Sixth Circuit BAP Says Creditor Must Tell Non-Bankruptcy Court to Stop Violating the Automatic Stay

According to a recent opinion issued by the Bankruptcy Appellate Panel (“BAP”) for the Sixth Circuit, a creditor must attempt to stop a non-bankruptcy court from continuing civil proceedings against a debtor for failure to pay a judgment representing a dischargeable debt.[1] The BAP’s holding in In re Wohleber could mean that a creditor cannot remain silent but must take affirmative action to stop a non-bankruptcy court from proceeding with any litigation that violates the automatic stay.

In 2006, as part of divorce proceedings prior to the Bankrutpcy filing, the Debtor’s wife won a property settlement award.  Six years later, after appeals, the state court entered an order directing the Debtor/Husband to pay approximately $36,500 within 21 days. Thereafter, the couple continued litigating for another nine months and the Debtor/Husband failed to pay the $36,500. Eventually, the state court directed the Debtor/Husband to pay the $36,500 by October 1^st, and scheduled a sentencing hearing for October 8^th on the wife’s motion for contempt should the Debtor/Husband fail to pay.

The Debtor/Husband did not pay and filed for bankruptcy protection on October 4^th. The Debtor/Husband also filed a “suggestion of bankruptcy” with the state court. At the sentencing hearing on October 8th, the state court judge concluded that the automatic stay did not apply in a contempt proceeding, and sent the Debtor/Husband to jail for 30 days, with the condition that he could be released earlier if he paid the $36,500. After 10 days in jail, the parties entered an agreed order releasing the Debtor from jail and holding his sentence in abeyance “pending resolution of the relevant issues in the [debtor’s] pending bankruptcy matter.”

After the Debtor/Husband was released from jail, he dismissed his bankruptcy and the wife filed a motion to reimpose the contempt sentence. The Debtor/Husband then filed a second bankruptcy.

Three years later, the Debtor/Husband filed an adversary proceeding seeking to hold the wife and her counsel in contempt for violation of the automatic stay in the initial bankruptcy. The bankruptcy judge dismissed the Debtor/Husband’s contempt action, finding insufficient evidence to show a stay violation by the wife and her counsel. The Debtor/Husband appealed, and the BAP reversed and remanded.

Writing for the BAP, Judge Humphrey stated the general principle that continuation of proceedings to collect a matrimonial property division are automatically stayed, absent an exception to the automatic stay. He found no exceptions.

First, Judge Humphrey found that the contempt proceedings did not fall under the “criminal action” exception to the stay in Section 362(b)(1), because contempt proceedings in state court are civil in nature. Second, Judge Humphrey found that there was no “court-made exception” to the stay, such as the ability of a judge to uphold the dignity of the court.  Finding no exceptions to the stay, Judge Humphrey ruled that the sentencing hearing and confinement were stay violations.

The Court then addressed the question of whether the wife or her counsel were liable for having themselves violated the automatic stay.

Judge Humphrey stated that recent cases “appear to be uniform in holding that creditors have a duty to stay the post-petition enforcement of pre-petition civil contempt orders issued by state courts.”

Judge Humphrey held that the wife and her counsel “had a duty to take affirmative action to prevent the use of the sentencing hearing . . . to coerce payment of the dischargeable property settlement.” Judge Humphrey said there was “no evidence in the record” that counsel for the wife “took any of the available steps to prevent the sentencing hearing from proceeding . . . in violation of the automatic stay.” However, the BAP could not rule as to the question of liability because the bankruptcy court had dismissed the adversary proceeding before the wife and her counsel had an opportunity to explain what actions they had taken, if any, to forestall incarceration.

Judge Humphrey, however, went on to list actions that could have been taken to avoid a stay violation: (1) filing a motion for relief from the stay, (2) filing a motion to vacate the contempt order in view of the bankruptcy, or (3) submitting an agreed order to hold the state court contempt proceedings in abeyance pending resolution of automatic stay questions in bankruptcy court.

The BAP remanded the case, allowing counsel and the wife to “present evidence on whether they took affirmative action” to prevent a stay violation.

[1] Wohleber v. Skruko (In re Wohleber), 18-8008 (B.A.P. 6th Cir. March 4, 2019).