In an opinion that would have benefited from Gertrude’s advice to Polonius “More matter, with less art,” the First Circuit found that a debtor may be sanctioned for inadvertent failure to comply with a court order despite lack of harm to creditors, trustee or court. Charbono v. Sumski, No. 14-2151 (1st Cir. June 15, 2015).
The debtor’s confirmed chapter 13 plan included language explaining the “ongoing obligation to provide a copy of each federal income tax return (or any request for extension) directly to the Trustee within seven days of the filing of the return (or any request for extension) with the taxing authority.” When the debtor’s wife filed a request with the IRS for an extension of time to file his 2013 tax return, the debtor failed to notify the trustee within the mandated seven days. The following June, the trustee filed a motion to dismiss or to sanction the debtor in the amount of $200, based on this failure. The debtor objected to the motion and provided the extension request which had been approved by the IRS. After a hearing, the bankruptcy court ordered the debtor to pay $100 in sanctions. The district court affirmed. Charbono v. Sumski, No. 13-471, 2014 WL 4922988, at *5 (D. N.H. Sept. 30, 2014).
On appeal the circuit court applied a thousand dollar vocabulary [evidently, Judge Selya enjoys spicing up his opinions with unusual words in contexts permitting even the unwashed masses to understand his meaning-see], and an abuse of discretion standard to determine whether the court had legal authority to impose the challenged sanction.
The debtor argued that because he ultimately complied with the order to provide the request for extension and no harm was done by the delay, the sanction was imposed for no purpose other than punishment and, therefore, amounted to a criminal contempt fine.
The court rejected this argument finding that a bankruptcy court may impose sanctions under its inherent power to vindicate its judicial authority outside the contempt arena (“inherent power sanction”). The circuit court found that the authority to impose a punitive, non-contempt, sanction was implied in the Supreme Court cases of Law v. Siegel, 134 S. Ct. 1188, 1198 (2014); and Marrama v. Citizens Bank of Mass., 549 U.S. 365, 375-76 (2007). The court identified instances in which this power may be exercised including: “disciplining attorneys, remedying fraud on the court, and preventing the disruption of ongoing proceedings.” On the other hand, factors distinguishing the exercise of contempt power from other sanctions include “whether the issuing court made an express finding of contempt, whether the underlying conduct evinces a criminal mens rea, and whether the order falls within a recognized inherent power of the court (other than the contempt power).”
Applying these factors, the court found that the sanction was explicitly not based on a finding of contempt, that the debtor did not have the requisite mens rea for contempt and that “the $100 impost fell squarely within the long-recognized authority of courts to ‘impose . . . submission to their lawful mandates.’” Having found that the sanction did not meet the requirement for criminal contempt, however, the circuit court seemed to have forgotten the flip-side of the equation: meeting the requirements for the “inherent power sanction.” Without finding that the sanction here was justified by fraud on the court, disruption of ongoing proceedings, or any other factor other than the mere fact of noncompliance, the court found simply that the sanction was within the court’s power.
The court rejected the debtor’s argument that since his failure to comply with the court order was a matter of inadvertence rather than bad faith, a necessary element for imposition of a punitive sanction was absent. It found that those cases requiring bad faith generally involved fee shifting necessitating a showing of bad faith to justify veering from the established American Rule.
The debtor argued that the sanction was in fact issued in accordance with a uniform policy amounting to a local rule and that notice of such rule was a due process requirement. The court found that the trustee’s motion for sanctions provided all the notice that was necessary and that the bankruptcy court’s language concerning its own “policy” of uniformly sanctioning noncompliance with its standing order was aspirational rather than practical.
Finally, the court rejected the debtor’s argument that the $100 fine was imposed without regard to the debtor’s financial circumstances, finding that in fact the bankruptcy court did consider the individual circumstances of the debtor’s lack of bad faith, and dire financial straits. Without addressing how inadvertent behavior is amenable to deterrence, the court found that the extenuating circumstances of this case were outweighed by the deterrence effect of the sanction.
The court paid lip-service to restraint stating that the absence of a bad faith requirement should not be read to give bankruptcy courts free reign. It went on to find that, despite the absence of bad faith and harm, the sanction imposed here was modest and, therefore, the least extreme alternative to achieve the court’s punishment and deterrence objectives. Unfortunately, while the court acknowledged the principle that a bankruptcy court’s sanction power has limits, it did not find the words to establish those limits.
Tags: Sanctions
