Tagnetics – A case of Involuntary Bankruptcy

UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF OHIO WESTERN DIVISION AT DAYTON

In re: TAGNETICS INC.,

Case No. 19‐30822

Judge Humphrey Chapter 7
Decision Granting Petitioning Creditors’ Motion for Contempt (Doc. 145)
and Determining Additional Interest as a Remedy to Enforce Compliance

This matter is before the court on the Motion to Hold Tagnetics in Indirect Contempt (doc. 145)
(the “Motion”), filed by petitioning creditors Jonathan Hager, Ronald E. Earley and Kenneth W.
Kayser (the “Petitioning Creditors”). For the reasons explained below, the court finds Tagnetics,
Inc. (“Tagnetics”) in civil contempt of this court’s Order Granting in Part Tagnetics’ Motion to
Enforce Settlement Agreement (Doc. 101) and Ordering Other Matters entered on October 25, 2019
(doc. 119) (the “Settlement Enforcement Order”).
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.

IT IS SO ORDERED.
Dated: February 11, 2020
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As a remedy for Tagnetics’ contempt, the court is ordering that Tagnetics pay, in addition to the
federal judgment rate of interest on all amounts owed to the Petitioning Creditors under the
Settlement Enforcement Order which have already become due, an additional 5% per annum, simple
interest, compounded monthly, (the “additional interest”) on all sums which previously became due
the Petitioning Creditors under the Settlement Enforcement Order, and on all future sums which
become due to the Petitioning Creditors to the extent that those sums are not paid as due under the
Settlement Enforcement Order. The purpose of that additional interest on sums that have become due
and or become past‐ due in the future is to coerce Tagnetics’ compliance with the Settlement
Enforcement Order. However: 1) Tagnetics shall have 30 days from the date of the entry of the
separate order to be entered to pay all sums currently due to the Petitioning Creditors under the
Settlement Enforcement Order, with interest pursuant to 28 U.S.C. § 1961 commencing three business
days following the date of entry of the Settlement Enforcement Order; 2) The additional 5% interest
shall only commence to accrue 31 days from the date of the entry of this order; and
3) While all sums due under the Settlement Enforcement Order shall collect interest at the federal
judgment rate of interest provided by 28 U.S.C. § 1961 from the time they first become due until
those sums are paid, the additional 5% interest shall not accumulate during the pendency of any
stay pending appeal ordered by a court of competent jurisdiction.
Procedural and Factual Background

Through the Settlement Enforcement Order, the court granted, in part, Tagnetics’ motion to enforce
a settlement reached between it, as the putative Chapter 7 debtor in this case, and the Petitioning
Creditors who filed an involuntary bankruptcy petition against Tagnetics.1 The integral terms of
the Settlement Enforcement Order are as follows:

1 The original petitioning creditors who filed the involuntary petition against Tagnetics included
the Petitioning
Creditors, plus Kayser Ventures Ltd, Robert Strain, and S‐Tek Inc. Kayser Ventures, Strain, and
S‐Tek previously settled with Tagnetics and are no longer serving as petitioning creditors.

2

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• Payment Schedule

Payments Timing Earley
Kayser Hager

First Within 3 business days of the entry of this order

$30,000 $30,000 $30,000

Second 12 months from entry of this order $30,000 $30,000
$30,000 Third 18 months from entry of this order $30,000 $30,000
$30,000 Balance Upon next liquidity event2 $96,980
$61,582 $58,144 Total
$186,980.00 $151,582.00 $148,144.00

• Excepting the payments required by [the Settlement Enforcement] Order as defining the terms of
the settlement reached by the parties, the parties are mutually released from any past obligation
to each other arising out of any contract or claim of any nature, including as to any salary,
benefits, loans or other similar obligations owed to the Remaining Petitioning Creditors. This
release shall not affect any equity interest, including shares of stock, held by the Remaining
Petitioning Creditors, except that it shall release any past dividends or other monetary
obligations arising of any such equity or stock ownership.

• Within 7 days after the Remaining Petitioning Creditors’ receipt of the initial $30,000 payments,
Tagnetics shall file with the court and serve, by email, upon on each of the Remaining Petitioning
Creditors a notice of payment.

• Upon the filing with the court of the notice of payment, the court will, after a 24‐hour waiting
period, dismiss the Involuntary Petition against Tagnetics.

Settlement Enforcement Order at 2. Tagnetics has appealed the Settlement Enforcement Order to the
United States District Court for the Southern District of Ohio (the “District Court”), stating one
issue on appeal: “The Bankruptcy Court erred when it held that the parties’ settlement agreement
did not include a release of Tagnetics’ affiliates, subsidiaries, parent corporation, officers, and
directors.” Tagnetics sought a stay pending appeal from this court, which the court denied through
an order entered on November 15, 2019 (doc.

2 Liquidity event is defined as follows:
(a) when one person or entity directly or indirectly becomes the beneficial owner of more than 50%
of the outstanding securities of Tagnetics, provided that the one person or entity does not
directly or indirectly own more than 50% of the outstanding securities of Tagnetics on the date
that the agreement becomes valid;
(b) the consummation of a merger, sale, or consolidation of Tagnetics with/to another company;
(c) a sale of substantially all of the assets of Tagnetics; or
(d) completion of a plan to liquidate, dissolve, or wind up Tagnetics that was
approved by Tagnetics’ shareholders or Board of Directors.

Settlement Enforcement Order at n.1.
3

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138).3 The Petitioning Creditors filed the Motion on November 22, 2019 and the court held a
telephonic hearing on the Motion on January 28, 2020 (doc. 156 & 161).
Positions of the Parties

The Petitioning Creditors assert through the Motion that Tagnetics is in contempt of the Settlement
Enforcement Order in failing to pay them the sums of money due to them under the Settlement
Enforcement Order, particularly the payments which were due to them within three business days
after the entry of the Settlement Enforcement Order ($30,000 to each of the Petitioning
Creditors).4 Tagnetics asserts that it is not in contempt because it has appealed the Settlement
Enforcement Order to the United States District Court for the Southern District of Ohio (the
“District Court”). However, the Petitioning Creditors note that Tagnetics has not obtained a stay
pending appeal and they argue that, absent obtaining a stay pending appeal, Tagnetics must
comply with the terms of the Settlement Enforcement Order even though Tagnetics appealed the
Settlement Enforcement Order. As a remedy for Tagnetics’ alleged contempt, the Petitioning
Creditors request the court to add interest on to the sums they are due under settlement agreement
and to order that the payments due under the settlement agreement be expedited.

3 On January 30, 2020 Tagnetics filed a motion with the District Court seeking a stay of the
enforcement of the Settlement Enforcement Order on the condition of the posting of a supersedeas
bond. As of the date of the issuance of this order, the District Court had not ruled on that
motion.

4 The Petitioning Creditors seek an order finding Tagnetics in “indirect contempt.” “Indirect
contempt” is generally viewed as a person’s violation of a court’s order which occurs outside the
courtroom and presence of the judge or contemptuous acts against parties to the litigation as
opposed to the court. See Codispoti v. Pa., 418 U.S. 506, 5‐34 (1974) (Rehnquist, J., dissenting);
Hanner v. O’Farrell, 1998 U.S. App. LEXIS 5551 at *9‐10 (6th Cir. Mar. 18, 1998); and Dayton
Newspapers, Inc. v. Teamsters Local Union No. 957, 176 F. Supp. 2d 765, 770 (S.D. Ohio 2001).
Direct contempt is generally viewed as a person’s violation of a court order in the presence of the
judge or conduct tending to disrupt ongoing judicial proceedings. See Dayton Newspapers at 767 n.1.
Direct and indirect contempt can be either criminal or civil contempt. Regardless, the court is
construing the Petitioning Creditors’ Motion as seeking a determination from the court that
Tagnetics is in civil contempt of the Settlement Enforcement Order. There is no dispute that any
alleged violation of the Settlement Enforcement Order has occurred outside the presence of the
judge and is directed against the parties as opposed to the court and, thus, to the extent
Tagnetics violated the Settlement Enforcement Order and is held in contempt, any such contempt
would constitute indirect contempt.
4

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Law on Civil Contempt

“The purpose of contempt proceedings is to uphold the power of the court, and also to secure to
suitors therein the rights by it awarded.” Bessette v. W. B. Conkey Co., 194 U.S. 324, 327 (1904).
The contempt power is an inherent power which the federal courts “must have and exercise in
protecting the due and orderly administration of justice and in maintaining the authority and
dignity of the court[.]” Roadway Express v. Piper, 447 U.S. 752, 764 (1980) (citation omitted).
“Civil contempt is the power of the court to impose sanctions to coerce compliance with its
orders.” United States v. Tenn., 925 F. Supp. 1292, 1301 (W.D. Tenn. 1995) (citing Hicks v. Feiock,
485 U.S. 624, 632 (1988)); Shillitani v. United States, 384
U.S. 364, 370 (1966); Gompers v. Buck’s Stove & Range Co., 221 U.S. 418, 442 (1988)).

Contempt may be categorized as either “criminal contempt” or “civil contempt.” The difference
between civil contempt and criminal contempt in large part lies in the purpose of the remedy
imposed by the court. A finding of criminal contempt is generally remedied through a sanction
ordered by the court intended to penalize or punish the contemnor. The remedy for civil contempt,
on the other hand, is intended to either compensate the aggrieved party for its damages or losses
incurred as a result of the contemnor’s violation of the court’s order or to coerce the contemnor’s
compliance with the order. Ahmed v. Reiss Steamship Co. (In re Jaques), 761 F.2d 302, 305 (6th Cir.
1985) (citations omitted). Thus, as described by the Supreme Court: It is not the fact of
punishment but rather its character and purpose, that often serve to distinguish between the two
classes of cases. If it is for civil contempt the punishment is remedial, and for the benefit of
the complainant. But if it is for criminal contempt the sentence is punitive, to vindicate the
authority of the court. It is true that punishment by imprisonment may be remedial, as well as
punitive, and many civil contempt proceedings have resulted not only in the imposition of a fine,
payable to the complainant, but also in committing the defendant to prison. But imprisonment for
civil contempt is ordered where the defendant has refused to do an affirmative act required by the
provisions of an order which, either in form or substance, was mandatory in its character.
Imprisonment in such cases is not inflicted as a punishment, but is intended to be remedial by
coercing the defendant to do what he had refused to do. The decree in such cases is that the
defendant stand committed unless and until he performs the affirmative act required by the court’s
order.

Gompers, 221 U.S. at 441‐42.

5

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In order for a court to hold a person in contempt, the court must find by clear and convincing
evidence that the person “violated a definite and specific order of the court requiring him to
perform or refrain from performing a particular act or acts with knowledge of the court’s order.”
Elec. Workers Pension Trust Fund of Local Union #58 v. Gary’s Elec. Serv. Co., 340 F.3d 373, 379
(6th Cir. 2003) (quoting NLRB v. Cincinnati Bronze, Inc., 829 F.2d 585, 591 (6th Cir. 1987)
(citation omitted)); In re Franks, 363 B.R. 839, 843 (Bankr. N.D. Ohio 2006) (similar).
Corporations may be held in civil contempt. See McComb v. Jacksonville Paper Co., 336 U.S. 187
(1949); NLRB v. Aquabrom, Div. of Great Lakes Chemical Corp., 855 F.2d 1174, 1186 (6th Cir. 1988).
Bankruptcy courts have the authority to find persons in civil contempt. In re Franks, 363 B.R. 839,
842 (Bankr. N.D. Ohio 2006); Elder‐Beerman Stores Corp. v. Thomasville Furniture Indus. (In re
Elder‐Beerman Stores Corp.), 197 B.R. 629, 632 (Bankr. S.D. Ohio 1996).
As the Sixth Circuit has emphasized, “[c]ontempt is serious” and “courts must exercise the contempt
sanction with caution and use ‘[t]he least possible power adequate to the end proposed.’” Gascho v.
Global Fitness Holdings, LLC, 875 F.3d 795, 799 (6th Cir. 2017) (internal citation omitted). The
“drastic nature of contempt sanctions” requires that the court use those powers “only in clear and
urgent instances.” Lucas v. Telemarketer Calling from 407 (476‐5680), 2015 U.S. Dist. LEXIS 151077
(S.D. Ohio Nov. 6, 2015) (quoting in part Springfield Bank v. Caserta, 10 B.R. 57, 59 (Bankr. S.D.
Ohio 1981)).
Consistent with the mandate to use its contempt powers sparingly, a court’s civil contempt
authority should not be used when the movant is merely seeking to collect on a money judgment.5
Aetna Cas. & Sr. Co. v. Markarian, 114 F.3d 346, 349‐50 (1st Cir. 1997); Ecopetrol S.A. v. Offshore
Exploration & Prod. LLC, 172 F. Supp. 3d 691, 697 (S.D.N.Y. 2016); Jou

5 A money judgment, as that term is used in Federal Rule of Civil Procedure 69, has been referred
to as a judgment which includes two elements: “(1) an identification of the parties for and against
whom judgment is being entered, and (2) a definite and certain designation of the amount which
plaintiff is owed by defendant.” Penn Terra, Ltd. v. Department of Environmental Resources, 733
F.2d 267, 275 (3d Cir. 1984); Fox v. Nat’l Oilwell Varco, 602 Fed. Appx. 449, 452 (10th Cir. 2015)
(citing Ministry of Def. & Support for the Armed Forces of the Islamic Republic of Iran v. Cubic
Def. Sys., Inc., 665 F.3d 1091, 1101 (9th Cir. 2011)) (similar). Federal Rule of Civil Procedure
54(a), incorporated into the Federal Rules of Bankruptcy Procedure by Rule 7054, defines “judgment”
as “a decree and any order from which an appeal lies.” See also Associated Gen. Contrs. Of Ohio,
Inc.
v. Drabik, 250 F.3d 482, 485 (6th Cir. 2001) (discussing “money judgment” in the context of
determining whether an award of attorney fees was a money judgment entitled to interest under 28
U.S.C. § 1961.).
.

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v. Adalian, 2015 U.S. Dist. LEXIS 13786 at *16‐17 (D. Haw. Feb. 5, 2015). Rather, in those
circumstances, the aggrieved party must use the tools provided under and through Federal Rule of
Civil Procedure 69 to enforce and collect upon the money judgment.
Analysis of this Case

Tagnetics has neither asserted nor argued that it has complied with the Settlement Enforcement
Order. Nor has it asserted that the Settlement Enforcement Order is not clear and specific, nor
that it was not aware of the Settlement Enforcement Order. Rather, it has only asserted that it has
appealed the Settlement Enforcement Order and does not want to pay sums due under the settlement as
found through the Settlement Enforcement Order in the event that the District Court determines that
there “was no meeting of the minds” as to the settlement.6
The Settlement Enforcement Order has many attributes of being a money judgment. It is a final,
appealable order and, in fact, has been appealed. See Fed. R. Civ. P. 54(a). And more importantly,
it requires Tagnetics to pay definite sums of money to the Petitioning Creditors. However, due to
the unique and special circumstances of this case, including the specific requirement in the
parties’ settlement of an initial payment as consideration for dismissal of the petition, the
court’s civil contempt power is the only remedy available to enforce Tagnetics’ compliance with the
Settlement Enforcement Order, including its obligation to pay the Petitioning Creditors the sums
they are due. The collection tools provided by Rule 69 are not presently available to collect the
sums due the Petitioning Creditors because the Tagnetics’ bankruptcy case initiated through the
involuntary bankruptcy petition remains pending, along with the stay provided by the Bankruptcy
Code.
11 U.S.C. § 362(a). The automatic stay applies in all bankruptcy cases, including
those commenced through the filing of an involuntary petition. In re Nicole Gas Prod. Ltd., 502
B.R.

6 Tagnetics’ only “Statement of Issue on Appeal” included with its Designation Of Record And
Statement Of Issues To Be Presented On Appeal Submitted By Tagnetics, Inc. (doc. 137) was that
“[t]he Bankruptcy Court erred when it held that the parties’ settlement agreement did not include a
release of Tagnetics’ affiliates, subsidiaries, parent corporation, officers, and directors.” That
document did not include an alternative argument or statement of issue on appeal that there was no
meeting of the minds as to the settlement agreement.

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508, 514 (Bankr. S.D. Ohio 2013); In re Epstein, 314 B.R. 591, 594 (Bankr. S.D. Tex. 2004); In re
C.W. Mining Co., 2008 Bankr. LEXIS 4840 at *9 (Bankr. D. Utah Aug. 7, 2008). Thus, the Petitioning
Creditors may not simply enforce their rights under the Settlement Enforcement Order through the
collection mechanisms provided by Rule 69.7
An appeal of an order by itself does not stay a party’s duty to comply with the court’s order. A
party’s obligation to comply with a court order exists pending an appeal absent a stay issued by an
appropriate court staying enforcement of that order. Maness v. Meyers, 419 U.S. 449, 458‐59 (1975);
United States v. Fesman, 781 F. Supp. 511, 514 (S.D. Ohio 1991).
Similarly, without a stay pending appeal, the trial court retains the authority to enforce the
order. Williamson v. Recovery Ltd. P’ship, 731 F.3d 608, 626 (6th Cir. 2013); City of Cookeville,
Tenn. v. Upper Cumberland Elec. Membership Corp., 484 F.3d 380, 394 (6th Cir. 2007).
Thus, since a stay has not been issued by this court or the District Court, Tagnetics is not in
compliance with the Settlement Enforcement Order, and the Settlement Enforcement Order is definite
and specific and Tagnetics at all times has been aware of the Settlement Enforcement Order, the
court finds by clear and convincing evidence that it is in contempt.
Since Tagnetics is in contempt of the Settlement Enforcement Order, the court is left with the
issue of how to compensate the Petitioning Creditors for their damages incurred as a result of
Tagnetics’ contempt and how to coerce Tagnetics’ compliance with the Settlement Enforcement Order.
The Petitioning Creditors’ damages are a loss of money – the failure to be paid the sums they are
due under the Settlement Enforcement Order. The Petitioning Creditors may be adequately compensated
for those damages through the interest to which they are entitled under federal law, that being the
federal judgment rate of interest provided by 28 U.S.C. § 1961. However, in addition to
compensatory damages, this court may also include in any civil contempt sanction a monetary
component intended to coerce the contemnor into compliance with its order. Any such coercive
component, however, must be prospective only and not retroactive. See Shillitani v. United States,
384

7 Once the initial payments are made to the Petitioning Creditors, pursuant to the terms of the
settlement and the Settlement Enforcement Order, the involuntary bankruptcy petition can be
dismissed and the Rule 69 collection remedies may be available to collect any additional sums due
under the Settlement Enforcement Order.

8

9
U.S. 364, 369‐370 (1966); Jaques, 761 F.2d at 308. Accordingly, Tagnetics shall have 30 days
from the date of the entry of this order to pay all past‐due sums due to the Petitioning Creditors
under the Settlement Enforcement Order ($30,000 to each Petitioning Creditor), with interest at the
rate provided by 28 U.S.C. § 1961 commencing three business days after the Settlement Enforcement
Order was entered. To coerce Tagnetics’ compliance with the Settlement Enforcement Order, in the
event those sums are not paid to the Petitioning Creditors within 30 days of this order, the court
finds that it is appropriate to add on to that federal judgment rate of interest, additional
interest at the rate of 5% per annum, simple interest, compounded monthly, commencing on the 31st
day following the entry of this order and continuing until all such sums are paid. In addition,
interest shall accrue on all sums due under the Settlement Enforcement Order in the future at the
federal judgment rate of interest, plus the 5% per annum, compounded monthly, until all such sums
are paid. This additional interest shall be on all sums previously due that are not paid to the
Petitioning Creditors within 30 days of the entry of separate order to be entered, plus any
additional sums that become due in the future, from the time that those sums first become due under
the settlement agreement as found by the court through the Settlement Enforcement Order. The
additional 5% interest shall not be due or accumulate during the pendency of any stay pending
appeal, from the time the stay first becomes effective until the stay terminates.
Conclusion
For the foregoing reasons, the court finds that Tagnetics is in civil contempt of the
Settlement Enforcement Order. Accordingly, the Petitioning Creditors’ motion to hold
Tagnetics in contempt is granted. A separate order will be entered consistent with this
decision.

IT IS SO ORDERED.
Copies to: All Creditors and Parties in Interest, Plus

Douglas S. Draper, 650 Poydras Street, Suite 2500, New Orleans, Louisiana 70130 Leslie A. Collins,
650 Poydras Street, Suite 2500, New Orleans, Louisiana 70130
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