Another Appellate Court Vacates A Bankruptcy Court Contempt Judgment

The Southern District of New York vacated a bankruptcy court's judgment holding a debtor's business competitor (C) "in contempt for violation of the [Bankruptcy Code's] automatic stay … and assessing sanctions" of $19.2 million. In re Windstream Holdings, Inc., 2022 WL 5245633, *1 (2) (S.D.N.Y. Oct 6, 2022). The bankruptcy court had erroneously sanctioned C for a "literally false and intentionally misleading advertising campaign" to lure subscribers away from the debtor, mistakenly reasoning that C's advertisements violated the automatic stay by suggesting the debtor was going out of business. Id. According to the district court, though, C's "advertisements did not violate the … stay, and, in any case, there was a fair ground of doubt whether they did so." Id. at *3.

Relevance

Appellate courts have not been afraid to overturn bankruptcy court sanctions. In re Gravel, 6 F. 4th 503, 508, 512-13 (2d Cir. 2021) (2-1) (bankruptcy court's punitive sanctions order vacated and reversed; "… a contempt order is warranted only where the party has notice of the order, the order is clear and unambiguous, and the proof of noncompliance is clear and convincing"; "… a bankruptcy court cannot hold a party in contempt for violating an order that is subject to varying interpretations.") cert denied. __ U.S. __ (June 13, 2022); Beckhart v. Newrez LLC, 31 F.4th 274, 275, 278 (4th Cir. 2022) ("neither the bankruptcy court nor the district court applied" the current standard for holding "a creditor in civil contempt" for violating a "confusing" Chapter 11 confirmation order; "any sanction that may ultimately be imposed must be supported – both in type and in amount — by a sufficient evidentiary record."); In re DeGennaro, III, 2020 WL 7231945,*9 (S.D.N.Y. Dec. 8, 2020) (bankruptcy court sanctions vacated because of an abuse of discretion; order not "clear and unambiguous"; no "clear and convincing evidence of non-compliance" with order "whose terms cannot now be created"; no willful compliance with unclear order; no advance warning of possible contempt sanction; sanctions imposed … too "quickly and without sufficient explanation."). Bankruptcy courts may still sanction parties, but their "contempt power… is narrowly circumscribed." Gravel, 6 F. 4th at 511, quoting Perez v. Danbury Hosp., 347 F.3d 419, 423 (2d Cir. 2003).

The Facts

The debtor and C "compete[d] … in providing residential and commercial voice and data communication services …." Windstream, 2022 WL 5245633, at *1. After the debtor sought Chapter 11 relief in March, 2019, C "launched a direct-mail campaign directed at [the debtor's] customers," noting the bankruptcy, "uncertainty," and offering to "buy-out" the debtor's customers from their contracts with the debtor. According to the bankruptcy court when granting the debtor's motion for summary judgment, C "was liable for violating the automatic stay through its advertising campaign, … an act to control property of the estate, namely, the debtor's customers or contracts with those customers." Id. at *2, relying on Bankruptcy Code (Code) §362(a)(3) (staying acts to "obtain" or "exercise control" over estate property). The bankruptcy court later held a trial on contempt and sanctions; held C "in contempt"; and "sanctioned [C] $19,179,329.45 for [the debtor's] losses …." Id. at *3.