In re: Randall Hake v. ( 2006 )

By order of the Bankruptcy Appellate Panel, the precedential effect
of this decision is limited to the case and parties pursuant to 6th
Cir. BAP LBR 8013-1(b). See also 6th Cir. BAP LBR 8010-1(c).
File Name: 06b0016n.06
BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT
In re: RANDALL J. HAKE AND
MARY ANN HAKE, )
)
Debtors. ) No. 06-8014
_____________________________________ )
)
)
F. DEAN ARMSTRONG, )
)
Appellant. )
)
)
)
Appeal from the United States Bankruptcy Court
for the Northern District of Ohio, Eastern Division at Youngstown.
No. 04-41352.
Submitted: August 23, 2006
Decided and Filed: October 3, 2006
Before: GREGG, LATTA, and SCOTT, Bankruptcy Appellate Panel Judges.
____________________
COUNSEL
ON BRIEF: F. Dean Armstrong, ARMSTRONG LAW FIRM, Flossmoor, Illinois, Victor O.
Buente, Jr., Newton Falls, Ohio, for Appellant.
____________________
OPINION
____________________
JAMES D. GREGG, Bankruptcy Appellate Panel Judge. F. Dean Armstrong, Esq.
(“Appellant”) appeals an order of the bankruptcy court finding him in contempt of court and
imposing a monetary sanction of $312.50. For the reasons that follow, the bankruptcy court’s order
is REVERSED.
I. ISSUE ON APPEAL
The issue raised by this appeal is whether the bankruptcy court erred in holding the Appellant
in contempt for participating in a hearing before it while his law license had been temporarily
suspended because he failed to pay an annual registration fee.
II. JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal.
The United States District Court for the Northern District of Ohio has authorized appeals to the Panel
and a final order of the bankruptcy court may be appealed as of right pursuant to 28 U.S.C.
§ 158(a)(1). For purposes of appeal, a final order “ends the litigation on the merits and leaves
nothing for the court to do but execute the judgment.” Midland Asphalt Corp. v. United States, 489
U.S. 794, 798, 109 S. Ct. 1494, 1497 (1989) (citations omitted). The bankruptcy court’s order
holding the Appellant in contempt and imposing a fine is a final appealable order. Shuffler v.
Heritage Bank, 720 F.2d 1141, 1145 (9th Cir. 1983). “A decision on a contempt petition is within
the sound discretion of the trial court and thus is reviewed only for an abuse of discretion.” Elec.
Workers Pension Trust Fund of Local Union #58, IBEW v. Gary’s Elec. Serv. Co., 340 F.3d 373, 378
(6th Cir. 2003) (citing Peppers v. Barry, 873 F.2d 967, 968 (6th Cir. 1989)); accord, United States
v. Grable, 98 F.3d 251, 253 (6th Cir. 1996).
“An abuse of discretion is defined as a ‘definite and firm conviction that the [court below]
committed a clear error of judgment.’ The question is not how the reviewing court would have
ruled, but rather whether a reasonable person could agree with the bankruptcy court’s decision; if
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reasonable persons could differ as to the issue, then there is no abuse of discretion.” Mayor & City
Council v. W. Va. (In re Eagle-Picher Indus., Inc.), 285 F.3d 522, 529 (6th Cir. 2002). The
bankruptcy court’s decision, under this standard, will only be disturbed if it “relied upon clearly
erroneous findings of fact, improperly applied the governing law, or used an erroneous legal
standard.” Gary’s Elec. Serv. Co., 340 F.3d at 378 (citing Blue Cross & Blue Shield Mut. v. Blue
Cross & Blue Shield Ass’n, 110 F.3d 318, 322 (6th Cir. 1997)).
III. FACTS
The Appellant is an attorney who represents Buckeye Retirement Co., L.L.C. (“Buckeye”),
a creditor in the chapter 11 bankruptcy case of Randall J. Hake and Mary Ann Hake. On
November 2, 2005, Appellant filed his Motion for Admission of F. Dean Armstrong Pro Hac Vice
and Notice (“Motion”) and supporting affidavit. The Motion and affidavit asserted that the
Appellant was a member in good standing of the bar of the State of Illinois, and that there had been
no disciplinary proceedings, or criminal charges instituted against him. The bankruptcy court
granted the Motion on November 16, 2005.
On February 9, 2006, the Appellant appeared before the bankruptcy court at a contested
hearing during which he examined witnesses and made arguments to the court. Subsequently, the
bankruptcy court learned from the Attorney Registration and Disciplinary Commission of the
Supreme Court of Illinois (“ARDC”) that the Appellant had been removed from the Master Roll of
Attorneys on February 6, 2006. The bankruptcy court issued an order for the Appellant to appear
and show cause why his admission pro hac vice should not be revoked, and why he should not be
held in contempt (“Show Cause Order”). The Appellant filed a written response to the Show Cause
Order in which he explained that he was unaware of the suspension of his Illinois law license prior
to receiving the court’s Show Cause Order. After receiving the Show Cause Order, the Appellant
learned that he had been temporarily suspended for failure to pay the annual registration fee to the
ARDC. The Appellant did not have a record of having received the invoice for payment of the fee,
and asserted that the nonpayment was an unintentional oversight. Upon learning of the situation, and
before the Show Cause Order hearing, Appellant paid the registration fee and, in accordance with
the rules of the ARDC, was reinstated to the Master Roll of Attorneys.
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On March 13, 2006, the bankruptcy court held a hearing on its Show Cause Order at which
the Appellant testified on his own behalf to the information contained in his written response.
Although the bankruptcy court found that the Appellant’s failure to pay the fee was unintentional,
it found that the Appellant had constructive notice that the annual fee was due. The court then found
that “[Appellant]’s failure to inform this Court that he had allowed his status of good standing to
lapse constituted a form of deceit upon the Court . . . . This Court finds it appropriate to hold
[Appellant] in contempt of court and to impose a monetary sanction of Three Hundred Twelve and
50/100 Dollars ($312.50), which is to be paid withing ten (10) days of entry of this Order.” (J.A. M,
p. 3.) (footnote omitted.) (The bankruptcy court arrived at the $312.50 figure by multiplying the
Appellant’s hourly rate by the length of the February 9, 2006 hearing.) The Appellant then filed this
timely appeal.
IV. DISCUSSION
1. Nature of Contempt Sanction - Civil or Criminal?
The threshold issue is whether the “monetary sanction” imposed by the bankruptcy court was
in the nature of civil or criminal contempt. The nature of a contempt citation is derived from the
totality of the circumstances. In re Chandler, 906 F.2d 248, 249 (6th Cir. 1990) (citing In re Jaques,
761 F.2d 302, 305 (6th Cir. 1985)). A contempt fine is civil if it either coerces one into compliance
with a court order or compensates for a loss sustained. Int’l Union, United Mine Workers of Am. v.
Bagwell, 512 U.S. 821, 829, 114 S. Ct. 2552, 2558 (1994). A contempt fine is criminal if “it is
imposed retrospectively for a ‘completed act of disobedience’ . . . .” Id. at 828 (quoting Gompers
v. Bucks Stove & Range Co., 221 U.S. 418, 443, 31 S. Ct. 492, 498 (1911)). The purpose of a
criminal contempt fine is to vindicate the authority of the court. Gompers, 221 U.S. at 443; TWM
Mfg. Co., Inc. v. Dura Corp., 722 F.2d 1261, 1270 n.8 (6th Cir. 1983). “A ‘flat, unconditional fine’
totaling even as little as $50 announced after a finding of contempt is criminal if the contemnor has
no subsequent opportunity to reduce or avoid the fine through compliance.” Int’l Union, 512 U.S.
at 829 (quoting Penfield Co. of Cal. v. SEC, 330 U.S. 585, 588, 67 S. Ct. 918, 920 (1947)).
Although termed a “monetary sanction” by the bankruptcy court, the fine imposed upon the
Appellant does not serve to compensate an aggrieved party or coerce the Appellant into compliance
with an order of the court. The Appellant also had no opportunity to reduce or avoid the fine through
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compliance. The fine was imposed solely for punitive purposes and to vindicate the authority of the
court. Without question, the fine imposed was in the nature of criminal contempt.
2. Bankruptcy Court’s Contempt Authority
A second issue is whether the bankruptcy court has the power to impose criminal sanctions.
There is a split of authority among the circuits on this issue, and the Sixth Circuit Court of Appeals
has not directly addressed the issue. Both the Fifth Circuit Court of Appeals and Ninth Circuit Court
of Appeals have held that bankruptcy courts lack power to impose criminal sanctions. Griffith v.
Oles (In re Hipp, Inc.), 895 F.2d 1503, 1509 (5th Cir. 1990); Placid Refining Co. v. Terrebonne Fuel
& Lube, Inc. (In re Terrebonne Fuel & Lube, Inc.), 108 F.3d 609, 613 n.3 (5th Cir. 1997); Knupfer
v. Lindblade (In re Dyer), 322 F.3d 1178, 1197 (9th Cir. 2003); Price v. Lehtinen (In re Lehtinen),
332 B.R. 404, 412 (B.A.P. 9th Cir. 2005).
In Hipp, the Fifth Circuit held that the bankruptcy courts do not have the inherent contempt
authority of Article III courts. In re Hipp, 895 F.2d at 1511. The court explained that the inherent
contempt authority of Article III courts stems from the necessity of those courts to vindicate their
authority without dependence on other branches of government. Id. at 1512-13. Because
bankruptcy courts have immediate recourse to Article III courts to enforce compliance with their
order, the court reasoned that they have somewhere else to turn without offending the principle of
separation of powers. Id. at 1512 (citing In re Omega Equip. Corp., 51 B.R. 569, 573 (D.D.C.
1985)). The court further noted that where Congress has intended non-Article III courts (for
example, military and tax courts) to possess criminal contempt powers, it has statutorily granted such
powers. Id. at 1513.
The Fifth Circuit next considered whether the bankruptcy courts had in fact been statutorily
granted such powers by 11 U.S.C. § 105(a). In pertinent part, § 105(a) reads:
The court may issue any order, process or judgment that is necessary
or appropriate to carry out the provisions of this title. No provision
of this title . . . shall be construed to preclude the court from, sua
sponte, taking any action . . . necessary or appropriate to enforce or
implement court orders or rules . . . .
The Fifth Circuit concluded that § 105 does not grant bankruptcy courts power to punish
criminal contempt because criminal contempt is not “necessary or appropriate to enforce or
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implement” the courts’ orders or rules. Rather, criminal contempt is intended to vindicate the
authority of the court. Id. at 1515. The court similarly found no statutory grant of criminal contempt
power in 28 U.S.C. § 157 because a criminal contempt proceeding is not a core proceeding, nor is
it “related to” a case under title 11. To the contrary, a criminal contempt proceeding is separate and
independent and can be prosecuted even after the underlying proceeding is terminated. Id. at 1517-
18.
In Dyer, the Ninth Circuit held that 11 U.S.C. § 105(a) grants bankruptcy courts civil
contempt authority, but, like the Fifth Circuit concluded that criminal contempt sanctions, unlike
compensatory damages or attorney fees, are not “necessary” and are not authorized by § 105(a). Id.
at 1193.1 Acknowledging the debate among the circuits on this issue, the Ninth Circuit noted,
Not only have the other circuits struggled with this question, so have
the drafters of the Federal Rules of Bankruptcy Procedure. In 1987,
the drafters passed Fed. R. Bankr.P. 9020, specifying contempt
procedures in bankruptcy court, but noted that the rule might be
inapplicable because ‘bankruptcy judges may not have the power to
punish for contempt.’ Rule 9020 was repealed in 2001. Now,
contempt motions are governed by Fed. R. Bankr.P. 9014 (a generic
rule regarding all ‘contested matters.’). The advisory notes
explaining this change emphasize the conflicting authorities and state
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.’
In re Dyer, 322 F.3d at 1193 n.15.
Several other circuits have acknowledged the issue, but not reached a conclusion. The Eighth
Circuit has held that bankruptcy courts are authorized, at least, to hear criminal contempt
proceedings and make proposed findings of fact and conclusions of law for de novo review by the
1
In dicta, however, the Ninth Circuit stated that “relatively mild” non-compensatory fines
may be necessary under some circumstances and are therefore permissible under § 105(a). Dyer, 322
F.3d at 1193-94. The court discussed approvingly its prior decision in Miranda v. S. Pac. Transp.
Co., 710 F.2d 516, 520 (9th Cir. 1983), where it held that a court could impose a non-compensatory
fine of $250 on an attorney in order to vindicate local rules. Id. at 1194 n.16. The court then went
on to conclude that “when a bankruptcy court exercises the contempt authority of § 105(a), it may
not impose serious punitive sanctions,” id. at 1195 (emphasis added), despite its statement earlier
in the opinion that “criminal contempt sanctions are not available under § 105(a),” id. at 1193, with
no reference to the level of “seriousness” of the sanctions.
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district court. The court did not, however, reach the question of whether a bankruptcy court can
enter its own criminal contempt judgment, subject to review only by appeal.2 Brown v. Ramsay (In
re Ragar), 3 F.3d 1174, 1177-79 (8th Cir. 1993); see also Sosne v. Reinert & Dupree, P.C. (In re
Just Brakes Corporate Sys., Inc.), 108 F.3d 881, 885 (8th Cir. 1997) (acknowledging “serious
question” whether bankruptcy courts have contempt powers). Both the Second and the Seventh
Circuit Courts of Appeals have also acknowledged that there is a serious question as to whether the
bankruptcy courts are vested with criminal contempt power, but saved the resolution of the issue for
another day. United States v. Guariglia, 962 F.2d 160, 163 (2d Cir. 1992); Cox v. Zale Del., Inc.,
239 F.3d 910, 916-17 (7th Cir. 2001).
Still other circuits have suggested in dicta, without the benefit of analysis, that the bankruptcy
courts are vested with criminal contempt power. Eck v. Dodge Chem. Co. (In re Power Recovery
Sys., Inc.), 950 F.2d 798, 802 n.17 (1st Cir. 1991); Graham v. United States (In re Graham), 981
F.2d 1135, 1142 (10th Cir. 1992) (citing former Bankruptcy Rule 9020 which was repealed in 2001).
While the Sixth Circuit Court of Appeals has not directly addressed this issue, it has
favorably cited the Fifth Circuit’s holding in Hipp that no implied grant of criminal contempt power
exists where Congress had not explicitly granted it. Rafoth v. Nat’l Union Fire Ins. Co. (In re Baker
& Getty Fin. Serv., Inc.), 954 F.2d 1169, 1173-74 (6th Cir. 1992), see also In re Lawrence, 164 B.R.
73, 75-76 (W.D. Mich. 1993) (finding that, in Baker, the Sixth Circuit implicitly endorsed Hipp, and
holding that bankruptcy courts do not have jurisdiction to conduct a criminal contempt hearing nor
to enter an order finding criminal contempt). In Baker, the Sixth Circuit declined to imply that
bankruptcy courts are authorized to conduct jury trials where the relevant statutes do not reveal any
such congressional intent. Id. In addition, the dissent in McClatchey v. Parsons (In re Lazy Acres
Farm, Inc.), 134 F.3d 371, 1997 WL 809968 *5 n.1 (6th Cir. 1997) (Boggs, J., dissenting) (unpub.
table) explicitly stated that “criminal contempt sanctions are beyond the power of the bankruptcy
court . . . .”
2
The Eighth Circuit specifically rejected the Fifth Circuit’s reasoning in Hipp that criminal
contempt is not “necessary or appropriate” to enforce the court’s rules or orders. While the court
acknowledged that criminal contempt judgments are intended to vindicate the authority of the court,
it opined that criminal contempt judgments may be necessary or appropriate to enforce the order for
whose violation it is imposed. Ragar, 3 F.3d at 1179.
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The Sixth Circuit has acknowledged that courts must have the power to impose submission
to their lawful mandates, and respect and decorum in their presence. See In re Smothers, 322 F.3d
438 (6th Cir. 2003). In Smothers, the court suggested penalties, other than criminal contempt, that
may more appropriately fit conduct of attorneys that falls below the expected standards of members
of the bar. For example, the court suggested a lecture from the court regarding the offending
behavior, involving the offending attorney’s office management or partnership, recommending to
the appropriate bar association that the attorney be subject to disciplinary action such as a public
reprimand, and public disciplinary postings on a page associated with the court’s website listing the
attorney’s name, details of the misconduct, and the court’s disapproval. Id. at 442-43. The Sixth
Circuit appears to lean toward the position articulated by the Fifth Circuit in Hipp, i.e., the
bankruptcy courts are without statutory authority to impose monetary sanctions for criminal
contempt, and favors the imposition of non-monetary over monetary sanctions in appropriate
circumstances.
3. Propriety of Bankruptcy Court’s Contempt Finding
Were we to assume that bankruptcy courts have the power to impose criminal contempt
sanctions, the bankruptcy court in this case abused its discretion in holding the Appellant in
contempt. To be guilty of criminal contempt, the Appellant must have engaged in willful
disobedience, which must be proved beyond a reasonable doubt. TWM Mfg. Co., 722 F.2d at 1272
(citing United States v. Powers, 629 F.2d 619, 626 n. 6 (9th Cir. 1980)). Willfulness, in this context,
“means a deliberate or intended violation, as distinguished from an accidental, inadvertent, or
negligent violation. . . .” Wright v. Nichols, 80 F.3d 1248, 1251 (8th Cir. 1996) (quoting Hubbard
v. Fleet Mortgage Co., 810 F.2d 778, 781 (8th Cir. 1987)). Applying these standards, and viewing
the evidence in the light most favorable to the court’s finding, TWM Mfg. Co., 722 F.2d at 1272
(citing In re Joyce, 506 F.2d 373, 376 (5th Cir. 1975)), there is insufficient evidence to find the
Appellant guilty of criminal contempt. There is a complete absence of evidence that the Appellant
deliberately failed to pay the registration fee, or failed to advise the bankruptcy court of the
temporary suspension of his Illinois law license. All evidence and inferences lead to the conclusion
that the failure to pay the registration fee, and the resulting participation in a hearing before the
bankruptcy court while temporarily suspended, was inadvertent and accidental. The bankruptcy
court itself found that “[the Appellant’s] failure to pay the registration fee was not intentional . . . .”
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(J.A. M, p. 2.) Therefore, the bankruptcy court abused its discretion in holding the Appellant in
criminal contempt.
V. CONCLUSION
Because the fine imposed was intended to vindicate the authority of the bankruptcy court,
it was a criminal contempt sanction. There is a serious question whether the bankruptcy court has
the power to impose such sanctions. Even assuming, for the sake of argument, that the bankruptcy
court has such power, it abused its discretion in holding the Appellant in criminal contempt because
there was no evidence of willful disobedience. The bankruptcy court’s order is, therefore,
REVERSED.
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