Opinion
Case No. 95-13061-AM, Adversary Proceeding No. 95-1228
February 14, 1996
Sally Ann Hostetler, Esquire, Odin, Feldman Pittleman, P.C., Fairfax, VA, Of Counsel for the debtor in possession
John P. Van Beek, Esquire, Young, Goldman Van Beek, Alexandria, VA, Of Counsel for Lilia Kreb
MEMORANDUM OPINION
The matter is before the court on a rule to show cause issued on July 31, 1995, in response to the plaintiff's motion to have the defendant, Lilia Kreb, and her former attorney, Iris McCollum Green, held in civil contempt for an unsuccessful attempt to thwart a temporary restraining order issued by this court. A hearing was held on August 22, 1995, at which Ms. Kreb and Ms. Green, each represented by separate counsel, were present. At the conclusion of the hearing the court took the matter under advisement.
Ms. Green was represented by Shelley D. Hayes, Esquire, a member of the District of Columbia Bar, who was permitted to appear pro haec vice without local counsel. Ms. Green's arrangements for local counsel had fallen through, and the court did not wish to delay the hearing further or to deprive the respondent of the right to be represented at the hearing by counsel.
Findings of Fact
The underlying action in this adversary proceeding seeks to avoid, as either a fraudulent conveyance under § 548 of the Bankruptcy Code or as a preference under § 547, the sums represented by two cashier's checks, one for $170,000.00 drawn on NationsBank of D.C., N.A. and one for $120,000.00 drawn on NationsBank of Va., N.A. The checks were delivered by the debtor to Ms. Kreb, his paramour, who is also known by her Tunisian name of Lilia El Ouaer, in May and June, 1995, respectively. Both checks had been deposited by the defendant in a Tunisian bank account and were in the process of being transmitted to NationsBank for payment.
The debtor filed a voluntary chapter 11 petition in this court on July 13, 1995. Simultaneously, he filed the complaint commencing the present adversary proceeding and a motion for a temporary restraining order to prohibit NationsBank from paying the two checks. On July 14, 1995, the court held an expedited hearing on the request for the temporary restraining order. Ms. Kreb, who had been served with notice of the hearing the previous afternoon, was present with her attorney, Ms. Green. NationsBank had been given notice of the hearing by facsimile but did not attend, although it communicated to the debtor's attorney a request to modify certain language in the proposed temporary restraining order, which the debtor agreed to do. After considering the motion papers, affidavits, and the arguments of Ms. Green and the debtor's attorney, the court entered a seven-day temporary restraining order prohibiting NationsBank from paying the checks in order to preserve the status quo until an evidentiary hearing could be held on a motion for preliminary injunction.
Although Ms. Green was not a member of the bar of this court and was not accompanied by local counsel as required by Local Rule 105(E)(2), the court, in light of the very short notice that had been given of the hearing, waived the requirement for local counsel and allowed Ms. Green to appear pro haec vice for Ms. Kreb.
The specific language of the order, which was entitled "TEMPORARY RESTRAINING ORDER AGAINST NATIONSBANK," was as follows:
1. NationsBank is restrained from honoring two cashier's checks made payable to Lilia Kreb a/k/a Lilia El Ouaer, one in the amount of $170,000 dated early May 1995 and the other in the amount of $120,000 dated June 7, 1995.
2. NationsBank is required to do immediately what is required of it to avoid honoring the instruments and stopping their payment.
3. NationsBank is further ordered to hold such funds pending further order of this Court, not permitting their disbursement to either Debtor, Defendant or anyone else.
4. This injunction is entered at 1:30 p.m. on July 14, 1995 and shall expire at 11:59 p.m. on July 21, 1995.
5. A hearing on preliminary injunction shall be held on July 21, 1995 at 9:30 a.m.
The order was endorsed by Ms. Green as "Seen and objected to."
Immediately following the hearing, the debtor's attorney telephoned NationsBank and advised it that the temporary restraining order had been signed. A copy of the order was shortly thereafter transmitted to NationsBank by facsimile. In the mean time, Ms. Green and her client proceeded to the Dupont Circle branch office of NationsBank in the District of Columbia, arriving about 2:00 p.m. and asked to speak with Hunt Allard, the branch manager. In her testimony, Ms. Green suggested that the mission was undertaken at her client's insistence. Ms. Kreb, by contrast, testified that she was simply "listening to my lawyer," who, according to Ms. Kreb, advised her that "the judge was wrong in his ruling" and that "no one can stop a cashier's check under international law." According to Mr. Allard, they demanded payment of the cashier's checks, Ms. Kreb in particular stating, "I want my money." According to Ms. Green, her purpose in going to the bank was simply to determine the status and whereabouts of the two checks. Mr. Allard testified, and Ms. Green disputed, that at the beginning of the discussion Mr. Allard was unaware of the temporary restraining order, and that Ms. Green did not volunteer its existence but only addressed it after it was brought up in a telephone conference call with Don McClure, who worked in the office of NationsBank's general counsel. At that point, Ms. Green argued to Mr. Allard and Mr. McClure that the temporary restraining order was not valid because NationsBank was "not a party" and "had not been served" and that this court "could not restrain anyone who was not a party." Mr. Hunt attempted to track down the checks without success, and Ms. Kreb and Ms. Green ultimately left the office late that afternoon. Although there is some conflict in the testimony, the court, having heard the witnesses testify and having had an opportunity to observe their demeanor, finds that Ms. Green and Ms. Kreb went to the bank with the purpose of seeking to have the checks paid, and that Ms. Green intentionally did not volunteer the existence of the temporary restraining order and only attacked its validity after Mr. McCollum mentioned it.
This is corroborated to some extent by Ms. Kreb's testimony that she was "panicky" after the ruling because she had been told that under Tunisian law she was "subject to 5 to 7 years in jail" if the checks she deposited were not paid. The rationale for this belief was never clearly explained.
Ms. Green received a telephone call the following day from NationsBank's general counsel and was advised that one of the cashier's checks had been presented but had been returned unpaid with a notation referencing the temporary restraining order. The second cashier's check was similarly not paid.
On July 17, 1995, Ms. Green wrote on her client's behalf to Hugh L. McColl, Jr., the chief executive officer of Nationsbank. In the letter, she represented that she had been retained by Ms. Kreb "to represent her in an action against NationsBank in the event it refuses to honor two cashiers checks issued by the bank on which she is the name `payee'", and, without mentioning the existence of the temporary restraining order, she admonished Mr. McColl:
Pursuant to U.C.C. § 133.10 [sic], a cashier's check is the primary obligation of a bank. Current case law states that "for all intents and purposes, after certification the payee becomes a depositor of the drawee bank with the rights and duties of a depositor." Hence, if your bank fails to honor the cashier's checks presented to it on behalf of Ms. El Ouaer, the payee, we will not hesitate to pursue this matter in Court. It is our hope that NationsBank recognizes its obligations and responsibilities under the Banking Laws of the United States and the Uniform Commercial Code.
On July 19, 1995, Ms. Green filed on Ms. Kreb's behalf in the Superior Court of the District of Columbia a "Complaint for Preliminary and Permanent Injunction" against NationsBank, a "Motion for Preliminary and Permanent Injunction," and a "Motion for Temporary Restraining Order." In the complaint, she asked the court, among other relief, to "Enjoin the Defendant NationsBank from refusing to pay the cashier's checks which have already been presented to it on the plaintiff's behalf and in the motion for temporary restraining order she requested that the Superior Court "issue a Manatory [sic] Temporary Restraining Order requiring the Defendant NationsBank to pay and honor her validly presented cashier's checks." Neither the complaint nor the motion make any mention whatsoever of the existence of this court's temporary restraining order. Although Ms. Green testified that it was "always" her "intent" to advise the Superior Court of its existence, this court, having had the opportunity to hear her testify and observe her demeanor, does not find her testimony on this point credible, and this court finds that she had no intent of volunteering the existence of this court's temporary restraining order. In any event, NationsBank's attorney did furnish a copy of the temporary restraining order to the judge hearing the motion, and that judge declined to issue the order sought by Ms. Green.
An evidentiary hearing was subsequently held by this court on July 21, 1995, on whether to issue a preliminary injunction. At the hearing, the court granted the oral motion of NationsBank for relief in the nature of interpleader, permitted NationsBank to pay the $290,000.00 represented by the two checks into the registry of the court, and enjoined the plaintiff and the debtor from maintaining an action against NationsBank in any other forum with respect to the two checks.
After hearing extensive testimony concerning the circumstances under which the checks were delivered, the source of the funds, and the debtor's debts and assets, the court concluded that there was a reasonable likelihood that the debtor (in his capacity as debtor in possession) would ultimately prevail on the fraudulent conveyance claim only to the extent of approximately $100,000.00, that appearing to be the amount by which the debtor was rendered insolvent as a result of the transfer of funds represented by the two cashier's checks. The court ordered that $102,500.00 of the funds that had been paid into the registry of the court be held pending a trial on the merits and directed that the balance of the funds be paid to Ms. Kreb. The debtor in possession appealed to the U.S. District Court, which on October 31, 1995, modified the grant of the preliminary injunction to require that the entire $290,000 be retained in the registry of this court pending disposition of the adversary proceeding. Boxall v. Kreb (In re Boxall), 188 B.R. 198 (E.D.Va. 1995). Ms. Kreb and the debtor in possession subsequently negotiated a settlement of the adversary proceeding under which the bankruptcy estate received $205,000 of the escrowed funds and Ms. Kreb received $85,000, with certain small adjustments not relevant here. The court approved the settlement by order dated January 23, 1995, reserving for a later hearing (which has now been held), an attorney's lien asserted by Ms. Green in the funds due her former client.
NationsBank has submitted an affidavit of its attorney that it incurred $687.50 in legal fees in preparing for and appearing in the Superior Court of the District of Columbia in opposition to the motion brought by Ms. Green on Ms. Kreb's behalf. It also incurred an additional $1,560.00 in preparing for and appearing in this court at the preliminary injunction hearing where it moved for leave to pay the disputed funds into court. While the latter motion was no doubt precipitated by the Superior Court action, it appears that, even without the Superior Court action, NationsBank would eventually have sought interpleader relief in order to protect itself from the inherent potential for multiple liability. Accordingly, the court finds only $687.50 as the expense to NationsBank directly resulting from the abortive attempt to use the Superior Court for an end run around this court's temporary restraining order. The debtor in possession has filed an affidavit of his attorney that he incurred $720.00 preparing for and appearing at the Superior Court hearing and an additional $1,428.50 in bringing the contempt motion that is currently before the court.
Conclusions of Law and Discussion
This court has jurisdiction of this matter under 28 U.S.C. § 1334 and 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. The adversary proceeding itself is a core proceeding under 28 U.S.C. § 157(b)(2)(F) and (H). This court has authority under 11 U.S.C. § 105(a) to "issue any order, process, or judgment that is necessary or appropriate" to carry out the provisions of the Bankruptcy Code and to hold parties in civil contempt for violation of its orders. Burd v. Walters (In re Walters), 868 F.2d 665, 669 (4th Cir. 1989). A bankruptcy judge's finding of contempt, however, has some of the characteristics of a non-core proceeding in that it is subject to de novo review by a United States District Judge.
Under F.R.Bankr.P. 9020(c), if a hearing before a bankruptcy judge results in a finding of contempt, the order of contempt must be served on the person or entity named in the order and "shall be effective 10 days after service of the order and shall have the same force and effect as an order of the district court unless, within the 10 day period, the entity named therein serves and files objections prepared in the manner provided in Rule 9033(b)." If objections are filed, the contempt order is reviewed "as provided" in F.R.Bankr.P. 9033, which governs the review of non-core proceedings and requires the district judge to "make a de novo review upon the record or, after additional evidence, of any portion of the bankruptcy judge's findings of fact or conclusions of law to which specific written objection has been made. . . ."
The essential issue in this case is whether Ms. Kreb, and Ms. Green as her attorney, may properly be held in civil contempt for attempting to persuade NationsBank to violate a temporary restraining order, of which Ms. Kreb and Ms. Green had actual knowledge, and which was issued in a case in which Ms. Kreb was a party defendant and had appeared generally. Ms. Green vigorously asserts that the temporary restraining order by its explicit terms restrained only NationsBank and thus left her and her client free to assert any independent claim her client had against NationsBank. With equal vigor, she asserts that the temporary restraining order was not valid against NationsBank because NationsBank was not a "party" to the adversary proceeding and because this court had no power to enjoin a non-party. Ms. Kreb, having obtained new counsel, essentially concedes that bringing the Superior Court action was in contempt of this court's temporary restraining order but takes the position that she was legally unsophisticated and that any action she took was on the advice of Ms. Green, her attorney.
It is, of course, true that in literal terms the temporary restraining order restrained only NationsBank. However, it can hardly be doubted that a person having knowledge of a court order defies the court's authority and interferes with its process if he or she attempts to induce or trick the party to whom the order is formally directed into not complying with the order. See, U.S. v. Paccione, 964 F.2d 1269 (2d Cir. 1992) (owner of business could be held in contempt of temporary restraining order prohibiting dissipation of business's assets even though owner was not named in injunction and was not a defendant in case, since owner had knowledge of the restraining order). Here, Ms. Green and her client, in the asserted belief that this court did not have authority "under international law" to issue the temporary restraining order, undertook to circumvent it by first attempting to bully, and perhaps trick, NationsBank (through Mr. Allard) into paying the two checks notwithstanding the temporary restraining order that prohibited the bank from doing so. When this was unsuccessful, Ms. Green then wrote to the bank's president and subsequently filed in another court an injunctive action and request for temporary restraining order to require NationsBank to do precisely what this court had prohibited it from doing — that is, to pay the two checks. The pleadings in the other court, moreover, intentionally did not advise the other court of this court's temporary restraining order, an omission which speaks volumes as to counsel's lack of good faith.
As the Supreme Court has recently held, even if a bankruptcy court enters an order in excess of its authority under the Bankruptcy Code, that order cannot be attacked collaterally but only by direct appeal. Celotex Corp. v. Edwards, — U.S. —, 115 S.Ct. 1493 (1995). Nevertheless, this court would not necessarily be inclined to find a contempt simply because a party to litigation before this court brought an action in another court attacking an order of this court, where the facts and circumstances suggested that the party was attempting in good faith, even if mistakenly, to obtain a ruling that this court exceeded its authority in issuing the original order. But the facts in this case present a far different picture — the portrait is rather of client and counsel, unhappy with a ruling of this court, scheming to circumvent that ruling. This is not a case where Ms. Kreb and Ms. Green went to Mr. Allard and stated up front, "We know the bankruptcy court has told you not to pay the cashier's checks, but the court had no authority to do that." Nor is this a case where they filed pleadings in another court fairly setting forth this court's ruling but asserting that this court was without jurisdiction to enter the order. The record rather is redolent of an attempt to bamboozle either NationsBank into paying, or the Superior Court for the District of Columbia into requiring payment of, the two cashier's checks. Had those efforts been successful, the funds would effectively have been put beyond the reach of this court.
But see Keene Corp. v. Acstar Ins. Co. (In re Keene Corp.), 168 B.R. 285 (Bankr.S.D.N.Y. 1994), where the court was faced with a situation very similar to that presented here. The debtor in possession had obtained a temporary restraining order from the bankruptcy court prohibiting certain judgment creditors from obtaining payment out of escrows that secured final judgments. The attorneys for several of the judgment creditors were present in court when the motion for the temporary restraining order was heard and argued against it. The court nevertheless granted the temporary restraining order to preserve the status quo until a preliminary injunction hearing could be held. The attorneys for the judgment creditors then filed civil suits against the escrow agents in the United States District Court to compel release of the escrowed funds and obtained from the District Judge an order to show cause why the escrow agent should not immediately release the funds. At the show cause hearing, however, the District Judge denied the requested relief and dismissed the suits, in effect leaving the matter with the bankruptcy court. At the debtor's request, the bankruptcy court issued a rule to show cause why the attorneys should not be held in contempt. The attorneys then filed a motion to dismiss, which the court denied, stating, "The court assumes, for the purposes of [the] motion to dismiss, that the acts of LP K [the law firm] and Messrs. Levy and Maimon, the latter being the LP K partner directly responsible for the commencement of the federal actions . . . were in contempt of this Court's TRO. . . ." Accord, Transicoil, Inc. v. Blue Dove Development Assocs., L.P. (In re Eagle-Picher Industries, Inc.), 166 B.R. 626, 629 (Bankr.S.D.Ohio 1994) (Actions of creditors in filing complaint in different forum in attempt to relitigate matter already decided by bankruptcy court "was an act subversive of the authority of this court [and]. . . an act in contempt of this court").
The court is mindful, as Ms. Green eloquently argued at a subsequent hearing on her claimed attorney's lien, that all legal change depends to a greater or lesser extent on counsel pressing the boundaries of settled law. The court has no quarrel with the proposition that a good faith argument for the reversal or extension of existing law is not and should not be sanctionable simply because the argument fails to carry the day. What convinces the court that Ms. Green and her client were not engaged in a good faith effort to achieve reversal of what they believed to be an erroneous ruling is Ms. Green's total lack of candor, in her initial discussions with Mr. Allard, and in her pleadings filed with the Superior Court, with respect to the existence of the temporary restraining order that had been issued by this court.
Ms. Green's additional argument that the temporary restraining order was invalid because NationsBank was not a "party" misses the mark. It is, of course true, that Fed.R.Civ.P. 65(d) provides,
Every order granting an injunction and every restraining order shall set forth the reasons for its issuance; shall be specific in terms; shall describe in reasonable detail, and not by reference to the complaint or other document, the act or acts sought to be restrained; and is binding only upon the parties to the action, their officers, agents, servants, employees, and attorneys, and upon those persons in active concert or participation with them who receive actual notice of the order by personal service or otherwise.
(emphasis added). Although NationsBank was not a named defendant in the adversary proceeding, it unquestionably was named as the respondent to the motion for a temporary restraining order, was given notice of the motion and the hearing, elected not to attend, had actual knowledge of the order that was issued, and never sought to have service quashed or the temporary restraining order vacated. Indeed, at the subsequent hearing on the preliminary injunction, it took no position on whether the injunction should issue but simply asked to pay the disputed funds unto court and be dismissed as a party. Even if NationsBank itself had a legal basis to seek reversal of the temporary restraining order on the ground that it had not been formally made a party defendant to the underlying adversary proceeding, only NationsBank would have had standing to assert such an argument; Ms. Green and Ms. Kreb cannot assert it for NationsBank.
With respect specifically to Ms. Kreb, the argument is made that she really did not understand the legal issues involved and relied on her attorney for advice. However, she unquestionably knew that the temporary restraining order had been issued and knew that it prohibited NationsBank from paying the check. Whether or not her attorney told her that this court's ruling was wrong, she had no legal right to defy the ruling. Additionally, the court finds it difficult, after hearing both her and Ms. Green's testimony, to accept that Ms. Kreb was an entirely passive participant, simply following her counsel's advice, in the ensuing efforts to force NationsBank to pay the cashier's checks. She was clearly upset by the temporary restraining order and actively encouraged her attorney to find some way around it. At the same time, her level of legal sophistication was clearly far less than her attorney's, and, as between the two, the conduct of the attorney is far more blameworthy.
It was signed in open court while she was present.
The court notes that one explanation for Ms. Green's misguided zeal may have been that she had entered into an oral contingent fee agreement with Ms. Kreb for a $90,000 fee if she were successful in obtaining payment of the $290,000.
There remains the issue of an appropriate sanction. Civil contempt is remedial and coercive in nature, unlike criminal contempt, the purpose of which is to punish. Since the underlying action has now been settled and there is no further need for an injunction, there is likewise no need for coercive sanctions. However, it is obvious that both the debtor and NationsBank have incurred actual damage in the form of attorney fees in responding to the injunction action brought in the Superior Court. Under the terms of the settlement agreement between Ms. Kreb and the debtor, the entirety of NationsBank's fees are being paid equally out of each party's share of the disputed funds. Accordingly, the court concludes that an appropriate sanction is a fine, payable to the debtor in possession for the legal fees he incurred responding to the Superior Court suit and bringing the contempt action in this court, plus $687.50 of the NationsBank legal fees he is paying, or a total of $2,836.00. Given the disparity in culpability as between Ms. Kreb and her attorney, the court further concludes that Ms. Kreb should be liable for $300.00 of such costs and her attorney for the balance ($2,536.00).
In re Keene Corp., supra, 168 B.R. at 288 ("Civil contempt proceedings can be coercive or compensatory. Coercive civil contempt imposes sanctions, such as fines or imprisonment, to compel compliance with the court's orders; compensatory civil contempt attempts to indemnify the injured party for the damage caused by the contempt.").
"As a rule, one who violates a valid interlocutory order, which subsequently terminates due to passage of time or mootness, is nonetheless liable as a civil contemnor for damages caused by his disobedience." Keene, supra, 168 B.R. at 289.
A separate order will be entered consistent with this memorandum opinion.