Thе plaintiff-appellant / cross-appellee, Dorothy R. Duby (the “Debtor”), and the
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.
The USDA received notice of the Debt- or’s discharge on July 30, 2004. Due to an internal error at the USDA, however, the Debtor’s loan was incorrectly treated as if it were secured by a mortgage and had survived the discharge. As such, between July 15, 2004, and April 13, 2006, the USDA sent the Debtor an additional seventeen monthly statements reflecting a payment of $11.50 due February 28, 2006, one statement reflecting a payment of $23.46 due March 28, 2006, and one statement reflecting a payment of $35.42 due April 28, 2006. On March 29, 2006, the Debtor received a Notice of Payment Default, indicating that her account was in default, that the default had been reported to a credit reporting service, and that she was at risk of losing her home. Additionally, the USDA repeatedly called the Debt- or during the same post-discharge period seeking to collect the debt.
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 counsel continued to send
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 11 U.S.C. § 106(a)(3) and the First Circuit’s In re Rivera Torres decision barred the Debt- or’s claims for punitive and emotional distress damages, respectively, against the USDA. The bankruptcy court scheduled a further hearing with respect to the Debt- or’s actual damages and attorney’s fees, reserving the question of whether damages for a violation of the discharge injunction were appropriate in this case. The Debtor sought leave to appeal the Liability Decision, but the Panel denied her request and the appeal was dismissed as interlocutory on April 13, 2010.
On May 27, 2010, the bankruptcy court held an evidentiary hearing on damages, at which the Debtor and her counsel testified. The bankruptcy court took the matter under advisement and the parties filed post-trial briefs. On July 21, 2010, the bankruptcy court issued a Memorandum Opinion and order in which it awarded attorney’s fees in the amount of $11,848.50 for the violation of the automatic stay and $3,000.00 as a sanction for the violation of the discharge injunction. While the bankruptcy court recognized that the Debtor did not provide evidence of any collectible damages other than attorney’s fees, it held the Debtor was entitled to reasonable attorney’s fees even in the absence of other damages, noting that “the [Debtor] in this case made an attempt to settle the issue without proceeding with litigation, but the USDA refused.” Although the Debtor sought to recover $74,039.00 in attorney’s fees for 448.20 hours, the bankruptсy court awarded fees limited to approximately 80 hours of work and applied the rate allowable under the Equal Access to Justice Act, 28 U.S.C. § 2412, adjusted for inflation. The bankruptcy court reasoned that the Debtor should be awarded $4,836.00 for 39.90 hours spent during the period in which settlement was offered and rejected, and an additional $7,012.50 for 40 hours spent filing and prosecuting the Debtor’s complaint. With respect to the violation of the discharge injunction, the bankruptcy court held that a $3,000.00 sanction award was necessary “to prevent further violations.”
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 28 U.S.C. § 158(a)(1).
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.,
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,
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.” 11 U.S.C. § 362(a)(6). Similarly, 11 U.S.C. § 524(a)(2) states that “a discharge in a case under this title ... operates as an injunction against the commencement or continuation of an actiоn, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived....” 11 U.S.C. § 524(a)(2). In the present case, the bankruptcy court found that the USDA violated both the automatic stay and discharge injunction. The USDA does not appeal those findings.
Unlike 11 U.S.C. § 362, no specific provision exists in the Bankruptcy Code to provide redress for violations of the discharge injunction. Nonetheless, “ ‘[a] bankruptcy court is authorized to invoke § 105 to enforce the discharge injunction imposed by § 524 and order damages for the [debtor] ... if the merits so require.’ ”
Pratt v. Gen. Motors Acceptance Corp. (In re Pratt),
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.,
Notwithstanding the bankruptcy court’s power to аward damages under II U.S.C. § 362(k)(l) and its statutory contempt powers under 11 U.S.C. § 105(a), a court may not award damages against the United States unless sovereign immunity has been expressly and unequivocally waived.
See United States v. Nordic Village, Inc.,
(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 judgmеnt 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 substаntive claim for relief or cause of action not otherwise existing under this title, the Federal Rules of Bankruptcy Procedure, or nonbank-ruptcy law.
11 U.S.C. § 106(a). Notably, punitive damages are expressly excepted from the waiver of sovereign immunity. 11 U.S.C. § 106(a)(3). As such, “[the] distinction between coercive and punitive sanctions, which serves to distinguish between civil and criminal contempt, is particularly important in this case where Congress expressly declines to waive sovereign immunity for punitive damages.”
Jove Eng’g, Inc. v. I.R.S.,
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 waivе sovereign immunity for all forms of ‘monetary relief or ‘money damages’ specifically, it could have done so.”
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 11 U.S.C. § 106 rather than the plain text of the statute, contradicting well-settled principles of statutory construction. She asserts that this caused the First Circuit to ignore the Bankruptcy Code’s internаl rules of construction which require the word “including,” as it appears in 11 U.S.C. § 106(a)(3), to be read in a non-limiting manner.
See
11 U.S.C. § 102(3) (“In this title ... ‘includes’ and ‘including’ are not limiting”). Alternatively, even had Congress intended “money recovery” to be a limited term, she contends that it must at least mean compensatory damages, which, according to First Circuit precedent, include emotional distress damages.
See Fleet Mortgage Group, Inc. v. Kaneb,
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 11 U.S.C. § 106(a) unequivocally waives sovereign immunity for non-punitive court ordered money damages under 11 U.S.C. § 105 so long as they are necessary and appropriate, see
Jove Engineering, Inc. v. I.R.S.,
Nonetheless, the Debtor argues the bankruptcy court erred in finding that
In re Rivera Torres
bars emotional distress damages for violations of the automatic stay against the federal government because that case only involved a violation of the discharge injunction. She contends that the First Circuit’s discussion of 11 U.S.C. § 362, was not essential to its hold
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 11 U.S.C. § 106 did not support a reading that emotional distress damages were available as “actual damages” or a remedy for civil contempt.
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 11 U.S.C. § 362(k)(l), the facts of this case are such that the USDA’s collection efforts began as a violation of the automatic stay, but ultimately became a violation of the discharge injunction upon the termination of the automatic stay once the Debtor received her discharge. The
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,
Having determined that the Debt- or suffered actual damages, we turn to the question of whether the adversary prоceeding was necessary. The bankruptcy court concluded that it was because the
Nonetheless, the USDA urges the Panel to adopt the holding of
Sternberg v. Johnston,
The decision in
Sternberg
has been sharply criticized. For example, in
Grine v. Chambers (In re Grine),
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 unper-suasively 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 “[pjermitting 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 , 503,106 S.Ct. 755 ,88 L.Ed.2d 859 (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 , 577-78,106 S.Ct. 2686 ,91 L.Ed.2d 466 (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 cоurthouse 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 onе 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 Bankr.LEXIS 3302 *22-23 n. 7,2009 WL 3380605 *7 n. 7 (Bankr.N.D.Cal. Oct. 15, 2009).
If the purpose of the automatic stay is, as the Ninth Circuit recognized, to preserve the status quo,
see Sternberg,
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 decisiоn 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.,
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 even address the issue of attorney’s fees incurred to stop the impermissible collection еfforts in its letter to the Debtor’s counsel. Apparently, the USDA took the erroneous position that attorney’s fees, absent some other injury, are unrecoverable under 11 U.S.C. § 362(k)(l). Proven wrong, the USDA cannot now complain that its own intransigence forced the Debtor to incur additional legal fees to recover her actual damages. 3 In sum, the litigation was neither wasteful nor a “long-shot,” particularly where liability was already conceded.
The bankruptcy court calculated the award of attorney’s fees based upon rates allowable under the Equal Access to Justice Act, 28 U.S.C. § 2412, adjusted for inflation, and concluded that a reasonable
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 civil contempt sanction, failing which, the sanction is punitive in nature.
See Int’l Union, United Mine Workers of America v. Bagwell,
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 Debt- оr 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.
Notes
. The First Circuit nonetheless noted the existence of dicta in a prior decision of the First Circuit in
Fleet Mortgage Group, Inc. v. Kaneb,
. We further note that the Eleventh Circuit cases pre-date
In re Rivera Torres
and were discussed by the First Circuit in its decision.
. Had the Debtor refused a reasonable counter-offer of settlement regarding the attorney's fees to stop the USDA's violation of the automatic stay, perhaps this argument would carry more weight.
. Given the bankruptcy court’s substantial reduction of the Debtor’s fee request, there can be no real argument that the USDA is funding her attempt to reverse First Circuit precedent.