In March, Bankruptcy Judge Christopher M. Klein of Sacramento, Calif., imposed more than $46 million in compensatory and punitive damages on a bank for foreclosing and evicting a couple from their home although the lender knew they had filed a chapter 13 petition expressly to halt foreclosure. The judgment included $40 million in punitive damages for what Judge Klein called a “Kafkaesque nightmare of stay-violating foreclosure.” Sundquist v. Bank of America NA, 566 B.R. 563, 571 (Bankr. E.D. Cal. March 23, 2017).
Months later, the parties reached a confidential settlement requiring the judge to expunge his opinion from the public record. Judge Klein said the proposed settlement created a “hostage standoff” that he characterized as “a naked effort to coerce this court to erase the record.”
In an opinion on Jan. 18, Judge Klein’s response to vacating his opinion was “No chance. No dice.”
The Genesis of the Settlement
The parties responded to the $46 million judgment with cross motions for rehearing. The bank claimed there was evidence justifying total exculpation. The debtors countered with arguments that they should be entitled to more than $9 million in compensatory damages.
Mediation ensued and resulted in a proposed settlement giving the debtors an undisclosed amount totaling considerably more than Judge Klein’s $6 million judgment.
In his March opinion, Judge Klein had earmarked the $40 million in punitive damages for five California law schools and two nonprofit groups to “be used only for education in consumer law and delivery of legal services in matters of consumer law.” The settlement called for the law schools and nonprofit groups to receive about $300,000.
There was a catch: The settlement would require Judge Klein to vacate his March opinion, which excoriated the bank for its contemptuous behavior. Although the parties could have settled between themselves without court approval, they needed the judge’s blessing to vacate his opinion.
The intended recipients of the punitive damages opposed vacating the opinion but took no position on the settlement otherwise. Judge Klein took the settlement under submission in October, with the question of vacating his March decision being a primary sticking point.
Judge Klein handed down his decision on Jan. 18. He crafted an elegant solution designed to ameliorate the lender’s legitimate concerns while leaving his opinion on the public record, available for citation by other judges in other cases.
The Hostage Standoff
As a result of his opinion in March, Judge Klein said “the situation is now bigger than the” debtors. The “public-interest component cannot be ignored” because “some things are not appropriate to sweep under the carpet.”
Under American Games Inc. v. Trade Products. Inc., 142 F.3d 1164 (9th Cir. 1998), Judge Klein said he had equitable discretion to vacate his opinion, or not. Once decisions have been entered after trial, he said that attempts to “‘buy and bury’ adverse judgments are viewed with caution.”
In deciding how to exercise discretion, Judge Klein said the record did not suggest “that the facts constitute an anomalous or isolated incident that might unfairly besmirch an otherwise upstanding defendant.” He said the lender had shown no remorse, made no apology, made no promise to reform, and had not accepted responsibility for its actions.
“To name and to shame [the lender] on the public record in an opinion that stays on the books serves a valuable purpose casting sunlight on practices that affect ordinary consumers,” Judge Klein said. Under the circumstances, the proper method for erasing the opinion is to reverse it on appeal, he said.
The Solution
Releases in the agreement would alleviate any concern on the part of the bank that the debtors might mount another lawsuit after collecting the settlement. On the other hand, Judge Klein said the bank had legitimate concerns, although remote, that the doctrine of issue preclusion (sometimes called offensive collateral estoppel) might enable a third party to sue the lender and contend that some of the issues were decided in the $46 million judgment.
To contour a solution giving the bank the protection it legitimately needed, Judge Klein undertook an extensive analysis of the Restatement (Second) of Judgments. In that respect alone, his opinion is worth reading in full text.
To give the parties most of what they wanted, Judge Klein said he would vacate the portion of his judgment awarding damages to the debtors while closing the adversary proceeding “without dismissing the adversary proceeding and without erasing the opinion.” Vacating the damage award would remove finality and preclude a third party from raising a claim of issue preclusion.
To add belt and suspenders, Judge Klein said his order on the motion to vacate the judgment would provide that the legal and factual issues were not “sufficiently firm to be accorded preclusive effect.”
Judge Klein granted the parties’ wish by keeping the terms of settlement secret. He did say that the debtors would receive a “substantial premium” over the original award of about $6 million.
The “public interest” component of the original punitive damage award would be “indirectly honored in the settlement” because the debtors obliged themselves to give about $300,000 to the consumer advocacy programs.