Where the bankruptcy court granted partial summary judgment on the debtor’s complaint for willful violation of the automatic stay, but did not decide damages, the order was interlocutory and the Bankruptcy Appellate Panel lacked jurisdiction over the appeal. Lugo Ruiz v. FirstBank Puerto Rico, No. 17-7 (B.A.P. 1st Cir. April 14, 2017). [Read more…] about Order On Liability But Not Damages Is Interlocutory
Governmental Regulatory Exception to Automatic Stay Applies to Contempt Proceeding
“Civil contempt proceedings are exempted from the automatic stay under the government regulatory exemption when the proceedings are intended to effectuate the court’s public policy interest in deterring litigation misconduct.” Dingley v. Yellow Logistics, LLC, No. 14-60055 (9th Cir. April 3, 2017).
The underlying Nevada state court litigation arose out of a dispute in between Mark Dingley’s towing company and two transportation companies, Yellow Logistics, LLC, and Yellow Express, LLC, (Yellow) in which Yellow sued Mr. Dingley for improper towing, storage and sale of one of Yellow’s trucks. The Nevada court ordered $4,000 in discovery sanctions against Mr. Dingley when he failed to appear for a scheduled deposition. When he then failed to pay the sanction the court ordered Mr. Dingley to show cause why he should not be held in contempt. Mr. Dingley filed for chapter 7 bankruptcy before the contempt issue came to hearing. Yellow filed a brief in the state court arguing that the automatic stay did not apply to prevent the ongoing contempt litigation. Mr. Dingley responded with a complaint in the bankruptcy court arguing that Yellow’s state court brief violated the automatic stay. The bankruptcy court agreed with Mr. Dingley and awarded sanctions.
The BAP reversed, finding that, under the reasoning in David v. Hooker, Ltd., 560 F.2d 412 (9th Cir. 1977), the automatic stay does not preclude state court litigation concerning sanctions for discovery misconduct where that issue does not involve an attempt to collect a debt or otherwise harass the debtor on account of the debt. In re Dingley, 514 B.R. 591 (B.A.P. 9th Cir. 2014).
On appeal, the Ninth Circuit avoided the issue of Hooker having been decided prior to the 1978 automatic stay amendment to the Bankruptcy Code. Rather, the circuit court read section 362(b)(4) as applying to the civil contempt proceeding in state court. That section creates an exception to the automatic stay for: “the commencement or continuation of an action or proceeding by a governmental unit . . . to enforce such governmental unit’s . . . regulatory power . . .”
The ninth circuit has established two tests for determining whether a particular action falls under this exception: the pecuniary purpose test and the public policy test. Under these tests, if the government seeks to protect its own pecuniary interest or adjudicate private rights, the government regulatory exemption will not apply and the automatic stay will remain in force.
The court found its prior decision in In re Berg, 230 F.3d 1165 (9th Cir. 2000), to be controlling. In Berg, the court found that contempt litigation under Fed. R. App. Proc. 38, which provides for sanctions for filing a frivolous appeal, fell under the section 362(b)(4) exception to the automatic stay. The court found that because the purpose of Rule 38 was to effectuate the policy of deterring unprofessional behavior in litigation rather than to protect the government’s pecuniary interest or adjudicate a private right, it fell within the public policy test. It did not matter that the sanctions were sought by and would adhere to the benefit of a private party.
Likewise, the contempt proceeding in this case was in furtherance of the public policy against deterring unprofessional conduct in litigation, albeit at the discovery stage rather than the appellate stage. Because the state court contempt proceeding was not an attempt to protect pecuniary interests or adjudicate private rights, it fell under the exception to the automatic stay and could proceed.
Emotional Distress Damages Available for Stay Violation
Emotional distress damages may be awarded for willful violation of the automatic stay. Lansaw v. Zokaites (In re Lansaw), No. 16-1867 (3rd Cir. April 10, 2017).
Garth and Deborah Lansaw operated a day care center out of property they leased from Frank Zokaites. The Lansaws and Mr. Zokaites had numerous disputes during the course of their relationship and the Lansaws eventually entered into a lease with a third party. Mr. Zokaites asserted a lien against the Lansaws’ personal property for unpaid rent and, the next day, the Lansaws filed a bankruptcy petition. Despite notice of the bankruptcy, Mr. Zokaites entered the day care center during business hours, took photographs and behaved in a physically threatening manner toward Ms. Lansaw. Mr. Zokaites also entered the property during off hours, confronted Ms. Lansaw’s mother who was there to clean, and padlocked the door, allowing Ms. Lansaw to reenter only in the company of a police officer. Additionally, Mr. Zokaites threatened the Lansaws’ new landlord with legal action if he did not end the lease with the Lansaws. After a lengthy procedural history, and a hearing, the bankruptcy court awarded the Lansaws $7,500 for emotional distress, $2,600 in attorney fees, and $40,000 in punitive damages.
On Mr. Zokaites’ appeal, the Third Circuit, quoting Havens v. Mobex Network Servs., LLC, 820 F.3d 80, 92 (3d Cir. 2016), stated its standard of review of the bankruptcy court’s factual findings as “clearly erroneous only if it is ‘completely devoid of minimum evidentiary support displaying some hue of credibility or bears no rational relationship to the supportive evidentiary data.’”
The circuit court then turned to the question of whether section 362(k)(1)’s reference to “actual damages” includes damages for emotional distress. While the First, Ninth and Eleventh Circuits have expressly allowed such damages, the Fifth and Seventh Circuits have left the question open, and a district court out of the Sixth Circuit, United States v. Harchar, 331 B.R. 720 (N.D. Ohio 2005), found that such damages are not included in the scope of section 362(k)(1)’s “actual damages.”
The Harchar court rested its decision on legislative history, finding that prior to enactment of section 362(k)(1) in 1984, enforcement of the automatic stay provision was governed by the court’s contempt powers. When the extent of those powers was called into question by Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), Congress enacted section 362(k) to give debtors a method of enforcing the automatic stay. The district court found that section 362(k)(1) was enacted to counteract the decision in Northern Pipeline as to enforcement power, and that the non-inclusion of emotional distress damages indicated that Congress did not intend those damages to be deemed “actual damages.”
The Seventh Circuit, in Aiello v. Providian Fin. Corp., 239 F.3d 876 (7th Cir. 2001), held that because the automatic stay was intended to afford financial protection during bankruptcy, at the very least an award of damages for emotional distress had to be tied to pecuniary loss.
The Ninth Circuit, on the other hand, held in Dawson v. Washington Mut. Bank, F.A. (In re Dawson), 390 F.3d 1139 (9th Cir. 2004), abrogation on other grounds recognized in Gugliuzza v. FTC (In re Gugliuzza), –– F.3d ––, 2017 WL 1101094 (9th Cir. Mar. 24, 2017), that an award of damages for emotional distress was included in the scope of “actual damages” and need not be tied to pecuniary loss. Like the Harchar court, the Ninth Circuit looked to legislative history, but rather than limiting that analysis to the history of section 362(k), the court looked to the history of the automatic stay provision, enacted six years earlier in the 1978 amendments. It found that an important purpose of the automatic stay was to give the debtors breathing room free of financial burdens including collection efforts and harassment by creditors. Because Congress considered abusive creditor conduct when enacting the automatic stay provision, the later enforcement provision could be deemed to address those same considerations.
The Lansaw court was persuaded by the Ninth Circuit’s reasoning in Dawson. “If the automatic stay was meant to protect against non-pecuniary emotional harm, it is only logical that Congress would intend to include damages resulting from that harm when it introduced the award of ‘actual damages’ as the enforcement mechanism six years later.” In finding that emotional distress damages were available, however, the court specifically declined to decide whether a finding of pecuniary loss was a predicate to that award, finding that pecuniary damages in the form of attorney fees were present here. (In a footnote, the court suggested that since section 362(k) is likely to provide the only avenue for such relief, pecuniary loss would likely not be a prerequisite).
Addressing the specific emotional distress award in this case, the court disagreed with Mr. Zokaites that any such claim must include corroborating medical evidence. Rather, the court found that “where a stay violation is patently egregious, a claimant’s credible testimony alone can be sufficient to support an award of emotional-distress damages.” Here, the emotional distress claim was supported by the Lansaws’ credible testimony of nightmares, fear, depression, ulcer and general withdrawal from society. That, in conjunction with the evidence of Mr. Zokaites’s threatening physical behavior and interference with the Lansaws’ business and new lease, was sufficient to support the emotional distress award.
Turning, finally, to the issue of punitive damages, the court found that, based on the egregiousness of Mr. Zokaites’s behavior, the ratio between actual damages and the amount of the punitive damage award, and punitive damages awarded in similar cases, the court did not err either in the award itself or its amount.
Attorney Fee Application Filed Too Late
Where the debtors’ attorneys filed a fee application as an administrative claim after the debtors completed their chapter 13 plan, the court properly denied the administrative claim and treated the debt as discharged. Cripps v. Foley, No. 16-744 (W.D. Mich. March 31, 2017).
After the debtors, Lon and Deborah Cripps, completed their chapter 13 bankruptcy and the trustee had filed the notice of completion, their bankruptcy attorneys, Dietrich Law Firm, filed a fee application for $642.60 as an administrative claim. (During the course of the bankruptcy, Dietrich Law had filed fee applications amounting to over $13,000 which had been approved and paid through the plan). The trustee objected to the fees as untimely and, while the issue was pending, the Cripps’ were granted discharge. While the court approved the fee application under section 330(a), it found that the fees could not be paid as an administrative claim under section 503.
On appeal, Dietrich Law argued that the Code does not include a time limit for filing fee applications and that approved attorney’s fees are not discharged in bankruptcy. Citing Rule 2016(1) and relevant caselaw, Dietrich Law argued that the court had the power to permit the fee application as an administrative claim.
The district court found that even though the bankruptcy court might have had the power to award the fees, it did not abuse its discretion when it found that the administrative claim was untimely. The court agreed that various provisions in chapter 13 create an “implicit” deadline for filing administrative claims. Here, the fee request was made after the Cripps completed their plan payments and there was, therefore, no longer any plan through which to pay the claim and no plan to modify to accommodate a new or alternative method of payment.
The court turned to Dietrich Law’s argument that its claim should not have been deemed discharged because it was a post-petition debt and discharge applies only to pre-petition debts. The court disagreed, finding instead that, while there is no controlling law on the issue, the bankruptcy court correctly relied on the reasoning in In re Phillips, 219 B.R. 1001 (Bankr. W.D. Tenn .1998) and similar cases which rejected the post-petition claim argument raised here. The district court thus agreed with the majority that attorney’s fees are not post-petition claims under 1305(a)(2).
Finally, the court rejected Dietrich Law’s policy arguments of windfall to debtors and chilling effect on bankruptcy counsel as “general considerations” that do not undermine the bankruptcy court’s “sound reasoning.”
Sovereign Immunity in Tax Refund Turnover Claim
Application of section 505(a)(2)(B), which carves out an exception to the government’s abrogation of sovereign immunity in tax refund claims, involved issues of both fact and law, and therefore, the district court remanded this appeal to the bankruptcy court for determination of whether it had subject matter jurisdiction over the debtors’ claim for turnover of their tax refund. United States v. Copley, No. 3:16-cv-207 (E.D. Va. March 31, 2017).
Chapter 7 debtors, Matthew and Jolinda Copley, listed the United States as a creditor for a tax debt of over $13,000 from 2008, 2009, and 2010. They also listed a 2013 tax refund in the amount of over $3,000 which they sought to exempt under Virginia’s homestead exemption statute. Post-petition, the IRS notified the Copleys that it had withheld their 2013 tax refund as set off against the tax debt. The Copleys sought turnover of the refund and both parties moved for summary judgment. The bankruptcy court granted judgment in favor of the Copleys, relying on sections 522 and 542(a) and case law establishing that, unless the IRS acts to offset the tax debt prior to bankruptcy, the refund becomes part of the bankruptcy estate.
On appeal, the United States raised for the first time the jurisdictional question of whether sovereign immunity barred the Copleys’ claim. Absent specific waiver, a bankruptcy court lacks jurisdiction over a suit against the United States and its agencies, so the district court began with a look at the abrogation of immunity in sections 106 and 505. Specifically, the court looked to the exception to waiver carved out by section 505(a)(2)(B) which prohibits a court from determining “any right of the estate to a tax refund, before the earlier of.- (i) 120 days after the trustee properly requests such refund from the governmental unit from which such refund is claimed; or (ii) a determination by such governmental unit of such request.” The United States argued that the waiver of sovereign immunity did not apply in this case because the debtors rather than the trustee requested the refund, and because the debtors did not seek the refund for the benefit of the estate.
In finding that there were unanswered questions of law and fact that were relevant to resolution of this issue, the court seemed to rely on the decision in United States v. Bond, 762 F.3d 255, 260 (2d Cir. 2014), where the Second Circuit, in a chapter 11 case, found that a liquidating trustee does not qualify as “trustee” as contemplated by section 505, but that the debtor, if acting on behalf of the bankruptcy estate, may so qualify. Based on this reasoning, the district court found that the bankruptcy court needed to determine: “(1) whether the Debtors constitute ‘trustees’ as contemplated under§ 505; and, (2) whether the Debtors, who purportedly exempted the tax refund from bankruptcy, sought the refund for ‘the right of the estate.’” The court remanded to the bankruptcy court to address these issues.
Res Judicata Does Not Bar Post-Confirmation Objection to POC
Plan confirmation did not adjudicate claim allowance on contested unsecured claims, therefore, res judicata did not bar the debtors’ post-confirmation challenges to the proofs of claim. LVNV Funding v. Harling, No. 16-1346, and LVNV Funding v. Rhodes, No. 16-1347 (4th Cir. March 30, 2017).
In two chapter 13 cases, LVNV filed proofs of claim prior to plan confirmation. The debtors, Derrick and Teresa Harling, and Jeffrey Rhodes, objected after plan confirmation but prior to the claims bar date. LVNV argued that the objections should have failed under the doctrine of res judicata. The bankruptcy courts found that res judicata did not apply, and disallowed the claims on the basis that the underlying debts were uncollectible due to the passage of the statute of limitations.
LVNV appealed both cases directly to the Fourth Circuit.
Res judicata applies when 1) there is a prior, final, judgment on the merits, 2) identical parties, and 3) the same cause of action in both proceedings. Finding that res judicata bars relitigation of issues that were actually litigated or determined in a prior hearing, the court turned to the Code: specifically, the confirmation and claims allowance provisions. Under section 502(a), a claim is deemed “allowed” unless a party objects. Under section 1325(a) a bankruptcy court “must” confirm a plan that is: 1) proposed in good faith, 2) does not unfairly discriminate between unsecured creditors, and 3) is in the best interest of creditors. Unsecured claims are generally pro-rata recipients of distributions from a pool of estate assets and, therefore, individual unsecured claims are not subject to scrutiny at the confirmation stage. Because of disparate timelines for confirmation and claims procedures, a party typically may file a proof of claim or object to a filed claim after the plan has been confirmed.
In these cases, the court found that because the claims were presumed allowed at the time of the confirmation hearing, the issue of allowance of the claims was not raised until post-confirmation when the debtors objected. Likewise, no issues addressed at the confirmation hearing were relevant to the claims allowance determination. For that reason, res judicata did not bar the debtors’ objections to LVNV’s claims.
Contrary to LVNV’s argument, neither Covert v. LVNV Funding, LLC, 779 F.3d 242 (4th Cir. 2015), nor D & K Properties Crystal Lake v. Mutual Life Insurance Co. of New York, 112 F.3d 257 (7th Cir. 1997), supported application of res judicata. In Covert, the plaintiffs filed post-discharge federal consumer protection claims against LVNV without having objected to its claim in bankruptcy and without listing the FDCPA claim as a bankruptcy estate asset. Covert, thus, stands for the proposition that “debtors who do not object to proofs of claim during their bankruptcy proceeding are precluded from later litigating the subject matter of those claims for personal gain outside the Chapter 13 bankruptcy proceeding as a way to avoid including the claim as an asset in their bankruptcy estate.” D & K Properties involved a secured creditor and actual adjudication in bankruptcy of the issue the debtors attempted to raise post-discharge in district court.
The court concluded that plan confirmation and the validity of individual unsecured claims are “distinctly separate” processes, and therefore the identity of causes of action between the two adjudications, as required for application of res judicata, was absent.
NCBRC filed an amicus brief in support of the debtor in this case.
Circuit Court Upholds Punitive Damages Eight Times Compensatory
There was sufficient evidence of the mortgage servicer’s reckless indifference to the mortgagor’s rights to support a punitive damage award eight times the compensatory damage award for invasion of privacy. May v. Nationstar Mortgage, No. 16-1285, 16-1307 (8th Cir. March 29, 2017).
While in chapter 13 bankruptcy, Jeannie May entered into an agreement with her mortgagee to pay down her mortgage and arrears. After she was discharged from bankruptcy, the mortgage servicer, Nationstar, sent her a mortgage statement in which it misstated a $51 credit as a $5,162 debit. Nationstar also damaged Ms. May’s credit score by incorrectly reporting a delinquent debt. Ms. May spent the next two years trying to get Nationstar to correct the admitted error. Instead of correcting the problem, however, Nationstar commenced aggressive collection efforts including threatening of foreclosure, conducting periodic property inspections, and making numerous mocking and sarcastic phone calls to her. Ms. May sued Nationstar alleging invasion of privacy under state law, and federal claims under RESPA, FDCPA and FCRA. The jury awarded compensatory damages of $50,000 for the invasion of privacy, and $50,000 for the violation of the FCRA. It also awarded $400,000 in punitive damages for the invasion of privacy.
The parties cross-appealed with Nationstar arguing that its culpability was limited to a series of inadvertent errors that did not add up to reckless indifference or evil motive as required under Missouri law to support a punitive damages award.
The circuit court disagreed. It was the province of the jury to weigh the conflicting evidence and a finding of reckless indifference will be overturned only in the complete absence of probative facts. The court found sufficient evidence to support the jury’s finding.
Nationstar next argued that the $400,000 punitive damage award was excessive and in violation of its due process rights under the Fourteenth Amendment. To violate due process, punitive damages must “shock the conscience of the court or demonstrate passion or prejudice on the part of the trier of fact.” A court will consider: 1) the degree of reprehensibility, 2) the compensatory to punitive damage ratio, and 3) how the award compares to awards in similar cases.
With respect to reprehensibility—the most important of the three factors—the court found that it may be demonstrated by showing any of the following: physical harm, indifference or reckless disregard of health or safety of others, financial vulnerability of the victim, repeated conduct, or intentionality. The court found there was evidence of each of these factors to support the jury finding.
As to the compensatory to punitive damage ratio, Nationstar argued that the 8:1 ratio was excessive. Again the court disagreed. Noting that it had affirmed ratios as high as 5.7:1, the court considered the degree of Nationstar’s culpability as well as the percentage of the company’s net worth the punitive damage amount represented: thirty-three thousandths of one percent. It found that the ratio did not render the award unconstitutional.
Finally, in a comparison of this case with others, the court noted that while few cases of this type rested on a theory of state law invasion of privacy, compared to cases with similar facts the award was in line.
The court concluded that the punitive damage award was adequately supported.
Ms. May cross-appealed on the grounds that the lower court erroneously excluded the testimony of a witness who was unrelated to Ms. May’s case but who had had similar experiences with Nationstar and whose testimony Ms. May offered to rebut Nationstar’s anticipated defense of innocent inadvertence. The court found no abuse of discretion in excluding the testimony, as Ms. May was still able to counter Nationstar’s evidence of good faith and, allowing the testimony would have resulted in a “mini-trial” on an unrelated case.
Ms. May also challenged the district court’s jury instructions on her RESPA claim. The controversy surrounded an instruction based on an amendment to the statute under which the requirement that a creditor respond to a request for information does not apply if the request is identical to an earlier request to which it did respond. Nationstar argued that the amendment was merely a codification of a common sense application of the law and therefore the instruction was correct. Nationstar also noted that Ms. May did not object to the instruction at the time.
Because of her failure to object the court reviewed the instruction for “plain error.” It found none. There were many grounds upon which her RESPA claim might have failed and no indication that this instruction was dispositive. The fact that Ms. May received a jury verdict of $500,000 in damages suggests that she was vindicated at trial without regard to the RESPA claim.
Mere Retention of Property Does Not Support Stay Violation
Breaking with the majority view that passive retention of estate property may be an “exercise of control,” the Tenth Circuit held that the lender must take some affirmative action to support a stay violation claim. WD Equipment, LLC. v. Cowen, No. 15-1413 (10th Cir. Feb. 27, 2017).
Jared Cowen defaulted on the purchase money security interest loan for one vehicle and a non-pmsi loan for another vehicle. After the vehicles were repossessed, by separate but related lenders, Mr. Cowen filed for chapter 13 bankruptcy. The case was dismissed, however, because, without his trucks, he could not earn income to finance his plan. The bankruptcy court retained jurisdiction over Mr. Cowen’s adversary complaint for violation of the automatic stay. In the hearing on that complaint, the lenders lied and presented forged documents to support their claims that the sale of one vehicle and title transfer of the other took place pre-bankruptcy. The bankruptcy court found that the lenders’ failure to turn over the vehicles constituted continuing violation of the automatic stay and awarded damages. The district court recalculated damages but otherwise affirmed.
The circuit court began by rejecting the lenders’ argument that the bankruptcy court lost jurisdiction over the adversary complaint when the bankruptcy case was closed, finding that it had no support in the Code and was precluded by the prior case of Johnson v. Smith (In re Johnson), 575 F.3d 1079, 1083 (10th Cir. 2009).
On the merits, the court interpreted the language in section 362(a)(3) that bankruptcy’s automatic stay provision prohibits a lender from “any act” to exercise control over property of the estate. The court found that the phrase “any act” requires an affirmative action beyond mere passive retention of property, stating, “stay means stay, not go.” The court rejected the argument that when, in 1984, Congress added the language prohibiting exercise of control over property to the automatic stay provision, it intended to cover situations such as the one at bar. Instead, the court found that the amendment was amenable to the less drastic interpretation that Congress meant to include situations where the creditor violated the stay without actually taking possession of the property, as in situations involving intangible property rights.
The court also found that Mr. Cowen could not hang his hat on the relationship between the turnover provision of section 542 and violation of stay under section 362. The court found the two provisions function separately with the court’s power to enforce section 542 arising out of section 105(a).
Having found that mere retention of the vehicles was insufficient to support a stay violation, however, the court offered an alternative basis for stay violation. It found that the lenders’ lying and forging of documents in an attempt to show pre-bankruptcy ownership of the vehicles were affirmative acts to exercise control over estate property. The court remanded to the district court to reconsider the case in light of this finding.
Court Erroneously Requires that Exemption Attach to Equity
Because the debtor had no equity in her residential property to which it could attach, the Sixth Circuit found that the bankruptcy court properly authorized sale of the property and denied her claim for exemption based on her state law redemption rights. Brown v. Ellman (In re Brown), No. 16-1967 (6th Cir. March 20, 2017).
Susan Brown’s residence was valued at $170,000 and was secured for more than $200,000. When she filed her chapter 7 petition, she indicated her intent to surrender the property. The trustee sought an order allowing him to sell the property for $160,000 and use the proceeds to pay administrative costs and make distributions to creditors. Ms. Brown objected and claimed an exemption under section 522(d) based on her state law redemption rights. She did not seek a stay of the sale. The sale went forward and the bankruptcy court denied Ms. Brown’s exemption claim on the basis that she had no equity in the property. The district court affirmed.
On appeal, the circuit court began with the jurisdictional issues of mootness and standing.
With respect to the trustee’s claim that the appeal was moot, the court began with section 363(m) which provides that an appeal of an order authorizing the trustee’s sale of property is moot if the debtor failed to seek a stay of the sale and it was conveyed to a bona fide purchaser. While some courts have treated this as a per se rule, others have added the requirement that the person seeking a finding of mootness show that an order on appeal would “materially alter” the sale of the property. In re ICL Holding Co., 802 F.3d 547, 554 (3d Cir. 2015); C.O.P. Coal Dev. Co. v. C.W. Mining Co. (In re C.W. Mining Co.), 641 F.3d 1235, 1239 (10th Cir. 2011). The issue was unsettled in the Sixth Circuit. Official Comm. of Unsecured Creditors v. Anderson Senior Living Prop., LLC (In re Nashville Senior Living, LLC), 620 F.3d 584 (6th Cir. 2010).
The court adopted the reasoning expressed by the third and tenth circuits that, where an appeal of the order authorizing the sale will not affect the underlying transaction, the appeal is not moot. Here, the trustee, who carries the burden of showing mootness, failed to argue that a finding on appeal in favor of the debtor would alter the sale. Nor was the case moot under Article III principles because the appellate court would be able to issue effective relief.
The trustee next argued that Ms. Brown had no standing to appeal because she had no equity in the property and therefore no claim to any of the proceeds from the sale. The court disagreed with the trustee’s framing of the issue. Ms. Brown sought an exemption based on her state law redemption rights. If the bankruptcy court had granted her motion, she would have been entitled to the exempted portion of the proceeds. Therefore, she had standing as a party who was “affected adversely” by the court’s decision.
Turning to the merits, the court addressed whether the bankruptcy court erred in denying her exemption under section 522(d).
The circuit court agreed with the bankruptcy court’s finding that “that any exemption on the basis of the value of the debtor’s redemption rights must attach to some equity held by the debtor after satisfaction of the secured liens on the property. . . Absent such equity, the debtor had no interest to which the claimed exemption could attach.” The court rejected the argument that Law v. Siegel mandated reversal of the bankruptcy court’s decision. Rather, the court found that where Law dealt with the court’s power to surcharge a debtor’s exemption under section 105, it was faced with whether the exemption under section 522(d) applied at all. The court concluded that “Section 522 will not support an exemption on the basis of state-law redemption rights in a piece of property if the proceeds from the sale of that property are insufficient to satisfy the prior obligations owed to the secured creditors.”
In its amicus brief, NCBRC argued, among other things, that section 522(d) protects a debtor’s “interest” in property, as distinguished from “value,” and such interest may be possessory. The Code, which favors exemptions as furthering the debtor’s fresh start, does not require that an exemption attach to equity. Unfortunately, though the court deemed NCBRC’s brief “helpful,” it misconstrued or otherwise failed to address, this argument.
Court Issues $45m Punitive Damages Award Against BofA
“The mirage of promised mortgage modification lured the plaintiff debtors into a kafkaesque nightmare of stay-violating foreclosure and unlawful detainer,” for which the court ordered over $1 million dollars in actual damages plus a significant punitive damage award. Sundquist v. Bank of America, No. 10-35624, Adv. Proc. No. 14-2278 (Bankr. E.D. Cal. March 23, 2017).
In the first 30 pages of the 109-page opinion, the court walked through the facts of the case illustrating Bank of America’s egregious conduct and including extensive quotes from Renee Sundquist’s journal. A few highlights include the following facts. Though struggling financially, Erik and Renee Sundquist were current on their home loan, defaulting only after Bank of America told them that the only way they could get loan modification would be if they were in default. After that began a series of abortive modification attempts during which Bank of America consistently lost paperwork, denied modification for no apparent reason, or otherwise dangled modification before the Sundquists without actually providing it, while at the same time going forward then retreating on foreclosure actions. At one point, a Bank of America employee told Renee that modifications were “not real” but were simply a way for Bank of America to make more money before foreclosure.
The Sundquists filed for chapter 13 bankruptcy under threat of imminent foreclosure. After foreclosing in violation of the stay, Bank of America sent thugs to stake out the residence and intimidate the family, and gave them a three-day notice of eviction causing the Sundquists and their children to find temporary housing. Upon learning that they were no longer the owners of the home, the Sundquists voluntarily dismissed their bankruptcy case thereby ending the automatic stay. Meanwhile, and without the Sundquists’s knowledge, Bank of America rescinded the foreclosure and returned title of the home to them. When they later returned to the house they found that major appliances had been removed. In keeping with its conduct throughout, Bank of America attempted to collect mortgage payments for the months the Sundquists had been without their home.
The court found Bank of America’s conduct to be willful and intentional and that it resulted in “emotional distress, lost income, apparent heart attack, suicide attempt, and post-traumatic stress disorder, for all of which Bank of America disclaim[ed] responsibility.”
Finding that state tort principles inform damage awards in bankruptcy, the court applied a “but for” analysis to the issue of damages: “If a consequence would not have occurred ‘but for’ the automatic stay violations, then courts make awards based on that consequence.” Actual damages including economic loss, emotional distress, attorney’s fees, and punitive damages are all recoverable under appropriate circumstances.
In detailed analysis of the evidence, the court concluded that actual damages, including $70,000.00 in fees to trial counsel, medical expenses, loss of employment income, HOA fees, and lost property, came to over $1 million.
Turning to punitive damages, the court balanced the desire to properly punish Bank of America beyond what it might consider “cost of doing business,” and a reluctance to award the Sundquists vastly more than would be reasonable. It concluded that it had the power to make a portion of the award payable to organizations devoted to the public purposes of education and consumer protection. To that end, the court ordered that a portion of the punitive damages be directed to seven entities: the National Consumer Bankruptcy Rights Center, the National Consumer Law Center and five University of California Law Schools.
The decision is likely to be appealed.