District Court Adopts Bankruptcy Court's Report and Recommendation and Issues Arrest Warrants for Attorneys and their Client as a Civil Sanction; Vacated and Remanded Order Increasing Monetary Daily Sanction and Requiring Sanction to be Payable to Trustee

By Karl Johnson posted 12 days ago

Karl Johnson, Hellmuth & Johnson, PLLC
Jeffrey Klobucar, Bassford Remele, P.A.

 Contributing Editor: Matthew D. Swanson, Fuller, Seaver, & Swanson, P.A.

          In Chowdhury v. Hansmeier, Nos. 18-cv-3403, 19-cv-0156 (WMW), 2019 U.S. Dist. Lexis 70481 (D. Minn. Apr. 25, 2019), the District Court (1) held that it lacked jurisdiction to hear an appeal of the bankruptcy court’s October 24, 2018 contempt order due to appellant’s failure to timely file a notice of appeal; (2) vacated in part the bankruptcy court’s December 13, 2018 contempt order to the extent it increased daily sanctions from $250 to $1,000 and ordered the sanctions payable to the bankruptcy trustee because the bankruptcy court did not explain whether it considered the appropriate factors and did not explain whether the sanctions were compensatory or coercive; (3) vacated in part the bankruptcy court’s January 9, 2019 order for contempt to the extent that it relied on the December 13, 2018 contempt order; and (4) adopted  the January 14, 2019 report and recommendation for the issuance of arrest warrants as a civil contempt sanction because the defendants had demonstrated that monetary sanctions would not secure compliance with court orders. 

           After the appellant creditor’s prepetition judgment was vacated, the debtor obtained summary judgment for restitution of amounts the creditor had recovered before the judgment was vacated.  When defendants failed to adequately respond to post-judgment discovery, the debtor brought a motion to compel followed shortly by a motion for contempt.  On October 24, 2018, the bankruptcy court held the defendants in civil contempt of court and ordered defendants to pay a daily monetary sanction of $250.  On December 13, 2018 the bankruptcy court granted the debtor’s second motion for contempt and ordered defendants to pay an increased daily sanction of $1,000 to the trustee until they purged their contempt.  Defendants did not purge their contempt, and the bankruptcy court issued an order to show cause.  Following the hearing on the show cause order, the bankruptcy court entered its January 9, 2019 order holding that defendants remained in contempt of court, provided defendants with requirements to purge their contempt, and stated that if defendants did not purge their contempt a report and recommendation would be issued recommending the issuance of arrest warrants.  On January 14, 2019 the bankruptcy court issued a report and recommendation to the district court recommending the issuance of arrest warrants for the defendants.

           Because defendants failed to timely appeal the October 24, 2018 contempt order, the district court held it lacked jurisdiction to review any of the October 24 rulings.  The defendants conceded they intentionally violated the bankruptcy court’s orders despite having the ability to comply with the orders.  The district court held that the bankruptcy court had the undisputed authority to impose a civil contempt sanction to coerce a contemnor into compliance with a court order or to compensate the opposing party for losses from the contemnor’s conduct. Chi Truck Drivers v. Bhd. Labor Leasing, 207 F.3d 500, 505 (8th Cir. 2000).  The district court held that if coercive, the sanction should be payable to the court. Chaganti & Assocs., P.C. v. Nowotny, 470 F.3d 1215, 1224 (8th Cir. 2006) (citing Hicks ex rel. Feiock v. Feiock, 485 U.S. 624, 632 (1988).  The district court found the record to be unclear as to whether or not the sanction was intended to be coercive or compensatory.  The district court also noted that the bankruptcy court’s order did not address the relevance of the United Mine Workers factors in determining the appropriate sanction amount when increasing the daily monetary sanction from $250 to $1,000. United States v. United Mine Workers, 330 U.S. 258, 304 (1947).  The district court vacated the bankruptcy court’s December 13, 2018 order as to the increase of the daily monetary sanction from $250 to $1,000. 

           Finally, the district court adopted the bankruptcy court’s report and recommendation and issued arrest warrants for the defendants, requiring their confinement until they purge their contempt.  The district court found that defendants had many opportunities to purge their contempt, and were warned about the possibility of incarceration, yet defendants remained steadfast in their refusal to comply.  The district court also noted that the defendants acknowledged that they did not intend to comply with the bankruptcy court’s orders, even under threat of incarceration.  The district court found it apparent that additional monetary sanctions were unlikely to garner the defendants’ compliance.  Citing Supreme Court precedent in United Mine Workers v. Bagwell, 512 U.S. 821, at 290 n.56 (1994), the district court found the defendants’ behavior evidenced a “flagrant disrespect for the bankruptcy court and a mockery of the judicial power of the United States,” and as such, warranted confinement as an appropriate remedy to coerce defendants’ compliance.