Harris v. Shayla Stevens & Tozzi Law, LLC (In re Harris)

Citation: 592 B.R. 750Docket: Case No. 18-21635-JRS; Adversary Proceeding Case No. 18-02043-JRS

Court: United States Bankruptcy Court, N.D. Georgia; October 16, 2018; Us Bankruptcy; United States Bankruptcy Court

SummaryOriginalCytator Case TreatmentAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

The U.S. Bankruptcy Court, led by Judge James R. Sacca, addressed whether the exception to the automatic stay under 11 U.S.C. § 362(b)(4) for governmental units exercising police and regulatory powers encompasses court-imposed sanctions, including incarceration, against a non-attorney debtor in a post-judgment collection matter. The Court determined that this exception does not extend to such sanctions and that these proceedings are thus subject to the automatic stay.

Debtor Shawntae Harris filed for Chapter 11 bankruptcy on August 18, 2018, and initiated an adversary proceeding on August 22, 2018, seeking to halt state court actions related to a Motion to Compel Discovery and for Contempt filed by Creditor Shayla Stevens. A state court hearing was set for August 24, 2018, due to Ms. Harris' non-appearance at a prior contempt hearing. An expedited hearing in bankruptcy court on August 23 led to a temporary restraining order (TRO) to preserve the status quo while the Court evaluated the applicability of the automatic stay to the state court proceedings. The TRO was extended during a follow-up hearing on September 6, 2018, with further proceedings scheduled for October 16, 2018.

Ms. Harris seeks a ruling that the automatic stay applies to the contempt proceedings in Cobb County Superior Court, asserting that the contempt hearing on August 20 violated the stay and requesting sanctions against Ms. Stevens and Tozzi Law for proceeding with the hearing.

The state court's Motion to Compel Discovery and for Contempt, filed on April 26, 2018, stems from Ms. Stevens' efforts to collect a $6,400,000 judgment against Ms. Harris. A state court order on August 1, 2018, required Ms. Harris to produce documents and awarded fees, with a warning of potential contempt if compliance was not met by August 10, 2018. Prior to the August 13 compliance hearing, Ms. Harris' former attorney sought clarification on discovery requests, and during the hearing, the state court indicated a willingness to grant additional time for compliance, emphasizing the urgency of document production or the possibility of jail for non-compliance.

Judge Green confirmed two key dates: August 17th and August 20th, for compliance regarding Ms. Harris. If Mr. Tozzi finds Ms. Harris sufficiently compliant, they may avoid the August 20th hearing. Mr. Partridge informed Mr. Tozzi of his termination by Ms. Harris on August 16th, a fact disputed by her. On August 17th, Mr. Tozzi expressed uncertainty about compliance in an email to the court. Ms. Harris filed for Chapter 11 bankruptcy on August 18, 2018, and notified the relevant parties beforehand. Neither Ms. Harris nor her legal representatives attended the August 20th hearing, believing it was stayed due to the bankruptcy filing; however, Judge Green proceeded and issued a rule nisi for a hearing on August 24th regarding Ms. Harris' contempt for discovery noncompliance and her absence.

Ms. Harris subsequently initiated an adversary proceeding on August 22, 2018, to stay the August 24th hearing and seek an injunction against further state court actions. The automatic stay under 11 U.S.C. § 362 protects the debtor from actions against them following a bankruptcy filing, although there are exceptions. One such exception, outlined in § 362(b)(4), permits governmental units to continue actions enforcing their police or regulatory powers, aimed at public welfare, despite the stay. Courts typically assess whether an action is a governmental enforcement of public interest under two tests: the pecuniary purpose test and the public purpose test. The former determines if the primary aim is the debtor's property interests, while the latter assesses if the action serves public policy or adjudicates private rights.

Courts should consider lawsuits that mainly adjudicate private rights, even if they incidentally serve public interests, as falling outside the police power exception, especially when a successful outcome would financially benefit specific private parties at the expense of other creditors, contrary to the Bankruptcy Code's priorities. In this case, the state court contempt proceedings are subject to the stay, as Ms. Stevens was pursuing discovery to enforce a $6.4 million judgment against Ms. Harris. Ms. Stevens sought the state court's help to compel document production and impose monetary sanctions on Ms. Harris for non-compliance. Although collecting judgments serves public interest, facilitating the collection effort primarily assists a private party rather than advancing public policy.

Ms. Stevens claimed that Judge Green’s hearings on August 20th and 24th were sua sponte and therefore exempt from the stay under 362(b)(4). However, the transcript of the August 13th hearing indicates that Judge Green was responding to Ms. Stevens' Motion and relied on Mr. Tozzi’s representations regarding Ms. Harris’ compliance. The court found Ms. Stevens' argument unconvincing regarding Judge Green's sua sponte action, noting that the preparation of the Rule Nisi by the trial court did not determine whether the proceeding was initiated independently. The Motion was intended to compel Ms. Harris' compliance with document production and recover previously awarded costs. Judge Green's inquiry into Mr. Tozzi's satisfaction with Ms. Harris’ compliance indicates that the hearings were not conducted without a litigant's request. Ms. Stevens referenced the Seventh Circuit's Alpern v. Lieb, asserting that sanctions imposed by a court on its own initiative reflect governmental action, supported by the California case Papadakis v. Zelis, which held that sanctions for frivolous litigation tactics cannot be obstructed by federal bankruptcy laws.

Attorneys are licensed by the state, and courts aim to punish professional misconduct to deter future violations. Courts possess inherent authority to regulate attorney conduct as officers of the court. Sanctions against attorneys or pro se litigants for frivolous lawsuits or appeals under Rule 11 may fall within the exception to the automatic stay imposed by Section 362(b)(4). However, in this case, Ms. Harris is neither an attorney nor a pro se litigant, and the contempt issue stems from a motion to compel discovery, not a frivolous lawsuit or appeal.

The case of Alpern v. Lieb involved a pro se litigant sanctioned under Rule 11 for a frivolous lawsuit, and upon filing for bankruptcy, he sought to stay proceedings. The Seventh Circuit treated the dismissal and sanctions appeals separately, ruling the dismissal appeal was not stayed as it was brought by the debtor. It held that proceedings to impose Rule 11 sanctions are exempt from stay, emphasizing that Rule 11 was designed to address unprofessional conduct rather than reduce litigation costs for the prevailing party.

The court finds Alpern's reasoning troubling, suggesting it could broaden the scope of the 362(b)(4) exception beyond its intended narrow application. The idea that a private litigant bringing a Rule 11 motion acts as a "private attorney general" seems an overreach, given the narrow interpretation required for that subsection. While it is acknowledged that courts must regulate litigants’ conduct irrespective of the stay, the court questions the necessity of pursuing contempt motions related to discovery disputes when the underlying action is stayed. Allowing state courts to incarcerate debtors for failing to produce documents in post-judgment collection actions could serve no governmental regulatory purpose, especially when such information cannot be immediately used to collect the judgment due to the automatic stay. Ultimately, the court distinguishes this case from Alpern, noting that Rule 11 explicitly excludes discovery sanctions, and disagrees with any implication that would allow for post-petition incarceration for pre-petition document production failures.

An expansive interpretation of Alpern raises unnecessary complications regarding the exception to the automatic stay under 11 U.S.C. § 362(b)(4), which is intended to be applied narrowly. A bankruptcy judge in the Seventh Circuit, bound by Alpern’s precedent, disagreed with its reasoning in the case of Benalcazar. In Benalcazar, a commercial landlord attempted to enforce a judgment against a debtor after a judgment for breach of lease was obtained prior to the debtor's bankruptcy. The landlord's efforts to collect included motions for document production and sanctions, which the state court ruled were not stayed after the bankruptcy filing. However, the bankruptcy court determined that these contempt proceedings did not qualify for the exception under § 362(b)(4) because they were initiated by the landlord, a private entity, rather than a governmental unit, and were aimed at furthering a private financial interest rather than enforcing regulatory authority.

The current case mirrors Benalcazar, with Ms. Stevens pursuing financial information from Ms. Harris to assist in collecting her judgment. Stevens filed a motion in state court to compel Harris's compliance. The court emphasized that Stevens's actions serve a private pecuniary goal, thereby falling outside the § 362(b)(4) exception and remaining subject to the automatic stay. Additionally, a reference to United States v. Coulton notes that the Eleventh Circuit cited Alpern in a non-binding opinion affirming that contempt proceedings could continue against an attorney who violated a disgorgement order, although the specifics of that case do not alter the conclusion drawn from Benalcazar regarding the current issue.

Coulton is deemed distinguishable from the current case due to the specific circumstances of the debtor, an attorney facing sanctions for professional misconduct related to the case at hand, which are not present here. Ms. Harris is entitled to a temporary reprieve from creditor collection actions, as granted to all Chapter 11 petitioners, which includes a stay on the collection of judgments from state court proceedings and any related discovery. While the automatic stay reflects Congress’s intent to mitigate creditor inconveniences during bankruptcy, it does not exempt Ms. Harris from her obligation for full financial disclosure. Failure to comply with discovery requests may result in sanctions similar to those that could have been imposed by Judge Green.

The Court finds that the August 20th hearing was a violation of the automatic stay but did not constitute a sanctionable offense as it was not conducted knowingly and willfully. Factors justifying this conclusion include the transitional nature of Ms. Harris's legal representation and differing interpretations of the stay’s applicability. The automatic stay remains in effect for all state court proceedings against Ms. Harris until modified or terminated by the Court or by law. Ms. Harris's motion for sanctions against Defendants Shayla Stevens and Tozzi Law, LLC is denied. Furthermore, the Court of Appeals referenced the implications of a Chapter 7 case, noting the importance of the automatic stay in providing the debtor with a "breathing spell" from collection efforts. Definitions of "governmental unit" are also included, clarifying the entities that fall under this designation.

The judge in Benalcazar found himself unable to simply reject the precedent set by Alpern due to its binding nature, especially after the Supreme Court's decision in Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A. This ruling emphasized that courts must enforce clear statutory language as intended by Congress. The Eleventh Circuit highlighted that Roy was disbarred and imprisoned by the time the appeal was considered. The court views the case of Coulton as limited to its specific egregious facts involving an unethical attorney who stole from clients. If the panel in Coulton intended to extend its reasoning to exempt all sanctions or contempt motions against non-attorney debtors from the automatic stay, their decision was non-binding due to its unpublished status. Consequently, this Court opts to respectfully disagree and will not apply Coulton's reasoning to the current case.