Armed with an order from a U.S. Bankruptcy Court, the difficult part is behind you—namely, obtaining the order—or so you think! You face the opposing party and request compliance with the provisions of the order, but they refuse to comply. This situation sounds like one that is easily rectified, but how do you actually enforce the terms of a bankruptcy court order? In many situations, especially in the context of executing what is necessary to carry out the terms of a §363 sale order, it is anything but simple. For example, many §363 sales orders will provide that parties to contracts that have been assumed by the purchaser must take, or not take, certain actions. Often, there are hundreds of executory contracts involving parties with varying levels of sophistication and knowledge of the bankruptcy process. When approached with the sale order, parties may be hesitant to comply out of sheer ignorance of the process. Other times, parties will begin to quarrel over the true meaning of the terms of the sales order. Similar situations arise in enforcing cash collateral and debtor-in-possession (DIP) financing orders. Additionally, compliance issues arise in the enforcement of the automatic stay, non-dischargeability and turnover orders. This article seeks to provide practical assistance in enforcing compliance with a bankruptcy court order.

Civil Contempt Power

Obviously, the easiest and most efficient way to proceed is to reach an agreement with the party against whom you are trying to enforce the order. However, if your request for compliance falls on deaf ears, it may be necessary to seek the bankruptcy court's assistance in the enforcement of the order. It is now well-settled that the authority under 11 U.S.C. §105 is broad enough to allow the bankruptcy court to use the civil contempt power to police court orders.² This power extends to a variety of actions, including §363 sales orders, enforcing the automatic stay³ and the enforcement of turnover, DIP, dischargeability⁴ and cash-collateral orders.⁵ Imposition of civil contempt in these matters seeks to compensate for losses or damages caused by the defendant's non-compliance with the court's order.⁶

There is an important difference between civil and criminal contempt. Criminal contempt involves the power of the court to maintain and vindicate the dignity of the courts and is punitive in nature.⁷ Underlying the distinction between criminal and civil contempt sanctions is the procedural protections due a litigant before any particular contempt penalty may be imposed. Because civil contempt sanctions are considered non-punitive and avoidable, fewer procedural protections are required.⁸ Generally, a jury trial is required for the imposition of criminal sanctions, and there is an open question as to whether bankruptcy courts have the authority to impose criminal sanctions.⁹ Where a sanction is imposed retrospectively for a completed act of disobedience, the contempt is "criminal." However, "if the objective of the sanction is to compel compliance with a court order or to compensate complainant for losses sustained, the contempt is civil."¹⁰ As discussed later in this article, different relief is requested when requesting a finding of civil contempt versus criminal contempt, and one must be vigilant in drafting the requested relief. Otherwise, certain requests can be construed for an exercise of authority to impose criminal contempt sanctions and may be denied by the bankruptcy court for lack of authority.

In seeking the court's exercise of its civil contempt powers, it is important to follow the proper procedures. Federal Rule of Bankruptcy Procedure 9020(b) was enacted in 1987 and provided in part: "Contempt committed in a case or proceeding pending before a bankruptcy judge...may be determined by the bankruptcy judge only after a hearing on notice." However, FRBP 9020(b) was unclear exactly as to how the notice was to be issued by the court. Rule 9020 was repealed in 2001 and now simply provides that contempt motions are governed by FRBP 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." At least one commentator has stated "[T]he more detailed treatment of contempt was promulgated at a time when there were doubts as to whether bankruptcy judges were empowered to punish for contempt. Now that that issue has been resolved in favor of the existence of the contempt power, a more traditional approach to treatment of contempt is possible."¹¹ Accordingly, it seems that pursuant to the Rules, a motion requesting contempt remedies or an order to show cause pursuant to FRBP 9020 and 9014 would be the best way to proceed.

Generally, the party seeking relief has the burden of establishing civil contempt by clear and convincing evidence.¹² In order to be found in contempt, the offending party must have knowingly and willfully violated a definite and specific court order,¹³ although contempt is not dependent upon the intent of the defendant.¹⁴ To satisfy the requirements that parties had knowledge of an order requiring them to perform or refrain from performing particular acts, all that is required is showing that parties had actual notice of the court's order.¹⁵ Once the moving party makes a prima facie showing that a court order was violated, the burden of production shifts to the non-moving party to show a "present inability to comply that goes beyond a mere assertion of inability."¹⁶

Among the remedies available to the bankruptcy court in a civil contempt proceeding is the imposition of a fine payable to the complainant for damages sustained as a result of the contumacious conduct.¹⁷ The purposes of civil contempt sanctions "are to (1) compensate the claimant for losses and expenses it incurred because of the contemptuous conduct and (2) coerce the contemnor into complying with the court order or injunction."¹⁸

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One of the easiest ways to avoid issues associated with compliance with any bankruptcy court order is to ensure that the proposed orders presented to the bankruptcy court are as detailed and clear as possible so as to avoid issues of interpretation in the future.

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Remedies available upon a finding of civil contempt include an award of actual damages and attorneys fees and expenses.¹⁹ In addition, so long as the purpose is to coerce compliance with an order of the court, a bankruptcy court may impose a fine conditioned on the observance of a future course of conduct, such as compliance with the order in question. A "characteristic of a coercive sanction is that it incorporates a mechanism for the contemnor to purge itself and thereby reduce or eliminate the sanction."²⁰ Additionally, although bankruptcy law is loath to award attorneys fees absent some basis in statute or contract, there are two limited exceptions that apply in bankruptcy proceedings. The first permits recovery of attorneys fees where a common benefit is bestowed on a class protected by a common fund. The second exception is where fee-shifting is used as an equitable remedy to further the interest of justice and rectify certain aggravated conduct amounting to abusive or bad-faith litigation practices such as willful disobedience of a court order.²¹

Conversely, "a flat unconditional fine totaling even as little as $50" could be criminal "if the contemnor has no subsequent opportunity to reduce or avoid the fine through compliance," and the fine is not compensatory.²² This is so regardless of whether the non-compensatory fine is payable to the court or to the complainant.²³ Whether the fine is payable to the complainant may, however, be one relevant factor in determining whether the fine is compensatory or punitive.²⁴ Accordingly, if a request is made, which the court would construe as purely punitive (not coercive orders in the context discussed above), for actions previously taken in which the contemnor has no ability to purge itself of non-compliance or control the reduction or elimination of the sanction, then the court is likely to view such a request as one for the imposition of criminal sanctions: The bankruptcy court would not be able to move quickly on the request and ultimately may wind up referring it out to the district court as there is much debate among the circuits concerning the bankruptcy court's ability to adjudicate and punish criminal contempt.²⁵ An example of a request that may rise to the level of a criminal sanction versus one that would seek to coerce compliance could be a request by a party for the imposition of a disproportionate fine for failure to comply with a §363 sale order, requiring a party to an assigned contract to operate in accordance with the terms of the contract instead of requesting fees and costs incurred due to the non-compliance, immediate compliance and possibly, depending on the exigencies of the facts in the case, a daily imposition of a fine until compliance is accomplished. In the latter request, the contemnor is not being "punished" per se, but rather possesses the ability to control or eliminate the possible sanction based on conduct completely within the contemnor's control.

Conclusion

One of the easiest ways to avoid issues associated with compliance with any bankruptcy court order is to ensure that the proposed orders presented to the bankruptcy court are as detailed and clear as possible. Additionally, the order should contain a provision in which the bankruptcy court retains jurisdiction to hear any dispute arising from the interpretation of the order—possibly even including an expedited forum for the resolution of any such disputes. An area where this can be especially important is with respect to the assumption and assignment of executory contracts in the context of a §363 sale or confirmation of a reorganization plan. The order should be clear enough to be understood standing alone by a third party with little or no bankruptcy expertise, spelling out exactly what was assigned and the responsibilities of the contracting party to the assignee of the executory contracts.²⁶

However, if parties cannot agree, and the issue is not one that requires further court interpretation of the language of the order, the contempt power of the bankruptcy court pursuant to §105 of the Bankruptcy Code, as well as FRBP 9014 and 9020, can be effective and expeditious. It is important to remember that the proper procedural steps must be followed, and that care must be given in drafting the requested relief to ensure that it falls within the parameters of the bankruptcy court's civil contempt powers.

Footnotes

¹ Jo Ann J. Brighton is special counsel in the Debt Finance Section of Kennedy Covington, Lobdell & Hickman in Charlotte, North Carolina. She is on the Editorial Board for the ABI Journal, a member of ABI's Business Reorganization Committee and is certified in business bankruptcy by the American Board of Certification. Return to article

² See, e.g., In re Ware, 2003 W. L. 1960454 (Bankr. M.D.N.C. 2003), citing In re Walters, 868 F.2d 665 (4th Cir. 1989); In re Better Homes of Virginia Inc., 22 B.R. 426, 430 (E.D. Va. 1985), aff'd. 804 F.2d 289 (4th Cir. 1986); In re Alamo, 239 B.R. at 623 (M.D. Fla. 1999). See, also, 11 U.S.C. §105(a); 10 Collier on Bankruptcy ¶9020.02[1] (15th Ed. Rev. 2002). See, generally, In re Dyer, 322 F.3d 1178, 1193 (9th Cir. 2003). Return to article

³ Jore Engineering Inc. v. IRS, 92 F.3d 1539 (11th Cir. 1996). Return to article

⁴ In re Beck, 272 B.R. 112 (Bankr. E.D. Pa. 2002). Return to article

⁵ See, e.g., In re Shore, 193 B.R. 598 (S.D. Fla. 1996); In re Spanish Riviera Plaza Realty Co., 155 B.R. 249 (Bankr. S.D. Fla. 1993). See, also, 10 Collier on Bankruptcy ¶9020.02[1] (15th Ed. Rev. 2002). Return to article

⁶ See McComb v. Jacksonville Paper Co., 336 U.S. 187, 69 S.Ct. 497, 93 L.Ed. 599 (1949). See, also, In re Carrico, 206 B.R. 447 (S.D. Fla. 1997). Return to article

⁷ Hicks ex rel. Feiock v. Feiock, 485 U.S. 624, 108 S.Ct. 1423 (1988). Return to article

⁸ In re Shore, 193 B.R. §98, 601 (S.D. Fla. 1996), citing United Mine Workers v. Baswell, 512 at 821 (1994) (other citation omitted). Clark v. Boynton, 362 F.2d 992 (5th Cir. 1996); Bush Ranch Inc. v. E.I. DuPont DeNemours & Co., 99 F.3d 363 (11th Cir. 1996) (criminal contempt damages require constitutional protections afforded defendants, including right to jury), cert denied, 522 U.S. 906, 118 S.Ct. 263, 139 L.Ed. 2d 190 (1997). Return to article

⁹ See more complete discussion at supra fn. 25. Return to article

¹⁰ In re Aspen Limousine Service, 198 B.R. 341, 350 (D. Colo. 1996). Return to article

¹¹ 10 Collier on Bankruptcy ¶ 9020.02[1] (15th Ed. Rev. 2002). Return to article

¹² In re Ware, supra fn. 2, citing In re General Motors Corp., 61 F.3d 256, 258 (4th Cir. 1995). Return to article

¹³ Alamo, 239 B.R. at 623 (other citations omitted). Return to article

¹⁴ See McComb v. Jacksonville Paper Co., 336 U.S. 187, 69 S.Ct. 497, 93 L.Ed. 599 (1949). See, also, In re Carrico, 206 B.R. 447 (S.D. Fla. 1997). Return to article

¹⁵ In re Carrico, 206 B.R. at 447. Return to article

¹⁶ Id. Return to article

¹⁷ In re A-1 Specialty Gasolines Inc., 246 B.R. 445 U.S. 450 (S.D. Fla. 2000) (other citations omitted). Return to article

¹⁸ In re Ware, supra, note 2 at 6, citing In re Walters, 868 F.2d 665, 668 (4th Cir. 1989), and Sizzler Family Steakhouses v. Western Sizzlin Steakhouses Inc., 793 F.2d 1529, 1534 (11th Cir. 1986). Return to article

¹⁹ In re Ware, supra; (Alamo), 239 B.R. at 623; In re Cox, 214 B.R. 635 (Bankr. N.D. Ala. 1997); Carrico, 206 B.R. at 4217; (Better Homes of Virginia), 52 B.R. at 431. Return to article

²⁰ In re Ware, supra, 7 (ordering that if contemnor failed to turn over vehicle to trustee within 48 hours, the contemnor was subject to monetary sanction of $10,000 per day until vehicle is delivered." See, also, Better Homes, 52 B.R. at 431-32, citing United States v. United Mine Workers, 330 U.S. 358, 67 S. Ct. 677, 91 L. Ed. 884 (1947). Return to article

²¹ See In re Nangle, 281 B.R. 654, 659 (8th Cir. 2002). Return to article

²² F.J. Hanshaw Enters. Inc. v. Emerald River Dam Inc., 244 F.3d 1128, 1138 (9th Cir. 2001). See, also, Int'l. Union, United Mine Workers of Am. v. Bagwell, 512 U.S. 821, 827-34, 114 S.Ct. 2552, 129 L.Ed.2d 642 (1994). Return to article

²³ Hanshaw, 244 F.3d at 1138 n.7. Return to article

²⁴ Id. Return to article

²⁵ For circuits holding that a bankruptcy court does not have the power to impose criminal (punitive) sanctions, see, generally, In re Terrebonne Fuel & Lube, 108 F.3d 609, 613 n. 3 (5th Cir. 1997); In re Just Brakes Corp. Sys., 108 F.3d 881, 885 (8th Cir. 1997); cf. Cox v. Zale Delaware Inc., 239 F.3d 910, 916-17 (7th Cir. 2001). For circuits suggesting that bankruptcy courts can impose punitive or criminal sanctions, see Bessette v. Avco Fin. Servs., 230 F.3d 439, 445 (1st Cir. 2000); In re Graham, 981 F.2d 1135, 1142 (10th Cir. 1992); cf. Jove Eng'g., 92 F.3d at 1558. Compare In re Ragar, 3 F.3d 1174 (8th Cir. 1993), with In re Hipp, 895 F.2d 1503, 1515-16 (5th Cir. 1990); In re Power Recovery Systems Inc., supra, 950 F.2d 798 (1st Cir. 1991); In re Rainbow Magazine Inc., 77 F.3d 278, 284-85 (9th Cir. 1996); In re Skinner, 917 F.2d 444, 447-48 (10th Cir. 1990) (per curiam). 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 FRBP 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 FRBP 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." See, generally, In re Dyer, 322 F.3d 1178, 1193 (9th Cir. 2003). Return to article

²⁶ Obviously, the parties to the contracts must receive the appropriate notice under §§363 and 365 and FRBP 2002 concerning the sale of the assets and the assignment of any executory contracts. Return to article