Thursday, December 31, 2009

Contempt Upheld for Injunction Not Yet Reduced to Writing

In one more chapter of the Gary Bradley bankruptcy, the Fifth Circuit Court of Appeals upheld a finding of contempt against the Lazarus Exempt Trust based upon conduct occurring between the court's oral pronouncement of an injunction and its reduction to writing. Matter of Gary Bradley, No. 08-50587 (5th Cir. 11/11/09).

When Gary Bradley filed bankruptcy, his trustee, Ronald Ingalls, sought to recover properties held by the Lazarus Exempt Trust. Prior to trial, the Court had issued an injunction preventing the Trust from dissipating assets held or controlled by the trust. This injunction expired at the conclusion of the trial. In order to avoid a gap period between expiration of the preliminary injunction and entry of a judgment, the Trustee, the IRS and the FDIC filed a Joint Motion to Maintain Status Quo Pending Final Ruling in Adversary Proceeding.

At the hearing on the motion, the attorney for the Lazarus Exempt Trust acknowledged that there were plans underway to dispose of certain property. The Court orally pronounced an injunction which was narrower than the one requested by the moving parties. The written order was not entered until 27 days later. Meanwhile, Bradley Beutel, the Trustee of the Lazarus Exempt Trust carried out a sale of property and disbursed the funds. He sought to have the Bankruptcy Court ratify the transfers, but the court denied the motion.

After that, the Bankruptcy Trustee sought to hold Beutel in contempt both personally and in his capacity as trustee. The Court made a finding of civil contempt and ordered Beutel and the Trust (which now had a new trustee) to repay $317,953.53. Beutel's personal liability was settled, leaving only the issue of the liability of the trust.

Tommy Thompson, the successor Trustee of the Lazarus Exempt Trust appealed, contending that he could not be held in contempt for violation of an oral injunction. The Fifth Circuit distinguished two Seventh Circuit cases in which oral pronouncements were deemed unenforceable on the basis that in those cases a written order was never entered. In contrast, in this case, a written order was entered in conformity with the oral ruling, the Trustee of the Trust was aware of the ruling and considered himself bound by it (as shown by his motion seeking ratification) and his conduct violated a central tenet of the ruling. As a result, the Court stated that:

The question we face is not whether the bankruptcy court acted properly to create an effective, appealable order. It is whether Beutel's manifestly improper actions can render him liable for contempt.
Opinion, p. 11.

The court stated that the first step was to consider whether the order was civil or criminal. The court found that the fact no imprisonment was involved was not dispositive. Instead, it noted that criminal contempt is intended to punish the contemnor and vindicate the authority of the court, while civil contempt is intended to compel compliance with an order or compensate another party for the contemnor's violation. Imprisonment can be used in connection with either civil or criminal contempt, the distinction being whether the imprisonment is for a fixed term or can be remitted based upon compliance with the court's order. Monetary sanctions can also constitute either civil or criminal contempt. If awarded to punish, they are criminal, while if awarded to compensate, then they are civil. In this case, the court found that the Bankruptcy Court's award constituted remedial civil contempt.

Ironically, the Court found that if the case had involved criminal contempt, it would have been clear that violation of an oral ruling would be permissible, since the federal criminal contempt statute includes violation of a court's "command." However, the question was closer in the civil contempt analysis. The elements of civil contempt are: "(1) that a court order was in effect, and (2) that the order required certain conduct by the respondent, and (3) that the respondent failed to comply with the court's order." Opinion, p. 14.

In conclusion the court stated:

We see no reason why the civil contempt power, as generally recognized in our courts, should not reach Beutel’s conduct. As discussed above, the power is broad and pragmatic, reaching where it must—consistent with prudent court management and due process—to prevent insults, oppression, and experimentation with disobedience of the law. Beutel’s shell game with the proceeds of Trust property is the type of conduct contempt targets, and there is no doubt that he received adequate notice and opportunity to be heard at all stages of the proceedings. His conduct had the effect of frustrating not only the injunction, but also the trial on the merits, by diverting funds from Trust entities that the bankruptcy court would later rule belonged to the bankruptcy estate. The district court found—not clearly erroneously—that Beutel intentionally avoided the injunction hearing because he intended to sell Trust assets and distribute the proceeds in a manner that he expected the court to prohibit. On top of this, the bankruptcy court provided clear notice of the commands that Beutel violated, and which the bankruptcy court later reduced to writing and entered. The bankruptcy court found—also not clearly erroneously—that Beutel knew about the “oral injunction” and considered himself bound. Nonetheless he consummated the transaction as planned and then falsely claimed he had not known about the court’s command. With proper procedures, this conduct could support a criminal contempt conviction. Thompson provides no reason why the result should be different merely because the contempt finding made Beutel
liable to the opposing party rather than imposing a fine payable to the court. We hold that the civil contempt power reaches Beutel’s conduct despite the fact that it occurred before the written injunction was in force.
Opinion, pp. 16-17.

While the Fifth Circuit's conclusion is unremarkable, it contains a good discussion of civil contempt. Indeed, it is unclear what the contempt proceeding gained the Bankruptcy Trustee. The Bankruptcy Court found that the assets disposed of were property of the estate. The contempt ruling merely required the trust to repay the value of assets of the bankruptcy court which it disposed of. It seems that the Trustee could have reached the same result without the necessity of a contempt proceeding.

Nevertheless, the opinion drives home the point that Bankruptcy Courts are federal courts and that their pronouncements--whether reduced to writing or not--should be taken seriously.

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