Contributed by Blaire Cahn
Noting that the “commission of a tort is not protected by the Bankruptcy Code,” the United States Court of Appeals for the Sixth Circuit recently found that the automatic stay imposed by section 362(a) of the Bankruptcy Code did not apply to a contempt proceeding against a debtor for violation of an injunction. The injunction related to, among other things, a suit for trademark infringement and trademark dilution.
Dominic’s Restaurant v. Mantia centers around a family owned and operated Italian restaurant. The restaurant closed in 2007, but certain products continued to be marketed under the name “Dominic’s Foods of Dayton.” Following the closure of the restaurant, Reece Powers (the debtor in this appeal) joined with two business partners (the granddaughter of Dominic and the former chef at Dominic’s Restaurant) to open a new restaurant. The new restaurant was remarkably similar to the original Dominic’s restaurant – the business was named and registered with the Ohio Secretary of State as “Dominic’s Restaurant, Inc.,” and publicity for the restaurant included promises to bring back the old Dominic’s recipes. Dominic’s Foods and another relative of Dominic filed suit in the United States District Court for the Southern District of Ohio against Powers and his two business partners asserting trademark infringement, trademark dilution, and certain state law violations.
The plaintiffs sought and were granted a temporary restraining order and later a preliminary injunction. The plaintiffs filed a series of contempt motions against the defendants for failure to comply with the terms of the order and the injunction. Concurrently, the district court established a discovery schedule. The plaintiffs moved for a default judgment against the defendants for failure to comply with the schedule. Shortly thereafter, Powers filed for bankruptcy protection and argued that the proceedings were stayed by his filing. The district court dismissed this argument, granted the default judgment, and found the defendants in contempt. Powers filed an appeal and noted that the sole issue is “whether the automatic bankruptcy stay should preclude further proceedings in contempt that are civil in nature.” Powers argued that the stay should apply in this case because the contempt claim is a proceeding against a debtor, and the tort action and related contempt claim were commenced prior to the filing of the bankruptcy petition.
The Sixth Circuit affirmed the decision of the district court and held that the contempt proceeding against Powers is not subject to the automatic stay. It noted that the filing of a bankruptcy petition will generally stay judicial proceedings against a debtor, but pointed out that the automatic stay does not apply in all cases. Specifically, although a debtor’s interests in its property are protected by the stay, the tortious use of property by a debtor is not. Here, overturning the district court’s decision would effectively permit Powers to continue the commission of a tort. Further, the plaintiffs are neither creditors nor claimants in Power’s bankruptcy case.
Underlying the court’s reasoning was the concern that a court must have the power to ensure compliance with its orders and that the automatic stay should not provide a tool for parties to violate such orders. In the intellectual property context, this decision is in line with cases that hold that, even though alleged acts of infringement may have occurred prepetition, to the extent that they continue postpetition, they are new acts that may be enjoined without violating the stay. Some courts, however, have held that, because the action could have been (and here, was) commenced prepetition, continuation is subject to the automatic stay. That the court in Dominic’s already had issued an injunction prepetition may distinguish it from cases in which no decision on infringement had been made as of the petition date.
It remains to be seen how far this decision will be extended outside of the infringement context. It is likely too broad of an interpretation of Dominic’s to conclude that every court order entered prepetition is specifically enforceable postpetition, particularly where compliance with such court order would require the debtor to take affirmative actions. Nonetheless, this case stands as a reminder that the stay is not an automatic entitlement to ignore prepetition lawsuits, particularly court orders entered in such actions. Despite the breadth of the stay, courts can and will take into account equitable policies and impose limits on it.