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In re Fidelity Mortgage Investors

September 3, 1976

IN RE: FIDELITY MORTGAGE INVESTORS, DEBTORS, FIDELITY MORTGAGE INVESTORS, APPLICANT-APPELLEE,
v.
CAMELIA BUILDERS, INC., E.J. YELVERTON, JR., FARNALE, INC., R.L. GOODALE AND JEFFERY H. HUBBARD, RESPONDENTS-APPELLANTS



Appeal from order and judgment in contempt proceeding in Chapter XI bankruptcy case in United States District Court for the Southern District of New York, Richard Owen, Judge, against appellants initiators of action in federal court in Mississippi without permission of bankruptcy court to enforce liens against properties held under deed of trust by debtor-in-possession. Affirmed.

Smith, Mansfield and Van Graafeiland, Circuit Judges. Van Graafeiland, Circuit Judge, dissents.

Author: Smith

SMITH, Circuit Judge:

Fidelity Mortgage Investors (hereinafter, "FMI"), is a real estate investment trust organized under the laws of Massachusetts.*fn1 Like many other real estate investment trusts, FMI has not weathered the recent recession. As a result, FMI has been forced to file for reorganization under Chapter XI of the federal Bankruptcy Act, 11 U.S.C. § 701, et seq. This appeal stems from events surrounding that reorganization.

Camelia Builders, Inc. (hereinafter, "Camelia") and Farnale, Inc. (hereinafter, "Farnale"), organized into a joint venture, have acted as general contractors for the construction of eighty condominium units in Jackson, Mississippi. FMI granted a construction loan to the developer of that condominium project.

When the developer of the Jackson condominium project ran into financial difficulties, FMI, Camelia and Farnale all found themselves with creditor interests in the partially-completed units. FMI, in return for the construction loan, had received a first deed of trust on the condominium project and the land on which it was to be built. Camelia and Farnale possessed materialmen's and mechanic's liens by virtue of the labor and supplies they had furnished for the partially-completed condominiums.

Shortly after the financial problems of the Jackson condominium developer came to fruition, FMI was forced to confront the precariousness of its own financial situation. Accordingly, on January 30, 1975, FMI filed for Chapter XI reorganization in the United States District Court for the Southern District of New York.

The FMI petition evidently caused great concern to Camelia and Farnale who, as rival creditors, apparently viewed their lien interests in the Jackson condominium units as in potential conflict with FMI's deed of trust in that same property. Hence, Camelia and Farnale began an action in the United States District Court for the Southern District of Mississippi (Walter M. Nixon, Judge) seeking to ensure the superiority of their lien claims in the Jackson property over any competing claims asserted by FMI as holder of the deed of trust. This federal action was brought by Camelia and Farnale on March 24, 1975, almost two months after FMI filed its Chapter XI petition in New York.

As a result of the federal action begun by Camelia and Farnale, FMI was required to deposit almost $76,000 with the Mississippi district court. FMI was also required to incur the costs of defending its interests in that lawsuit.

It is the position of FMI that Camelia and Farnale were barred by the Bankruptcy Rules from instituting an action in Mississippi without first securing permission from the bankruptcy judge in New York, who had two months earlier received FMI's Chapter XI petition. Accordingly, FMI moved in the New York bankruptcy court (Asa S. Herzog, Judge) that Camelia and Farnale be held in contempt for initiating the Mississippi action without first securing permission from the court in New York in which FMI had earlier filed its Chapter XI petition.

Judge Herzog, after a hearing participated in by the parties, held both Camelia and Farnale in contempt for knowingly initiating the Mississippi action without his permission. The lawyers for Camelia and Farnale, as well as two corporate officers, were held in contempt also.

However, Judge Herzog, rather than punishing the contempt with the limited sanctions available to a bankruptcy judge, certified the matter to the United States District Court for the Southern District of New York (Richard Owen, Judge), pursuant to Rule 920(a)(4) of the Bankruptcy Rules. Judge Owen accepted Judge Herzog's factual findings, accordingly held the defendants in contempt and ordered that FMI be paid costs, including reasonable attorneys' fees for the defense of the Mississippi action and for the prosecution of the contempt proceeding. Judge Owen also ordered the defendants to cause the return of FMI's $76,000 deposit in the Mississippi district court.

Camelia, Farnale and the lawyers and officers held in contempt appeal from Judge Owen's order. They urge us, on a variety of jurisdictional, substantive, constitutional and procedural grounds, to reverse the decision of the district court as to both liability and punishment. We decline this invitation and affirm the contempt order of the district court in all respects.

I.

Before turning to the arguments advanced on appeal, it may be useful to review the statutory and regulatory scheme of which the defendants-appellants are adjudged in contempt.

Rule 11-44 of the Bankruptcy Rules mandates that a Chapter XI petition shall automatically stay other judicial proceedings against the debtor-in-possession except by permission of the bankruptcy court with whom the Chapter XI petition is filed. Section 41(a) of the Bankruptcy Act, 11 U.S.C. § 69(a), compels obedience to "any lawful order, process or writ" of a bankruptcy judge. Rule 920, premised upon the statutory authority of § 41(a), permits bankruptcy judges to punish via contempt proceedings. Rule 920(a)(3) limits the contempt sanctions available to bankruptcy judges to fines not in excess of $250. However, Rule 920(a)(4) authorizes bankruptcy judges to certify contempt proceedings to district judges when it appears to the bankruptcy judges that greater sanctions are warranted.

District judges are not limited to the same contempt sanctions as bankruptcy judges.

Camelia and Farnale instituted their action in the Mississippi district court approximately two months after FMI filed its Chapter XI petition in New York. Camelia and Farnale acknowledge that the Mississippi action was initiated without the permission of the New York bankruptcy court. Under Rule 11-44, the petition filed by FMI in New York acted as a stay to prevent the subsequent Mississippi action. Camelia and Farnale proceeded with the Mississippi action anyway.

Judge Herzog, accordingly, found that Camelia and Farnale had violated the Rule 11-44 stay. He certified the case to Judge Owen pursuant to Rule 920(a)(4). Judge Owen issued the contempt order now on appeal.

With this background, we turn to the arguments advanced by Camelia and Farnale.

II.

Camelia and Farnale claim that a contempt order cannot be premised upon Rule 11-44 on the facts of this case. First, they argue that the meaning of Rule 11-44 is unclear and that, under accepted law, a person cannot be held in contempt for violating an imprecise order.

Second, they argue that they cannot be held in contempt because they did not know of FMI's Chapter XI petition in New York and, therefore, did not know of the consequent stay. The evidence before Judge Herzog, Camelia and Farnale assert, failed to indicate that they knew of the stay. Proof of such knowledge, they point out, is essential before there can be a finding of contempt.

Third, Camelia and Farnale argue that Judge Owen erred when he accepted as not clearly erroneous Judge Herzog's findings that Camelia and Farnale did know of the New York stay. Judge Owen's review of the facts, they claim, should have been de novo.

Finally, Camelia and Farnale argue that they were not bound by the New York stay since they had not received formal notice of it pursuant to Rule 602(a) of the Bankruptcy Rules.

We find these arguments unpersuasive.

It is, of course, true that, for a person to be held in contempt, the court order violated must "be specific and definite." In Re Rubin, 378 F.2d 104, 108 (3d Cir. 1967). See, also, In Re LaMarre, 494 F.2d 753, 758 (6th Cir. 1974). It is, however, not true, as Camelia and Farnale assert, that Rule 11-44 is imprecise and therefore cannot serve as the basis for a contempt order.

Rule 11-44 bars "the commencement or the continuation of any court or other proceeding against the debtor" after the debtor has filed a Chapter XI petition. It is difficult to conceive of a rule with a more apparent and certain meaning: after the Chapter XI petition has been filed, a debtor cannot be sued. Cf. In Re Brown, 147 U.S. App. D.C. 156, 454 F.2d 999 (1971).

It is also true, as Camelia and Farnale assert, that a person cannot be held in contempt of an order about which the person had no knowledge. In Re Rubin, supra; Yates v. United States, 316 F.2d 718, 723 (10th Cir. 1963). However, the evidence presented to Judge Herzog amply documented knowledge on the part of Camelia, Farnale and their agents of FMI's Chapter XI petition and the consequent stay under Rule 11-44.

The evidence before Judge Herzog indicated the following: (a) that defendant-appellant Goodale, an officer of Farnale, read about FMI's Chapter XI petition in the Wall Street Journal, the day after that petition was filed; (b) that defendant-appellant Hubbard, counsel for Camelia and Farnale, read that article also; (c) that, prior to the institution of the Mississippi action, Hubbard had also read about FMI's Chapter XI petition in state court papers filed by FMI and that Hubbard had read Rule 11-44 at that time; (d) that Hubbard confirmed the existence of FMI's Chapter XI petition in a telephone conversation with the clerk of the New York bankruptcy court, that conversation occurring the day before the commencement of the Mississippi action and (e) that the complaint filed by Camelia and Farnale in the Mississippi district court referred to the Chapter XI petition of which Camelia and Farnale now deny any knowledge.

In short, there was ample evidence to support Judge Herzog's finding that Camelia and Farnale, and their agents, knew of FMI's Chapter XI petition and the consequent Rule 11-44 stay.

District Judge Owen accepted those findings as not clearly erroneous. Camelia and Farnale assert this was error because Judge Owen was required to review de novo the evidence with respect to Camelia and Farnale's knowledge of the Chapter XI petition. We disagree.

Rule 752(a) of the Bankruptcy Rules provides that all findings of fact made by a court in a bankruptcy context "shall not be set aside unless clearly erroneous." By virtue of Rule 901 and 11 U.S.C. § 1(9), the term "court" in Rule 752(a), and thus the clearly erroneous standard, apply to the factual findings of bankruptcy judges, such as the findings certified by Judge Herzog to Judge Owen. Rule 810 also prevents district courts from setting aside findings of fact by bankruptcy judges unless clearly erroneous.

Nevertheless, Camelia and Farnale, relying on O'Hagan v. Blythe, 354 F.2d 83 (2d Cir. 1965), argue that the facts certified by Judge Herzog to Judge Owen were to be reviewed by Judge Owen de novo, rather than pursuant to the clearly erroneous standard of Rules 752(a) and 810.

O'Hagan was decided eight years before Rules 752(a) and 810 went into effect. Assuming, arguendo, that O'Hagan, a criminal contempt case, did stand for the position asserted by the creditors, that decision was superseded subsequently at least as to civil contempt proceedings by Rules 752(a) and 810 which, on their face, establish a clearly erroneous standard for review of factual findings by bankruptcy ...


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