Three Way Split of Opinion on Automatic Stay

January 7, 2014

It is axiomatic that when a state or federal court issues an order either requiring or prohibiting future conduct, the court expects compliance. In civil cases, non-compliance may be punished through the court’s use of contempt powers, which may include a fine or jail time until the individual complies. Since compliance isn’t always possible (e.g. an order to pay money when none is available), filing bankruptcy has traditionally been a refuge to temporarily stop civil contempt penalties and provides the debtor with an opportunity to either comply with the order or discharge the obligation. But the bankruptcy automatic stay protection is now under attack and may or may not be available to a contemnor, depending on where he lives.

Take for example, the case of Dominic’s Restaurant of Dayton, Inc. v. Mantia, 683 F.3d 757 (6th Cir. 2012). In 2007, the Mantia family closed their Dayton, Ohio restaurant but continued to use the restaurant name “Dominic’s” to sell food products. Christie Mantia sold her interest in the Dominic’s restaurant soon after it closed, and planned to open a restaurant with new partners Reece Powers and Harry Lee called (what else)”Dominic’s” and use old Dominic’s recipes. The original owners of Dominic’s filed a lawsuit for trademark infringement and trademark dilution.

The district court issued a temporary restraining order and then a preliminary injunction directing Mantia, Powers, and Reed to cease using the Dominic’s name and graphics. The plaintiffs then filed a series of contempt motions against the defendants for violation of the injunctions. The district court granted a default judgment and found the defendants in contempt. Powers then filed for personal bankruptcy.

Filing a personal bankruptcy triggers the bankruptcy automatic stay, a bankruptcy court federal injunction that protects the debtor from continuing litigation. The Bankruptcy Code lists several exceptions to the automatic stay, including criminal contempt actions, but not civil contempt actions. Nevertheless, the district court declined to stay the judgments against Powers.

The Sixth Circuit Court of Appeals considered the matter of whether the automatic stay protects a debtor during a civil contempt action. Other Circuit Courts had previously considered the issue and followed three different approaches:

  • The Third and Eleventh Circuits have determined that only criminal proceedings may continue despite the automatic stay and have refused to create an exception for civil contempt actions.
  • The Fifth Circuit and courts in the Second Circuit have determined that if a contempt order is issued to enforce an order of the court and not to enforce a money judgment, collect money, or harass a defendant, its continuance does not violate the automatic stay.
  • The Fourth and Tenth Circuits have invoked their equitable powers to allow civil contempt actions to proceed if such actions relate to compliance with a court order.

The Sixth Circuit found that the exceptions to the automatic stay cited in the Bankruptcy Code are not exhaustive and courts have recognized other exceptions. One of these exceptions is that a court has an inherent power to take action to ensure that parties comply with its orders. The Sixth Circuit adopted the approach by the Fourth and Tenth Circuits and allowed the civil contempt and injunctions to proceed, despite the automatic stay.

If a court has directed you to do or stop doing something and you cannot comply, speak with an experienced bankruptcy attorney to discuss your options. In many cases a bankruptcy filing will provide you with time to deal with the court order without being fined or incarcerated. Your bankruptcy attorney can discuss you options with you keep you out of further legal trouble.

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