The Bankruptcy Hotline

Serious Punitive Sanctions Not Permitted by Code

The Ninth Circuit has ruled that Section 105(a) of the Bankruptcy Code does not authorize a bankruptcy court to award 'serious' punitive sanctions for a violation of the automatic stay. Knupfer v. Lindblade (In re Dyer), No. 01-56319 (March 13).

The bankruptcy court awarded a trustee $151,439 as either sanctions, attorneys' fees, or punitive damages in addition to $50,000 in punitive damages for a violation of the automatic stay by a creditor. The Ninth Circuit found that punitive damages are not a sanction available to bankruptcy courts. The $50,000 sanction amounted to a criminal contempt sanction because its purpose was not compensatory or to coerce compliance as set forth in Section 105(a), which also does not contain an 'explicit grant of authority to award punitive damages.' In remanding the matter, the court stated that the sanctions of compensatory damages, attorneys' fees and securing a creditor's compliance adequately meet the goal of enforcing the Code. Further, while 'relatively mild' non-compensatory fines may be warranted under certain circumstances, Section 105(a) does not provide for the type of 'serious punitive penalties' assessed here.

Sublessor Not Entitled to Administrative Priority

The Ninth Circuit ruled that a creditor that is a sublessor of the debtor's commercial property is not entitled to administrative priority for its breach of contract claim because '365(d)(3) does not apply to debtors who are lessors. In addition, the court held that priority could not be conferred under Section 503(b)(1)(A) because the creditor's administrative claim did not arise from a post-petition transaction and did not confer any benefit on the estate of the debtor. Einstein/Noah Bagel Corp. v. Smith (In re BCE West LP), No. 01-16724 (Feb. 14).

Knupfer v. Lindblade (In re Dyer)

The bankruptcy court awarded a trustee $151,439 as either sanctions, attorneys' fees, or punitive damages in addition to $50,000 in punitive damages for a violation of the automatic stay by a creditor. The Ninth Circuit found that punitive damages are not a sanction available to bankruptcy courts. The $50,000 sanction amounted to a criminal contempt sanction because its purpose was not compensatory or to coerce compliance as set forth in Section 105(a), which also does not contain an 'explicit grant of authority to award punitive damages.' In remanding the matter, the court stated that the sanctions of compensatory damages, attorneys' fees and securing a creditor's compliance adequately meet the goal of enforcing the Code. Further, while 'relatively mild' non-compensatory fines may be warranted under certain circumstances, Section 105(a) does not provide for the type of 'serious punitive penalties' assessed here.The Ninth Circuit ruled that a creditor that is a sublessor of the debtor's commercial property is not entitled to administrative priority for its breach of contract claim because '365(d)(3) does not apply to debtors who are lessors. In addition, the court held that priority could not be conferred under Section 503(b)(1)(A) because the creditor's administrative claim did not arise from a post-petition transaction and did not confer any benefit on the estate of the debtor. Einstein/Noah Bagel Corp. v. Smith (In re BCE West LP), No. 01-16724 (Feb. 14).

Sale of Debtor's Assets Kills Sex Discrimination Settlement

The Third Circuit has ruled that travel vouchers that were awarded to over 2000 flight attendants of Trans World Airlines as part of a class action settlement of a sex discrimination case were properly 'extinguished' when TWA's assets were sold in bankruptcy court to American Airlines. United States v. Knox-Schillinger (In re Trans World Airlines Inc.), No. 01-1788 (March 13).

The court stated that while it recognized the plaintiffs' claims were 'based on Congressional enactments addressing employment discrimination and are, therefore, not to be extinguished absent a compelling justification. At the same time, in the context of a bankruptcy, these claims are, by their nature, general unsecured claims and, as such, are accorded low priority.' The court further opined that it would be inconsistent with the Bankruptcy Code's priority scheme to allow the plaintiffs to assert successor liability claims against American Airlines while limiting other creditors' recourse to the proceeds of the asset sale. Because the claims against TWA were 'connected to or arise from the assets sold, the court found that the bankruptcy court properly approved the sale 'free and clear' of successor liability.

Serious Punitive Sanctions Not Permitted by Code

The Ninth Circuit has ruled that Section 105(a) of the Bankruptcy Code does not authorize a bankruptcy court to award 'serious' punitive sanctions for a violation of the automatic stay. Knupfer v. Lindblade (In re Dyer), No. 01-56319 (March 13).

The bankruptcy court awarded a trustee $151,439 as either sanctions, attorneys' fees, or punitive damages in addition to $50,000 in punitive damages for a violation of the automatic stay by a creditor. The Ninth Circuit found that punitive damages are not a sanction available to bankruptcy courts. The $50,000 sanction amounted to a criminal contempt sanction because its purpose was not compensatory or to coerce compliance as set forth in Section 105(a), which also does not contain an 'explicit grant of authority to award punitive damages.' In remanding the matter, the court stated that the sanctions of compensatory damages, attorneys' fees and securing a creditor's compliance adequately meet the goal of enforcing the Code. Further, while 'relatively mild' non-compensatory fines may be warranted under certain circumstances, Section 105(a) does not provide for the type of 'serious punitive penalties' assessed here.

Sublessor Not Entitled to Administrative Priority

The Ninth Circuit ruled that a creditor that is a sublessor of the debtor's commercial property is not entitled to administrative priority for its breach of contract claim because '365(d)(3) does not apply to debtors who are lessors. In addition, the court held that priority could not be conferred under Section 503(b)(1)(A) because the creditor's administrative claim did not arise from a post-petition transaction and did not confer any benefit on the estate of the debtor. Einstein/Noah Bagel Corp. v. Smith (In re BCE West LP), No. 01-16724 (Feb. 14).

Knupfer v. Lindblade (In re Dyer)

The bankruptcy court awarded a trustee $151,439 as either sanctions, attorneys' fees, or punitive damages in addition to $50,000 in punitive damages for a violation of the automatic stay by a creditor. The Ninth Circuit found that punitive damages are not a sanction available to bankruptcy courts. The $50,000 sanction amounted to a criminal contempt sanction because its purpose was not compensatory or to coerce compliance as set forth in Section 105(a), which also does not contain an 'explicit grant of authority to award punitive damages.' In remanding the matter, the court stated that the sanctions of compensatory damages, attorneys' fees and securing a creditor's compliance adequately meet the goal of enforcing the Code. Further, while 'relatively mild' non-compensatory fines may be warranted under certain circumstances, Section 105(a) does not provide for the type of 'serious punitive penalties' assessed here.The Ninth Circuit ruled that a creditor that is a sublessor of the debtor's commercial property is not entitled to administrative priority for its breach of contract claim because '365(d)(3) does not apply to debtors who are lessors. In addition, the court held that priority could not be conferred under Section 503(b)(1)(A) because the creditor's administrative claim did not arise from a post-petition transaction and did not confer any benefit on the estate of the debtor. Einstein/Noah Bagel Corp. v. Smith (In re BCE West LP), No. 01-16724 (Feb. 14).