The founder of a company that went into Chapter 11 was found to have violated a gatekeeping order issued by the Bankruptcy Court which required any person or entity to seek permission from the Bankruptcy Court before commencing any action against the new Chief Restructuring Officer and CEO.  The founder, through two entities, moved in the District Court for leave to name him.  The motion for leave was denied, and the Debtor asked to have the movants appear and show cause why they should not be held in contempt.

The Bankruptcy Court determined that the motion constituted “pursuit of a claim” against Seery in violation of Order. Accordingly, it held all parties involved in filing the motion in contempt and ordered them to pay $239,655. In making this estimate, the Bankruptcy Court started by considering the expenses the Debtor actually incurred — namely the fees Highland paid its lawyers to litigate the contempt proceedings. But the Bankruptcy Court assumed Highlands submissions were conservative, so it added over $50,000 based on mere guesswork. It declined the invitation to award treble damages, but imposed, sua sponte, a $100,000 sanction for failed appeals, apparently to deter Appellants from seeking review of its contempt order.

The District Court vacated the Bankruptcy Court’s $100,000-per-appeal sanction (without prejudice) because even Highland conceded that it was excessive. But it affirmed the remainder of the award. Most relevantly, Appellants argued that the sanction was punitive and thus exceeded the scope of the Bankruptcy Court’s civil contempt powers. The District Court concluded that because the Bankruptcy Court expressly designed its award to compensate Highland for the costs it incurred in litigating the contempt proceedings, the award was compensatory and therefore civil.

The U.S. Fifth Circuit Court of Appeals reversed:

“Bankruptcy courts are not Article III courts. Therefore, they do not necessarily possess the inherent powers of such courts. So while Article III courts have the inherent power to punish  violations of their orders through criminal contempt, bankruptcy courts have only civil contempt powers because that is all Congress has given them. Accordingly, bankruptcy courts may issue contempt orders, but any contempt sanction imposed by a bankruptcy court must be civil.

“The civil contempt power is limited. That is because it uniquely is liable to abuse. Unlike most areas of law, where a legislature defines both the sanctionable conduct and the penalty to be imposed, civil contempt proceedings leave the offended judge solely responsible for identifying, prosecuting, adjudicating, and sanctioning the contumacious conduct. Thus, civil contempt sanctions may not have the primary purpose of punishing the contemnor or vindicating the authority of the court. Rather, they must be remedial, and for the benefit of the complainant.

“That means civil contempt sanctions must be calculated either to (1) coerce the contemnor into compliance with a court order or (2) compensate another party for the contemnors violations. Contempt sanctions imposed to coerce the contemnor into compliance with a court order are civil only if they are conditional on the contemnor’s conduct. Contempt sanctions imposed for compensatory purposes are civil only if they are based upon evidence of complainants actual loss.

“A fee-shifting sanction — the kind we are tasked with reviewing here — is supposed to be compensatory. Goodyear Tire & Rubber Co. v. Haeger, 581 U.S. 101 (2017) ….

“DAF obviously could have filed the Motion in the bankruptcy court. The Seery Order specifically states that an entity may bring a covered claim with the bankruptcy courts approval. Thus, DAF (or any of the other Appellants for that matter) could have filed the Motion in the bankruptcy court, sought the approval of the bankruptcy judge, and committed no contempt.  It is also common ground that DAF’s only contumacious conduct was filing the Motion in the district court as opposed to the bankruptcy court. We take the parties’ agreement on that as dispositive of the scope and extent of Appellants misconduct. So the question presented is whether the bankruptcy court’s sanctions award comports with Goodyear Tire. Both the bankruptcy judge and the district court reasoned that the award was compensatory because it shifted expenses Highland reasonably and necessarily incurred in responding to the Motion. Both courts were wrong.

“Highland incurred virtually all its contempt-related expenses because the bankruptcy court permitted extensive discovery and conducted a marathon evidentiary hearing to unearth Dondero’s role in filing the Motion. But Dondero’s intentions were relevant only to criminal contempt — a sanction the bankruptcy court was powerless to impose. Dondero’s intentions — and virtually all of the discovery and the bankruptcy courts mini-trial — were irrelevant to civil contempt. The only question in civil contempt is whether and to what extent Highland was damaged by DAF’s choice to file the Motion in the wrong forum. Neither Highland nor the bankruptcy court was permitted to seize on DAF’s error and leverage it into a punitive proceeding….

“On remand, the bankruptcy court is instructed to limit any sanction award to the damages Highland suffered because DAF filed the Motion in the wrong court — i.e., the expenses Highland reasonably incurred in opposing the Motion in district court, less those it would have spent opposing the Motion had it been filed in bankruptcy court.”

 

In the Matter of Highland Capital Management, 98 F.4th 170 (5^th Cir. 2024).