The recent case of In re Micah Cade McKinneyCase No. 21-50046-rlj-11 (Bankr. ND Tex., April 28, 2022) outlines violations of the bankruptcy injunction.
Contempt litigation in bankruptcy is sometimes driven by intentional and deliberate conduct on the part of a creditor – perhaps out of spite that the debtor who owed them money filed for bankruptcy in the first place. But more often than not, automatic stay or release order violations result from a misunderstanding of the applicable law. This case is an example.
As of December 2018, the debtor, Micah McKinney, and his wife Leslie McKinney, were parties to a divorce case in state court. On March 31, 2021, state court held a hearing on two motions filed by Leslie McKinney in the divorce case: a motion to enforce temporary restraining orders and a motion to award a tax refund. The state court orally granted the relief sought by Leslie McKinney, holding Micah McKinney in contempt and ordering that he transfer approximately half of a $3 million tax refund to Leslie McKinney.
On April 5, 2021, before any written order was issued by State Court, Micah McKinney filed this Chapter 11 bankruptcy filing. The case was primarily filed because Micah McKinney had no not have the funds to comply with the March 31 state court ruling.
On August 22, 2021, after lengthy mediation, Micah McKinney and Leslie McKinney reached a settlement agreement that resolved all of their divorce disputes except for some SAPCR (“lawsuits affecting the parent-child relationship”) issues. ). The terms of the Settlement Agreement have been incorporated into Micah McKinney’s Bankruptcy Plan (“Plan”). On November 4, 2021, the Plan was confirmed. Under the plan and the settlement agreement incorporated therein, Leslie McKinney has waived all claims against Micah McKinney, including claims in the divorce case, except for certain post-SAPCR issues. query. The plan also states that all claims from the company Lanfear, which represented Leslie McKinney in the divorce case, have been released. The order confirming the plan includes a broad injunction (“Order of release”) barring any action to assert any pre-confirmation claim against Micah McKinney in a manner inconsistent with the terms of the plan. At the time of the hearing in this case, Micah McKinney had met all of his obligations to Leslie McKinney under the Plan.
On February 17, 2022, Leslie McKinney, through the law firm Lanfear, filed a petition in the divorce case seeking entry of two orders related to the state court hearing held March 31, 2021 (“motion to enter”). The orders, as proposed, provide for Micah McKinney to be jailed if he fails to pay several pre-bankruptcy claims to Leslie McKinney, Lanfear and others; they also demanded that Micah McKinney place the $3 million tax refund in escrow for payment of a claim to the Lanfear company. Each of the claims covered by the proposed orders were dismissed by the order confirming Micah McKinney’s plan. After Micah McKinney’s attorney sent an email to Leslie McKinney’s attorney on February 17, 2022, expressing Micah McKinney’s objection to the motion to enter as a violation of the injunction to discharge, the Leslie McKinney’s attorney said she did not intend to seek relief in the motion to enter. but just wanted a clear record to make it easier for others to judge
SAPCR Matters in State Court. Subsequently, Leslie McKinney filed an amended motion on February 28, 2022 (“Amended motion to seize”) which added language to the orders indicating that their entry was not an attempt to impose a remedy but rather to accurately reflect the record. A hearing on the amended motion to enter has been scheduled in state court for March 22, 2022.
On February 25, 2022, Micah McKinney filed a motion seeking to hold Leslie McKinney and the Lanfear firm in contempt for violating the discharge injunction by filing the motions to enter. On March 1, 2022, he filed a Motion for a Preliminary Injunction, which was granted on March 8, 2022, enjoining Leslie McKinney and Lanfear Law Firm from proceeding with their Motion to Insert and Amended Motion to Insert (collectively the “Motion to Insert “). and barring the State Court from granting motions to enter the March 22 hearing. The Court took the motion for contempt under advisement.
When a creditor violates the injunction of release in a bankruptcy case, a bankruptcy court can hold the creditor in contempt to compensate the debtor for the violation and compel the creditor to comply with the injunction. Placid Refining Co. v. Terrebonne Fuel & Lube, Inc. (In re Terrebonne Fuel & Lube, Inc.), 108 F.3d 609, 612–13 (5th Cir. 1997). This authority derives from 11 USC § 105, which allows a bankruptcy court to make any order necessary to enforce the provisions of the Bankruptcy Code. Cirillo v. Valley Baptist Health Sys. (In re Cirillo), no. 09-10324, 2014 WL 1347362, at *4 (Bankr. SD Tex. 3 April 2014). In determining whether a party should be held in contempt for breaching a release order, courts use an objective standard, and contempt is appropriate when there is no “reasonable cause to doubt” as to whether the creditor’s conduct might be lawful under the injunction. Ordered.” Taggart vs. Lorenzen, 139 S.Ct. 1795, 1804 (2019).
Below Taggart, three elements must be proven for a court to find a party in contempt: “(1) the party breached a precise and specific order of the court to … refrain from doing … particular … acts; (2) the party did so with knowledge of the court order; and (3) there is no reasonable reason to doubt that the order prohibited the party’s conduct. » In the city of Detroit, Michigan.614 BR 255, 265 (Bankr. ED Mich. 2020).
The Court had no trouble finding that Leslie McKinney and the Lanfear law firm violated the injunction for discharge by filing the motions to enter. The release order states:
FROM THE EFFECTIVE DATE, ALL HOLDERS OF CLAIMS AGAINST THE DEBTOR… ARE PERMANENTLY ENFORCED AND PROHIBITED FROM… BEGINNING OR PROCEEDING IN ANY MANNER, DIRECTLY OR INDIRECTLY, WHETHER, SUIT, SUIT OR OTHER PROCEEDING OF ANY KIND NATURE WHETHER AGAINST THE DEBTOR OR THE ESTATE, WITH RESPECT TO SUCH CLAIM OR INTEREST ARISING PRIOR TO THE EFFECTIVE DATE, INCLUDING, WITHOUT LIMITATION, THE ENTRY OR EXECUTION OF ANY JUDGMENT, OR ANY OTHER ACT FOR THE COLLECTION, DIRECTLY OR INDIRECTLY, OF ANY CLAIM OR INTEREST AGAINST THE ESTATE OR THE DEBTOR.
The proposed orders on the listing motions stated that Micah McKinney should make payments to Leslie McKinney for a portion of the $3 million tax refund and payments to Lanfear Law Firm for attorney’s fees – obligations that were expressly paid by confirmation of the plan. The discharge injunction enjoins the “continuation in any manner whatsoever” of the “entry or execution of any judgment” on a pre-petition request. As an action that continues to seek entry into state court of a pre-motion claim, Leslie McKinney and Lanfear’s filing of motions to enter clearly violated the injunction of dump. The same would apply to a hearing on the motions or the issuance by the State Court of an order on the motions. The Court rejected the idea that the inclusion of a disclaimer in the petition stating that it was not an attempt to collect any of the monetary damages or awards contained therein saved the leadership from outrage. And the court flatly rejected any suggestion that the order sought by the state court was necessary to accurately reflect the record. All further proceedings in state court have been suspended by Micah McKinney’s filing for bankruptcy. Moreover, the language of savings has done nothing to solve the critical problem, namely that any pursuit of a released claim violates the injunction to release independently of the purpose of the prosecution. The Court made it clear that entering an order against a debtor on a prior application during the pendency of bankruptcy proceedings violates the automatic stay; and entering an order against a debtor in a pre-petition claim after the debtor has received a discharge violates the injunction to discharge.
Moving on to the second part of the Taggart test, the Court easily found knowledge to exist, as Leslie McKinney and the Lanfear firm did not dispute that they were aware of the injunction to discharge when they filed the motions to enter. Both were claimants under the plan, actively negotiating with Micah McKinney before his approval. They both received distributions under the plan after confirmation. The amended motion to enter expressly acknowledges that the plan resolves the monetary relief sought by their motions.
With regard to the final part under Taggartthe Court found that Leslie McKinney and the Lanfear firm had “no objectively reasonable basis for concluding that [their] behavior might be lawful. Despite Leslie McKinney’s belief that she was acting
legally, the Court found no objective basis to conclude that it and the firm Lanfear’s pursuit of claims in State Court on a pre-petition claim would not violate the injunction of discharge – such conduct directly violates the plain language of the injunction.
Noting that the three elements of Taggart test had been satisfied, the bankruptcy court found Leslie McKinney and the Lanfear firm in contempt. The Court therefore turned to crafting an appropriate sanction. The Court found that the evidence clearly indicated that neither Leslie McKinney nor the Lanfear firm intended to breach the injunction. Therefore, the Court found that, although she never had an objectively reasonable basis to conclude that she was not in breach of the dismissal injunction, she had shown that she was “not acting in bad faith but, instead, under an erroneous understanding of how she was held under the discharge order. Therefore, despite a request for attorney’s fees and punitive damages, the Court ultimately limited its assessment of damages to a penalty of $250/day for each day after the date this order became final that Leslie McKinney did not file a notice in state court withdrawing the motions to enter.
The denial of attorney fees to Micah McKinney was somewhat surprising, but the Court determined that, in this case, an additional penalty was not necessary or appropriate in the circumstances.