Los Alamos National Bank v. Potter et al

1
UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: 	JEFFERY W. POTTER, 	No. 7-05-14071 MS
Debtor.
____________________________________________________________________________
LOS ALAMOS NATIONAL BANK,
Plaintiff,
v. 	No. 05-1149 M
JEFFERY W. POTTER; LEGAL DEFENSE AND
MAINTENANCE TRUST OF CALIFORNIA DATED
8/25/03; MARIANA DANILOVIC, Trustee; MARTIN
S. FRIEDLANDER; KITTY MILLER; FRENCH & FRENCH
FINE PROPERTIES, INC.; and SUMMIT INVESTMENT
COMPANY, LLC,
Defendants.
ORDER GRANTING, IN PART, and DENYING, IN PART, LOS ALAMOS NATIONAL
BANK’S MOTION FOR CIVIL CONTEMPT AND SANCTIONS AGAINST
MARTIN S. FRIEDLANDER
THIS MATTER is before the Court on Los Alamos National Bank’s Motion for Civil
Contempt and Sanctions Against Martin S. Friedlander (Docket # 63), as supplemented by Los
Alamos National Bank’s Supplement to Motion for Civil Contempt and Sanctions Against
Martin S. Friedlander (Docket #126) (together “Motion for Contempt and for Sanctions”). 	The
Motion for Contempt and for Sanctions requests the Court to impose of sanctions against Martin
S. Friedlander pursuant to the Court’s equitable powers under 11 U.S.C. § 105(a), based on Mr.
Friedlander’s filing of a lawsuit against Los Alamos National Bank (“LANB”) in the United
States District Court for the District of California, as cause No. CV-06-6870 DDP/(RCX)
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1The California Action was subsequently transferred by the United States District Court
for the District of California to the United States District Court for the District of New Mexico.
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(“California Action”).1 Alternatively, LANB asserts that the filing of the California Action and
continued prosecution of the California Action in New Mexico following the transfer of the
California Action to the United States District Court for the District of New Mexico constitutes a
willful violation of the automatic stay under 11 U.S.C. § 362(a)(3). 	LANB seeks sanctions
against Martin Friedlander for the amount of the attorneys fees LANB incurred in defending the
California Action.
The Court held a final hearing on the Motion for Contempt and for Sanctions on August
3, 2007 and took the matter under advisement. Upon review of the Motion for Contempt and for
Sanctions in light of the evidence and testimony presented at the final hearing and the relevant
Rules, Bankruptcy Code sections, and case law, the Court finds that the Motion for Contempt
and for Sanctions must be denied to the extent it seeks an imposition of monetary sanctions for
contempt in violation of a specific court order, but granted, in part, based on a willful violation
of the automatic stay.
DISCUSSION
As a preliminary matter, the Court finds that to the extent the Motion for Contempt and
for Sanctions constitutes a request for sanctions under Rule 11, Fed.R.Civ.P., the Motion for
Contempt and for Sanctions must be denied. 	Rule 11, Fed.R.Civ.P., made applicable to
bankruptcy proceedings by Rule 9011, Fed.R.Bankr.P., provides for the imposition of an
appropriate sanction, if, after notice and a reasonable opportunity to respond, the court
determines that the party violated the rule by presenting to the court any written motion or other
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2The Court subsequently granted LANB’s motion to reconsider the Order and set aside
that portion of the Order indicating that the Court would abstain from hearing this adversary
proceeding. See Order Granting Plaintiff’s Motion for Reconsideration (Docket # 28).
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paper for an improper purpose. Rule 11(b) and (c), Fed.R.Civ.P. 	A party seeking to initiate a
motion for sanctions under Rule 11, Fed.R.Civ.P. may not file the motion with the court until
after serving the motion on the opposing party and giving that party twenty-one days within
which to withdraw or correct the challenged paper. Rule 11(c)(1)(A), Fed.R.Civ.P. 	No notice
of the Motion for Contempt and for Sanctions was given in accordance with Rule 11(c)(1)(A),
Fed.R.Civ.P. 	Furthermore, such a motion would have been more properly brought in the
California Action. Consequently, sanctions cannot be imposed under Rule 11, Fed.R.Civ.P.
Civil Contempt Based on Violation of Court Order.
LANB alleges that, by filing the California Action, Mr. Friedlander violated a specific
court order. 	“To be held in contempt, ‘a court must find the party violated a specific and
definite court order and the party had notice of the order.’” In re Lucre Management Group,
LLC, 365 F.3d 874, 875 (10 th Cir. 2004) (quoting In re Nielsen, 53 F.3d 342 (Table), 1995 WL
247461, at *1 (10 th Cir. April 27, 1995)). 	The order LANB contends Mr. Friedlander violated is
this Court’s Order Denying Motion to Dismiss and/or to Transfer Venue and Abstaining from
Adjudication of Adversary Proceeding2 (“Order”) (Docket # 22).
That Order found that venue was proper pursuant to 28 U.S.C. § 1409(a) and that the
Court had personal jurisdiction over Defendant Martin Friedlander. Id. The decretal paragraph
ordered that the motion to dismiss or transfer venue was denied. Id. 	LANB asserts that because
the Order found that venue was proper in this Court, Mr. Friedlander’s initiation of the
California Action when he knew of this Court’s determination of proper venue was in contempt
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of the Order. 	This Court disagrees.
Nothing in the Order directs or prohibits either party to this adversary proceeding to take
or refrain from taking any specific action. 	Unlike the order in Lucre Management, which
specifically ordered that collected funds were to be used solely to pay certain expenses, the
Order contains no specific directive. See, Lucre Management, 365 F.3d at 875 (affirming finding
of contempt where debtor used funds to pay administrative costs in violation of order “requiring
that ‘whatever funds are collected from the properties are to be used solely to pay expenses of
the properties . . . ’”). 	The Court, therefore, concludes that sanctions cannot be imposed under
the Court’s general civil contempt powers based on a violation of a prior, specific and definite
court order.
Civil Contempt based on Violation of Automatic Stay.
LANB argues, alternatively, that the filing of the California Action constitutes a willful
violation of the automatic stay. 	Pursuant to 11 U.S.C. § 362(h),
An individual injured by any willful violation of a stay provided by this section shall
recover actual damages, including costs and attorneys’ fees, and, in appropriate
circumstances, may recover punitive damages.
11 U.S.C. § 362(h).
Section 362(h) applies to “individuals.” Id. 	LANB is not an “individual” and, therefore, does
not fall within the protections afforded under 11 U.S.C. § 362(h). See McRoberts v. S.I.V.I. (In re
Bequette), 184 B.R. 327, 335 (Bankr.S.D.Ill. 1995) (“under the plain meaning of the statute, the
damages remedy of § 362(h) is limited to natural persons and is not available to corporate
plaintiffs”); Barnett Bank of Southeast Georgia, N.A. v. Trust Company Bank of Southeast
Georgia, N.A. (In re Ring), 178 B.R. 570, 576 (Bankr.S.D.Ga. 1995) (“The term “individual,”
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3But cf. Paradise Towing, Inc. v. The C.I.T. Group/Sales Financing, Inc., ___ B.R. ___,
2005 WL5405829, *3 (W.D.Tex. 2005) (holding that § 362(h) provided a remedy for corporate
creditors injured by a willful violation of the automatic stay); In re Bennett, 317 B.R. 313, 318
(Bankr.D.Md. 2004) (secured creditor had standing to pursue action for willful violation of the
automatic stay under § 362(h)); In re Homer Nat’l Bank v. Namie, 96 B.R. 652, 655 (W.D.La.
1989) (finding that corporate creditor had standing under § 362(h)).
4LANB is a secured creditor in the Debtor’s bankruptcy proceeding. See Debtor’s
Schedule D; Case No. 7-05-14071 MS; Docket # 18.
5See also, Maritime Asbestosis Legal Clinic v. LTV Steel Co., Inc. (In re Chateaugay
Corp.), 920 F.2d 183, 186-87 (2nd Cir.1990) (finding that corporate debtor injured by violation of
the automatic stay may recover damages by invoking the court’s civil contempt power); A & J
Auto Sales, Inc. v. United States (A & J Auto Sales, Inc.), 210 B.R. 667, 670-71 (Bankr.D.N.H.
1997), aff’d, 223 B.R. 839 (D.N.H. 1998) (noting that “[t]hree circuit courts of appeals have
acknowledged that corporate debtors may recover damages for stay violations through the civil
contempt power of section 105.”) (citing Jove Eng’g Inc. v. Internal Revenue Serv., 92 F.3d
1539, 1553-54 (11th Cir. 1996), In re Goodman, 991 F.2d 613, 620 (9th Cir. 1993) and
Chateaugay, 920 F.2d at 186-87).
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however, is limited to natural persons and does not include corporate entities”)(citation
omitted). 3 See also, Versar Architects & Engineers, Inc. v. Chem-Nuclear Geotech, Inc. (In re
Versar Architects & Engineers, Inc.), 138 B.R. 620 (Bankr.D.Colo. 1992) (holding that § 362(h)
does not apply to corporate debtors).
While there is no Tenth Circuit case on point, other courts have allowed corporate
creditors injured by a willful violation of the automatic stay to recover compensatory damages
pursuant to the court’s discretionary civil contempt powers under 11 U.S.C. § 105(a).4 See, e.g.,
Ring, 178 B.R. at 577 (concluding that “while Plaintiff is without standing to recover damages
from Defendant under section 362(h), it does have standing to initiate a civil contempt
proceeding and seek compensation for its damages.”); Bequette, 184 B.R. at 335 (court would
consider whether to award damages for violation of the automatic stay to creditor-bank under §
105(a)).5 This is because the purpose of the automatic stay is to protect both debtors and
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6As explained by the bankruptcy court in Ring,
The automatic stay also provides creditor protection. Without it, certain creditors
would be able to pursue their own remedies against debtor’s property. Those who
acted first would obtain payment of their claim in preference to and to the
detriment of other creditors. Bankruptcy is designed to provide an orderly
liquidation procedure under which all creditors are treated equally.
Ring, 178 B.R. at 576 (quoting H.R.Rep. No. 95-595, 95th Cong., 2nd Sess. 340 (1978),
U.S. Code Cong. & Ad.News 1978, pp. 5787, 6297).
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creditors. 	See Homer Nat’l Bank v. Namie, 96 B.R. 652, 655 (W.D.La. 1989) (“The purpose of
the automatic stay is to protect creditors in a manner consistent with the bankruptcy goal of equal
treatment.”).6
The bankruptcy court has the power pursuant to 11 U.S.C. § 105(a) to “issue any order,
process, or judgment that is necessary or appropriate to carry out the provisions of this title.” 11
U.S.C. § 105(a). Under 11 U.S.C. § 362, the filing of a bankruptcy proceeding operates
automatically to stay, among other things, “any act to obtain possession of property of the estate
or of property from the estate or to exercise control over property of the estate.” 11 U.S.C. §
362(a)(3). 	Thus, the Court may use its general civil contempt powers under 11 U.S.C. § 105(a)
insofar as the Court is enforcing the provisions of 11 U.S.C. § 362. See Mountain America
Credit Union v. Skinner (In re Skinner), 917 F.2d 444, 447 (10 th Cir. 1990) (concluding that
Congress has granted Bankruptcy Courts civil contempt power pursuant to § 105(a), and
affirming court’s use of § 105(a) to compensate a debtor for injuries suffered as a result of a
creditor’s violation of the automatic stay). But see, In re Hunter, 190 B.R. 118, 119 n.11
(Bankr.D.Colo. 1995) (noting that Skinner did not determine whether contempt was the proper
remedy for violation of § 362, and declining to use civil contempt to punish an alleged stay
violation).
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When 11 U.S.C. § 105(a) is used as the source for issuing civil contempt sanctions based
on a violation of the automatic stay, the complainant must show that the offending party had
actual knowledge of the automatic stay. See A & J Auto Sales, 210 B.R. at 671 (finding that
because a damages award under § 105(a) requires a showing that a definite and specific order of
the court has been violated, unlike a motion under § 362(h), the debtor was required to show that
the party had actual knowledge of the stay). 	Moreover, unlike 11 U.S.C. § 362(h), damages for
civil contempt under 11 U.S.C. § 105(a) are discretionary, not mandatory. Id. (citations
omitted).
In this case, it is clear that Mr. Friedlander had actual knowledge of the automatic stay
when he initiated the California Action. 	He has actively participated in the Debtor’s bankruptcy
case and related adversary proceedings. He has asserted that the automatic stay protected the
beneficial interest of the Debtor in the funds that are the subject of this adversary proceeding.
See Exhibit 6. 	The California Action violated the automatic stay inasmuch as it represents a
continued effort on the part of Mr. Friedlander to obtain certain funds that are the subject of this
adversary proceeding, and in which this Court as already determined the bankruptcy estate holds
a beneficial interest. See Order on Motion for Determination of Whether Proceeding is Core or
Non-Core, p.4 (Docket # 78).
The Court rejects Mr. Friedlander’s disingenuous argument that the California Action,
which includes a count based on the tort of conversion, is separate and distinguishable from the
central disputes raised in this adversary proceeding. Indeed, the first element to be proved in a
claim for conversion is “wrongful possession, or of the exercise of a dominion over it in
exclusion or defiance of the owner’s right, or of an unauthorized and injurious use or of a
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wrongful detention after demand.” Mine Supply, Inc. v. Elayer Co., 75 N.M. 772, 773-774, 411
P.2d 345, 355 (N.M. 1966) (internal quotation marks omitted). The purpose of this adversary is
to determine the priority of competing liens against and consequent interests in the funds in
escrow so that the funds can be disbursed accordingly. 	The United States District Court for the
District of New Mexico dismissed the California Action upon its transfer to New Mexico
because it determined that such action raised the same matters now pending before this Court in
this adversary proceeding. See Memorandum Opinion and Order Dismissing Complaint; Case
No. CIV 06-399 WPJ/LCS (Docket # 46) pp. 13 and 16 (finding that Friedlander failed to state a
claim for conversion, and concluding that “Friedlander’s suit should be dismissed in its entirety
because he has already brought his fraud and prima facie tort claims in Bankruptcy Court where
they may be resolved.”). Clearly, the filing of the California Action was an attempt by Mr.
Friedlander to circumvent the bankruptcy process. 	Such action is precisely the type of action
the automatic stay was designed to prevent. 	The Court, therefore, finds that the filing of the
California Action constituted a violation of the automatic stay for which sanctions for civil
contempt under 11 U.S.C. § 105(a) may issue.
Civil contempt must be remedial in nature, and imposed for the benefit of the
complainant. Lucre, 365 F.3d at 876 (quoting International Union, United Mine Workers of
America v. Bagwell, 512 U.S. 821, 827-28, 114 S.Ct. 2552, 129 L.Ed.2d 642 (1994)). See also,
In re Armstrong, 304 B.R. 432, 437 (10th Cir. BAP 2004) (“Fines imposed for civil contempt are
meant to coerce a defendant into compliance with a court order or compensate the complainant
for actual losses.”)(citation omitted). LANB incurred attorneys’ fees as a result of the filing of
the California Action. However, LANB did not file this Motion for Contempt and for Sanctions
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until several months after the California Action was filed, and after the California Action had
been transferred to the United States District Court for the District of New Mexico. LANB has
made no showing that the automatic stay in effect as a result of the Debtor’s bankruptcy
proceeding was raised in the California Action. Thus, while the Court does not question that
LANB incurred fees in defending the California Action in the amounts reported on Exhibit 14,
the Court does not find it appropriate to award the total amount of the fees requested by LANB.
Nevertheless, even if LANB had immediately raised the automatic stay in the California Action
as an impediment to the continuation of that proceeding, it would have had to incur attorneys’
fees, which, at a minimum would have been $1000.00. 	Therefore, to compensate LANB for its
injury caused by Mr. Friedlander’s knowing violation of the automatic stay, the Court will
impose civil sanctions against Mr. Friedlander pursuant to 11 U.S.C. § 105(a) in the amount of
$1,000.00.
WHEREFORE, IT IS HEREBY ORDERED that the Motion for Contempt and for
Sanctions is GRANTED, in part. 	Sanctions for civil contempt in the amount of $1,000.00 are
hereby imposed against Martin S. Friedlander and in favor of LANB. The remainder of the
relief requested in the Motion for Contempt and for Sanctions is hereby DENIED.
________________________________________
MARK B. McFEELEY
United States Bankruptcy Court
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COPY TO:
James Jurgens
Attorney for Plaintiff
100 La Salle Cir Ste A
Santa Fe, NM 87505-6976
Martin S. Friedlander
Defendant
10350 Wilshire Blvd Ste 603
Los Angeles, CA 90024-4717
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