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The Ninth Circuit's Bankruptcy Appellate Panel Holds That a Creditor Does Not Violate Automatic Stay By Maintaining Contempt Proceeding Against the Debtor

The Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") recently issued the opinion, Yellow Express LLC v. Dingley (In re Dingley), BAP No. NV-13-1261-KiJuTa (9th Cir. BAP Aug. 6, 2014), which held that a creditor does not violate the automatic stay by maintaining a state court contempt proceeding against the debtor because the state court contempt proceedings related to court-ordered sanctions for the debtor's discovery violations. In 2009, the appellants had filed a state court action against the debtor and two LLCs he owned and controlled. One year prior to the bankruptcy filing, the state court ordered the debtor and his two LLCs to pay sanctions to appellants for their willful failure to appear for depositions. The debtor and the two LLCs did not pay the sanctions. On April 2, 2013, the state court judge issued an order to show cause ("OSC") why the debtor and the LLCs should not be held in contempt for nonpayment. The debtor filed a Chapter 7 proceeding on April 8, 2013.

The debtor provided the appellants with notice of his bankruptcy filing, but the appellants declined to request the state court vacate the OSC because: (1) the LLCs had not filed bankruptcy and did not receive the benefit of the automatic stay; and (2) Ninth Circuit authority excepted a state court proceeding from the automatic stay. Accordingly, the appellants timely filed their state court brief in response to the OSC. The debtor filed a motion to enforce the stay and the bankruptcy court held that the appellants could not proceed against the debtor and found the appellant's counsel in contempt of court for his willful violation of the automatic stay. The BAP reversed the findings of the bankruptcy court. Specifically, the BAP found that the precedent of the Ninth Circuit is set in David v. Hooker, Ltd., 560 F.2d 412 (9th Cir. 1977) and Dumas v. Atwood (In re Dumas), 19 B.R. 676 (9th Cir. 1982): a contempt action for nonpayment of court-ordered sanctions is exempted from the automatic stay unless the proceeding turns on the determination or collection of the underlying judgment.

Judge Jury, while concurring with the BAP's decision, wrote separately as she believed that Hooker's judicially-created rule is not consistent with the modern breadth of the automatic stay adopted in Ninth Circuit case law and is at odds with the plan language of 11 U.S.C. § 362(b). To see the full opinion, please click here.

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