Almost one year ago, Bankruptcy Judge Mike N. Nakagawa of Las Vegas socked a mortgage servicer with some $300,000 in actual and punitive damages for “reprehensible” conduct by violating the automatic stay 98 times over a period of 648 days during the debtors’ chapter 13 case.
On January 7, the Ninth Circuit Bankruptcy Appellate Panel reversed in part. The rulings would have made law favorable in part to creditors were it not for the fact that both per curiam opinions were nonprecedential. Despite reversals, the BAP nonetheless left the door open for the bankruptcy court on remand to impose almost equivalent sanctions.
The BAP’s holdings include:
- Although a lender’s willful violation of the automatic stay continues after discharge, the lender must be given actual notice of the discharge order as a predicate to finding a violation of the discharge injunction;
- For the court to award attorneys’ fees for a stay violation under Section 362(k)(1), debtors are not required to have personal liability to pay counsel; and
- One spouse who was not liable for the debt cannot be awarded sanctions for a stay violation if the other spouse owned the property and was solely liable for the debt.
The Bankruptcy Court’s Opinion
A husband and wife filed a joint petition and confirmed a chapter 13 plan. The couple’s home was in the wife’s name. The husband was not liable on the note.
During the chapter 11 case, the servicer of a second mortgage began calling and sending mail demanding payment on the mortgage that had been extinguished, leaving the lender with nothing more than an unsecured claim to receive no payments under the plan because the servicer had not filed a claim. The husband fielded all of the calls and handled the family’s mail.
The servicer never received notices about the bankruptcy because the schedules had an incorrect address. In a telephone call early in the chapter 13 case, the husband told the servicer they were in bankruptcy. The servicer ignored the information because the husband was not liable on the debt and was not an owner of the property. The servicer’s calls and demand letters continued after discharge.
After discharge, the couple reopened the case and brought a contempt motion.
Judge Nakagawa wrote a 59-page opinion finding a willful violation of the automatic stay. In re Moon, 613 B.R. 317 (Bankr. D. Nev. Feb. 25, 2020). To read ABI’s report on the opinion, click here.
Judge Kanagawa found no discharge violation because he found no facts sufficient to show that the servicer was aware of the discharge order. For violating the stay, he gave (1) the wife $742 for actual pecuniary loss, (2) the husband $100,000 for emotional distress, (3) $67,000 for the debtors’ attorney’s time charges, and (4) $200,000 in punitive damages.
The servicer appealed. The debtors appealed the failure to impose sanctions for violating discharge.
Attorneys’ Fees
The servicer argued on appeal that the debtors were not entitled to recover attorneys’ fees because they were not personally liable to counsel. There was no written engagement agreement and no contingency agreement.
The BAP rejected the argument, based on an extrapolation from Section 362(k)(1). For a willful stay violation, it provides that an individual debtor “shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”
The BAP’s unsigned opinion recited Ninth Circuit authority holding that a debtor may recover attorneys’ fees incurred in prosecuting an action for damages, not just for violating the stay. Another Ninth Circuit opinion allows recovery of attorneys’ fees in successfully challenging damages awarded on appeal.
Although the Ninth Circuit’s opinions and authority from the Supreme Court were not on point, the BAP decided that policy considerations led to the conclusion that “attorney’s fees and costs are ‘incurred’ even when the plaintiff is not personally liable for them. This is true whether counsel is representing the plaintiff on a contingent fee basis or pro bono publico.”
Requiring debtors to have personal liability, the BAP said, “would defeat the statute’s purpose: making it possible for injured, impecunious debtors to obtain counsel to bring suit and vindicate their rights against violators of the automatic stay.”
The BAP also rejected the idea that the lack of a written engagement agreement meant no entitlement to recovery of attorneys’ fees. It “would have been better practice for [the debtor’s attorney] to have entered into a written fee agreement with the [debtors, but] the lack of such an agreement is not fatal since the presence of an attorney-client relationship suffices.”
The BAP vacated and remanded the award of $67,000 in attorneys’ fees because the court was reversing and remanding other aspects of the sanctions. The BAP also wanted a precise calculation of the fee award because the bankruptcy court had imposed no sanctions for violation of discharge.
On the other hand, the BAP allowed the bankruptcy court on remand to decide whether an enhancement would be appropriate.
The Husband’s Damage Award
In a separate opinion, the BAP dealt with the $100,000 in emotional distress damages awarded to the husband.
Even though the couple filed a joint petition, the BAP said the estates of the husband and wife were nonetheless separate. The husband did not own the home; he had conveyed his community property interest to his wife, and he was not liable on the mortgage debt.
With regard to the husband, the lender could not have violated the stay in the sense of enforcing a lien against his property or attempting to collect a debt from him. The only stay violation with regard to him would arise under Section 362(a)(3) for attempting to obtain possession or control over estate property.
There again, there could be no stay violation, because the home was no longer estate property when the home revested in the wife on confirmation, and the servicer was not notified about the bankruptcy until after the home had revested.
Because the husband did not own the property and was not liable for the debt, the BAP set aside the award of $100,000 in emotional distress damages in his favor, because there was no stay violation regarding his property or debt.
The servicer did not contest the award of $742 in pecuniary damages in favor of the wife.
Punitive Damages
Judge Nakagawa had awarded $200,000 in punitive damages, representing 200% of actual damages for the husband’s emotional distress.
The BAP found “no clear error” in finding that the circumstances warranted punitive damages and saw no error in finding that the servicer’s actions were “reprehensible.” The BAP said it “would have had little trouble” in upholding $200,000 in punitive damages had it also upheld the $100,000 award to the husband.
The BAP was constrained to vacate the punitive damage award and remand for the bankruptcy court to “reconsider the amount in light of the significantly reduced compensatory award,” that is, the vacature of the husband’s $100,000 in damages for emotional distress.
To avoid insinuating that Judge Nakagawa on remand could only impose nominal punitive damages, the BAP said that the “bankruptcy court[] may consider the amount of attorney’s fees and costs in determining the size of a punitive damages award under § 362(k)(1).”
No Discharge Violation
The BAP found insufficient evidence in the record to show that the servicer was aware of the discharge order or when it became aware. Alluding to Taggart v. Lorenzen, 139 S. Ct. 1795 (2019), the BAP said there was a “fair ground of doubt” about the servicer’s conduct after discharge.
The BAP therefore upheld the bankruptcy court’s refusal to find contempt of the discharge injunction.
Observations
The BAP in substance said that the servicer would have been liable for discharge violations had the servicer been given notice of the discharge injunction. In other words, a court will not assume that a creditor who violates the automatic stay must assume that continuation of the same actions will also violate the discharge injunction.
On that point, courts in the future may reach different conclusions. Why must there be actual notice of the discharge order if there was notice of the bankruptcy?
Consider this: Assume that the creditor continues stay-violating activities that commenced before discharge. Further assume that the creditor ceases violating the discharge sometime after discharge but before receiving notice of discharge.
Does Taggart require giving notice of entry of the discharge order if the creditor knew there was a bankruptcy? Why should the creditor be let off the hook for continuing the same contemptuous activities?
If pre-discharge conduct and notice satisfy the Taggart standard, why must there be new notice?
The opinion by Judge Nakagawa and the BAP opinions indicate that more damages could have been proven had the debtors’ counsel presented better evidence. Any disinclination to impose damages is peculiar to the facts of the case.
The opinions are Rushmore Loan Management Services LLC v. Moon (In re Moon), 20-1144 and 20-1057 (B.A.P. 9th Cir. Jan. 7, 2021).
Almost one year ago, Bankruptcy Judge Mike N. Nakagawa of Las Vegas socked a mortgage servicer with some $300,000 in actual and punitive damages for “reprehensible” conduct by violating the automatic stay 98 times over a period of 648 days during the debtors’ chapter 13 case.
On January 7, the Ninth Circuit Bankruptcy Appellate Panel reversed in part. The rulings would have made law favorable in part to creditors were it not for the fact that both per curiam opinions were nonprecedential. Despite reversals, the BAP nonetheless left the door open for the bankruptcy court on remand to impose almost equivalent sanctions.
The BAP’s holdings include:
- Although a lender’s willful violation of the automatic stay continues after discharge, the lender must be given actual notice of the discharge order as a predicate to finding a violation of the discharge injunction;
- For the court to award attorneys’ fees for a stay violation under Section 362(k)(1), debtors are not required to have personal liability to pay counsel; and
- One spouse who was not liable for the debt cannot be awarded sanctions for a stay violation if the other spouse owned the property and was solely liable for the debt.