hearing on the motion for December 12, 1995, at which both the debtor and Mr. Edelen testified. At the conclusion of the hearing, the court made findings of fact and conclusions of law orally on the record under F.R.Bankr.P. 7052. The court declined to find Mr. Edelen in contempt with respect to the September 29, 1995, hearing, because it was unclear from the testimony whether the actions taken at that hearing were driven by Mr. Edelen or instead by the state court judge. The court did find Mr. Edelen in civil contempt, however, with respect to the hearing on November 3, 1995, since Mr. Edelen had actual knowledge of the debtor's bankruptcy filing, and the action he took was clearly prohibited by the automatic stay under § 362 of the Bankruptcy Code. The court determined that an appropriate remedial sanction was a fine, payable to the debtor, in the amount of $1,100, which the court determined to constitute reasonable attorney's fees (although only approximately one-half of what the debtor requested) for representing the debtor at the November 3, 1995, hearing in the Fairfax County Circuit Court and for representing the debtor in connection with the motion in this court to have Mr. Edelen held in contempt. An order was entered on December 13, 1995, consistent with the court's bench ruling, adjudging Mr. Edelen in civil contempt and imposing a fine of $1,100 payable to the debtor.
Mr. Edelen orally moved at the hearing that he be allowed to set the fine off against his contribution claim against the debtor. The court declined to allow him to do so.
Subsequent to the entry of the order, the court received letters both from debtor's counsel and Mr. Edelen. Debtor's counsel sought to have the court's order (which by that time had already been entered, although copies had not yet been mailed to the parties) find a continuing contempt until Mr. Edelen withdrew the motion that had occasioned the November 3, 1995, hearing. Mr. Edelen for his part complained that there was no documentary evidence to support the claimed attorney's fees and that the debtor's former domestic relations attorneys were not sanctioned even though they had also violated the automatic stay by bringing an interpleader action that named the debtor as one of the interpleader defendants. The court advised both parties by letter that any request to alter or amend the court's findings or order would have to be brought by motion. Mr. Edelen thereafter on December 22, 1995, filed written objections to the court's order and the debtor filed on December 26, 1996, the motion for reconsideration and to amend that is presently before the court.
Upon being advised of the bankruptcy, they voluntarily withdrew their motion to pay the disputed funds into court. Mr. Edelen's complaint is that he was not likewise given adequate warning and afforded an opportunity to withdraw his motion before he was proceeded against for contempt. Mr. Edelen had, however, received prior to the November 3, 1995, hearing the standard notice of commencement of case mailed by the clerk of this court which included the following statement:
CREDITORS MAY NOT TAKE CERTAIN ACTIONS. A creditor is anyone to whom the debtor owes money or property. Under the Bankruptcy Code, the debtor is granted certain protection against creditors. Common examples of prohibited actions by creditors are contacting the debtor to demand repayment, taking action against the debtor to collect money owed or to take property of the debtor, and starting or continuing foreclosure actions, repossessions, or wage deductions. If unauthorized actions are taken by a creditor against a debtor, the court may penalize that creditor. A creditor who is considering taking action against the debtor or the property of the debtor should review Sec. 362 of the Bankruptcy Code and may wish to seek legal advice. The staff of the Bankruptcy Court is not permitted to give legal advice.
Even at the hearing on the contempt motion, Mr. Edelen refused to concede that his actions violated the stay and, based on his demeanor at the hearing, which could charitably be described as combative and bitter with respect to his former wife, the court does not believe Mr. Edelen would have asked the state court to dismiss the rule to show cause no matter how many letters or oral warnings he may have received from debtor's counsel asserting the automatic stay.
Conclusions of Law and Discussion A.
As has been many times observed, the automatic stay is one of the fundamental protections provided by the Bankruptcy Code. In re: Terry, 1 B.R. 880 (Bankr.E.D.Va. 1980). Under Section 362(a) of the Bankruptcy Code, 11 U.S.C. § 362(a), the filing of a bankruptcy petition
operates as a stay, applicable to all entities, of —
(1) the commencement or continuation, including the issuance or employment of process, of a judicial * * * proceeding against the debtor that was * * * commenced before the commencement of a case under this title, or to recover a claim against the debtor that arose before the commencement of a case under this title;
(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of a case under this title;
(emphasis added). So fundamental is the automatic stay to the orderly administration of bankruptcy cases that it is effective even as to parties who had no notice of the filing. In re: James, 120 B.R. 802, 814 (E.D.Pa. 1990), aff'd 940 F.2d 46 (3rd Cir. 1991). No special action or request by the debtor is required to make the stay effective: as noted by the Fourth Circuit,
The automatic stay is a self-executing provision of the Bankruptcy Code and begins to operate nationwide, without notice, once the debtor files its petition for relief.
In re: A. H. Robins Co. Inc., 63 B.R. 986, 988 (Bankr.E.D.Va. 1986) (emphasis added), aff'd Grady v. A. H. Robins Co., Inc. 839 F.2d 198 (4th Cir. 1988), cert. dismissed Joynes v. A. H. Robins Co., Inc., 487 U.S. 1260 (1988). Accord, NLT Computer Services Corp. v. Capital Computer Systems, Inc., 755 F.2d 1253, 1258 (6th Cir. 1985) (stay is "automatic and self-operating").
Under § 105(a), Bankruptcy Code, this court has the authority to "issue any order, process, or judgment that is necessary or appropriate" to carry out the provisions of the Bankruptcy Code and to hold parties in civil contempt for violation of its orders. Burd v. Walters (In re Walters), 868 F.2d 665, 669 (4th Cir. 1989); See, Budget Service Co. v. Better Homes of Va., Inc, 804 F.2d 289 (4th Cir. 1986) (independent of contempt power, bankruptcy judge has power under § 362(h) to award debtor both compensatory and punitive damages for violation of automatic stay). Although under 28 U.S.C. § 157(b)(2)(A) matters concerning the administration of the estate are normally "core" proceedings, contempt proceedings, even in aid of the court's jurisdiction over the administration of the estate, have some of the characteristics of a non-core proceeding in that a bankruptcy judge's finding of civil contempt is subject to de novo review by a United States District Judge. Specifically, under F.R.Bankr.P. 9020(c), if a hearing before a bankruptcy judge results in a finding of contempt, the order of contempt must be served on the person or entity named in the order and "shall be effective 10 days after service of the order and shall have the same force and effect as an order of the district court unless, within the 10 day period, the entity named therein serves and files objections prepared in the manner provided in Rule 9033(b)." If objections are filed, the contempt order is reviewed "as provided" in F.R.Bankr.P. 9033, which governs the review of non-core proceedings and requires the district judge to "make a de novo review upon the record or, after additional evidence, of any portion of the bankruptcy judge's findings of fact or conclusions of law to which specific written objection has been made. . . ."
B.
In the present case, it is clear that Mr. Edelen had actual knowledge of the debtor's bankruptcy case at the time of the November 3, 1995, hearing in the Fairfax County Circuit Court at which he sought to have the debtor jailed for not executing an adequate deed and for not paying him $77 that she had been required to pay. Although he does not really dispute that he had such knowledge, he asserts he did not understand the scope of the automatic stay. Where parties are ignorant of the bankruptcy filing itself, actions taken in unwitting violation of the stay, although void, do not constitute contempt. But where a party has actual knowledge of the bankruptcy, and despite such knowledge intentionally undertakes actions that in fact violate the stay, the party's ignorance of the legal effect of the stay is no defense to a resulting motion to find the party in civil contempt, although it may have a mitigating effect on the sanctions adjudged. See, e.g., In re Peterkin, 102 B.R. 50 (Bankr.E.D.N.C. 1989). In the present case, the debtor was required to pay counsel to appear with her at the hearing before the state court to argue the applicability of the stay and to pay counsel to file the contempt action against Mr. Edelen in this court. An appropriate sanction in such case is a compensatory award of the attorneys fees reasonably incurred as a result of Mr. Edelen's actions.
The debtor testified she filed a suggestion of bankruptcy in the state court action and mailed a copy to Mr. Edelen on September 27, 1995. He denied having received a copy. It is clear, however, that he received a subsequent notice mailed out by debtor's counsel on October 12, 1995, seeking a 10 day extension of the time to file schedules and a statement of financial affairs in the chapter 7 case, because on October 18, 1995, he filed with the clerk of this court an objection, dated the same date, objecting to the requested extension, citing the debtor's failure to appear at the settlement on the Bethany Beach property and stating "settlement needs to take place immediately to avoid further action against Ms. Snyder." October 18, 1995, as noted above, was the date Mr. Edelen verified the petition for rule to show cause filed in the state court. A standard notice of commencement of the debtor's case was mailed to Mr. Edelen on October 15, 1995, by the Clerk of this court.
It has been held that a violation of the automatic stay is willful when the creditor knows of the debtor's bankruptcy and intentionally engages in acts later found to violate the stay. . . .[O]nce a creditor learns that a bankruptcy petition has been filed, the creditor has the burden "to correctly ascertain the scope of the automatic stay"; and "[i]f the creditor is uncertain about the scope of the automatic stay, he takes the risk of being assessed for damages if he fails to obtain clarification from the bankruptcy court.
102 B.R. at 53-54 (internal citations omitted). Peterkin was a motion for assessment of damages under § 362(h) rather than a contempt proceeding, but I conclude that the principle is the same.
C.
With respect to the debtor's motion that the contempt order be amended to find a continuing contempt until Mr. Edelen actually withdraws the rule to show cause — which the state court has continued generally but not dismissed — I find that the record before me, which does not include a transcript of what transpired at the state court hearing, is insufficient to determine whether the state court viewed the contempt proceedings as one primarily to enforce the private rights of the parties or as one to vindicate the dignity of the state court whose orders the debtor had flouted. See, e.g., In re Dunham, 175 B.R. 615 (Bankr.E.D.Va. 1994) (Tice, J.) (contempt order entered to uphold the dignity of the court does not violate the automatic stay); Rook v. Rook (In re Rook), 102 B.R. 490 (Bankr.E.D.Va. 1989) (contempt order which was intended to force debtor to pay debt to former wife violated automatic stay, but separate contempt order entered to vindicate the dignity of the court did not violate automatic stay). Furthermore, once a court issues a "show cause" order, as the Fairfax County Circuit Court did in this case, the party suing out the rule does not have a unilateral right to dismiss it; at that point, it is for the court that issued the rule to determine whether the court's interest in vindicating the dignity of its own orders is outweighed by the private interest of the parties. Finally, since the contempt proceeding was continued "generally" rather than to a date certain, it will not be placed back on the hearing docket unless one of the parties were to ask that it be heard, and there is no present risk of that happening. The automatic stay ordinarily does not require that judicial proceedings against a debtor be dismissed; the automatic stay is just that, a stay. The state court, by continuing the contempt proceeding generally has recognized the automatic stay. Accordingly, I cannot find, on the limited record presently before the court, that Mr. Edelen's failure to dismiss — or more accurately, ask the state court to dismiss — the rule to show cause is a continuing violation of the automatic stay.
The debtor testified that the reason she had not appeared at the originally scheduled closing was because she knew she was going to be filing bankruptcy. However, an intent to file bankruptcy, even in the immediate future, is no justification for a present disobedience of a court ruling, notwithstanding that the effect of the ruling might be stayed or subject to avoidance once the petition was actually filed.
But see In re Peterkin, supra, where the bankruptcy court held that a state agency that had brought a contempt proceeding against the debtor in state court in order to collect a prepetition debt for employment taxes was required by the automatic stay "to do what is necessary to abate the state court proceedings." 102 B.R. at 54.
Once the debtor receives a discharge, the discharge injunction may of course require dismissal, but in the present case the debtor has not yet received a discharge.
D.
There remains the issue of Mr. Edelen's objections to the contempt order itself. As discussed above, once a person held in contempt files a timely objection, the objection must be heard and determined by a United States District Judge. F.R.Bankr.P. 9020, governing contempt proceedings, requires that the objections be "prepared in the manner provided in Rule 9033(b)" and "reviewed as provided in Rule 9033," which governs District Court review of proposed findings of fact and conclusions of law by a bankruptcy judge in "non-core" proceedings. Under F.R.Bankr.P. 9033(b), the objecting party must "identify the specific proposed findings or conclusions objected to and state the grounds for such objection." The opposing party may respond to the objections within 10 days after being served with a copy thereof. Additionally,
Debtor's counsel has complained that he did not receive a copy of Mr. Edelen's objection, although the objection contains a certificate of service reflecting service on the debtor's counsel. In any event, a copy is attached to this memorandum opinion.
A party objecting to the bankruptcy judge's proposed findings or conclusions shall arrange promptly for the transcription of the record, or such portions of it as all parties may agree upon or the bankruptcy judge deems sufficient, unless the district judge otherwise directs.
From a review of the file, it does not appear that Mr. Edelen has arranged for a transcript of the contempt hearing on December 12, 1995, and he should promptly make appropriate arrangements with the court reporter and file with the clerk a copy of the transcript order. In any event, the clerk will be directed to transmit to the District Court the pleadings, exhibits, orders, and transcript (if one is filed) related to the contempt proceeding.
To the extent Mr. Edelen disputes the court's findings of fact, it will obviously be necessary to have the entire hearing transcribed; to the extent he objects to the conclusions of law reached by the court on the basis of those findings, it would probably be sufficient simply to have the court's ruling transcribed unless the District Court determines that the entire hearing transcript is required.
A separate order will be issued denying the debtor's motion to alter or amend the order of December 13, 1995, and directing the clerk to transmit Mr. Edelen's objection to the United States District Court for the Eastern District of Virginia under F.R.Bankr.P. 9033.