DOROTHY R. DUBY, Debtor v. UNITED STATES OF AMERICA
BAP NOS. NH 10-052, NH 10-057
United States Bankruptcy Appellate Panel for the First Circuit
June 28, 2011
Bankruptcy Case No. 03-13502-JMD; Adversary Proceeding No. 08-01160-LHK
UNITED STATES BANKRUPTCY APPELLATE PANEL FOR THE FIRST CIRCUIT
DOROTHY R. DUBY, Debtor.
DOROTHY R. DUBY, Plaintiff-Appellant / Cross-Appellee, v. UNITED STATES OF AMERICA, Defendant-Appellee / Cross-Appellant.
Appeal from the United States Bankruptcy Court for the District of New Hampshire (Hon. Mark W. Vaughn, U.S. Bankruptcy Judge)
Before Hillman, Feeney, and Bailey, United States Bankruptcy Appellate Panel Judges.
Terrie Harman, Esq., on brief for Plaintiff-Appellant / Cross-Appellee.
Michael McCormack, Esq., on brief for Defendant-Appellee / Cross-Appellant.
June 28, 2011
The plaintiff-appellant / cross-appellee, Dorothy R. Duby (the “Debtor“), and the defendant-appellee / cross-appellant, United States of America, Department of Agriculture (the “USDA“), appeal from the bankruptcy court‘s final judgment and order dated July 21, 2010, awarding the Debtor $11,848.50 for attorney‘s fees for a violation of the automatic stay and $3,000.00 as a sanction for a violation of the discharge injunction. The issues presented on appeal are: (1) whether the bankruptcy court erred, as a matter of law, in ruling that the Debtor was barred from recovering emotional distress damages for violations of the automatic stay and discharge injunction from the USDA; (2) whether the bankruptcy court erred when it concluded that the Debtor was entitled to recover attorney‘s fees despite not having incurred any other recoverable damages; and (3) whether, in light of the express prohibition of punitive damage awards against the United States under
BACKGROUND
The facts necessary to decide this appeal are undisputed. The Debtor filed a voluntary Chapter 7 petition on October 14, 2003. On Schedule F – Creditors Holding Unsecured Nonpriority Claims (“Schedule F“), the Debtor listed the USDA as an unsecured nonpriority creditor in the amount of $1,800.00. Despite having received actual notice of the Debtor‘s bankruptcy petition and the automatic stay, the USDA sent her eight monthly billing statements that each reflected a payment due of $11.50 and a due date of February 26, 2006, while her case was pending. On July 15, 2004, the Debtor received a discharge.
On April 26, 2006, Debtor‘s counsel contacted the USDA by telephone to discuss the post-discharge account statements and phone calls received by the Debtor. As a result of the call, the USDA immediately corrected its records to reflect that the debt was not secured, did not survive bankruptcy, and was discharged. Two days later, the USDA sent the Debtor a letter apologizing for the inconvenience, indicating that her loan would be cancelled and explaining that she would not receive any further calls regarding the matter. On June 27, 2006, the USDA sent a final letter stating that the cancellation of her loan was complete.
On June 2, 2006, the Debtor‘s counsel sent a letter to the USDA demanding attorney‘s fees of $1,365.00 and emotional distress damages in the amount of $5,000.00 resulting from the USDA‘s admitted violations of the automatic stay. In response, the USDA advised the Debtor to submit a tort claim and enclosed the requisite form. In the months that followed, the Debtor‘s
On December 3, 2008, the Debtor reopened her bankruptcy case and commenced an adversary proceeding in the bankruptcy court, alleging violations of both the automatic stay and the discharge injunction. In the fall of 2009, the Debtor moved for partial summary judgment on the issue of liability and the USDA filed a cross-motion seeking dismissal of the entire complaint. On February 22, 2010, the bankruptcy court issued a Memorandum Opinion (the “Liability Decision“) and order granting each motion in part, finding that the USDA violated both the automatic stay and the discharge injunction, but concluding that
The Debtor filed a timely Notice of Appeal on August 4, 2010, and the USDA filed a cross-appeal on August 17, 2010.
JURISDICTION
The Panel may hear appeals from “final judgments, orders and decrees” pursuant to
STANDARD OF REVIEW
On appeal, the bankruptcy court‘s findings of fact are reviewed pursuant to the clearly erroneous standard, and its conclusions of law de novo. See Lessard v. Wilton-Lyndeborough Coop. School Dist., 592 F.3d 267, 269 (1st Cir. 2010). “A finding is ‘clearly erroneous’ when, although there is evidence to support it, the reviewing court is left with the definite and firm conviction that a mistake has been committed.” Padilla-Mangual v. Pavía Hosp., 516 F.3d 29, 31 (1st Cir. 2008) (quoting Anderson v. Bessemer City, 470 U.S. 564, 573 (1985)) (internal quotation marks omitted); Melendez-Garcia v. Sanchez, 629 F.3d 25, 41 (1st Cir. 2010). “[A] bankruptcy court‘s assessment of damages for violations of the automatic stay is reviewed for an abuse of discretion.” In re Heghmann, 316 B.R. at 400; see also Varela v. Ocasio (In re Ocasio), 272 B.R. 815, 822 (B.A.P. 1st Cir. 2002). This Bankruptcy Appellate Panel has previously characterized the “abuse of discretion” standard as follows:
Judicial discretion is necessarily broad - but it is not absolute. Abuse occurs when a material factor deserving significant weight is ignored, when an improper factor is relied upon, or when all proper and no improper factors are assessed, but the court makes a serious mistake in weighing them.
In re Ocasio, 272 B.R. at 828 n.12 (quoting Perry v. Warner (In re Warner), 247 B.R. 24, 25 (B.A.P. 1st Cir. 2000)).
DISCUSSION
I. Applicable Law
Section 362(a)(6) of the Bankruptcy Code provides that the filing of a bankruptcy petition “operates as a stay, applicable to all entities, of . . . any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.”
Once a court determines that the automatic stay has been violated,
Unlike
Courts have recognized two types of sanctions. Civil contempt sanctions are designed to coerce the contemnor into compliance with a court order or to compensate a harmed party for losses sustained. See United States v. United Mine Workers of Am., 330 U.S. 258, 303-304 (1947); Gompers v. Buck‘s Stove & Range Co., 221 U.S. 418, 442 (1911); Ingalls v. Thompson (In re Bradley), 588 F.3d 254 (5th Cir. 2009); Eck v. Dodge Chemical Co. (In re Power Recovery Sys., Inc.), 950 F.2d 798 (1st Cir. 1991). In contrast, criminal contempt sanctions are punitive in nature and are imposed for the purpose of vindicating the authority of the court. See id. Where a contempt sanction is not compensatory, it is civil, and therefore non-punitive, only if the contemnor is afforded some opportunity to purge the contempt. See Int‘l Union v. Bagwell, 512 U.S. 821, 829 (1994); Penfield Co. of Cal. v. SEC, 330 U.S. 585, 590 (1947).
Notwithstanding the bankruptcy court‘s power to award damages under
(a) Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to the following:
(1) Sections 105 . . . 362 . . . [and] 524 . . . of this title.
(2) The court may hear and determine any issue arising with respect to the application of such sections to governmental units.
(3) The court may issue against a governmental unit an order, process, or judgment under such sections or the Federal Rules of Bankruptcy Procedure, including an order or judgment awarding a money recovery, but not including an award of punitive damages. Such order or judgment for costs or fees under this title or the Federal Rules of Bankruptcy Procedure against any governmental unit shall be consistent with the provisions and limitations of section 2412(d)(2)(A) of title 28.
(4) The enforcement of any such order, process, or judgment against any governmental unit shall be consistent with appropriate nonbankruptcy law applicable to such governmental unit and, in the case of a money judgment against the United States, shall be paid as if it is a judgment rendered by a district court of the United States.
(5) Nothing in this section shall create any substantive claim for relief or cause of action not otherwise existing under this title, the Federal Rules of Bankruptcy Procedure, or nonbankruptcy law.
In In re Rivera Torres, a case involving a violation of the discharge injunction, the First Circuit held that “Congress has not ‘definitely and unequivocally’ waived sovereign immunity under § 106 of the Bankruptcy Code for emotional damages. We must assume that had Congress meant to waive sovereign immunity for all forms of ‘monetary relief’ or ‘money damages’ specifically, it could have done so.” 432 F.3d at 34 (internal citation omitted). Performing a temporal analysis by which the First Circuit looked to the congressional understanding of the enumerated section at the time of its amendment, it reasoned that when Congress amended
With this statutory framework in mind, we address the issues presented by the parties seriatim.
II. Emotional Distress Damages Against the Federal Government
The main purpose of the Debtor‘s appeal is to seek the reversal of In re Rivera Torres, which she contends was wrongly decided. The Debtor argues that the First Circuit erroneously relied on legislative history to analyze
We acknowledge that the First Circuit‘s analysis differs from that of the United States Court of Appeals for the Eleventh Circuit, which held that
As explained above, in In re Rivera Torres, the First Circuit held that “Congress has not ‘definitely and unequivocally’ waived sovereign immunity under § 106 of the Bankruptcy Code for emotional damages,” after determining through a temporal analysis that the background law at the time Congress amended
Ultimately, to the extent that the Debtor seeks reversal of binding precedent, reconsideration of In re Rivera Torres, if appropriate, must be left to the First Circuit.
III. Attorney‘s Fees Awarded under 11 U.S.C. § 362(k)
From the outset, we recognize that, while the bankruptcy court awarded attorney‘s fees under
That being said, the USDA asserts that the bankruptcy court‘s award of attorney‘s fees is erroneous in three respects. First, contrary to the bankruptcy court‘s findings, the USDA argues that an adversary proceeding was unnecessary because the Debtor suffered no recoverable actual damages and therefore there was no legitimate basis for the USDA to reach a monetary settlement. Second, even if the Debtor were entitled to attorney‘s fees accrued prior to the cessation of the USDA‘s collection activities as actual damages, which it contends she is not, the USDA, relying on Sternberg v. Johnston, 595 F.3d 937 (9th Cir. 2010), cert. denied, 131 S. Ct. 102 (2010), asserts that the vast majority of fees awarded are not available as a matter of law because they were incurred through litigation to collect the alleged actual damages. Third, the
Having determined that the Debtor suffered actual damages, we turn to the question of whether the adversary proceeding was necessary. The bankruptcy court concluded that it was because the USDA rebuffed the Debtor‘s settlement attempts. The USDA disagrees, arguing that settlement was unwarranted under existing law because emotional distress damages are not
Nonetheless, the USDA urges the Panel to adopt the holding of Sternberg v. Johnston, 595 F.3d at 940, and find that attorney‘s fees incurred in pursuit of an award of actual damages long after the cessation of conduct that violates the automatic stay are not recoverable under
The decision in Sternberg has been sharply criticized. For example, in Grine v. Chambers (In re Grine), 439 B.R. 461 (Bankr. N.D. Ohio 2010), the court stated:
This court disagrees with the holding and the unpersuasive reasoning in Sternberg. The Ninth Circuit dubiously found that the straightforward language of § 362(k) is ambiguous, then looked for guidance to a law dictionary and examples of state law malpractice and bad faith causes of action not created by any federal statute. This court does not find the language of the statute ambiguous or in need of odd parsing of simple language or resort to a dictionary or the guidance of Tennessee, California or Colorado state common law to inform the intent of Congress in § 362(k). Significantly, this specific provision of § 362, and indeed § 362 extensively in general, was materially amended by Congress in 2005 in respects not relevant to this case but in ways that can fairly be characterized as creditor-friendly. By that time, there was substantial established precedent, including Ninth Circuit and Ninth Circuit Bankruptcy Appellate Panel cases, see, e.g., In re Dawson, 390 F.3d 1139 (9th Cir. 2004); Havelock v. Taxel (In re Pace), 159 B.R. 890, 900 (9th Cir. BAP 1993), awarding fees for prosecuting then § 362(h) claims and adversary proceedings as “actual damages” against creditor defendants for violation of the automatic stay. If in 2005 Congress thought that established case law and such fee awards misconstrued the plain meaning of its statute, and improperly penalized creditors for actions in disregard of § 362(a), it had the opportunity to fix the problem by amending § 362(h) to remove any ambiguity in and the misconception by many courts of its expressed intent. It did not. Moreover, the Ninth Circuit itself in the case Orange Blossom Limited Partnership v. Southern California Sunbelt Developers, Inc. (In re Southern California Sunbelt Developers, Inc.), 608 F.3d 456 (9th Cir. 2010), has since resorted equally unpersuasively to hyper-technical legal gymnastics to distinguish Sternberg in the context of applying § 303(i) of the Bankruptcy Code, which permits a judgment for attorney‘s fees upon dismissal of an involuntary petition.
11 U.S.C. § 303(i) .This court also disagrees with the policy analysis advanced by the Ninth Circuit in support of its holding in Sternberg. The Ninth Circuit‘s statement that “[p]ermitting a debtor to collect attorney fees incurred in prosecuting a damages action would further neither the financial nor the non-financial goals of the automatic stay,” Sternberg, 595 F.3d at 948, is simply wrong. The automatic stay and the breathing room it affords from creditor collection activities play a vital
and fundamental role in bankruptcy. Midlantic Nat‘l Bank v. New Jersey Dept. of Envtl. Protection, 474 U.S. 494, 503 (1986). The fee shifting provision in § 362 serves to protect rights belonging to persons in difficult circumstances that are not necessarily measured by money alone. Cf. City of Riverside v. Rivera, 477 U.S. 561, 577-78 (1986). Without such a provision, individual debtors’ attorneys would be less likely to pursue vindication of the stay and their clients’ rights thereunder, both because their bankrupt clients lack the money to pay hourly fees and because of the oftentimes relatively small amount of probable damages, as in this case, making a contingency fee wholly impractical. The Sternberg holding that the right to fees under § 362(k) stops at the courthouse door gives creditors free shots at continuing pre-petition collection activity with little practical fear of financial accountability for their actions and hence little incentive to stop it. Under the Ninth Circuit analysis, a debtor who sustains injury from and seeks the help of counsel to stop automatic stay violations is effectively powerless to make a creditor pay the damages and fees incurred. Whether conduct constitutes a violation is also oftentimes reasonably disputed by the parties, giving debtors’ counsel little incentive to litigate the contours of § 362(a) in close cases for the benefit both of any particular debtor as well as for the bankruptcy system as a whole. As one bankruptcy judge in the Ninth Circuit rhetorically asks in likewise noting that ”Sternberg weakens substantially the effectiveness of the automatic stay,” “[w]hat good is it to be entitled to damages and attorneys’ fees for a violation of the automatic stay if it costs a debtor much more in unrecoverable fees to recover such damages and recoverable attorneys fees? In many, if not most, cases that will likely be the situation.” Bertuccio v. Cal. State Contrs. License Bd. (In re Bertuccio), Case No. 04-56255, 2009 WL 3380605 *7 n. 7 (Bankr. N.D. Cal. Oct. 15, 2009).
439 B.R. at 470-471. We find this criticism unassailable and adopt it as our own.
If the purpose of the automatic stay is, as the Ninth Circuit recognized, to preserve the status quo, see Sternberg, 595 F.3d at 948; Hillis Motors, Inc. v. Hawaii Auto. Dealers’ Ass‘n, 997 F.2d 581, 585 (9th Cir. 1993), then the mechanism by which stay violations are remedied must necessarily return the debtor to the status quo in order to serve that purpose. A contrary rule would, as it did here, discourage creditors who concede liability from settling with the debtor, particularly where punitive damages are unavailable. Moreover, this rule would often harm the other creditors of the estate because the debtor, who likely lacks the means to fund
Finally, the USDA argues that the attorney‘s fees awarded are “grossly excessive” because they are nearly ten times the Debtor‘s “pre-litigation actual damages.” Notably, the USDA only challenges the amount of fees awarded, not the methodology employed by the bankruptcy court to determine that amount. The USDA reasons that because $1,365.00 was the most the Debtor could have recovered under prevailing law, she should not be rewarded for choosing to “run up a large legal bill in an effort to recover the unrecoverable” instead of offering a settlement in that amount. The USDA asserts that “[t]his is precisely the kind of wasteful litigation that French discourages. Yet, the bankruptcy court‘s decision to award the plaintiff attorney‘s fees in an amount ten times greater than her potential best case result leads to just the opposite incentive of encouraging this kind of long-shot litigation instead of making reasonable pre-litigation settlement offers.” See French v. Corporate Receivables, Inc., 489 F.3d 402 (1st Cir. 2007).
The USDA‘s reasoning and arguments are flawed and lack merit. The USDA refused the Debtor‘s pre-litigation offer of settlement. Regardless of whether that settlement offer included a demand for unrecoverable emotional distress damages, the attorney‘s fees were recoverable and the USDA made no counter-offer in response to the demand. Indeed, the USDA did not
The bankruptcy court calculated the award of attorney‘s fees based upon rates allowable under the Equal Access to Justice Act,
IV. The $3,000.00 Sanction Awarded under 11 U.S.C. § 105(a)
The USDA argues that the $3,000.00 sanction for the violation of the discharge injunction to “prevent further violations” was an impermissible punitive sanction because it was afforded no opportunity to purge its contempt. Indeed, the adversary proceeding was not even commenced until long after the violations of the discharge injunction had ceased. As explained above, the ability to purge one‘s contempt is a pre-requisite for a non-compensatory coercive
CONCLUSION
For the reasons stated above, we conclude that the bankruptcy court correctly found that the First Circuit‘s decision in In re Rivera Torres bars awards of emotional distress damages against the federal government for violations of the automatic stay and discharge injunction and did not abuse its discretion by awarding the Debtor attorney‘s fees in the amount of $11,848.50 for the USDA‘s violation of the automatic stay. Nevertheless, the bankruptcy court erred as a matter of law by awarding $3,000.00 punitive sanction against the federal government. Therefore, we AFFIRM IN PART and REVERSE IN PART.