Michigan Bankruptcy Blog

Automatic Stay Does Not Bar Injunctive Relief Relative to Debtors' Commission of a Tort

The Sixth Circuit Court of Appeals recently affirmed a decision of the United States District Court for the Southern District of Ohio based upon the District Court's holding that the automatic stay does not prevent the issuance of injunctive relief.

In Dominic's Restaurant,¹ the plaintiff brought a suit against the debtor in Federal District Court to prevent the debtor from using its trademarks.  The District Court issued a temporary restraining order (TRO) and ultimately a preliminary injunction against the debtor and other defendants ordering them to refrain from using the plaintiff's trademarks.  The debtor and other defendants were later held in contempt several times for violations of the TRO and injunction.  Subsequently, the plaintiffs filed a (fourth) motion for contempt, arguing that the debtor and defendants had continued to use its trademarks despite the entry of the injunction.  Thereafter, one of the defendants, the debtor in this case, filed a Chapter 13 bankruptcy petition.  Regardless of the bankruptcy filing, the District Court granted the plaintiff's motion for contempt and again enjoined all the defendants from operating their restaurant in violation of the plaintiff's trademarks.

The Sixth Circuit affirmed the District Court's ruling.  The Sixth Circuit recognized that as a general rule the filing of a bankruptcy petition operates as a stay, among other things, of continued judicial proceedings against the debtor.  The Sixth Circuit went on to recognize that the bankruptcy stay protects interests in the debtor's property, but not tortious uses of that property by the debtor.  The court then reasoned that Section 362 is designed to prevent interference with the bankruptcy court's disposition of property of the estate, it was not intended to preclude post-petition lawsuits to enjoin unlawful conduct.  The court recognized that if Section 362 were read to prevent injunctive relief against trademark infringements, bankrupt businesses operating post-petition could violate the plaintiff's trademark rights with impunity.

The Sixth Circuit held that because the contempt motion involved the debtor's improper use of property to commit a tort (trademark infringement), the motion for contempt was not stayed by the debtor's bankruptcy filing.

---

¹ Dominic's Restaurant of Dayton, Inc. v. Mantia, Case No. 10-3376/3377, Sixth Circuit Court of Appeals, July 5, 2012

Categories: 6th Circuit Court of Appeals