Citing six separate stay violations by the homeowner’s association, the district court awarded the debtor damages for emotional distress and property interference. It also upheld the bankruptcy court’s award of punitive damages and attorney’s fees. The court remanded, however, for a determination of whether the damages for property interference should have extended beyond the end of the automatic stay. In re Parker, No. 19-2588 (N.D. Cal. March 22, 2021).
The debtor owned a condominium in the Bayside Court development. After she had lived there for some time, the Bayside Court Owner’s Association changed how it apportioned fees and assessments among the owners to make the owner’s responsibility more dependent upon the size of the unit. The change caused the debtor’s annual assessment to go from $7,000 to over $22,500. Litigation ensued, with the BCOA seeking unpaid assessments, and the debtor challenging the validity of the new assessments and claiming breach of fiduciary duty. [The status of this litigation is unclear].
The debtor filed for chapter 13 bankruptcy on October 8, 2014, listing the BCOA’s claim for approximately $160,000 as disputed. Her plan dealt with BCOA’s claim by surrender of the property. The plan also had a general provision that, upon confirmation, all estate property would revest in the debtor with the right to sell, refinance or execute a loan modification. The BCOA received a relief from stay order permitting it to exercise its state rights against the property.
Though the BCOA did not exercise its right of foreclosure, neither did it sit quietly as the bankruptcy case proceeded, and, in response to its conduct, the debtor filed various motions alleging violation of the automatic stay, violation of the discharge injunction and contempt. The bankruptcy court held a multi-day trial after which it found that the BCOA violated the automatic stay through its “(1) late payment demands; (2) disciplinary fines; (3) retroactive assessments; (4) improper settlement demands; (5) lost rents on the Property; and (6) post-petition assessments.” It awarded damages under section 362(k) of $5,000.00 for emotional distress, $39,000.00 for property right interference, $10,000 in punitive damages, and attorneys’ fees of $369,346.90 and costs of $9,770.05. It found individual members of the BCOA personally liable for a portion of the damages. Applying the “good faith belief” standard set forth in Lorenzen v. Taggart (In re Taggart), 888 F.3d 438, 444 (9th Cir. 2018), the bankruptcy court declined to exercise its authority under 105(a) to hold the BCOA in contempt for discharge and stay violations.
The BCOA and the individuals (collectively “the BCOA”) appealed. The debtor cross-appealed.
In a lengthy opinion, the district court addressed each violation separately.
Automatic stay violation.
- Late Payment Demands:
The BCOA sent the debtor several demand letters showing almost $170,000 to almost $200,000 in past-due HOA assessments warning about enforcement action and including payment instructions. The BCOA argued that these letters did not violate the automatic stay because the stay ended on December 17, 2015, when the chapter 13 plan was confirmed and the estate property revested in the debtor.
The court disagreed. Section 362(a)(5) prohibits any act to enforce a lien against property of the debtor securing a claim that arose before the petition, and section 362(a)(6) prohibits any act to collect a pre-petition debt. Section 362(a)(2) provides that the automatic stay persists until the case is closed or dismissed or the debtor is discharged. The court found, therefore, that the automatic stay continued to be in effect after confirmation of the debtor’s plan. As a factual matter, at least one of the demand letters was sent prior to confirmation. Likewise, the BCOA’s argument that the demand letters sought only post-petition assessments was contrary to the factual record. The letters sought recovery of both pre- and post-petition debt. Furthermore, the Ninth Circuit established in Goudelock v. Sixty-01 Ass’n of Apartment Owners, 895 F.3d 633, 637 (9th Cir. 2018), that post-petition assessments are considered pre-petition debt because the obligation to pay arose pre-petition.
The fact that the property revested in the debtor after confirmation did not change the result. The court found that this provision modified without ending the automatic stay and gave the creditors the right to pursue in rem rights but not the right to seek payment from the debtor herself.
The BCOA argued that the late payment demand letters were in pursuit of its in rem rights as authorized by California’s Davis-Stirling Common Interest Development Act, Cal. Civ. Code § 4000 et seq.. That Act requires an HOA to provide notices to the owner in order to perfect a lien for delinquent assessments. The court found the demand letters were not an attempt to secure a lien. In fact, the BCOA did not exercise its rights against the collateral by initiating foreclosure, but sought to collect payments in the form of money directly from the debtor personally. Moreover, to the extent the demand letters sought payment for pre-petition assessments, even if they could be said to have been sent in order to perfect a lien, that act in itself would violate section 362(a)(5) which prohibits post-petition acts to secure a pre-petition debt.
The court also rejected BCOA’s argument that the late payment demands did not violate the automatic stay because they were merely informative rather than coercive or threatening. The court found the argument inconsistent with BCOA’s argument that the notices were an attempt to perfect its lien. More importantly, the bankruptcy court found as a factual matter that the letters provided no information to the debtor that the BCOA was aware she already had. In fact, the letters were intended to apply pressure on the debtor to pay notwithstanding boilerplate language to the contrary.
- Disciplinary fines:
For over a year after her petition, the BCOA imposed 22 separate fines for violation of HOA rules on the debtor which the bankruptcy court found to violate the stay. The BCOA argued that the fines represented discipline for post-petition conduct rather than for debt incurred pre-petition. It argued that Goudelock addresses only the dischargeability of continuing HOA assessments rather than disciplinary fees.
The court found the bankruptcy court’s factual finding that the violations occurred before the debtor abandoned the property prior to bankruptcy was dispositive. In fact, the BCOA included the allegations supporting the fines in its claim in bankruptcy. There was no evidence to support the BCOA’s contention that the fines, including those for destruction of property and unpaid taxes, were incurred post-petition.
The court also found that such fines were included in Goudelock’s “fair contemplation” test which renders post-petition assessments part of pre-petition debt if they could have been contemplated by pre-petition obligations. Here, the debtor’s agreement pre-petition to comply with the HOA Covenants, Conditions and Restrictions, (CC&R) and its “contract-like” obligation to pay fines for noncompliance, was contemplated pre-petition. “Reviewing this issue of law de novo, the Court finds that the bankruptcy court did not err in concluding the claim for the disciplinary fines arose prior to the petition and therefore actions to collect on such claims would be barred by the automatic stay.” The court also deferred to the bankruptcy court’s factual finding that the fines were imposed to punish the debtor for seeking to discharge her debt in bankruptcy.
- Retro-Assessments:
The court next addressed whether the BCOA’s post-petition invoice to the debtor for “retro-assessments” of almost $10,000 violated the automatic stay. The “retro-assessments” represented the increase in the debtor’s responsibility for assessments as applied to previous years. The court found the invoice was an attempt to collect a pre-petition debt and to the extent it sought post-petition assessments, the debt would fall within Goudelock’s “fair contemplation” test.
- Settlement Letters:
The court turned to the BCOA’s two settlement efforts initiated shortly after she filed for bankruptcy. The BCOA argued that good faith attempts to settle are excepted from the stay, and that the bankruptcy court erred in finding the settlement letters were merely intended to “make [the debtor’s] life miserable.” The settlement letters offered to accept 60 cents on the dollar and stated:
“If the offer is not accepted, we will be moving forward with our lawsuit with new counsel, and cross-complaining Unit 990’s tenant and realtor among other things inclusive of filing multiple adverse claims with the Bankruptcy Court. This will occur if you manage to maintain the Chapter 13 filing (which is full of errors by the way) vis a vis the Trustee’s current valid move to dismiss, or convert to a Chapter 7 as has always been expected.”
The court deferred to the bankruptcy court findings that the author of the settlement letter was an advisor to the BCOA with disdain for the bankruptcy process, and the letters themselves were coercive and harassing in “the tone, context, and content, and the inclusion of any threat of continued legal action outside of the Bankruptcy Court.”
- Lease of Property:
The BCOA next argued that its lease of the property after the debtor moved out did not violate the stay. It argued that once the debtor surrendered the property it could lease it out in exercise of its in rem rights without turning over the rental amounts to the debtor.
The district court found BCOA misunderstood the legal impact of the debtor’s surrender of the property. Surrender gave BCOA the right to foreclose but, without further legal action by BCOA, did not confer ownership interest on the property. In fact, the confirmed plan revested the property in the debtor including her right to “sell, refinance or execute a loan modification.” The debtor “continued to retain ownership and title in the property until a creditor foreclosed on the property in 2016. Thus, the automatic stay prevented BCOA from seizing it, leasing it, and pocketing the proceeds.” In fact, the court found the BCOA’s leasing of the property was simply an attempt to recoup the debt without foreclosing.
- Post-Petition Assessments:
The court made quick work of BCOA’s next argument that its attempt to collect post-petition assessments did not violate the stay, finding that, under Goudelock, those assessments were tied to pre-petition obligations, were subject to discharge, and could not be pursued without violating the stay.
Damages:
The BCOA argued that the damage award was an abuse of discretion. Beginning with the $5,000 award of damages for emotional distress, the BCOA argued that the finding was insufficiently supported by evidence and that the debtor was precluded from seeking those damages because she failed to include them in the joint pretrial order.
The court found no abuse of discretion in the award despite the absence of corroborating testimony. The bankruptcy court was persuaded by the debtor’s testimony as to her own distress and the facts that the BCOA, rather than exercising its right to foreclose, continued to pursue her for ever-increasing fines and assessments after she abandoned the property and moved to Texas. As to the debtor’s failure to include the damages in the joint pretrial order, the court found the omission was not prejudicial to BCOA. The trial lasted four days over four months during which time BCOA was aware of the claim.
The BCOA next argued that the court’s award of $10,000 in punitive damages was error because BCOA did not have the requisite intent to violate the stay. The court found, however, that it enough to show reckless and callous disregard for the rights of others. Here, the bankruptcy court found that BCOA embarked on a “campaign to flout the bankruptcy process” in “callous and repeated disregard” for the debtor’s rights. The court found no abuse of discretion.
BCOA next challenged the bankruptcy court’s award of property interference damages in the amount of $39,000 in collected rent, arguing that once the debtor surrendered the property, she gave up the right to receive rents from it. The court disagreed, reiterating that the debtor did not give up ownership of the property when she surrendered it, but merely gave the BCOA free rein to exercise its in rem right of foreclosure.
The bankruptcy court also found individual members of the BCOA personally liable for some of the damages. They challenged that award arguing that, under California law, individual members of the board could not be found liable for exercise of their business judgment. The individuals argued that they acted in good faith with respect to assessments and notices and were therefore entitled to the immunity offered by the state and that the Bankruptcy Code did not override state law in that regard. This argument failed largely because it was poorly aimed. The court found that the individual liability was based on the individual’s execution of the lease rather than on the assessments and notices.
The BCOA next argued that the award of $369,346.90 in attorney’s fees was erroneous because much of the trial was devoted to litigating a contempt motion which ultimately lost, because the fee was excessive, and because the debtor failed to mitigate the amount of fees. The record showed that the bankruptcy court conducted a detailed review of the fees and reduced them where appropriate, noting that the litigation was lengthy and involved. The court found that the buckshot stay violations taking place over the course of a long time were not amenable to being addressed in a single cease and desist letter. Therefore, the debtor could not have mitigated the costs by early intervention.
The court affirmed the bankruptcy court’s findings with respect to the appeals by BCOA and the individual board members.
It turned next to the debtor’s cross-appeal in which she argued that the court should have awarded her all of the rent collected up until the property was sold instead of using her discharge date as the end date for turning the rent over to her. She also sought attorney’s fees for litigating the issue.
Under In re Snowden, 769 F.3d 651, 659 (9th Cir. 2014) and Sundquist v. Bank of Am., N.A., 566 B.R. 563, 611 (Bankr. E.D. Cal. 2017), vacated in part on other grounds In re Sundquist, 580 B.R. 536 (Bankr. E.D. Cal. 2018), the Ninth Circuit held that damages for an automatic stay violation may continue beyond the end of the automatic stay. Here, the bankruptcy court’s order simply used the debtor’s discharge as the cessation of the stay violation with respect to the rent collection without addressing the possibility that damages for the violation continued beyond that date. For that reason, the court vacated and remanded that portion of the bankruptcy court decision.
Tags: automatic stay
