Appellate Courts Skeptical About Bankruptcy Court Sanctions

The Fifth Circuit, for example, takes a balanced approach. "[B]ankruptcy courts have only civil contempt powers because that is all Congress has given them …. Accordingly, bankruptcy courts may issue contempt orders, but any contempt sanction imposed by a bankruptcy court must be civil" — compensatory, not punitive. In re Highland Capital Management, 2024 WL 1450065, *2 (5^th Cir. Apr. 4, 2024) (2-1). Accord, In re Markus, 78 F.4^th 554, 563 n.5 (2d Cir. 2023). A split Fourth Circuit, as noted, went further: a bankruptcy court's "civil contempt and sanctions orders … for violating a discovery order are interlocutory and cannot be immediately appealed as of right." In re Bestwall, LLC, 2024 WL 1841960, (4^th Cir. Apr. 29, 2024) (2-1). The Second Circuit takes a more nuanced approach. PHH Mortg. Corp. v Senesenich (In re Gravel), 6 F. 4^th 503, 511, 513 (2d Cir. 2021). ("A bankruptcy court's award of sanctions, including findings of contempt, are reviewed [on appeal] for abuse of discretion;" reviewed under 28 U.S.C. §158(d)(2)(A) (after certification); "this court has a duty to conduct its own 'exacting' review of contempt orders;" bankruptcy court cannot "hold a party in contempt for violating an order that is subject to varying interpretations".).

Relevance

The Fourth Circuit, in Bestwall, stretched to decline review of a devastating sanctions order ($402,817) in the face of a powerful dissent. In Highland Capital, however, the Fifth Circuit drastically reduced a bankruptcy court's sanctions order ($239,655), again in the face of a dissenting judge and a district judge. Two practitioners also recently stated that bankruptcy practitioners "and anyone else that appears before a bankruptcy judge" should be reminded "that there can be serious consequences for failing to comply with the [bankruptcy] court's orders. Parties stand to lose not just their money or property, but their freedom." D. Lowenthal and K. Black, "Bankruptcy Courts Have Contempt Power," LAW 360, May 14, 2024, at 2 (describing a bankruptcy judge's monetary sanction and order of "civil confinement" for a corporation's principal in BYJU's Alpha Inc. v. Camshaft Capital Fund, 2024 WL 1455586, *3-4 (Bankr. D. Del. Apr. 3, 2024)). A few recent decisions will show the different approaches of some appellate courts on bankruptcy court sanction orders.