National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

automatic stay

by on

Stay Does Not Require Bank to Release Citation Lien

Reasoning that the case involved a lien rather than an administrative freeze on funds in a bank account, the bankruptcy court found that the automatic stay did not require the bank to take affirmative steps to release its citation lien. In re Smiley, No. 17-27169 (Bankr. N.D. Ill. Jan 11, 2018).

J.P. Morgan Chase Bank froze the bank accounts belonging to chapter 13 debtor, Kim Smiley, pursuant to a citation to discover assets filed by Bank of America. Under Illinois law, the citation created a lien on Ms. Smiley’s accounts. After Ms. Smiley filed her bankruptcy petition, Bank of America refused to release the lien and unfreeze the funds. Ms. Smiley sought sanctions for violation of the automatic stay under section 362(k). [Read more…] about Stay Does Not Require Bank to Release Citation Lien

by on

Right to Attorneys’ Fees for Stay Violations Extends to Appeals

In a case of first impression, the Eleventh Circuit held that the “explicit, specific, and broad language [in section 362(k)] permits the recovery of attorneys’ fees incurred in stopping the stay violation, prosecuting a damages action, and defending those judgments on appeal.” Mantiply v. Horne (In re Horne), No. 16-16789 (11th Cir. Dec. 5, 2017). [Read more…] about Right to Attorneys’ Fees for Stay Violations Extends to Appeals

by on

Different State Laws Make for Different Treatment of Lease vs. Security Agreement Issue

The substance of a lease for personal property mandated that it be treated as a security agreement rather than a true lease, and therefore, the debtors were entitled to bifurcate the debt into secured and unsecured portions for treatment in their chapter 13 plan. In re Price, No. 17-67 (Bankr. E.D. N.C. Sept. 14, 2017).

Co-debtor, Sidney Price, entered into several lease agreements for equipment with Peak Leasing. The agreements provided that, once he had made all payments under them, Mr. Price had the option to purchase the property for $1.00.

In their chapter 13 plan, the Prices sought to treat the lease agreements as a secured debts and bifurcate the claims into secured and unsecured portions under section 1322(b)(2). Peak Leasing countered that the agreements were true leases and sought relief from the automatic stay to allow it to take possession of the property in the event the debtors failed to make the contractual payments. The court entered an interim order permitting modification of the stay pending its determination of the issue of whether the agreements were leases or security agreements. Mr. Price, however, defaulted on his obligations under the order and it was therefore made permanent. The case was before the court on Mr. Price’s motion for reconsideration and relief from judgment.

The court began its analysis by delineating the significance in chapter 13 of the difference between a lease and a security interest. Under section 365, a lease may be assumed, rejected or assigned. If the lease is in default, the debtor, in order to exercise his right to assume it, must cure the default, recompense the lessor for any loss due to the default, and assure the lessor of future payments under the lease. Under a lease, the value of the property is irrelevant.

In the case of a security agreement, on the other hand, section 506(a) provides for valuation of property and section 1322(b) permits bifurcation into secured and unsecured portions for purposes of treated in a chapter 13 plan.

State law determines whether an agreement is to be treated as a security agreement or a true lease. North Carolina has adopted the Uniform Commercial Code’s Section 1-203, which provides that the nature of the agreement is determined by its operation under the facts of the case rather than its title. Under the UCC, there is a “bright-line” test which, if established, renders the agreement a security agreement as a matter of law. Under this test, if a lease agreement does not allow the lessee to terminate the agreement at will and one of four additional conditions is met, including the option to purchase the property at the end of the lease for no, or nominal, additional cost, a court will find that the lease is, in fact, a security agreement.

In this case, the agreement did not permit Mr. Price to terminate the lease at will and, therefore, the court found the first prong of the bright-line test was met. The option to purchase the property at the end of the lease period for $1.00 satisfied the second prong of the bright-line test. Thus, the court concluded that the agreements were security agreements rather than true leases.

Turning to the motion for relief from judgment of the order modifying the stay, the court found that Mr. Price had met the three conditions under Rule 60(b) in that the motion was timely, he had a meritorious argument, and reconsideration would not unfairly prejudice the non-moving party. Because the court determined that the agreements were, in fact, security agreements, Mr. Price had a meritorious defense to the relief from stay motion, and Peak Leasing, while losing on the ultimate issue, at least had the benefit of receiving adequate protection payments under the interim order and was therefore better off than it would have been had the court merely denied the motion for relief from stay at the outset.

The court found that there was cause to grant the Prices relief from judgment.

Price Bankr ED NC opinion Sept 2017

In contrast, the court in In re Jack, 2017 Bankr. LEXIS 2128, No, 16-8007 (Bankr. M.D. Fla. July 31, 2017), held that state law mandated treatment of an agreement substantially similar to the one in Price, as a true lease rather than a security agreement.

Jeremy and Theresa Jack entered into an agreement to lease furniture for their home from Acceptance Now. The agreement was for two-months with an automatic renewal option. The agreement provided that the Jacks could purchase the furniture at any time by either, 1) paying the purchase price in full, 2) paying the lease price for 37 months, or 3) exercising the “Early Purchase Option.”

When they filed for chapter 13 bankruptcy, the Jacks sought to treat the agreement as a security agreement and bifurcate the debt into secured and unsecured portions in their plan.

In this case, Florida law dictated a different outcome from that of Price. Under Florida Statutes, section 559.9232(1)(e), a “rental-purchase agreement” is an agreement for the use of personal property for an initial period of four months or less, that is automatically renewed with each rental payment following the initial period, and that permits lessee to acquire ownership of the property. Florida law specifically provides, under section 559.9232(2)(f), that a rental-purchase agreement is not construed to be a security interest.

Having found the agreement to be a true lease, the court ordered the Jacks to either assume or reject the lease as required by section 365(d)(2).

Jack Bankr MD Fla opinion July 2017

by on

Automatic Stay Does Not Preclude Criminal Restitution Collection

The automatic stay does not prevent the government from collecting criminal restitution under the Mandatory Victim’s Restitution Act, 18 U.S.C. § 3613(a). Partida v. U.S. Dept. of Justice, No.15-60045 (9th Cir. July 7, 2017).

Deborah Partida was convicted of embezzlement and theft of labor union funds. She filed for Chapter 13 bankruptcy owing over $200,000 in court-ordered restitution for the crime. When the government offset the debt against her current income, she moved to hold it in contempt for a stay violation. The bankruptcy court denied the motion and the Bankruptcy Appellate Panel affirmed. Partida v. United States (In re Partida), 531 B.R. 811 (B.A.P. 9th Cir. 2015). [Read more…] about Automatic Stay Does Not Preclude Criminal Restitution Collection

by on

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.

Dingley 9th Cir. opinion 2017

by on

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.

Lansaw 3rd Cir opinion April 2017

by on

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.

Cowen 10th Cir. opinion Feb 2017

by on

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.

Sundquist Bankr ED Cal opinion March 2017

by on

Seventh Circuit Discusses Application of Co-Debtor Stay

Bankruptcy’s co-debtor stay was intended to prevent indirect pressure created by creditors attempting to collect against a co-signatory on a debt belonging to the bankruptcy debtor. Therefore, it does not apply to a debt solely belonging to the bankruptcy debtor’s spouse even though state law provides for collection of that debt through marital property. Smith v. Capital One Bank, No. 16‐1422 & 16‐1423 (7th Cir. Dec. 22, 2016). [Read more…] about Seventh Circuit Discusses Application of Co-Debtor Stay

by on

Incompetence Does Not Excuse Stay Violation

A mortgage creditor violated the automatic stay by mistakenly filing a claim to which it had no rights and by failing to immediately return payments on that claim it had received by the trustee. In re Mocella, 552 B.R. 706, No. 10-42287 (Bankr. N.D. Ohio 2016).

Joseph J. and Kimberly A. Mocella filed chapter 13 bankruptcy in June, 2010, and listed a debt to GMAC of approximately $10,000.00, secured by their car. GMAC filed a proof of claim (claim 2) for the secured debt. Nationstar Mortgage filed a proof of claim for over $76,000.00 secured by the Mocellas’ residence. On December 4, 2014, Nationstar filed a Transfer of Claim in which it stated that GMAC had transferred claim 2 to Nationstar. In fact, Nationstar intended to file the Transfer of Claim for a bulk servicing transfer from Ocwen Loan Servicing relating to an unsecured HomeSaver Loan Nationstar had given the Mocellas. [Read more…] about Incompetence Does Not Excuse Stay Violation