Matter of Ngan Gung Restaurant, Inc.

195 B.R. 593 (1996)

In the Matter of NGAN GUNG RESTAURANT, INC., Debtor NGAN GUNG RESTAURANT, INC., Appellant, v. OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF NGAN GUNG RESTAURANT, INC. and 318 Restaurant Workers Union, Appellees.

No. M 47 (JGK).

United States District Court, S.D. New York.

May 18, 1996.

Steven Stein, New York City, for Plaintiff-Appellant.

Bruce Weiner, Rosenberg Musso & Weiner, Brooklyn, New York, for the Official Committee of Unsecured Creditors of Ngan Gung Restaurant, Inc.

Ellen Dichner, Gladstein Reif & Meginniss, New York City, Merrill J. Clark, New York City, for 318 Restaurant Workers Union.

Ira R. Abel, New York City, for the trustee Henry Fong.

OPINION

KOELTL, District Judge:

The debtor-appellant Ngan Gung Restaurant, Inc. appeals an order of the Bankruptcy Court (Garrity, J.), dated December 8, 1995 (the "Order"), which directed the Office of the United States Trustee to appoint immediately a Chapter 11 trustee as punishment for the appellant's contempt.

This is a case under Chapter 11 of the Bankruptcy Code. By order to show cause dated November 8, 1995, the defendants-appellees, the Official Committee of Unsecured Creditors of Ngan Gung Restaurant, Inc. and 318 Restaurant Workers Union submitted an application for the appointment of a Chapter 11 trustee pursuant to 11 U.S.C. § 1104(a). On November 14, 1995, the appellees served the Debtor with a subpoena which required the Debtor to produce certain documents, including a portion of its 1994 banquet book. The banquet book was used to record reservations for banquets conducted at the Debtor. The Debtor objected to the discovery requests as burdensome. At a conference call on November 16, 1995, the Bankruptcy Court directed the Debtor to comply with the subpoena. On November 19, 1995, the Debtor produced the 1995 and 1996 banquet books but failed to produce the 1994 banquet book.

The hearing on the Application to appoint a Trustee continued on November 22, 1995. On that day, counsel to the Union informed the court that the Debtor had failed to produce the 1994 banquet book and orally moved for sanctions under Fed.R.Civ.P. 45(e). (12/8/95 Tr. at 7-10.) Judge Garrity ordered the Debtor to provide the appellees with an explanation of what happened to the 1994 banquet book. The Debtor's counsel told the court that the 1994 book had ceased to exist as of one or two months earlier. (12/8/95 Tr. at 7.) By letter dated November 28, 1995, the Debtor told the defendants that the 1994 book was discarded in the ordinary course of business in early November, before the order to show cause was served. (12/8/95 Tr. at 8.)

On November 29, 1995, the appellees made an oral motion for sanctions under Fed. R.Civ.P. 45, again suggesting that the appropriate sanctions for the Debtor's failure to produce the 1994 banquet book would be a Rule 37 sanction. At that time, the Bankruptcy Court conducted an evidentiary hearing where five witnesses testified. Richard Chan, the Debtor's Executive Director, testified that he personally threw out the 1994 book in the early part of November 1995 in the ordinary course of business. Later in his testimony, Chan admitted that the Debtor had no policy regarding the discarding of banquet books and that he did so when he saw fit. (12/8/95 Tr. at 11.) Chan testified that he threw out the 1994 book with the 1993 book because he felt like throwing it out. (12/8/95 Tr. at 11.) In addition, Chan stated that he did not know whether he had thrown out the book before the Debtor was served with the Bankruptcy Trustee Application. (12/8/95 Tr. at 11.) The Bankruptcy Court discredited Chan's testimony as uncorroborated and self-serving (12/8/95 at 15) and made a finding that the Debtor did not have a policy regarding the retention of its banquet books. (12/8/95 Tr. at 11, 15.)

Siu Nin Wong, a waiter employed by the Debtor, testified that several banquet books, including the 1994 book, were removed from a storage area at the direction of Mr. Chan three hours after the Debtor was personally served with the subpoena for the banquet books. (12/8/95 Tr. at 12.) Kei Choi Wang testified that on November 14 he saw Ha Moon Leung, a manager of the Debtor, take the banquet books, including the 1994 book, to Mr. Chan and then bring them to Mr. Chan's office. The Bankruptcy Court fully credited both Siu Nin Wong's and Kei Choi Wong's testimony.

At the end of the November 29 hearing, the Bankruptcy Court directed the appellees to provide a memorandum explaining what sanctions they were seeking and the legal support for these sanctions. The appellees requested five independent sanctions including an order precluding the Debtor from introducing evidence, a finding of contempt, and a finding that Richard Chan's dishonesty, incompetence, and mismanagement justified the appointment of a trustee under section 1104(a)(1) of the Bankruptcy Code. The Debtor submitted a reply memorandum.

On December 7, 1995, after receiving briefs from both sides, the Bankruptcy Court permitted the Debtor to present rebuttal witnesses. The Debtor called two witnesses. The first was Mr. Leung, who the Bankruptcy Court found acknowledged that the Debtor did not have a policy regarding the disposal of banquet books. (12/8/95 Tr. at 11.) The Debtor's second witness was Ted Chan, the brother of Richard Chan, who testified about when his brother learned that the November 14, 1995 subpoena was served. Ted Chan stated that he was present at the time the subpoena was served on an officer of the Debtor, and his brother Richard was not at the restaurant at that time. (12/7/95 Tr. at 49-53.) The Bankruptcy Court found Ted Chan's testimony "evasive and unbelievable." (12/8/95 Tr. at 14.)

On December 8, 1995, Bankruptcy Judge Garrity held the Debtor in contempt for failing to comply with the subpoena served by the defendants on November 14, 1995. Stating that it "cannot permit Debtor to remain in possession in the face of clear and convincing evidence that its management is not trustworthy and thus cannot fulfill the fiduciary obligations of a Debtor in Possession to its creditors," the Bankruptcy Court ordered the immediate appointment of a Chapter 11 trustee. (12/8/95 Tr. at 18.) Judge Garrity stated:

This is not an Order authorizing the appointment of the Chapter 11 operating Trustee. It is an Order finding the Debtor in contempt and sanctioning the Debtor for its contempt. The contempt is on the appointment of a Chapter 11 Trustee. I have not granted your motion to appoint a Trustee. I have sanctioned the Debtor for its contempt under my inherent powers, as well as Federal Rule of Civil Procedure 45(e).

(12/8/95 Tr. at 20.)

II. ANALYSIS

The Court reviews the bankruptcy court's conclusions of law de novo and findings of fact under a clearly erroneous standard. In re Ionosphere Clubs, Inc., 922 F.2d 984, 988 (2d Cir.1990); cert. denied sub nom. Air Line Pilots Assn. Int'l v. Shugrue, 502 U.S. 808, 112 S.Ct. 50, 116 L.Ed.2d 28 (1991); Fed.R.Bankr.P. 8013. The abuse of discretion standard governs the review of the bankruptcy court's imposition of sanctions. Chambers v. NASCO, Inc., 501 U.S. 32, 55, 111 S.Ct. 2123, 2138, 115 L.Ed.2d 27 (1991) (standard of review for court's imposition of sanctions reviewed under abuse of discretion standard); see also In re Sharon Steel Corp., 871 F.2d 1217, 1225 (3d Cir.1989) (appointment of trustee reviewed under abuse of discretion standard); Pereira v. Felzenberg, No. 94 Civ. 7105, 1996 WL 101224, at *2 (S.D.N.Y. March 8, 1996) (Sweet, J.) (employing abuse of discretion standard to review bankruptcy court's imposition of sanctions under Fed.R.Bankr.P. 7037); In re Owen, 96 B.R. 427, 428 (N.D.N.Y.1989) (abuse of discretion standard governs review of appointment of trustee).

The Bankruptcy Court made it clear in its oral decision, and the parties do not dispute, that in appointing a trustee the Bankruptcy Court was not granting the appellees' application for the appointment of a trustee pursuant to 11 U.S.C. § 1104(a), which provides that a trustee may be appointed "on request of a party in interest or the United States trustee." 11 U.S.C. § 1104(a). Instead, the Bankruptcy Court stated that it ordered the immediate appointment of a trustee under Fed.R.Civ.P. 45(e)¹ and the bankruptcy court's inherent powers under 11 U.S.C. § 105(a)² as a sanction for the Debtor's contempt.

The initial question is whether the Bankruptcy Court had the power to appoint a trustee as a contempt sanction. To answer this question, the Court must determine whether this contempt sanction was a remedy for civil contempt or a punishment for criminal contempt. Although the Court of Appeals for the Second Circuit has not explicitly addressed the scope of the bankruptcy court's contempt powers, the majority of courts to confront this issue agree that in core proceedings bankruptcy courts have civil contempt power pursuant to 11 U.S.C. § 105.³In re Power Recovery Sys., Inc., 950 F.2d 798, 802 (1st Cir.1991); In re Skinner, 917 F.2d 444, 447 (10th Cir.1990); In re Walters, 868 F.2d 665, 669-70 (4th Cir.1989); In re Ionosphere Clubs, Inc., 171 B.R. 18, 21 (S.D.N.Y.1994) (Mukasey, J.); In re Stockbridge Funding Corp., 158 B.R. 914, 917 (S.D.N.Y.1993) (Sprizzo, J.); Federation of Puerto Rican Orgs. of Brownsville, Inc. v. Howe, 157 B.R. 206, 211 (E.D.N.Y.1993) (Nickerson, J.); In re Max Frankel, 192 B.R. 623, 629-30 (Bankr.S.D.N.Y.1996) (listing cases); but see In re Sequoia Auto Brokers Ltd., Inc., 827 F.2d 1281, 1283-91 (9th Cir. 1987). The bankruptcy court's authority to impose criminal contempt sanctions is much less certain than its power to impose civil contempt sanctions. Although there is authority that bankruptcy courts have the authority to impose criminal sanctions, see In re Power Recovery Sys., 950 F.2d at 802, the Court of Appeals for the Second Circuit stated in United States v. Guariglia, 962 F.2d 160 (2d Cir.1992), that this is a "serious...