The Ninth Circuit Bankruptcy Appellate Panel held that committing a “technical” violation of the automatic stay does not absolve the creditor of liability for a willful stay violation under Section 362(k).
Even if the chapter 7 debtors were not defendants in the action that violates the stay, the BAP opinion on November 18 also held that the debtors have standing to prosecute a stay violation if the action aimed to collect a claim against the debtors.
The Stay Violations
Like many stay violations, the case arose from the creditor’s amateurish bankruptcy advice.
A married couple owned a corporation that borrowed $2.75 million from a bank. The corporation gave the bank a security interest in all its property, and the couple gave unsecured, personal guarantees.
Around the time that the company defaulted on the bank loan, the couple transferred their home and $125,000 cash to a trust for no consideration. A relative was the trustee, and the couple’s adult children were the beneficiaries of the trust.
In state court, the bank filed a fraudulent transfer suit against the couple, the trustee of the trust and others. The couple filed a chapter 7 petition.
Two weeks later, the bank filed a notice of trial with the state court and served the notice on the debtors’ counsel. According to the November 18 BAP opinion by Bankruptcy Judge Robert J. Faris, the notice suggested that the trial would proceed against all defendants.
The same day, the bank filed a “notice of stay” in state court informing the state court that the suit was stayed as to the debtors. The state court rejected the stay notification, saying it was not filed by the party requesting the stay.
Judge Faris said that the state court’s logic was “incorrect” but that the bank did not withdraw the notice of trial as to the debtors or any of the other defendants. He added that “the Bank’s failure to do anything in response for several weeks is both unexplained and unexcused.”
Another defendant and the debtors’ counsel both told the bank that pursuit of the suit would be a stay violation. At a hearing, the bank informed the state court that it intended to continue the suit against the other defendants but not against the debtors.
In response to a demand by the debtors’ counsel to stop the suit, the bank argued that the stay did not apply because it was no longer suing the debtors and that the fraudulently transferred property was not estate property. Later, however, the state court vacated the trial date, although the BAP opinion does not say why.
The debtors then filed a contempt motion asking for $5,000 in damages plus attorneys’ fees.
The bankruptcy court found that the bank knew about the stay and had filed the notice of trial, but had taken no other action to advance the case.
The bankruptcy court reasoned that it was only a “technical violation” not warranting sanctions. The bankruptcy court also held that the debtors lacked standing, based on the idea that only the chapter 7 trustee owned the fraudulent transfer claim. The debtors appealed.
The Stay Was Violated
Judge Faris agreed that the stay had been violated but disagreed that it was “technical.”
Two possible stay violations were afoot: (1) Section 362(a)(1) bars an action brought before bankruptcy to recover a claim against the debtor, and (2) Section 362(a)(3) bars an action to obtain possession of estate property.
For a willful stay violation against an individual debtor, Section 362(k) provides that the debtor “shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.” [Emphasis added.]
The bank knew about the stay but nonetheless filed the notice of trial and “intended to prosecute” the fraudulent transfer claim against the debtors, Judge Faris said. He agreed with the bankruptcy court that the actions violated the stay. He faulted the bank for failing to withdraw the notice of trial when the state court made the erroneous ruling that the wrong party had filed the notice of the bankruptcy stay.
Judge Faris found a violation of Section 362(a)(1), even if the bank had been proceeding only against other defendants and not the debtors. He cited the Second Circuit for the proposition that a fraudulent transfer action is undertaken to recover a claim against the debtor. See FDIC v. Hirsch (In re Colonial Realty Co.), 980 F.2d 125, 131-132 (2d Cir. 1992).
Judge Faris said that Colonial Realty was “well reasoned” and predicted that the Ninth Circuit would follow.
Likewise, Judge Faris found a Section 362(a)(3) violation, because the fraudulent transfer suit became estate property on the chapter 7 filing. He noted that the bank stopped pressing the suit only after the state court had vacated the trial date.
The Debtors Had Standing
Like the bankruptcy court, Judge Faris held that the debtors lacked standing under Section 362(a)(3) because the fraudulent transfer suit belonged to the chapter 7 trustee.
Reversing the bankruptcy court, Judge Faris held that the debtors had standing for violations of Section 362(a)(1), because debtors have standing whenever a “creditor takes some action against the debtor, whom the automatic stay is meant to protect.” The notice of trial indicating that the trial would proceed against all defendants gave them “standing to protect their interests.”
‘Technical’ Violations Don’t Obviate Section 362(k)
The bankruptcy court believed that sanctions were not warranted because the stay violation was only technical. However, the idea “that ‘technical’ violations are undeserving of sanctions under § 362(k) was error,” Judge Faris said.
The statute, Judge Faris said, provides that the court “shall” award sanctions for “any willful violation.” On the other hand, he said that “the court may consider the severity of the violation when deciding the amount of sanctions.” Still, he said, “there is no category of violations so minor that it automatically negates the mandatory language of § 362(k).”
Damages
Judge Faris found no error in the bankruptcy court’s finding that the debtor suffered no actual damages, because they offered no evidence of actual harm. For the same reason, the bankruptcy court did not err in denying punitive damages.
Judge Faris said that the bankruptcy court denied the recovery of all attorneys’ fees because it saw the bank’s violation as “technical.” Nonetheless, he said, “the reasonableness of a legal fee does not necessarily depend entirely on the severity of the conduct that precipitated the legal work.”
On the record, the BAP could not decide whether “any particular amount” of attorneys’ fees would be reasonable. Because the bank did not withdraw the notice of trial, Judge Faris observed that the debtors’ counsel spent six hours in analyzing the issue and communicating with the bank’s counsel.
Judge Faris said that the bankruptcy court “might” therefore find “that at least a portion” of the debtors’ attorneys’ fees “were reasonably incurred to prevent or mitigate the Bank’s stay violation.” He vacated the denial of attorneys’ fees and remanded for the bankruptcy court to determine “the reasonable amount (if any)” of the attorneys’ fees. Otherwise, he affirmed.
The Ninth Circuit Bankruptcy Appellate Panel held that committing a “technical” violation of the automatic stay does not absolve the creditor of liability for a willful stay violation under Section 362(k).
Even if the chapter 7 debtors were not defendants in the action that violates the stay, the BAP opinion on November 18 also held that the debtors have standing to prosecute a stay violation if the action aimed to collect a claim against the debtors.
The Stay Violations
Like many stay violations, the case arose from the creditor’s amateurish bankruptcy advice.
A married couple owned a corporation that borrowed $2.75 million from a bank. The corporation gave the bank a security interest in all its property, and the couple gave unsecured, personal guarantees.
Around the time that the company defaulted on the bank loan, the couple transferred their home and $125,000 cash to a trust for no consideration. A relative was the trustee, and the couple’s adult children were the beneficiaries of the trust.
In state court, the bank filed a fraudulent transfer suit against the couple, the trustee of the trust and others. The couple filed a chapter 7 petition.
Two weeks later, the bank filed a notice of trial with the state court and served the notice on the debtors’ counsel. According to the November 18 BAP opinion by Bankruptcy Judge Robert J. Faris, the notice suggested that the trial would proceed against all defendants.