Opinion ID: 781254
Heading Depth: 3
Heading Rank: 3

Heading: Sanctions under the Bankruptcy Court's Inherent Authority

Text: 89 Finally, we address the bankruptcy court's attempt to justify the sanction award under its inherent sanction authority. Chambers v. NASCO, Inc., 501 U.S. 32, 42-47, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991), held that Article III courts have an inherent authority to sanction bad faith or willful misconduct, even in the absence of express statutory authority to do so. In Caldwell v. United Capital Corp. (In re Rainbow Magazine, Inc.), 77 F.3d 278, 284 (9th Cir.1996), we held that bankruptcy courts, like district courts, also possess that inherent power. 90 In so concluding, we noted that § 105(a) impliedly recognized this inherent power. Id. The inherent authority derives not from statutory grants but rather from the very creation of the court (unless Congress intentionally restricts those powers). Id. at 283. We looked to § 105(a) to confirm our conclusion that Congress had not intended to restrict the bankruptcy court's inherent power to sanction bad faith litigation. Id. at 284. Because Rainbow Magazine referenced § 105(a), it is tempting to conclude that a bankruptcy court's inherent sanction power and the civil contempt powers of § 105(a) are interchangeable. Our cases have been less than clear concerning whether they are. Compare Bennett, 298 F.3d at 1069 (discussing the concepts without differentiation) with Rainbow Magazine, 77 F.3d at 278, 284 (differentiating between the two concepts). See also United States v. Arkison (In re Cascade Roads, Inc.), 34 F.3d 756, 767 (9th Cir.1994) (noting the conflicting descriptions). 91 We do discern a difference. Civil contempt authority allows a court to remedy a violation of a specific order (including automatic orders, such as the automatic stay or discharge injunction). The inherent sanction authority allows a bankruptcy court to deter and provide compensation for a broad range of improper litigation tactics. Fink v. Gomez, 239 F.3d 989, 992-93 (9th Cir.2001). 92 The inherent sanction authority differs from the civil contempt authority in an additional respect as well. Before imposing sanctions under its inherent sanctioning authority, a court must make an explicit finding of bad faith or willful misconduct. Id. In this context, willful misconduct carries a different meaning than the meaning employed in the context of determining whether an individual is entitled to damages under § 362(h) or a contempt judgment under § 105(a) for an automatic stay violation. With regard to the inherent sanction authority, bad faith or willful misconduct consists of something more egregious than mere negligence or recklessness. Id. at 993-94. Although specific intent to violate the automatic stay may not be required in the contempt context, Pace, 67 F.3d at 191, such specific intent or other conduct in bad faith or conduct tantamount to bad faith, Fink, 239 F.3d at 994, is necessary to impose sanctions under the bankruptcy court's inherent power. 93 Here, the bankruptcy court concluded that Mr. Lindblade's automatic stay violation was done in bad faith. We hesitate, however, to endorse that conclusion without a more explicit finding of fact. As we have stated, there is no indication in the record as it stands that Mr. Lindblade or his attorney was aware, when sending the May 1 letter, that by recording the deed they would violate the automatic stay. Indeed, it is hard to believe that they would have announced in the letter, in advance, their intent to record the deed had they realized that doing so would violate a court order. Mere ignorance or inadvertence is not enough to support a sanction award under the inherent authority. Fink, 239 F.3d at 992-93. 94 After the post-petition recordation Mr. Lindblade did assert, for a time, that the recordation was not automatically void. But he subsequently abandoned that position, and took no further steps to enforce his deed of trust, such as foreclosing on the property. Though Mr. Lindblade vigorously asserted the validity of his unrecorded deed of trust, he was entitled to do so, as his position in that regard was far from frivolous. Indeed, the bankruptcy court held that it was correct. 95 We need not resolve whether the district court was correct in finding that Mr. Lindblade violated the automatic stay in bad faith, however. The bankruptcy court's inherent sanction authority, we conclude, like its civil contempt authority, does not authorize significant punitive damages, so the punitive sanctions cannot stand, whatever Mr. Lindblade's degree of culpability. 20 96 Just as we have never authorized a punitive damage award under the bankruptcy court's civil contempt authority, so too have we refrained from authorizing a punitive damage award under the bankruptcy court's inherent sanction authority. Although Rainbow Magazine did not expressly limit the inherent sanctioning power to compensatory sanctions, 21 the case has been interpreted as so limited. See, e.g., In re Les Deville, 280 B.R. 483, 494-98 (9th Cir. BAP 2002) (relying, in part, on Rainbow Magazine for proposition that a bankruptcy court can rely on inherent authority to impose sanctions, but concluding that sanctions which are punitive in nature cannot be sustained under that authority). We agree with that interpretation of Rainbow Magazine. No question of punitive sanctions was before the court, nor did the opinion purport to address the issue. 97 Addressing the issue of punitive inherent authority sanctions as one of first impression, we conclude that the same reasons underlying our holding that the bankruptcy court lacks the authority to impose serious punitive sanctions under its contempt authority indicate the answer to the parallel question concerning the inherent sanction authority. Indeed, Hanshaw is even more directly on point as to the inherent sanction issue than it was with regard to civil contempt: In Hanshaw, we made clear that when a court uses its inherent powers to impose sanctions that are criminal in nature, it must provide the same due process protections that would be available in a criminal contempt proceeding, including the right to a jury trial. Hanshaw, 244 F.3d at 1139-40. [D]ue process guarantees need to be observed when a court resorts to its inherent power to punish misconduct simply because those powers are enormous; the procedural guarantees are the restraint that protects against intended or unintended abuse of that power. Id. at 1139. 98 Therefore, even if the bankruptcy court properly resorted to its inherent authority to sanction Mr. Lindblade, the punitive portion of the award could not be sustained under that authority. Only the compensatory sanctions are appropriate. We therefore remand the sanction award to the bankruptcy court to determine the appropriate scope of the compensatory sanction award.