LEONIE M. BRINKEMA, District Judge.
Before the Court are multiple appeals from decisions of the bankruptcy court. In the first appeal, Civil Action No. 1:13cv01180, Appellants John and Nancy Behrmann ("the Behrmanns"), who donated funds to Appellee National Heritage Foundation, Inc. ("NHF" or "Debtor"), appeal the bankruptcy court's decision denying their Renewed Motion for Leave to pursue litigation against NHF in the Central District of California. In the second appeal, Civil Action No. 1:13cv01181, which consolidated the appeals of the Behrmanns and their counsel, Jonathan D. Miller and his law firm, Nye, Peabody, Stirling, Hale & Miller, LLP, ("Miller"), and Daniel J. Schendzielos and his law firm, Schendzielos & Associates, LLC, ("Schendzielos") (collectively "Appellants"), the appellants attack the bankruptcy court's decision holding all of them jointly and severally in contempt. Independent of those appeals are NHF's motion for sanctions against all of the appellants under Fed. R. Bankr.P. 8020 for raising allegedly frivolous issues in these appeals and appellants' cross-motion for sanctions. For the reasons that follow, the bankruptcy court's decisions will be affirmed, NHF's motion for sanctions will be denied without prejudice, and appellants' cross-motion for sanctions will be denied.
NHF is a nonprofit, public charity incorporated in Georgia and headquartered in Falls Church, Virginia. Bankr.Dkt. No. 578.
Through NHF, the Behrmanns created the Highbourne Foundation, a DAF intended to fund scholarships for low-income students. Bankr.Dkt. No. 832-1. The Behrmanns and NHF enjoyed a 15-year relationship with no record of dissatisfaction until January 24, 2009, when NHF filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. Bankr.Dkt. No. 1. That filing was precipitated by a September 2008 jury verdict in Texas against NHF, in which $6.2 million in damages was awarded against NHF.
On October 13, 2009, NHF proposed its Fourth Amended and Restated Plan of Reorganization of the Debtor ("Plan") that included the sections that are relevant to these appeals. Section 7.19 released NHF's officers and directors, including the Houk family, from any claims relating to their actions before NHF filed for bankruptcy protection (the "Release Provision"). Bankr.Dkt. No. 665. Section 7.21 required that any claims against NHF's officers and directors, again including the Houk family, for actions relating to their conduct in the bankruptcy proceeding, be approved in advance by the bankruptcy court (the "Exculpation Provision").
The Behrmanns objected to confirmation of the Plan, challenging its "good faith" and arguing that
Bankr.Dkt. No. 585. On October 16, 2009, the bankruptcy court confirmed the Plan over the Behrmanns' objection after a hearing in which the Behrmanns and their bankruptcy counsel participated. Bankr. Dkt. No. 687 ("Confirmation Order"). In the Confirmation Order, the bankruptcy court found that the Plan had been proposed in good faith. Id. The Confirmation Order included the Release, Exculpation, and Discharge provisions discussed above. Id.
On October 23, 2009, the Behrmanns appealed the Confirmation Order to the district court, explicitly challenging the good faith of NHF and the Houk family in proposing the Plan and, specifically, the
On November 13, 2009, while that appeal was pending, the Behrmanns moved for a stay of the Confirmation Order to enable them to file a civil complaint against the Houk family. Bankr.Dkt. No. 732. The bankruptcy court granted the motion on December 17, 2009, staying those provisions of the Confirmation Order "as would bar the movants from commencing — solely in order to toll the running of the statute of limitations — a civil action against any of the debtor's officers, directors, or employees in a court of appropriate jurisdiction for causes of action arising out of payments made by the movants to the debtor." Bankr.Dkt. No. 800. The bankruptcy court explicitly limited the scope of the Order by providing that "no other provision of the confirmation order or plan is stayed other than the provisions specifically referenced in this order." Id. In accordance with that Order, the Behrmanns filed a civil action against the Houk family, but not NHF, in this court on January 22, 2010. Behrmann v. Houk, No. 1:10cv64 AJT/TRJ (E.D.Va. 2010). That action was in turn stayed pending resolution of the Behrmanns' appeal of the Confirmation Order.
In June 2010, while their appeal of the Confirmation Order was pending before the district court, the Behrmanns settled their dispute with NHF and withdrew their claim from the bankruptcy proceedings after NHF agreed to contribute $590,000.00 to a charity (or charities) of the Behrmanns' choice in exchange for a release of all claims against it. Bankr.Dkt. Nos. 948, 1023-3. The settlement agreement did not release any claims against the Houk family. Bankr.Dkt. No. 1023-3.
On August 17, 2010, the district court affirmed the bankruptcy court's entry of the Confirmation Order. The Behrmanns moved to stay the Confirmation Order, but both the district court and the Fourth Circuit denied the Behrmanns' request. On March 16, 2011, the Behrmanns dismissed their pending civil action against the Houk family in the district court "only as the result of the compulsion of the October 16, 2009 Order (the `Confirmation Order') of the Bankruptcy Court confirming the Fourth Amended Plan of Reorganization."
In their appeal of the Confirmation Order to the Fourth Circuit, the Behrmanns again challenged the good faith of NHF and the Houk family in proposing the Plan and again asserted their theory that the Houk family confiscated donated funds by using them to pay off debts in the bankruptcy proceeding. Behrmann v. Nat'l Heritage Found., 663 F.3d 704 (4th Cir. 2011).
The Behrmanns were partially successful on appeal. Although the Fourth Circuit rejected their "broadside" attack on the good faith of the Plan, it found that the record did not allow it to assess "whether NHF's circumstances entitle it to the benefit of the" Release and Exculpation provisions. Id. at 710-13. Accordingly, the Fourth Circuit vacated the district court's decision affirming the Release and Exculpation provisions and remanded the case to allow the bankruptcy court "to set forth specific factual findings supporting its conclusions." Id. at 713.
After the case was remanded, the bankruptcy court held a status conference on March 6, 2012. Bankr.Dkt. No. 997. At that hearing, the Behrmanns' bankruptcy counsel, Glenn Merrick, asked the court to vacate the Release and Exculpation provisions in light of the Fourth Circuit's decision. Id. Concerned about the prospect of
Despite Merrick's response, on June 28, 2012 — while the bankruptcy court was still considering the remanded issues and without first seeking leave to lift the automatic stay or leave to file a civil action against the debtor — Miller and Schendzielos filed suit on behalf of the Behrmanns against several defendants, including both NHF and the Houk family in the Central District of California. Behrmann v. Goldstein, No. 2:12cv5636 DMG/CW, 2012 WL 5054636 (C.D.Cal. June 28, 2012) ("California Action"); see also Bankr.Dkt. No. 1043-2 ("Original Complaint"). Among the claims in the Original Complaint were allegations that the Behrmanns' Highbourne Foundation donations had been improperly confiscated when NHF made payments to creditors during the bankruptcy proceedings.
On August 27, 2012, in a written opinion, the bankruptcy court struck the Plan's Release Provision but upheld the Exculpation Provision, explaining that the Exculpation Provision was "limited to acts or omissions taken in connection with the bankruptcy case itself" and "does not purport to release any pre-petition claims against the officers or directors." Bankr.Dkt. Nos. 1015, 1016 ("Reinstatement Order"). The Discharge Provision of the Plan, which was incorporated in the Confirmation Order, remained undisturbed.
On October 22, 2012, again without obtaining a lift of the automatic stay or leave of the bankruptcy court, the Behrmanns filed an amended complaint in the California action, which included, as defendants, both NHF and the Houk family. Bankr. Dkt. No. 1043-3 ("Amended Complaint").
Notwithstanding this "disclaimer language," the Amended Complaint contained a number of allegations concerning NHF's
On the same day they filed the Amended Complaint, the Behrmanns filed in the bankruptcy court a Motion for Leave to Pursue Litigation Claims Against Members of the Houk Family for Claims Arising During the Bankruptcy Exculpation Period, to which they attached a copy of the already-filed Amended Complaint. Bankr.Dkt. No. 1035 ("Motion for Leave"). This was the first time NHF, the Houk family, and the bankruptcy court had notice of the California action, which had been pending for nearly four months.
No party appealed the bankruptcy court's decision to maintain the Exculpation Provision in the Plan; however, NHF appealed the decision to strike the Release Provision. Nat'l Heritage Found., Inc. v. Behrmann, No. 1:12cv1329 AJT/JFA (E.D.Va. 2012). On October 25, 2012, as a result of that appeal, the bankruptcy court stayed its Order striking the Release Provision while NHF appealed that decision.
Within two weeks of receiving notice of the Amended Complaint, specifically on November 6, 2012, NHF demanded that the claims in the California action against NHF and the Houk family be dismissed. Appellants refused, although they later agreed to move for a stay of the litigation as to the Houk family, but not as to NHF.
On November 14, 2012, NHF filed a Motion for Contempt and Sanctions ("Motion for Contempt") against the Behrmanns, in which it argued that the Behrmanns had violated the Discharge and Exculpation provisions of the Plan by bringing the California action. For relief, NHF requested that the Court "require the Behrmanns to dismiss the California Action with prejudice against NHF and its Directors and Officers, and impose sanctions in the form of both compensatory and punitive damages." Bankr.Dkt. No. 1043.
On December 4, 2012, after conducting a hearing on NHF's Motion for Contempt and the Behrmanns' Motion for Leave, the bankruptcy court denied the Behrmanns' motion without prejudice, expressly allowing them to renew the motion if the district court affirmed the decision striking the Release Provision and declined to stay the decision pending appeal to the Fourth Circuit. Bankr.Dkt. No. 1056. The Behrmanns did not appeal this decision.
As to NHF's Motion for Contempt, on December 20, 2012, the bankruptcy court ordered both the Behrmanns as well as the counsel who filed the California action, appellants Miller and Schendzielos, to show cause why they should not be held in contempt of court for filing the Original and Amended complaints. Although NHF's Motion for Contempt had been directed only at the Behrmanns, the bankruptcy court sua sponte found that the prima facie showing of contempt applied to appellants Miller and Schendzielos, as well, because they had filed the Original and Amended complaints on behalf of the Behrmanns, and those filings were the basis
An evidentiary hearing to address the Motion for Contempt and the Order to Show Cause was scheduled for March 5, 2012; however, in response to appellants' motion requesting more time to respond, the hearing was continued to May 1, 2013. Bankr.Dkt. No. 1097.
On April 9, 2013, the Behrmanns filed a Renewed Motion for Leave to Pursue Litigation Claims Against Members of the Houk Family for Claims Arising During the Bankruptcy Exculpation Period, to which they attached a Proposed Second Amended Complaint. Bankr.Dkt. No. 1143 ("Renewed Motion for Leave"); Bankr.Dkt. No. 1180 ("Proposed Second Amended Complaint"). As had the Amended Complaint, the Proposed Second Amended Complaint included several allegations of bankruptcy fraud, specifically accusing the Houk family of deceiving DAF donors and the bankruptcy court during the bankruptcy proceedings and proposing the Plan in bad faith. See Proposed Second Amended Complaint at ¶¶ 206-63.
On May 1 and 2, 2013, the bankruptcy court held an evidentiary hearing during which it heard testimony from appellants Miller and Schendzielos; the Behrmanns' bankruptcy counsel Merrick; NHF's counsel David Goroff and Brittany Nelson; and expert witnesses Benjamin Ackerly and Bruce Henry. Bankr.Dkt. Nos. 1175, 1176.
On June 21, 2013, the court denied the Behrmanns' Renewed Motion for Leave, after finding that they were unable to establish the prima facie case required to obtain leave to sue the Houk family for matters relating to the administration of the Debtor's estate. Specifically, the court found that the bankruptcy fraud allegations in the Proposed Second Amended Complaint were barred by the doctrine of res judicata because they amounted to a renewed attack on the good faith of the Plan, a claim the Behrmanns had already fully litigated and lost before the bankruptcy, district, and appellate courts. The court also found that the allegations in the Proposed Second Amended Complaint were frivolous because they could not plausibly allege any injury arising out of the Houk family's conduct during the bankruptcy proceedings. Bankr.Dkt. No. 1186 ("Leave Order").
On the same day, the bankruptcy court entered an Opinion and Order finding all of the appellants in contempt of court, based on their filing the Original and Amended complaints in violation of the Confirmation Order (including the Discharge Provision), the Reinstatement Order (including the Exculpation Provision), and 11 U.S.C. § 1141(d)(1). Bankr.Dkt. No. 1187 ("Contempt Order"). The court also found that the filing of the Original Complaint was a violation of the automatic stay-provision in 11 U.S.C. § 362(a)(1).
The court's decision denying the Behrmanns leave to pursue claims against the Houk family and NHF is the subject of the Behrmanns' appeal in Civil Action No. 1:13cv01180; the decision holding all appellants in contempt is the subject of the appeals consolidated in Civil Action No. 1:13cv01181.
Under 28 U.S.C. § 158(a), a district court has jurisdiction to consider appeals from final judgments, orders, and decrees of a bankruptcy court. A district court sitting as an appellate court reviews the bankruptcy court's conclusions of law de novo. See In re Merry-Go-Round Enters., Inc., 400 F.3d 219, 224 (4th Cir.2005)
In this appeal, the Behrmanns attack the bankruptcy court's Order denying their Renewed Motion for Leave to file a Second Amended Complaint in the California action, which continued to include claims against the Houk family and NHF.
The abuse of discretion standard applies to a bankruptcy court's decision to deny a motion for leave to sue a trustee,
In deciding whether to grant leave to sue a trustee, a bankruptcy court must first determine whether a prospective plaintiff has established a prima facie case against the trustee. If a prima facie case is established, the court must then balance the interests of the parties. In re Cutright, 2012 WL 1945703, at *10-*11 (Bankr.E.D.Va.2012) (citing Kashani v. Fulton (In re Kashani), 190 B.R. 875 (9th Cir. BAP 1995)). "The prima facie case requirement requires a `pre-screening' of the allegations by the appointing court to determine if the plaintiff can present adequate grounds upon which to proceed against the trustee in another forum." Id. at *10.
The bankruptcy court found that the Behrmanns failed to satisfy the prima facie requirement for two reasons.
The doctrine of res judicata bars a plaintiff from re-litigating claims already considered by a court. See, e.g., United States v. Mumford, 630 F.2d 1023, 1027 (4th Cir.1980). The res judicata bar applies when "(1) a judgment on the merits in a prior suit resolv[es] (2) claims by the same parties or their privies" and a plaintiff files (or attempts to file) "(3) a subsequent suit based on the same cause of action." Aliff v. Joy Mfg. Co., 914 F.2d 39, 42 (4th Cir.1990).
The bankruptcy court applied the res judicata bar after finding that the Proposed Second Amended Complaint effectively alleged "that the Officers and Directors deceived the Donors and the Court in connection with the filing of the case and confirmation of the Debtor's Plan." Leave Order at 7 (citing Proposed Second Amended Complaint at ¶¶ 206-63).
The Behrmanns first argue that the application of res judicata is incorrect because the two causes of action do not arise out of the same transaction or the same core of operative facts. Appellants' Opening Brief ("Appellants' Br.") at 13. In this argument, the Behrmanns try to distinguish their previous, unsuccessful challenge to the good faith of the Plan by arguing that the conduct at issue in that challenge arose out of the Houk family's pre-petition conduct, whereas the California action is based on the Houk family's post-petition conduct, specifically focusing on conduct involving the "confiscation" of appellants' "monies" during the bankruptcy proceedings. Id.; Appellants' Reply Brief ("Reply Br.") at 2-3 ("Appellants allege that during NHF's bankruptcy case, and without notice to Appellants, the Houk Family wrongfully collaborated to embezzle monies that Appellants had contributed to their Foundation.") (emphasis in original). In other words, the Behrmanns argue that their attack in the bankruptcy court on the good faith of the Plan and the confiscation claims they wanted to raise in the Second Amended Complaint "involve different transactions[] and different operative facts," which makes the claims "wholly distinct" and, therefore, not barred by res judicata. Appellants' Br. at 13.
The bankruptcy court correctly determined that the bankruptcy fraud claims in the Proposed Second Amended Complaint "arise out of the same transaction or series of transactions or the same core of operative facts" as the claims raised in the Behrmanns' unsuccessful challenge to the Plan's good faith. Among the allegations in the Proposed Second Amended Complaint were claims that one "facet" of NHF and the Houk family's RICO "Enterprise" was NHF's voluntary petition in the bankruptcy court, and that "[d]uring the ensuing `reorganization' proceedings, NHF and
The Proposed Second Amended Complaint's allegation that DAF assets were wrongly confiscated is premised solely on NHF and the Houk family's alleged fraud on the bankruptcy court,
In sum, the Behrmanns' unsuccessful appeal of the Plan's good faith and the allegations in the Proposed Second Amended Complaint that NHF and the Houk family improperly used the bankruptcy proceedings to confiscate donor funds arise out of the same series of transactions and core operative facts — that is, the activities of the Houk family and NHF in the bankruptcy proceedings. Accordingly, the bankruptcy court did not err in concluding that the allegations in the Proposed Second Amended Complaint are barred as a matter of law under the doctrine of res judicata.
The Behrmanns also argue that res judicata does not apply because their challenge to the Plan's good faith was not, in fact, finally decided on appeal. They base this argument on the Fourth Circuit's finding that the Release and Exculpation provisions of the Plan were not supported by sufficient specific factual findings, and the bankruptcy court's subsequent determination on remand that the Release Provision (but not the Exculpation Provision) was not necessary for implementation of the Plan. Appellants' Br. at 13-14 ("[I]t cannot be said that the prior confirmation challenge (involving the `good faith' of incorporating into the Plan an unjustified non-debtor release) was finally decided against Appellants.").
The record fully supports the bankruptcy court's conclusion that the Behrmanns' "good faith" challenge to the Plan was fully adjudicated on the merits, and that the Fourth Circuit very clearly decided the good faith issue when it explicitly "reject[ed]" the Behrmanns' "contention that the Confirmed Plan fails to satisfy the good faith requirement." Behrmann, 663 F.3d at 710. Although the Fourth Circuit vacated two provisions of the Plan and remanded the case for further fact finding as to just those two provisions, the good faith issue was fully resolved. Accordingly, under the doctrine of res judicata, the
The bankruptcy court also determined that the claims in the Proposed Second Amended Complaint as to the Houk family and NHF were frivolous because the Behrmanns cannot establish that they were injured by reason of NHF and the Houk family's conduct in connection with the bankruptcy case. After stressing that the Behrmanns had withdrawn their claim against NHF in the bankruptcy proceedings upon entering into a settlement agreement, the bankruptcy court found itself "at a loss" to understand how the Behrmanns could claim they were harmed by any fraud or misrepresentation during the course of the bankruptcy case when the Behrmanns had already "parted with the entirety of their donated funds well before the bankruptcy case was ever filed." Leave Order at 9.
The Behrmanns argue that the bankruptcy court misread the Proposed Second Amended Complaint, which they describe as specifically alleging that misconduct by the Houk family during the course of the bankruptcy proceedings resulted in a substantial monetary loss, that is, the confiscation of DAF funds. Appellants' Br. at 15-16; Reply Br. at 6. NHF responds that the Behrmanns parted with ownership of the funds in question when they made their contributions to the Highbourne Foundation; consequently, when the bankruptcy proceedings began, "there was nothing belonging to them that could be `taken' from them." Appellee's Br. at 20.
It is well established in this circuit that a donor to a DAF has no right, title, or interest in the DAF's assets following the donation. See Behrmann, 663 F.3d at 707 n. 1 ("DAFs are funds that are owned and controlled by a sponsoring charitable organization.... Donors may make non-binding recommendations regarding how their donations are invested or distributed, but otherwise relinquish all right and interest in the donated assets." (emphasis added)); Nat'l Heritage Found. Inc. v. Behrmann, No. 1:12cv01329 AJT/JFA, 2013 WL 1390822, at *1 (E.D.Va. Apr. 3, 2013) ("When a donor contributes to a particular DAF, the donor must relinquish all right, title, and interest in the assets, in exchange for a 100% dollar for dollar tax deduction at the time the donation is made." (emphasis added) (citing 26 U.S.C. § 4966(d)(2))); Nat'l Heritage Found., Inc. v. Philadelphia Indem. Ins. Co., No. 1:12cv00447 TSE/IDD, 2012 WL 5331570, at *1 (E.D.Va. Oct. 25, 2012) ("The donors may advise the sponsoring foundation how they would like their contributions distributed or invested, but those recommendations are not binding on the sponsoring foundation.").
The Behrmanns cite three cases in an attempt to support their contention that the bankruptcy court incorrectly found that they had no ownership interest in the Highbourne Foundation's assets.
In their consolidated appeals, the Behrmanns, Miller, and Schendzielos, respectively, attack the bankruptcy court's decision to hold all of them in contempt and to impose joint and several sanctions on them. For the reasons that follow, that decision will also be affirmed.
Under 11 U.S.C. § 105(a), a bankruptcy court "may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of" the Bankruptcy Code. "No provision of [the Bankruptcy Code] providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules." Id.
The Fourth Circuit has seen "no reason to read into [Section 105] anything other than its plain meaning that a court of bankruptcy has authority to issue any order necessary or appropriate to carry out the provisions of the bankruptcy code," including contempt orders. In re Walters, 868 F.2d 665, 669 (4th Cir.1989); see also In re Kestell, 99 F.3d 146, 149 (4th Cir. 1996). A bankruptcy court's decision to impose sanctions for contempt is within its sound discretion and is, therefore, reversible only if that discretion has been abused. See Walters, 868 F.2d at 666.
Civil contempt must be shown by "clear and convincing" evidence (1) of the existence of a valid decree of which the alleged contemnor had actual or constructive knowledge; (2) that the decree was in the movant's "favor"; (3) that the alleged contemnor by its conduct violated the terms of the decree, and had knowledge (at least constructive knowledge) of such violations; and (4) that the movant suffered harm as a result. In re Grand Jury Subpoena (T-112), 597 F.3d 189, 202 (4th Cir.2010); Ashcraft v. Conoco, Inc., 218 F.3d 288, 301 (4th Cir.2000). "Willfulness is not an element of civil contempt." In re Gen. Motors Corp., 61 F.3d 256, 258 (4th
Appellants do not dispute that they had actual or constructive notice of the Confirmation and Reinstatement orders. There is also no dispute that both orders were in NHF's "favor." Accordingly, the relevant issues to be resolved are whether appellants' filing of the Original and Amended complaints knowingly violated valid orders of the bankruptcy court and the automatic stay and whether appellants' violations, if any, harmed NHF.
Before addressing the relevant issues, two frivolous arguments by appellants Miller and Schendzielos need discussion. Schendzielos argues that because NHF moved for sanctions only against the Behrmanns, the bankruptcy court's exercise of contempt jurisdiction over him and Miller through the Order to Show Cause violated their constitutional due process rights. Opening Brief of Appellants Daniel J. Schendzielos and Schendzielos & Associates, LLC, ("Schendzielos Br.") at 13-15. There is no merit to this argument. The bankruptcy court is empowered to "sua sponte [] tak[e] any action or mak[e] any determination necessary or appropriate to enforce or implement court orders or rules." 11 U.S.C. § 105(a). Both Miller and Schendzielos were served with the Order to Show Cause and then had five months to prepare for an evidentiary hearing, during which time they both conducted discovery. Both also fully participated in the two-day hearing. Therefore, they received the notice and the opportunity to be heard guaranteed under the Due Process Clause of the United States Constitution.
Miller and Schendzielos also frivolously argue that the Noerr-Pennington doctrine immunizes the Behrmanns from any finding of contempt because the filing of the Original and Amended complaints in California is "petitioning activity." Brief of Appellants Jonathan D. Miller, Nye, Peabody, Stirling, Hale & Miller, LLP ("Miller Br.") at 34-35; Schendzielos Br. at 28-29. "The Noerr-Pennington doctrine guarantees citizens their First Amendment right to petition the government for redress without fear of antitrust liability." Baltimore Scrap Corp. v. David J. Joseph Co., 237 F.3d 394, 398 (4th Cir.2001) (emphasis added). The doctrine has no application here, where the liability appellants seek to avoid is not antitrust liability, but a finding of contempt.
The bankruptcy court found that the filing of the Original Complaint without leave of the bankruptcy court violated the Discharge Provision of the Confirmation Order, as well as 11 U.S.G. § 1141(d)(1)
The Discharge Provision, included in both the Plan and the Confirmation Order, provides that
Bankr.Dkt. No. 665. Appellants do not dispute that the Discharge Provision precludes the Behrmanns from bringing any action against NHF for conduct occurring before October 16, 2009, which is the date when the Confirmation Order was entered. Appellants also acknowledge that the Original Complaint contained allegations relating to NHF's conduct occurring before October 16, 2009. See Original Complaint at ¶¶ 36-44, 53-61 ("The NHF Bankruptcy Filing and Proceedings"). Instead, they erroneously argue that the Confirmation Order was not a valid order when they filed the Original Complaint because "the Confirmation Order remained uncertain in the face of the judgment of the Fourth Circuit." Appellants' Opening Brief ("Behrmanns Br.") at 8-10; Miller Br. at 19-22 ("Appellants cannot be held in contempt for filing the Initial Complaint because it was done during a period that the bankruptcy court itself described as an `admittedly gray area' following remand."); Schendzielos Br. at 16-20.
When read in context, it is clear that the bankruptcy court's reference to a "gray area" related only to the two provisions of the Plan that had been vacated by the Fourth Circuit. See Bankr.Dkt. No. 1047 at 15 ("So there are practical problems to doing that while we're in this admittedly gray area of a remand and a determination of whether the release provisions should be included [in the Confirmation Order] or not.").
The bankruptcy court correctly rejected appellants' argument because the Discharge Provision was not challenged by the Behrmanns in their appeal of the Confirmation Order and was, therefore, clearly in effect when appellants filed the Original Complaint. Contempt Order at 25. The bankruptcy court also correctly found that appellants acknowledged as much when they argued during their appeals before the district and appellate courts that the Release and Exculpation provisions were severable from the Plan. See Bankr.Dkt. No. 665 at Section 12.2 ("Severability");
Given the language of the Fourth Circuit's decision alone, it is clear that the bankruptcy court correctly found that only two portions of the Confirmation Order, the Release and Exculpation provisions, had been vacated. Moreover, because it is uncontested that only those two provisions were challenged by the Behrmanns on appeal, appellants' argument that the Fourth Circuit's decision somehow vacated the entire Confirmation Order is clearly meritless. It is also clear that vacatur of the Confirmation Order as to these two provisions had no effect on the enforceability of the Discharge Provision, given the Plan's severability clause.
Moreover, after the case had been remanded to the bankruptcy court, the Behrmanns requested that the bankruptcy court vacate the entire Confirmation Order. If the Behrmanns had honestly believed that the Fourth Circuit had, in fact, vacated the entire Plan and the Confirmation Order, such a request would have been meaningless. Filing that motion clearly establishes that appellants had actual knowledge of a valid order of the bankruptcy court — the Confirmation Order. When the bankruptcy court denied their motion to vacate that order, that decision made it even clearer that the Confirmation Order was operative.
Even if it had been reasonable for appellants to believe that the Fourth Circuit had somehow vacated the entire Confirmation Order, including the Discharge Provision, the bankruptcy court properly reasoned that the automatic stay imposed under 11 U.S.C. § 362(a) would still have been applicable and appellants would not have been entitled to file claims against NHF without seeking permission to lift the stay. Contempt Order at 26-27. Under § 362(a), NHF's voluntary petition "operate[d] as a stay, applicable to all entities, of the commencement or continuation... of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case." 11 U.S.C. § 362(a)(1). The bankruptcy court found it "inarguabl[e]" that NHF was still in bankruptcy when the Fourth Circuit remanded the matter; accordingly, the automatic stay remained in full force and effect, notwithstanding the "uncertain" status of the Confirmation Order. Contempt Order at 26-27.
Miller argues that the bankruptcy court's finding that the automatic stay precluded
Appellants' argument is meritless. Simply put, every bankruptcy case is a "362 case." See, e.g., In re Gordon Properties, LLC, 460 B.R. 681, 699 (Bankr.E.D.Va. 2011) (stating that "[o]ne cardinal rule of bankruptcy practitioners is, if there is doubt as to whether the automatic stay applies, file a motion"). And notwithstanding their more recent position, the Behrmanns acknowledged as much in the course of this litigation when they requested — and received — leave of the bankruptcy court to lift the stay so that they could file a civil action in this district in November 2009, while their appeal of the Confirmation Order was pending. That request unequivocally demonstrates that the Behrmanns and their counsel knew that the bankruptcy court's permission was required before they could begin litigation against NHF in any other court.
The determinations that filing the Original Complaint violated the plain language of an enforceable Confirmation Order as well as the automatic stay and that appellants knew or should have known that they were in violation of the Confirmation Order and the automatic stay when they filed the Original Complaint without leave from the bankruptcy court were sound, and these elements of civil contempt are therefore satisfied.
The bankruptcy court found that appellants' filing the Amended Complaint violated the August 27, 2012, Reinstatement Order (reinstating the Exculpation Provision), as well as its Confirmation Order (containing the Discharge Provision) and 11 U.S.C. § 1141(d)(1). Contempt Order at 22-24, 27-32.
The Exculpation Provision of the Plan provides that NHF and the Houk family (as officers and directors of NHF)
Bankr.Dkt. No. 665. The Exculpation Provision precludes the Behrmanns from bringing claims against NHF and the Houk family that "aris[e] out of[] the Bankruptcy Case" (that is, claims for misconduct occurring between the date NHF filed for bankruptcy-protection in January 2009 and confirmation of the Plan in October 2009) without first obtaining permission from the bankruptcy court.
Notwithstanding the disclaimer language, the bankruptcy court correctly found that the Amended Complaint was "replete" with allegations relating to NHF's conduct that did pre-date both July 1, 2010, and the date the Confirmation Order was entered, and which arose out of NHF's conduct during the bankruptcy proceedings, all in violation of the Confirmation Order. Contempt Order at 9-11. From this finding, the court concluded that the Amended Complaint was "an attempt to collect on a pre-petition and pre-confirmation debt" against NHF and that there were "no allegations in the Amended Complaint that the Behrmanns or their Assignors were harmed by the Debtor, post-confirmation, at all"; rather, "the entirety of the claimed harm to the Behrmanns is alleged to have occurred well before the bankruptcy filing, or during the course of the bankruptcy case (where, it must be remembered, they ultimately withdrew their claim)." Id. at 10-11.
Citing to a section in the Amended Complaint actually titled "Specific Facts Involving Bankruptcy Fraud," the court also found that the Amended Complaint "unquestionably includes Exculpated claims," again notwithstanding the disclaimer language. Id. at 9-11, 22; see Amended Complaint at ¶¶ 135-50. Indeed, the bankruptcy court found that the Amended Complaint contained only four allegations based on post-confirmation conduct. Contempt Order at 11; Amended Complaint at ¶¶ 9, 156-58 (alleging that in late 2010 and 2011, the Houk family transferred funds from NHF to two new charitable organizations).
Further, the bankruptcy court found no support for appellants' argument that alleging post-confirmation continuation of a RICO enterprise was permissible under the Discharge Provision and rejected appellants' contention that the disclaimer language avoids a finding of contempt because the "allegations are in the Amended Complaint precisely because [appellants] intend to present evidence of the same to the jury." Contempt Order at 28-30.
Lastly, the court correctly found that the Amended Complaint was filed without leave several months after reinstatement of the Exculpation Provision, a decision that has not been appealed. Id. at 22. Given the Amended Complaint's inclusion of "unquestionably" exculpated claims against the Houk family (as well as discharged claims against NHF), filing those claims without leave of the bankruptcy court after the court reinstated the Exculpation Provision was in "direct violation" of the Confirmation and Reinstatement orders, and filing claims against NHF which had been discharged clearly violated the Confirmation Order. Id. at 22-23, 27-28.
The bankruptcy court's findings that the allegations in the Amended Complaint clearly involved pre-petition conduct as well as conduct during the bankruptcy proceedings are sound. The court was fully justified in rejecting appellants' attempts to "plead around" the Exculpation Provision and to explain away the overwhelming number of post-petition, pre-confirmation allegations leveled at the Houk family and NHF.
In sum, the bankruptcy court correctly concluded that the claims asserted in the Amended Complaint against the Houk family and NHF are barred by the Exculpation and Discharge provisions of the valid Confirmation Order, and that the record demonstrates that appellants knew that the Amended Complaint was filed in violation of that order as well as the Reinstatement Order.
Lastly, the bankruptcy court found that NHF was harmed by appellants' filing the Original and Amended complaints and then refusing to dismiss NHF from them, putting NHF to the expense of having to file its Motion for Contempt to secure the dismissal to which it was entitled. Contempt Order at 32-33 ("[NHF] should not have had to litigate a two-day contempt hearing before this Court to gain that result [dismissal of the claims against NHF]."),
NHF responds that "[e]very day that NHF remained a defendant in the California Action was a continuing violation of its legal rights." NHF Br. at 34-35. Consequently, "[e]very dime in legal fees that NHF spent to obtain dismissal of the improper claims constituted harm that it would not have suffered absent Appellants' violations of the Bankruptcy Court's orders." Id. To cure the violation, NHF was obligated to incur extensive legal expenses to seek relief from the bankruptcy court and, at the same time, guard against harm in the California action. Id. at 36.
The record clearly demonstrates a continuous pattern of non-compliance with the bankruptcy court's orders, as well as flagrant violations of the automatic stay, that is sufficient to establish harm to NHF's right to be protected from suit while in bankruptcy proceedings. Appellants conduct also harmed the integrity of the bankruptcy court and judicial proceedings. See Tattoo Art, Inc. v. Tat Int'l, LLC, Civil Action No. 2:10CV323, 2012 WL 3912572, at *5 (E.D.Va. Sept. 7, 2012) (stating that "because this is an action for contempt of court, not only the Plaintiff but also the judicial system suffers harm as a result of non-compliance"); Omega World Travel, Inc. v. Omega Travel, Inc., 710 F.Supp. 169, 171 (E.D.Va.1989) aff'd sub nom. Omega World Travel, Inc. v. Omega Travel & Shipping Agencies, Inc., 905 F.2d 1530 (4th Cir.1990) (stating that "the system as well as the movant was harmed by World's neglect of its obligations under the consent decree"). When the bankruptcy court issued the Contempt Order in June 2013, appellants had been in violation of the Confirmation Order since June 12, 2012, when they filed the Amended Complaint. That year-long violation alone is more than sufficient to find harm to both NHF and the judicial system. Omega, 710 F.Supp. at 171-72.
Because all the elements of civil contempt were properly found by the bankruptcy court, the next issue is whether the bankruptcy court abused its discretion in imposing sanctions for appellants' contempt and fashioning relief for NHF.
To purge their contempt, the bankruptcy court required appellants to (1) dismiss with prejudice all claims against NHF in the California action; (2) move to further amend the Amended Complaint in the California action to dismiss with prejudice all exculpated claims against the Houk family; and (3) pay NHF $278,098.53 in attorney's fees and costs, all within 10 days of the issuance of the Contempt Order. Contempt Order at 39-40. The Contempt Order provided that if the appellants failed to comply with the dismissal and amendment provisions of the Order within 10 days, they would be fined $500.00 a day for each provision of the Confirmation Order violated (for a total of $1,000.00 a day), also payable to NHF. Id.
The Behrmanns argue that the bankruptcy court erred in ordering them to dismiss their post-confirmation claims against NHF because the bankruptcy court's jurisdiction does not extend to "striking the claims against a reorganized debtor for acts or omissions occurring in the post-confirmation period." Behrmanns Br. at 15-16; Schendzielos Br. at 24. Miller and Schendzielos argue that they cannot be required to dismiss any of the Behrmanns' claims in the California action without their clients' consent, because if they complied, their clients could sue them for malpractice and they could be liable to the California bar for sanctions. Miller Br. at 35-36; Schendzielos Br. at 25-28. In addition, Miller argues that complying with the Contempt Order would adversely affect the Behrmanns' right to appeal, "as purging the contempt has the potential to render a clients' appeal moot."
NHF responds that the court did not abuse its discretion by ordering appellants to dismiss the Behrmanns' claims against it and the Houk family. NHF Br. at 36-44. First, NHF argues that Miller and Schendzielos's argument that without their clients' consent they were somehow powerless to purge their contempt by moving for a dismissal of the claims against NHF and the Houk family "makes no sense," because they both acknowledge that they have finally, in fact, complied with that provision of the Contempt Order. Id. at 37. NHF also points out that neither Miller nor Schendzielos asserts that the Behrmanns actually refused to consent to dismissal — making any ethical "quandary" they may have found themselves in "hypothetical." Id.
"The appropriate remedy for civil contempt is within the court's broad discretion." General Motors, 61 F.3d at 259 (4th Cir.1995) (citing McComb, 336 U.S. at 192, 69 S.Ct. 497). "[R]emedies and sanctions must be remedial and compensatory and, unlike criminal contempt, nonpunitive." Id. The Fourth Circuit has seen "no reason to read into [section 105] anything other than its plain meaning that a court of bankruptcy has authority to issue any order necessary or appropriate to carry out the provisions of the bankruptcy code." In re Walters, 868 F.2d at 669.
The Behrmanns and their counsel were on clear notice of the bankruptcy court's orders and were given an early opportunity to avoid sanctions by promptly dismissing the offending claims from the California action. By unreasonably refusing to dismiss those claims, and instead insisting on conducting discovery before the contempt hearing, the Behrmanns and their counsel caused NHF significant, unnecessary litigation expense. Miller and Schendzielos's arguments as to needing the Behrmanns' consent to dismiss the offending claims are frivolous. An attorney cannot violate court orders simply because his client withholds consent to compliance
For all these reasons, the bankruptcy court's requirement that all the claims asserted against NHF and the Houk family in the California action be dismissed was not an abuse of its discretion.
In addition to requiring dismissal of the offending claims, the bankruptcy court awarded NHF $278,098.53 in attorney's fees and costs. Appellants do not explicitly challenge the bankruptcy court's findings as to NHF's counsel's hourly rates or the ultimate calculation of the attorney's fees award.
NHF responds that awarding attorney's fees was not an abuse of discretion because the bankruptcy court found appellants' conduct to be willful, and that NHF
This Court fully agrees with NHF and the bankruptcy court that it was appellants — not NHF — who increased the cost of litigating the Motion for Contempt and the Order to Show Cause by opposing the motion and moving for a two-month continuance of the evidentiary hearing. Had appellants promptly dismissed the offending claims in the California action, none of the costs of discovery, brief writing, and participation in a two-day evidentiary hearing would have been incurred.
On this record it is clear that the bankruptcy court did not abuse its discretion in finding the appellants in contempt and awarding reasonable attorney's fees of $250,000 and $28,098.53 in costs to the appellees. In making its award, the bankruptcy court properly considered the 12 factors required under Barber v. Kimbrell's, Inc., 577 F.2d 216, 226 (4th Cir. 1978),
For all these reasons, the Court finds that the bankruptcy-court's order awarding $278,098.53 in attorney's fees and costs to NHF, jointly and severally payable by appellants, was not an abuse of its discretion.
Miller argues that subjecting appellants to a $1,000 per-day fine for failure to comply with the Contempt Order rises to the level of a criminal penalty, which in turn triggers certain protections that appellants were not afforded, including "notice of the intent to seek criminal sanctions, the right to a jury trial on the issues of contempt," and the opportunity "to present evidence that would have negated the element of
A reviewing court must decide for itself whether a contempt sanction was criminal or civil, regardless of how it was labeled by the sanctioning court. Cromer v. Kraft Foods N. Am., Inc., 390 F.3d 812, 821 (4th Cir.2004). "[P]utatively civil contempt sanctions will be held to be criminal sanctions in cases when the fines were `not conditioned on compliance with a court order,' `not tailored to compensate the complaining party,' but instead `initiated to vindicate the authority of the court and to punish the actions of the alleged contemnor[].'" Id. at 822 (quoting Bradley v. Am. Household, Inc., 378 F.3d 373, 377 (4th Cir.2004)); see also Int'l Union, United Mine Workers of Am. v. Bagwell, 512 U.S. 821, 828, 114 S.Ct. 2552, 129 L.Ed.2d 642 (1994).
Here, only the threat of fines was imposed on appellants because under the plain language of the Contempt Order, if appellants timely complied, no fines would be imposed. See Contempt Order at 39 ("Should [appellants] fail to [dismiss with prejudice the California federal action against NHF], the Court hereby imposes a daily fine in the amount of $500 per day.... If the [appellants] fail to comply with this requirement, the Court hereby imposes a daily fine in the amount of $500 per day."). Appellants' ability to purge their contempt is sufficient to support a finding that any fines imposed by the bankruptcy court would be "civil," and not "criminal." See Bagwell, 512 U.S. at 829, 114 S.Ct. 2552 ("Where a fine is not compensatory, it is civil only if the contemnor is afforded an opportunity to purge.").
Accordingly, the Court finds that the bankruptcy court held appellants in civil and not criminal contempt. For that reason, and the reasons discussed above, the bankruptcy court's imposition of daily fines for non-compliance with the Contempt Order was not an abuse of its discretion.
NHF has moved for sanctions against appellants under Federal Rule of Bankruptcy Procedure 8020, arguing that the appeals presently before the Court are frivolous as argued.
Federal Rule of Bankruptcy Procedure 8020 provides that "[i]f a district court ... determines that an appeal from an order ... of a bankruptcy judge is frivolous, it may, after a separately filed motion ... award just damages and single or double costs to the appellee." Fed. R. Bankr.P. 8020. "Because the language of Bankr[uptcy] Rule 8020 is materially identical to Fed. R.App. P. 38, the sanctions provision for the filing of frivolous appeals in the Court of Appeals, the standard for imposing sanctions is similar." In re Prop. Movers, L.L.C., 31 Fed.Appx. 81, 83 (4th Cir.2002) (citing Pettey v. Belanger, 232 B.R. 543, 548 (D.Mass.1999)).
A court considering a motion for sanctions for the filing of a frivolous appeal must "first determine that the appeal is frivolous, and then determine that this is an appropriate case for the imposition of sanctions." In re Prop. Movers, 31 Fed.Appx. at 84 (citing Williams v. United States Postal Service, 873 F.2d 1069, 1075 (7th Cir.1989)). An appeal is frivolous where "the result is obvious or when the appellant's argument is wholly without merit." Id. (internal quotation marks omitted). A finding of frivolity is appropriate where an appellant cites no relevant cases in response to a lower court's accurate exposition of the law, and where an
It is particularly appropriate to hold not only the appellant, but also his attorney, liable for a sanctions award when the frivolity of an appeal is premised not only on the filing of the appeal but also on the type of arguments used to support it. Dungaree Realty, Inc. v. United States, 30 F.3d 122, 124-25 (Fed.Cir.1994). Sanctions for the filing of a frivolous appeal are appropriate because "they compensate the prevailing party for the expense of having to defend a wholly meritless appeal, and by deterring frivolity, they preserve the appellate calendar for cases truly worthy of consideration." Id. at 125 (internal quotation marks omitted).
NHF asserts that many of appellants' arguments, including that the Fourth Circuit vacated the entire Confirmation Order; that the disclaimer language in the Amended Complaint turned their exculpated and discharged claims against the Houk Family and NHF into "mere allegations" of pre-confirmation conduct; that their ongoing violation of the bankruptcy court's orders did not cause NHF any harm; that the Contempt Order imposed criminal, rather than civil, penalties; and that the contempt proceedings deprived appellants and the assignors of due process, are meritless. National Heritage Foundation, Inc.'s Brief in Support of its Motion for Sanctions Under Federal Rule of Bankruptcy Procedure 8020 ("Motion for Sanctions") at 5-14.
In response, appellants contend that their arguments in these appeals are not only valid, but made in good faith. See Omnibus Response in Opposition to "National Heritage Foundation, Inc.'s Motion for Sanctions Under Federal Rule of Bankruptcy Procedure 8020" and Cross-Motion for Sanctions at 3-19.
The Court finds that sanctions for many of the arguments made by appellants would indeed be appropriate. In particular, and as explained above, appellants' arguments as to the effect of the Discharge Provision in the Confirmation Order following remand from the Fourth Circuit, as well as their arguments as to the harm caused by appellants' ongoing violations of the Confirmation Order, the lack of due process in the contempt proceedings, the purportedly criminal nature of the Contempt Order, and the purported application of the Noerr-Pennington doctrine, are so lacking in merit as to be frivolous.
Having determined that many of the arguments in these appeals are frivolous, the Court also finds that this is not an appropriate case for the imposition of sanctions at this time. See In re Prop. Movers, 31 Fed.Appx. at 84. First, the sanctions imposed by the bankruptcy court should be sufficient to remedy the harm caused by appellants' contempt and fairly compensate NHF for the reasonable expenses incurred in achieving a dismissal of the improperly filed claims in the California action.
Second, this litigation is now in its fifth year, and it has been nearly four years since the Behrmanns "settled" their claim against NHF. Imposing further sanctions may, unfortunately, simply encourage rather than deter additional litigation in a matter that should have been resolved years ago. Of particular concern is the
For all these reasons, NHF's Motion for Sanctions will be denied without prejudice. Should appellants pursue any another frivolous appeals, sanctions will be imposed for that appeal and the instant motion for sanctions will be reconsidered.
For the reasons stated above, the bankruptcy court's decisions will be AFFIRMED, NHF's Motion for Sanctions will be DENIED WITHOUT PREJUDICE, and appellants' Cross-Motion for Sanctions will be DENIED by an order to be issued with this Memorandum Opinion.
Amended Complaint at ¶¶ 135-50; see also ¶¶ 194, 202.
