Harris v. Shayla Stevens & Tozzi Law, LLC (In re Harris)
Harris v. Shayla Stevens & Tozzi Law, LLC (In re Harris)
Opinion of the Court
The issue before the Court is whether the exception to the automatic stay in § 362(b)(4) for a governmental unit exercising its police and regulatory powers is broad enough to include the imposition of sanctions by a court, including incarceration, in connection with a motion to compel discovery and for contempt against a non-attorney debtor in a post judgment collection proceeding. This Court concludes it is not so broad and that such proceedings are subject to the automatic stay. Although that conclusion seemed rather obvious to this Court, there does exist some case law - including at the level of the federal courts of appeal - that makes the issue more confusing than it should be with respect to which fact situations the exception should be applied in the context of sanctions motions and orders in non-bankruptcy forums.
Debtor Shawntae Harris ("Ms. Harris") filed for Chapter 11 bankruptcy relief on August 18, 2018. She filed this Adversary Proceeding on August 22, 2018, seeking injunctive relief against the continuation of state court proceedings on a Motion to Compel Discovery and for Contempt (the "Motion") filed by Creditor Shayla Stevens ("Ms. Stevens") by and through her counsel, Tozzi Law, LLC ("Tozzi Law") [Adv. Doc. 1]. Because a hearing in the state court was scheduled for August 24, 2018 on account of Ms. Harris' failure to appear at a post-petition contempt hearing in the state court on August 20, 2018, this matter came on for an expedited hearing before this Court on August 23, 2018, at which time the Court announced on the record that it was granting a temporary restraining order ("TRO") to maintain the status quo while the Court considered the issue of whether the automatic stay applied to the state court proceeding [Adv. Doc. 6]. After a continued hearing on September 6, 2018, the Court extended the TRO until October 16, 2018 and scheduled an additional hearing on the matter for that date [Adv. Doc. 11]. The relief sought by Ms. Harris is a determination that the automatic stay applied to the contempt proceedings in the Cobb County Superior Court such that the hearing that took place on August 20th was a violation of the stay and that sanctions should be levied against Ms. Stevens and Tozzi Law for "causing the [August 20th] hearing to go forward." [Adv. Doc. 1].
THE STATE COURT PROCEEDINGS
The Motion to Compel Discovery and for Contempt was filed in the Cobb County Superior Court on April 26, 2018. It arises *753out of Ms. Stevens' attempt to collect a judgment in her favor against Ms. Harris in the amount of $6,400,000 that was rendered by the Superior Court of Cobb County on March 3, 2014, a fi. fa. for which was issued on May 20, 2014 [Civ. Case No. 11-1-6943]. On August 1, 2018, the Honorable Reuben M. Green of the Cobb County Superior Court issued an order granting the motion, ordering Ms. Harris to produce all documents related to the motion, and awarding reasonable expenses and attorney's fees. The order further stated that: "Unless [the production of documents and payment of fees and expenses] have been fully complied with [by August 10, 2018], all parties and counsel shall report...on August 13, 2018...at which time the Court will determine whether to hold Shawntae Harris in willful contempt." [emphasis added]
Prior to the August 13th hearing, Ms. Harris' former state court counsel Durante Partridge filed a Request for Clarification and a Response to Plaintiff's Request for Production of Documents asserting that Ms. Harris had substantially complied with discovery requests and seeking clarification as to the scope of some of the Ms. Stevens' document production requests. During the compliance hearing on August 13, 2018, Ms. Stevens' state court counsel, Douglas Tozzi, told Judge Green that he was amenable to giving Ms. Harris another week to produce additional documents [Adv Doc. 13, p. 21]. The transcript from the hearing reveals the following;
* * * * *
Judge Green: So I want this stuff produced. I want this resolved, whether that's paying the total judgment or y'all work something out, fine. It doesn't matter to me. But I don't want to see you all back in front of me on discovery dispute. So you either give the stuff or you go to jail until they come in and show me all the line items they want and you provide every one of those line items. [Adv Doc. 13, p. 22-23].
* * * * *
Judge Green: Anything else other than the two dates that I've said, that you need?
Mr. Tozzi: No, Your Honor, Thank you.
Judge Green: All right. So the 17th and then the 20th. [Adv. Doc. 13, p. 27].
* * * * *
Judge Green: If she is - Mr. Tozzi if you'd listen for a second. If she is in, what you believe to be, sufficient compliance, even if it's not perfect, but if it's what you're comfortable with, let the other side know and y'all don't need to come on that Monday [August 20th] [emphasis added]. If it's sufficient for you to do the deposition and then you want more discovery after that, we can address more discovery in the future. But I don't want to make everybody come if we're close to compliance, at least sufficiently close that you can do your deposition. [Adv. Doc. 13, p. 29-30].
* * * * *
On or around Thursday, August 16th Mr. Partridge informed Mr. Tozzi that he was terminated by Ms. Harris, although this is disputed by Ms. Harris.
*754[Adv. Doc. 7]. Ms. Harris filed her petition under Chapter 11 the next day on August 18, 2018 [Bkry. Doc. 1] and informed the state court and opposing counsel of that fact prior to the August 20, 2018 hearing. Neither Ms. Harris' new state court counsel, Gary Freed, her bankruptcy counsel, Shayna Steinfeld, nor the Debtor herself attended the hearing on August 20th because they thought it was stayed on account of the bankruptcy, and that Mr. Partridge would appear to advise Judge Green of the bankruptcy. Judge Green clearly thought otherwise and issued a rule nisi setting a hearing on August 24th to address Ms. Harris' contempt regarding discovery and the failure to appear. Ms. Harris filed this adversary proceeding to stay the hearing scheduled for the 24th and obtain a permanent injunction against further proceedings in the state court on August 22, 2018 [Adv. Doc. 1].
DISCUSSION
Upon the filing of a bankruptcy petition,
(b) The filing of a petition ... does not operate as a stay-
(4) under paragraph (1), (2), (3), or (6) of subsection (a) of this section, of the commencement or continuation of an action or proceeding by a governmental unit ... to enforce such governmental unit's or organization's police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit to enforce such governmental unit's or organization's police or regulatory power;11 U.S.C. § 362 (b)(4).
This exception "serve[s] to insure uninterrupted governance of those terms of state law which protect the public welfare." Matter of Bell ,
An analysis under § 362(b)(4)"requires a court to determine whether the action in question is undertaken by a governmental unit and whether it is an action enforcing that unit's police or regulatory powers." In re Chintella , No. 13-73481,
In the instant case it is clear that the state court contempt proceedings are subject to the stay under either test. Ms. Stevens was conducting discovery in order to further the ultimate goal of collecting the $6.4 million judgment in her favor against Ms. Harris. Ms. Stevens filed the Motion in order to request the state court's assistance in compelling Ms. Harris to produce documents and to sanction her with a monetary penalty to reimburse Ms. Stevens for costs for Ms. Harris' perceived reticence in complying. While it is certainly in the public interest generally for parties to be able to collect judgments, it defies rational thought to assert that a court addressing a motion to compel or for contempt brought by the party seeking to collect a monetary judgment is somehow acting to "effectuate public policy" to a greater degree than it is assisting a private litigant in exercising her right to discovery and ability to collect that judgment.
Ms. Stevens argues in her responses [Adv. Doc. 7, 13] that Judge Green was proceeding sua sponte as to the hearings on August 20th and August 24th and, therefore, the proceedings were exempt from the stay under § 362(b)(4). To support the claim that the August 20th hearing was sua sponte, Ms. Stevens attached a portion of the hearing transcript for the August 13th hearing [Adv. Doc. 13]. Rather than support the claim that the Judge was proceeding sua sponte, the transcript clearly shows that Judge Green was acting in response to the Motion of Ms. Stevens and was relying on the representations of Mr. Tozzi as to whether Ms. Harris complied in order to determine how (and if) to proceed with the August 20th hearing. [See excerpts from transcript above ]. In addition, this Court is not persuaded by Ms. Stevens' contention that Judge Green was proceeding on his own motion because the Rule Nisi was "prepared by and issued by the trial court." [Adv Doc. 13, p. 2]. Whether Judge Green chose to have one of the parties submit an order or chose to prepare the order himself is not dispositive of the question of whether the proceeding was sua sponte. The Motion was filed because Ms. Stevens sought the trial court's assistance in forcing Ms. Harris to more fully comply with the production of documents. Ms. Stevens also wanted to recover and was previously awarded the costs and expenses associated with being forced to bring the Motion in the first place. Judge Green would not have asked the parties to appear for a hearing on the 20th had Mr. Tozzi informed the court that he was satisfied with the level of compliance because Judge Green clearly states that when he tells Mr. Tozzi: "If she is in, what you believe to be , sufficient compliance, even if it's not perfect, but if it's what you're comfortable with, let the other side know and y'all don't need to come on that Monday [August 20th] [emphasis added]."
Ms. Stevens relies on the Seventh Circuit Court of Appeals case of *756Alpern v. Lieb and the line of cases cited therein for her contention that "[a] court entering a show cause order or imposing sanctions on its own volition, rather than the behest of a litigant, acts as a governmental unit in sanctioning parties." [Adv. Doc. 7]. See Alpern v. Lieb ,
Alpern v. Lieb involved a pro se litigant, Eugene Alpern, who was sanctioned under Fed.R.Civ.P. 11 for filing a frivolous lawsuit in the district court which was subsequently dismissed. Alpern v. Lieb ,
*757This Court finds the reasoning in Alpern to be troubling
Perhaps Alpern can be easily distinguished from this case based on the fact that Rule 11 specifically excludes discovery sanctions from within its scope. To the extent Alpern intended to go beyond that, including to permit a state court to incarcerate a debtor post-petition for failing to produce documents pre-petition in a post judgment collection action, this Court disagrees with it. Too many unnecessary questions arise with an expansive reading of Alpern with regard to the exception to the stay found in § 362(b)(4), an exception to the automatic stay that is otherwise supposed to be read and applied narrowly.
In addition to this Court's concern with the reasoning of Alpern , it is clear that at least one bankruptcy judge in the Seventh *758Circuit - who was bound by its precedential authority - also did not agree with the reasoning of that case and found a way to rule that the stay did apply on facts virtually identical to those in this case. See In re Benalcazar ,
This Court agrees with the reasoning in Benalcazar. The exact same thing that is going on in that case is present in the instant case: Ms. Stevens seeks to extract financial information from Ms. Harris that will be helpful in attempting to collect the judgment she has against the her. Ms. Stevens filed the Motion with the state court in order to seek the court's assistance in forcing Ms. Harris to comply. Judge Green made clear during the proceedings that he was basing the determination of whether to continue holding hearings on the matter on Mr. Tozzi's assessment of Ms. Harris' compliance. Ms. Stevens seeks a "private pecuniary goal," one which does not fall within the exception under § 362(b)(4) and is, therefore, subject to the automatic stay.
It should be noted that in United States v. Coulton ,
Facts matter in a case, and the facts in Coulton are not the facts before this Court. This Court considers Coulton distinguishable from the instant case because the debtor there was an attorney being sanctioned for gross violations of professional misconduct in the very case before the court and the judge "acted purposely to vindicate judicial authority," even after the movant withdrew the request for reimbursement. Id. None of those factors are present here.
Ms. Harris is entitled to the same breathing spell from creditor collection action that is afforded all those who file a petition under Chapter 11. The collection of the judgment in the state court proceeding is clearly stayed now and that includes any discovery in that action. Congress was well aware of the inconvenience bankruptcy imposes upon creditors when it came up with its statutory scheme, which includes the automatic stay. This statutory scheme is not a free pass for Ms. Harris though. From a practical standpoint, this statutory scheme also provides Ms. Stevens with remedies in this Court, including but not limited to filing a Motion for a Rule 2004 examination to promptly obtain the same information she sought in the state court proceeding. Ms. Harris cannot escape her obligations for full financial disclosure in this Court. If she does not provide the necessary information in response to discovery requests in this bankruptcy case, this statutory scheme also provides that she could be subject to the same type of sanctions that could have been imposed by Judge Green.
Despite this Court's finding that the contempt proceedings are subject to the stay, the Court does not find that the stay violation (the hearing on August 20th) is a sanctionable one, because it was not knowing and willful, for the following reasons: (1) given that the case was in flux after the exit of Ms. Harris' former state court attorney and Judge Green's expectation that the parties would attend the hearing, it was not unreasonable for Mr. Tozzi to attend the hearing on August 20th *760and (2) there is some case law to support an argument that the matter was not stayed, although this Court is not persuaded by it. Accordingly, it is hereby
ORDERED that the automatic stay is applicable to the state court proceedings such that the August 20th, 2018 hearing was a violation of the stay, it is further
ORDERED that the automatic stay is in place and applicable to any further state court proceedings against the Ms. Harris until terminated or modified by order of this Court or operation of law, such as by the dismissal of the case, and it is further
ORDERED that Debtor's motion for sanctions against Defendants Shayla Stevens and Tozzi Law, LLC is DENIED.
Ms. Harris contends she did not terminate Mr. Partridge, but just hired additional counsel, Gary Freed. Mr. Freed and Ms. Harris contend that they both thought Mr. Partridge would attend the August 20th hearing. They also contend he never provided them with a copy of the Rule Nisi.
The Court of Appeals notes that Alpern had filed a Chapter 7 case, yet the Court of Appeals said that no trustee had been appointed. That is not possible. The Court of Appeals also says the "[t]he concern behind the automatic stay is that until the appointment of a trustee, the debtor may lack an adequate incentive to defend suits against him; and once a trustee is appointed, he should be allowed to concentrate on marshalling the debtor's assets and preparing a plan of liquidation without distraction of defending against a flurry of last-minute sits by disappointed creditors."Id at 690 [citations to other Seventh Circuit cases omitted]. As previously noted, however, the primary purpose of the automatic stay is to provide the debtor with a "breathing spell" from collection activity. S. REP. 95-989, 54, 1978 U.S.C.C.A.N. 5787, 5840.
The term "governmental unit" means United States; State; Commonwealth; District; Territory; municipality; foreign state; department, agency, or instrumentality of the United States (but not a United States trustee while serving as a trustee in a case under this title), a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state; or other foreign or domestic government.
Because the judge in Benalcazar could not simply disagree with Alpern , being bound by precedent, he concluded that Alpern may no longer be valid on account of the subsequent Supreme Court decision in Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A. , wherein the Supreme Court held that when the Bankruptcy Code's text is clear the "sole function of the court...is to enforce it according to its terms" because Congress is presumed to say what it means in a statute.
The Eleventh Circuit made it a point to state in its opinion that Roy was disbarred and in prison by the time this appeal reached it.
This Court views Coulton as being limited to the egregious facts in that case perpetrated by an unethical and dishonest attorney who essentially stole from his client and his client's relatives. To the extent the panel in Coulton intended for its reasoning to go beyond those facts to hold that every sanction or contempt motion against a non-attorney debtor is exempt from the automatic stay, it chose for its decision to not be binding by not publishing it, and in such event this Court would exercise its discretion to respectfully disagree and would not apply it to the facts of the case before this Court.
Reference
- Full Case Name
- IN RE: Shawntae HARRIS, Debtor. Shawntae Harris v. Shayla Stevens and Tozzi Law, LLC
- Cited By
- 2 cases
- Status
- Published