Type: Amicus
Date: May 23, 2017
Description: Whether section 106 waives government immunity from money damages for willful violation of the automatic stay.
Result: Pending
Hunsaker 9th Cir. NCBRC amicus May 2017
Governmental Regulatory Exception to Automatic Stay Applies to Contempt Proceeding
“Civil contempt proceedings are exempted from the automatic stay under the government regulatory exemption when the proceedings are intended to effectuate the court’s public policy interest in deterring litigation misconduct.” Dingley v. Yellow Logistics, LLC, No. 14-60055 (9th Cir. April 3, 2017).
The underlying Nevada state court litigation arose out of a dispute in between Mark Dingley’s towing company and two transportation companies, Yellow Logistics, LLC, and Yellow Express, LLC, (Yellow) in which Yellow sued Mr. Dingley for improper towing, storage and sale of one of Yellow’s trucks. The Nevada court ordered $4,000 in discovery sanctions against Mr. Dingley when he failed to appear for a scheduled deposition. When he then failed to pay the sanction the court ordered Mr. Dingley to show cause why he should not be held in contempt. Mr. Dingley filed for chapter 7 bankruptcy before the contempt issue came to hearing. Yellow filed a brief in the state court arguing that the automatic stay did not apply to prevent the ongoing contempt litigation. Mr. Dingley responded with a complaint in the bankruptcy court arguing that Yellow’s state court brief violated the automatic stay. The bankruptcy court agreed with Mr. Dingley and awarded sanctions.
The BAP reversed, finding that, under the reasoning in David v. Hooker, Ltd., 560 F.2d 412 (9th Cir. 1977), the automatic stay does not preclude state court litigation concerning sanctions for discovery misconduct where that issue does not involve an attempt to collect a debt or otherwise harass the debtor on account of the debt. In re Dingley, 514 B.R. 591 (B.A.P. 9th Cir. 2014).
On appeal, the Ninth Circuit avoided the issue of Hooker having been decided prior to the 1978 automatic stay amendment to the Bankruptcy Code. Rather, the circuit court read section 362(b)(4) as applying to the civil contempt proceeding in state court. That section creates an exception to the automatic stay for: “the commencement or continuation of an action or proceeding by a governmental unit . . . to enforce such governmental unit’s . . . regulatory power . . .”
The ninth circuit has established two tests for determining whether a particular action falls under this exception: the pecuniary purpose test and the public policy test. Under these tests, if the government seeks to protect its own pecuniary interest or adjudicate private rights, the government regulatory exemption will not apply and the automatic stay will remain in force.
The court found its prior decision in In re Berg, 230 F.3d 1165 (9th Cir. 2000), to be controlling. In Berg, the court found that contempt litigation under Fed. R. App. Proc. 38, which provides for sanctions for filing a frivolous appeal, fell under the section 362(b)(4) exception to the automatic stay. The court found that because the purpose of Rule 38 was to effectuate the policy of deterring unprofessional behavior in litigation rather than to protect the government’s pecuniary interest or adjudicate a private right, it fell within the public policy test. It did not matter that the sanctions were sought by and would adhere to the benefit of a private party.
Likewise, the contempt proceeding in this case was in furtherance of the public policy against deterring unprofessional conduct in litigation, albeit at the discovery stage rather than the appellate stage. Because the state court contempt proceeding was not an attempt to protect pecuniary interests or adjudicate private rights, it fell under the exception to the automatic stay and could proceed.
Emotional Distress Damages Available for Stay Violation
Emotional distress damages may be awarded for willful violation of the automatic stay. Lansaw v. Zokaites (In re Lansaw), No. 16-1867 (3rd Cir. April 10, 2017).
Garth and Deborah Lansaw operated a day care center out of property they leased from Frank Zokaites. The Lansaws and Mr. Zokaites had numerous disputes during the course of their relationship and the Lansaws eventually entered into a lease with a third party. Mr. Zokaites asserted a lien against the Lansaws’ personal property for unpaid rent and, the next day, the Lansaws filed a bankruptcy petition. Despite notice of the bankruptcy, Mr. Zokaites entered the day care center during business hours, took photographs and behaved in a physically threatening manner toward Ms. Lansaw. Mr. Zokaites also entered the property during off hours, confronted Ms. Lansaw’s mother who was there to clean, and padlocked the door, allowing Ms. Lansaw to reenter only in the company of a police officer. Additionally, Mr. Zokaites threatened the Lansaws’ new landlord with legal action if he did not end the lease with the Lansaws. After a lengthy procedural history, and a hearing, the bankruptcy court awarded the Lansaws $7,500 for emotional distress, $2,600 in attorney fees, and $40,000 in punitive damages.
On Mr. Zokaites’ appeal, the Third Circuit, quoting Havens v. Mobex Network Servs., LLC, 820 F.3d 80, 92 (3d Cir. 2016), stated its standard of review of the bankruptcy court’s factual findings as “clearly erroneous only if it is ‘completely devoid of minimum evidentiary support displaying some hue of credibility or bears no rational relationship to the supportive evidentiary data.’”
The circuit court then turned to the question of whether section 362(k)(1)’s reference to “actual damages” includes damages for emotional distress. While the First, Ninth and Eleventh Circuits have expressly allowed such damages, the Fifth and Seventh Circuits have left the question open, and a district court out of the Sixth Circuit, United States v. Harchar, 331 B.R. 720 (N.D. Ohio 2005), found that such damages are not included in the scope of section 362(k)(1)’s “actual damages.”
The Harchar court rested its decision on legislative history, finding that prior to enactment of section 362(k)(1) in 1984, enforcement of the automatic stay provision was governed by the court’s contempt powers. When the extent of those powers was called into question by Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), Congress enacted section 362(k) to give debtors a method of enforcing the automatic stay. The district court found that section 362(k)(1) was enacted to counteract the decision in Northern Pipeline as to enforcement power, and that the non-inclusion of emotional distress damages indicated that Congress did not intend those damages to be deemed “actual damages.”
The Seventh Circuit, in Aiello v. Providian Fin. Corp., 239 F.3d 876 (7th Cir. 2001), held that because the automatic stay was intended to afford financial protection during bankruptcy, at the very least an award of damages for emotional distress had to be tied to pecuniary loss.
The Ninth Circuit, on the other hand, held in Dawson v. Washington Mut. Bank, F.A. (In re Dawson), 390 F.3d 1139 (9th Cir. 2004), abrogation on other grounds recognized in Gugliuzza v. FTC (In re Gugliuzza), –– F.3d ––, 2017 WL 1101094 (9th Cir. Mar. 24, 2017), that an award of damages for emotional distress was included in the scope of “actual damages” and need not be tied to pecuniary loss. Like the Harchar court, the Ninth Circuit looked to legislative history, but rather than limiting that analysis to the history of section 362(k), the court looked to the history of the automatic stay provision, enacted six years earlier in the 1978 amendments. It found that an important purpose of the automatic stay was to give the debtors breathing room free of financial burdens including collection efforts and harassment by creditors. Because Congress considered abusive creditor conduct when enacting the automatic stay provision, the later enforcement provision could be deemed to address those same considerations.
The Lansaw court was persuaded by the Ninth Circuit’s reasoning in Dawson. “If the automatic stay was meant to protect against non-pecuniary emotional harm, it is only logical that Congress would intend to include damages resulting from that harm when it introduced the award of ‘actual damages’ as the enforcement mechanism six years later.” In finding that emotional distress damages were available, however, the court specifically declined to decide whether a finding of pecuniary loss was a predicate to that award, finding that pecuniary damages in the form of attorney fees were present here. (In a footnote, the court suggested that since section 362(k) is likely to provide the only avenue for such relief, pecuniary loss would likely not be a prerequisite).
Addressing the specific emotional distress award in this case, the court disagreed with Mr. Zokaites that any such claim must include corroborating medical evidence. Rather, the court found that “where a stay violation is patently egregious, a claimant’s credible testimony alone can be sufficient to support an award of emotional-distress damages.” Here, the emotional distress claim was supported by the Lansaws’ credible testimony of nightmares, fear, depression, ulcer and general withdrawal from society. That, in conjunction with the evidence of Mr. Zokaites’s threatening physical behavior and interference with the Lansaws’ business and new lease, was sufficient to support the emotional distress award.
Turning, finally, to the issue of punitive damages, the court found that, based on the egregiousness of Mr. Zokaites’s behavior, the ratio between actual damages and the amount of the punitive damage award, and punitive damages awarded in similar cases, the court did not err either in the award itself or its amount.
Circuit Court Upholds Punitive Damages Eight Times Compensatory
There was sufficient evidence of the mortgage servicer’s reckless indifference to the mortgagor’s rights to support a punitive damage award eight times the compensatory damage award for invasion of privacy. May v. Nationstar Mortgage, No. 16-1285, 16-1307 (8th Cir. March 29, 2017).
While in chapter 13 bankruptcy, Jeannie May entered into an agreement with her mortgagee to pay down her mortgage and arrears. After she was discharged from bankruptcy, the mortgage servicer, Nationstar, sent her a mortgage statement in which it misstated a $51 credit as a $5,162 debit. Nationstar also damaged Ms. May’s credit score by incorrectly reporting a delinquent debt. Ms. May spent the next two years trying to get Nationstar to correct the admitted error. Instead of correcting the problem, however, Nationstar commenced aggressive collection efforts including threatening of foreclosure, conducting periodic property inspections, and making numerous mocking and sarcastic phone calls to her. Ms. May sued Nationstar alleging invasion of privacy under state law, and federal claims under RESPA, FDCPA and FCRA. The jury awarded compensatory damages of $50,000 for the invasion of privacy, and $50,000 for the violation of the FCRA. It also awarded $400,000 in punitive damages for the invasion of privacy.
The parties cross-appealed with Nationstar arguing that its culpability was limited to a series of inadvertent errors that did not add up to reckless indifference or evil motive as required under Missouri law to support a punitive damages award.
The circuit court disagreed. It was the province of the jury to weigh the conflicting evidence and a finding of reckless indifference will be overturned only in the complete absence of probative facts. The court found sufficient evidence to support the jury’s finding.
Nationstar next argued that the $400,000 punitive damage award was excessive and in violation of its due process rights under the Fourteenth Amendment. To violate due process, punitive damages must “shock the conscience of the court or demonstrate passion or prejudice on the part of the trier of fact.” A court will consider: 1) the degree of reprehensibility, 2) the compensatory to punitive damage ratio, and 3) how the award compares to awards in similar cases.
With respect to reprehensibility—the most important of the three factors—the court found that it may be demonstrated by showing any of the following: physical harm, indifference or reckless disregard of health or safety of others, financial vulnerability of the victim, repeated conduct, or intentionality. The court found there was evidence of each of these factors to support the jury finding.
As to the compensatory to punitive damage ratio, Nationstar argued that the 8:1 ratio was excessive. Again the court disagreed. Noting that it had affirmed ratios as high as 5.7:1, the court considered the degree of Nationstar’s culpability as well as the percentage of the company’s net worth the punitive damage amount represented: thirty-three thousandths of one percent. It found that the ratio did not render the award unconstitutional.
Finally, in a comparison of this case with others, the court noted that while few cases of this type rested on a theory of state law invasion of privacy, compared to cases with similar facts the award was in line.
The court concluded that the punitive damage award was adequately supported.
Ms. May cross-appealed on the grounds that the lower court erroneously excluded the testimony of a witness who was unrelated to Ms. May’s case but who had had similar experiences with Nationstar and whose testimony Ms. May offered to rebut Nationstar’s anticipated defense of innocent inadvertence. The court found no abuse of discretion in excluding the testimony, as Ms. May was still able to counter Nationstar’s evidence of good faith and, allowing the testimony would have resulted in a “mini-trial” on an unrelated case.
Ms. May also challenged the district court’s jury instructions on her RESPA claim. The controversy surrounded an instruction based on an amendment to the statute under which the requirement that a creditor respond to a request for information does not apply if the request is identical to an earlier request to which it did respond. Nationstar argued that the amendment was merely a codification of a common sense application of the law and therefore the instruction was correct. Nationstar also noted that Ms. May did not object to the instruction at the time.
Because of her failure to object the court reviewed the instruction for “plain error.” It found none. There were many grounds upon which her RESPA claim might have failed and no indication that this instruction was dispositive. The fact that Ms. May received a jury verdict of $500,000 in damages suggests that she was vindicated at trial without regard to the RESPA claim.
Mere Retention of Property Does Not Support Stay Violation
Breaking with the majority view that passive retention of estate property may be an “exercise of control,” the Tenth Circuit held that the lender must take some affirmative action to support a stay violation claim. WD Equipment, LLC. v. Cowen, No. 15-1413 (10th Cir. Feb. 27, 2017).
Jared Cowen defaulted on the purchase money security interest loan for one vehicle and a non-pmsi loan for another vehicle. After the vehicles were repossessed, by separate but related lenders, Mr. Cowen filed for chapter 13 bankruptcy. The case was dismissed, however, because, without his trucks, he could not earn income to finance his plan. The bankruptcy court retained jurisdiction over Mr. Cowen’s adversary complaint for violation of the automatic stay. In the hearing on that complaint, the lenders lied and presented forged documents to support their claims that the sale of one vehicle and title transfer of the other took place pre-bankruptcy. The bankruptcy court found that the lenders’ failure to turn over the vehicles constituted continuing violation of the automatic stay and awarded damages. The district court recalculated damages but otherwise affirmed.
The circuit court began by rejecting the lenders’ argument that the bankruptcy court lost jurisdiction over the adversary complaint when the bankruptcy case was closed, finding that it had no support in the Code and was precluded by the prior case of Johnson v. Smith (In re Johnson), 575 F.3d 1079, 1083 (10th Cir. 2009).
On the merits, the court interpreted the language in section 362(a)(3) that bankruptcy’s automatic stay provision prohibits a lender from “any act” to exercise control over property of the estate. The court found that the phrase “any act” requires an affirmative action beyond mere passive retention of property, stating, “stay means stay, not go.” The court rejected the argument that when, in 1984, Congress added the language prohibiting exercise of control over property to the automatic stay provision, it intended to cover situations such as the one at bar. Instead, the court found that the amendment was amenable to the less drastic interpretation that Congress meant to include situations where the creditor violated the stay without actually taking possession of the property, as in situations involving intangible property rights.
The court also found that Mr. Cowen could not hang his hat on the relationship between the turnover provision of section 542 and violation of stay under section 362. The court found the two provisions function separately with the court’s power to enforce section 542 arising out of section 105(a).
Having found that mere retention of the vehicles was insufficient to support a stay violation, however, the court offered an alternative basis for stay violation. It found that the lenders’ lying and forging of documents in an attempt to show pre-bankruptcy ownership of the vehicles were affirmative acts to exercise control over estate property. The court remanded to the district court to reconsider the case in light of this finding.
Court Issues $45m Punitive Damages Award Against BofA
“The mirage of promised mortgage modification lured the plaintiff debtors into a kafkaesque nightmare of stay-violating foreclosure and unlawful detainer,” for which the court ordered over $1 million dollars in actual damages plus a significant punitive damage award. Sundquist v. Bank of America, No. 10-35624, Adv. Proc. No. 14-2278 (Bankr. E.D. Cal. March 23, 2017).
In the first 30 pages of the 109-page opinion, the court walked through the facts of the case illustrating Bank of America’s egregious conduct and including extensive quotes from Renee Sundquist’s journal. A few highlights include the following facts. Though struggling financially, Erik and Renee Sundquist were current on their home loan, defaulting only after Bank of America told them that the only way they could get loan modification would be if they were in default. After that began a series of abortive modification attempts during which Bank of America consistently lost paperwork, denied modification for no apparent reason, or otherwise dangled modification before the Sundquists without actually providing it, while at the same time going forward then retreating on foreclosure actions. At one point, a Bank of America employee told Renee that modifications were “not real” but were simply a way for Bank of America to make more money before foreclosure.
The Sundquists filed for chapter 13 bankruptcy under threat of imminent foreclosure. After foreclosing in violation of the stay, Bank of America sent thugs to stake out the residence and intimidate the family, and gave them a three-day notice of eviction causing the Sundquists and their children to find temporary housing. Upon learning that they were no longer the owners of the home, the Sundquists voluntarily dismissed their bankruptcy case thereby ending the automatic stay. Meanwhile, and without the Sundquists’s knowledge, Bank of America rescinded the foreclosure and returned title of the home to them. When they later returned to the house they found that major appliances had been removed. In keeping with its conduct throughout, Bank of America attempted to collect mortgage payments for the months the Sundquists had been without their home.
The court found Bank of America’s conduct to be willful and intentional and that it resulted in “emotional distress, lost income, apparent heart attack, suicide attempt, and post-traumatic stress disorder, for all of which Bank of America disclaim[ed] responsibility.”
Finding that state tort principles inform damage awards in bankruptcy, the court applied a “but for” analysis to the issue of damages: “If a consequence would not have occurred ‘but for’ the automatic stay violations, then courts make awards based on that consequence.” Actual damages including economic loss, emotional distress, attorney’s fees, and punitive damages are all recoverable under appropriate circumstances.
In detailed analysis of the evidence, the court concluded that actual damages, including $70,000.00 in fees to trial counsel, medical expenses, loss of employment income, HOA fees, and lost property, came to over $1 million.
Turning to punitive damages, the court balanced the desire to properly punish Bank of America beyond what it might consider “cost of doing business,” and a reluctance to award the Sundquists vastly more than would be reasonable. It concluded that it had the power to make a portion of the award payable to organizations devoted to the public purposes of education and consumer protection. To that end, the court ordered that a portion of the punitive damages be directed to seven entities: the National Consumer Bankruptcy Rights Center, the National Consumer Law Center and five University of California Law Schools.
The decision is likely to be appealed.
Seventh Circuit Discusses Application of Co-Debtor Stay
Bankruptcy’s co-debtor stay was intended to prevent indirect pressure created by creditors attempting to collect against a co-signatory on a debt belonging to the bankruptcy debtor. Therefore, it does not apply to a debt solely belonging to the bankruptcy debtor’s spouse even though state law provides for collection of that debt through marital property. Smith v. Capital One Bank, No. 16‐1422 & 16‐1423 (7th Cir. Dec. 22, 2016). [Read more…] about Seventh Circuit Discusses Application of Co-Debtor Stay
Demand for Full Payment Does Not Accelerate Mortgage Maturity Date
Demanding full payment of a mortgage after the debtor’s default did not accelerate the maturity date, such that the limitations period for filing a foreclosure action was moved up. Washington v. Bank of New York Mellon, No. 15-3210 (3rd Cir. Sept. 30, 2016) (unpublished).
Though the mortgage agreement specified a maturity date of 2037, the debtor, Gordon Washington, argued that when Bank of New York demanded full payment and filed its first foreclosure action in 2007, it activated the mortgage agreement’s acceleration clause and established a new maturity date for the mortgage. The foreclosure action failed for lack of prosecution, and the creditor filed a new action after Mr. Washington had filed his bankruptcy petition in 2014. Mr. Washington then sought an order to the effect that the creditor no longer had an interest in the property because the limitations period had elapsed. [Read more…] about Demand for Full Payment Does Not Accelerate Mortgage Maturity Date
Incompetence Does Not Excuse Stay Violation
A mortgage creditor violated the automatic stay by mistakenly filing a claim to which it had no rights and by failing to immediately return payments on that claim it had received by the trustee. In re Mocella, 552 B.R. 706, No. 10-42287 (Bankr. N.D. Ohio 2016).
Joseph J. and Kimberly A. Mocella filed Chapter 13 bankruptcy in June 2010, and listed a debt to GMAC of approximately $10,000.00, secured by their car. GMAC filed a proof of claim (claim 2) for the secured debt. Nationstar Mortgage filed a proof of claim for over $76,000.00 secured by the Mocellas’ residence. On December 4, 2014, Nationstar filed a Transfer of Claim in which it stated that GMAC had transferred claim 2 to Nationstar. In fact, Nationstar intended to file the Transfer of Claim for a bulk servicing transfer from Ocwen Loan Servicing relating to an unsecured HomeSaver Loan that Nationstar had given the Mocellas. [Read more…] about Incompetence Does Not Excuse Stay Violation
State Court Application of Automatic Stay Is Res Judicata
A state court’s final ruling as to the application of the automatic stay to a case before it was res judicata and could not be overruled by the bankruptcy court. Bank of North Georgia v. Vanbrocklin, 2016 Bankr. LEXIS 2176, No. 15-11761 (Bankr. N.D. Ga. May 15, 2016).
Bank of North Georgia (BNG) filed a state court lawsuit against several parties, including several entities as principals on four notes and against James P. Vanbrocklin as guarantor on the notes. When Mr. Vanbrocklin filed for Chapter 7 bankruptcy, he listed BNG as holding a contingent, unliquidated claim for approximately $1.2 million. BNG responded with an adversary complaint asserting that its claim was nondischargeable because Mr. Vanbrocklin, as a member and manager of Axiom Labs, a principal on the loans, had sold Axiom property, misappropriated proceeds, and wrongfully transferred property to a company called USA Labs. In the state case, BNG issued subpoenas and sought discovery as to transfers of property from either Mr. Vanbrocklin or USA Labs.
Mr. Vanbrocklin filed an emergency motion in the state court arguing that the discovery sought by BNG was in furtherance of its adversary proceeding in the bankruptcy court and requesting that the state court enforce the automatic stay by precluding such discovery. The state court granted the motion and stayed all proceedings in the state court as to Mr. Vanbrocklin. [Read more…] about State Court Application of Automatic Stay Is Res Judicata