Governmental Regulatory Exception to Automatic Stay Applies to Contempt Proceeding

Posted by NCBRC - April 24, 2017

“Civil contempt proceedings are exempted from the automatic stay under the government regulatory exemption when the proceedings are intended to effectuate the court’s public policy interest in deterring litigation misconduct.” Dingley v. Yellow Logistics, LLC, No. 14-60055 (9th Cir. April 3, 2017).

The underlying Nevada state court litigation arose out of a dispute in between Mark Dingley’s towing company and two transportation companies, Yellow Logistics, LLC, and Yellow Express, LLC, (Yellow) in which Yellow sued Mr. Dingley for improper towing, storage and sale of one of Yellow’s trucks. The Nevada court ordered $4,000 in discovery sanctions against Mr. Dingley when he failed to appear for a scheduled deposition. When he then failed to pay the sanction the court ordered Mr. Dingley to show cause why he should not be held in contempt. Mr. Dingley filed for chapter 7 bankruptcy before the contempt issue came to hearing. Yellow filed a brief in the state court arguing that the automatic stay did not apply to prevent the ongoing contempt litigation. Mr. Dingley responded with a complaint in the bankruptcy court arguing that Yellow’s state court brief violated the automatic stay. The bankruptcy court agreed with Mr. Dingley and awarded sanctions.

The BAP reversed, finding that, under the reasoning in David v. Hooker, Ltd., 560 F.2d 412 (9th Cir. 1977), the automatic stay does not preclude state court litigation concerning sanctions for discovery misconduct where that issue does not involve an attempt to collect a debt or otherwise harass the debtor on account of the debt. In re Dingley, 514 B.R. 591 (B.A.P. 9th Cir. 2014).

On appeal, the Ninth Circuit avoided the issue of Hooker having been decided prior to the 1978 automatic stay amendment to the Bankruptcy Code. Rather, the circuit court read section 362(b)(4) as applying to the civil contempt proceeding in state court. That section creates an exception to the automatic stay for: “the commencement or continuation of an action or proceeding by a governmental unit . . . to enforce such governmental unit’s . . . regulatory power . . .”

The ninth circuit has established two tests for determining whether a particular action falls under this exception: the pecuniary purpose test and the public policy test. Under these tests, if the government seeks to protect its own pecuniary interest or adjudicate private rights, the government regulatory exemption will not apply and the automatic stay will remain in force.

The court found its prior decision in In re Berg, 230 F.3d 1165 (9th Cir. 2000), to be controlling. In Berg, the court found that contempt litigation under Fed. R. App. Proc. 38, which provides for sanctions for filing a frivolous appeal, fell under the section 362(b)(4) exception to the automatic stay. The court found that because the purpose of Rule 38 was to effectuate the policy of deterring unprofessional behavior in litigation rather than to protect the government’s pecuniary interest or adjudicate a private right, it fell within the public policy test. It did not matter that the sanctions were sought by and would adhere to the benefit of a private party.

Likewise, the contempt proceeding in this case was in furtherance of the public policy against deterring unprofessional conduct in litigation, albeit at the discovery stage rather than the appellate stage. Because the state court contempt proceeding was not an attempt to protect pecuniary interests or adjudicate private rights, it fell under the exception to the automatic stay and could proceed.

Dingley 9th Cir. opinion 2017


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