The standards under Taggart limiting the imposition of contempt sanctions for violating the discharge injunction do not apply when the creditor’s violation of the automatic stay continues after discharge, according to Bankruptcy Judge Christopher M. Klein of Sacramento, Calif.
The case involved a law firm that advertised itself as “the premier creditors’ rights law firm in California.” With knowledge of the bankruptcy, the firm nonetheless violated the automatic stay and the discharge injunction. In his February 6 opinion, Judge Klein imposed $25,000 in punitive damages and about $9,900 in actual damages against the firm and its client, a judgment creditor.
Prof. Nancy Rapoport lauded Judge Klein for authoring a “beautifully written opinion.” Prof. Rapoport is the Garman Turner Gordon Professor of Law at the Univ. of Nevada at Las Vegas William S. Boyd School of Law.
The Stay and Discharge Violations
The mess unfolded like this: The creditor had a judgment for about $21,000. The creditor turned the judgment over to the law firm for collection. The firm served papers on the judgment debtor’s employer to garnish wages.
When the garnishment hit, the employee already had an outstanding garnishment for child support. Under California law, the employee’s wages at the time were not high enough to require the employer to withhold on account of both child support and the $21,000 judgment.
After the law firm filed papers to garnish on account of the judgment, the employee filed a chapter 7 petition and gave notice to the judgment creditor and the collection firm. However, the firm did not withdraw the garnishment.
Before the debtor received his discharge, he began working overtime, increasing his wages to a level where the employer was required to withhold on account of the $21,000 judgment. As a result, the debtor’s wages were garnished in violation of the automatic stay twice before the debtor received his discharge.
The law firm and the judgment creditor also had notice when the debtor received his discharge, but the firm did not withdraw the garnishment. Consequently, the debtor’s wages were garnished five more times after discharge.
After the third garnishment following discharge, the debtor’s lawyer faxed a letter to the law firm demanding the return of the garnished funds and withdrawal of the garnishment. The law firm ignored the letter, according to Judge Klein. The law firm also ignored several telephone calls and messages from the debtor’s lawyer to the collection firm.
After the seventh garnishment, the debtor’s lawyer filed a motion asking Judge Klein to impose sanctions. Three days later, the collection firm withdrew the garnishment after almost $900 had been withheld from the debtor’s wages.
Judge Klein’s Ruling
Judge Klein held a hearing with witnesses, after warning the judgment creditor and its counsel that he might impose contempt sanctions. Of no little significance, Judge Klein said that the creditor’s counsel, whom he called “expert debt collectors,” attempted to avoid the imposition of sanctions by misrepresenting the facts and California’s garnishment law.
“Conspicuously,” Judge Klein said, the firm failed to explain the delay in lifting the garnishment after receiving the demand letter from the debtor’s attorney. The firm and the judgment creditor conceded that they were aware of the bankruptcy and the discharge and acknowledged their affirmative duty to vacate the attachment.
Under Taggart v. Lorenzen, 139 S. Ct. 1795, 1801 (June 3, 2019), the Supreme Court held that a creditor cannot be in contempt of the discharge injunction if there was “an objectively reasonable basis for concluding that the creditor’s conduct might be lawful.” For ABI’s report on Taggart, click here.
Applying the higher Taggart standard regarding a discharge injunction to the automatic stay violation, Judge Klein said there was “no objectively reasonable basis for concluding that the conduct of [the judgment creditor and its law firm] might be lawful.” He went on to say, however, that violation of the automatic stay exposed them to sanctions under Section 362(k)(1).
For a “willful violation” of the automatic stay, the section allows the court to award “actual damages, including costs and attorneys’ fees,” plus punitive damages “in appropriate circumstances.”
Because he found “clear and convincing evidence” that the automatic stay violation was “willful,” Judge Klein confronted the question of whether the remedies under Section 362(k)(1) were cut off when the debtor received his discharge. He explained that the array of remedies available under common law for a discharge violation are more limited than those under Section 362(k)(1) for transgressing the automatic stay.
Judge Klein decided that Section 362(k)(1) continues to apply when an automatic stay violation continues after discharge. That section, he said, contains “stronger, more explicit, and more definite statutory remedies that are more adequate to the task than the least-possible-exercise-of-power restriction on civil damages” for violating the discharge injunction.
It would be “an odd system,” Judge Klein said, “that strips an individual debtor of the potent Section 362(k)(1) statutory punitive damages remedy” against a creditor who violates the automatic stay in bad faith but argues that the entry of discharge “insulates the same bad actor” from the more stringent sanctions for violating the automatic stay.
Characterizing the actions as a “callous disregard of the law and the rights of the creditor” was an “understatement,” Judge Klein said. Turning to the appropriate remedy, he awarded the debtor $5,500 for his attorneys’ fees plus $3,500 in actual damages for the debtor’s emotional distress. To justify damages for emotional distress, Judge Klein credited the debtor’s testimony that he was having trouble paying rent and buying food as a result of the garnishment.
Focusing on punitive damages, Judge Klein said there must be a showing of recklessness or callous disregard for the law. He said that the 19-day delay in lifting the garnishment after the demand letter from the debtor “tips the scales of reprehensibility in this case. Sophisticated debt collectors plainly know the law regarding the bankruptcy automatic stay. There is no explanation other than reckless or callous disregard for the law for not immediately having terminated” the garnishment on learning of the discharge violation.
Judge Klein awarded $25,000 in punitive damages. The punitive damages were “proportional,” he said, because they were about 2.5 times the debtor’s actual damages.
Joint and Several Liability
The judgment creditor argued that it should not be liable for sanctions because the law firm had committed the transgressions. Judge Klein cited Supreme Court authority for the notion that clients are held accountable for the acts or omissions of their counsel. He therefore imposed the sanctions jointly and severally on the judgment creditor and its counsel.
If they disagree, Judge Klein said they “remain free to allocate the consequences among themselves.”
Regarding the allocation of sanctions, Prof. Rapoport said that “lawyers, as agents, can bind their clients for acts done within the scope of agency. Lawyers (and clients) sometimes forget that.” Prof. Rapoport is an expert on ethics.
Best Practices on ‘Unbundling’
Prof. Rapoport was the co-reporter for an ABI task force studying ethics. A section of the report was devoted to limiting the scope of legal representation, or “unbundling.” To read the report, click here. The section on “unbundling” appears at pages 49ff.
The standards under Taggart limiting the imposition of contempt sanctions for violating the discharge injunction do not apply when the creditor’s violation of the automatic stay continues after discharge, according to Bankruptcy Judge Christopher M. Klein of Sacramento, Calif.
The case involved a law firm that advertised itself as “the premier creditors’ rights law firm in California.” With knowledge of the bankruptcy, the firm nonetheless violated the automatic stay and the discharge injunction. In his February 6 opinion, Judge Klein imposed $25,000 in punitive damages and about $9,900 in actual damages against the firm and its client, a judgment creditor.
Prof. Nancy Rapoport lauded Judge Klein for authoring a “beautifully written opinion.” Prof. Rapoport is the Garman Turner Gordon Professor of Law at the Univ. of Nevada at Las Vegas William S. Boyd School of Law.
The Stay and Discharge Violations
The mess unfolded like this: The creditor had a judgment for about $21,000. The creditor turned the judgment over to the law firm for collection. The firm served papers on the judgment debtor’s employer to garnish wages.
When the garnishment hit, the employee already had an outstanding garnishment for child support. Under California law, the employee’s wages at the time were not high enough to require the employer to withhold on account of both child support and the $21,000 judgment.
After the law firm filed papers to garnish on account of the judgment, the employee filed a chapter 7 petition and gave notice to the judgment creditor and the collection firm. However, the firm did not withdraw the garnishment.