In In re Dingley (August 6, 2014) — B.R. —-, 9th Cir.BAP (Nev.), the Ninth Circuit Bankruptcy Appellate Panel ("BAP") held that a creditor did not violate an automatic stay for maintaining a contempt proceeding against a debtor because it related to court-ordered sanctions for the debtor's discovery violations.
A Nevada state court sanctioned Mr. Dingley for failing to attend his deposition and ordered him to pay attorneys' fees and costs. When Mr. Dingley failed to pay the monetary sanction, the Nevada state court issued an order to show cause why Mr. Dingley should not be held in contempt for violating the sanction order. Mr. Dingley filed a chapter 7 bankruptcy petition in the Nevada bankruptcy court before the order to show cause hearing and took the position that the automatic stay in his bankruptcy case prohibited the Nevada state court from proceeding with the order to show cause hearing.
The Nevada state court ordered the plaintiff and Mr. Dingley to brief the automatic stay issue and after reviewing the plaintiff's brief (Mr. Dingley failed to file a brief), decided to proceed with the order to show cause hearing. Mr. Dingley's counsel then filed a motion in the Nevada bankruptcy court seeking an order staying the order to show cause hearing in the Nevada state court and requesting sanctions against the plaintiff for violation of the automatic stay. The Nevada bankruptcy court granted Mr. Dingley's motion and sanctioned the plaintiff $1,500 for violating the automatic stay.
On appeal before the BAP, the BAP held that the "bright line" rule in the Ninth Circuit regarding civil contempt proceedings is that if the sanction order does not involve a determination [or collection] of the ultimate obligation of the debtor nor does it represent a ploy by the creditor to harass the debtor, the automatic stay does not prevent the proceeding from going forward. The BAP noted that the bankruptcy court has exclusive jurisdiction to determine whether the automatic stay applies to a state court action. The BAP also noted that courts in other jurisdictions have criticized the Ninth Circuit's "bright line" rule regarding civil contempt proceedings and it suggested that the Ninth Circuit Court may need to revisit the validity of the rule.
If you have any questions concerning this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.