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SANCTIONS IN BANKRUPTCY

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Ninth Circuit reasoned that per diem fines that are coercive rather than punitive fall within the bankruptcy court’s civil contempt authority under 11 U.S.C. §105(a)

In re Kenny G Enterprises, LLCsanctions(“Kenny G I”), 692 Fed. 950 (9th Cir. 2017) (reprint in part from Lexology) Bankruptcy courts have authority to hold in civil contempt one who refuses to comply with a bankruptcy court order, including incarceration and/or daily fines until the offender complies. But when does civil contempt cross into criminal contempt, which is punitive and outside the scope of the bankruptcy court’s powers? While a bright-line rule is wanting, the 9th Circuit’s silence on a recent case implied that three years of incarceration plus a $1,000 daily fine to coerce compliance does not implicate criminal due process concerns and, therefore, is within the bounds of permissible bankruptcy court authority.

In a 2017 ruling, the 9th Circuit affirmed the entirety of the bankruptcy court’s order as a permissible exercise of the bankruptcy court’s civil contempt powers under 11 U.S.C. §105(a), which authorizes the bankruptcy court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” “Because complying with the bankruptcy court’s order will cure [Mr. G’s] contempt,” the Ninth Circuit found permissible the bankruptcy court’s order requiring incarceration and daily fines until turnover occurred. The Ninth Circuit expressly disagreed with the district court’s conclusion that sanctions must be capped at $1.4 million subject to turnover; rather, the Ninth Circuit reasoned that per diem fines that are coercive rather than punitive fall within the bankruptcy court’s civil contempt authority. However, the Ninth Circuit Court of Appeals indicated coercive sanctions may not proceed indefinitely. “At some point,” the court wrote, “due process considerations will require the bankruptcy court to conclude that [the] continued detention and the daily $1,000 sanctions have ceased to be coercive and instead have become punitive,” at which point, Mr. G must be released from custody.

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