In Re Wvf Acquisition, LLC
MEMORANDUM OPINION AND ORDER GRANTING SANCTIONS FOR WILLFUL VIOLATION OF THE AUTOMATIC STAY
THIS MATTER came before the Court for emergency preliminary hearing on September 30, 2009, and for evidentiary hearings on October 19, 2009 and November 13, 2009, upon the Emergency Motion for Contempt for Violation of the Automatic Stay [DE 15] (the “Motion”) filed by WVF Acquisition, LLC f/k/a WV Fiber Acquisition, LLC (the “Debtor”). The Court considered the Motion, the Memorandum in Support of Request for Punitive Damages Sought in the Debtor’s Emergency Motion to Hold WBS Connect, LLC in Contempt for Violation of the Automatic Stay [D.E. # 15] [DE 53] filed by the Debtor, the Memorandum in Opposition to Bankruptcy Court’s Authority to Award Corporate Debtor Punitive Damages Pursuant to Section §62 of the Bankruptcy Code [DE 57] filed by WBS Connect, LLC (“WBS”), the evidence admitted at the hearings on the Motion, and the presentations of counsel, and is otherwise fully advised in the premises. This Memorandum Opinion and Order sets forth the Court’s findings of fact and conclusions of law.
This matter presents the somewhat controversial question of whether the bankruptcy court may award punitive damages for violation of the automatic stay in a case involving a corporate debtor. For the reasons stated below, the Court determines that it has the power to award punitive damages and that punitive damages are warranted in this case. The Court awards against WBS in favor of the Debtor compensatory damages in the amount of $51,995.00 and punitive damages in the amount of $50,000.00, for a total of $101,995.00.
JURISDICTION AND DETERMINATION OF CORE PROCEEDING
The Court has jurisdiction over the Motion under 28 U.S.C. § 1334(b). The
FINDINGS OF FACT
The Debtor is a communication and information services company that provides internet access to customers in North America and Europe. The Debtor purchases dedicated internet access from WBS, which in turn secures internet access through Sprint Nextel Corporation (“Sprint”). The Debtor depends on the service provided by WT!S to provide service to tens of thousands of direct and indirect customers of the Debtor.
Shortly after the commencement of this case, WBS terminated all internet service to the Debtor, bringing the Debtor’s business to a halt. The Debtor alleges that this was a willful violation of the automatic stay in flagrant defiance of the law. After an emergency preliminary hearing on September 30, 2009, the Court entered its Order Granting Debtor’s Emergency Motion for Contempt for Violation of the Automatic Stay [DE 32], in which the Court found, inter alia, that the Debtor’s service contract with WBS is a valuable asset of the Debtor’s estate and termination of service under the contract represented a violation of the automatic stay under 11 U.S.C. § 362(a). On October 19, 2009, the Court held an evidentiary hearing on the Motion. At that hearing, the Debtor presented evidence on the damages it claims resulted from the termination of its internet service by WBS. Counsel for WBS requested a continued evidentiary hearing to allow WBS to present contrary evidence, and counsel for WBS consented to the Debtor presenting additional evidence of its own at such continued evidentiary hearing. Consequently, the Court held a second evidentiary hearing on the Motion on November 13, 2009.
The Debtor is a wholly owned subsidiary of Broadband One d/b/a Host.net (“Broadband One”). In July 2008, Broadband One used the Debtor to acquire substantially all of the assets of, and assume certain liabilities of, WV Fiber Acquisition, LLC (“WVFA”). The assumed liabilities included certain debts of WVFA to WTBS.
Prior to the Debtor’s acquisition of WVFA, WT3S and WVFA were parties to a certain Master Services Agreement (the “MSA”) governing provision of services by WBS to WVFA and payment by WVFA to WTBS for such services. Jeffrey Davis, the chief executive officer of the Debtor’s sole member, Broadband One, testified that when the Debtor acquired WVFA it assumed WWFA’s financial obligations to WBS. The amount of the assumed debt is not clear from the record, but it appears to have been at least $60,000.00. Consistent with the terms of the MSA, WB3S invoices the Debtor on a monthly basis for a monthly access fee paid in advance plus fees for excess bandwidth usage calculated based on a prior month’s usage by the Debtor. The Debtor and WTBS continue to operate under the terms of the MSA.
During the year prior to the petition commencing this case, the Debtor and WBS had ongoing disputes regarding amounts owed by the Debtor to WBS and
As of September 22, 2009, the Debtor owed WBS $90,000.00. On that date, WBS agreed not to disconnect the Debtor’s service if the Debtor paid $60,000.00 that same day and an additional $30,000.00 on September 28, 2009. The Debtor paid WBS $60,000.00 on September 22, 2009.
On Sunday, September 27, 2009, the day before it was to pay the remaining $30,000.00 to WBS, the Debtor filed a chapter 11 petition with this Court commencing the present case. The Debtor filed this case specifically to avoid service termination by WBS. At 3:25 p.m. Eastern Time on September 27, 2009, Mr. Davis sent to WBS, via electronic mail, a copy of a letter from the Debtor’s counsel on firm letterhead stating that the Debtor “filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code, in the United States Bankruptcy Court for the Southern District of Florida (the ‘Bankruptcy Court’), Case No. 09-30483-EPK.” The letter also stated as follows:
Pursuant to section 362(a) of the Bankruptcy Code all collection remedies and any attempt to collect a debt from the Debtor must stop. Please be advised that any action taken against the Debtor or its property without first obtaining relief from the automatic stay from the Bankruptcy Court may be subject to findings of contempt and the assessment by the Bankruptcy Court of penalties, fines and/or sanctions, as may be appropriate.
Mr. Hollander of WBS responded by electronic mail at 5:34 p.m. Mountain Time, stating: “Obviously we are sorry to see this. Trust you are making the best of a bad situation. Please set some time aside tomorrow to speak on the phone. Have a good Sunday.” That night, starting between 2:00 a.m. and 3:00 a.m. Eastern Time on Monday, September 28, 2009 and continuing through about 8:00 a.m. Eastern Time, WBS shut off all service to the Debtor.
Mr. Hollander testified that when he received the letter from the Debtor’s counsel informing WBS of the filing of this case, he did not believe the Debtor had actually filed. Mr. Hollander testified that Mr. Davis had threatened on numerous occasions that the Debtor would file bankruptcy. Mr. Hollander testified that after receiving the letter from Debtor’s counsel he did a Google search to see if he could find word of a bankruptcy filing by the Debtor, and seeing none concluded the letter was yet another threat from the Debtor. Mr. Hollander’s testimony on this point was not credible. Even if his testimony had been sincere, Mr. Hollander’s conclusion was not reasonable under the circumstances. A letter from a law firm on firm letterhead stating that it represents a debtor, announcing the filing of a bankruptcy petition, including the case number, and reminding the creditor of the effect of the automatic stay, is markedly different from a mere threat to file a bankruptcy. After receiving that letter from counsel to the Debtor, without appropriate investigation WBS could not reasonably question the pendency of the present chapter 11 case.
Early on Monday afternoon, September 28, 2009, counsel for WBS forwarded to
WBS knew full well how its actions would affect the Debtor. Mr. Hollander testified that the industry in general is very close knit and that he is intimately familiar with the Debtor’s business. There is no doubt that WBS intended to bring the Debtor to its knees. The service outage affected 15 of the Debtor’s circuits, stopping all internet traffic through the subject circuits. The Debtor’s primary business came to a standstill. Some circuits were brought back up late on Monday morning, after about 8 hours down. Other circuits remained out through late on Tuesday, September 29, 2009, in some cases for nearly 36 hours. The Debtor had never previously experienced a material downtime. As a result of the service outage, the Debtor agreed to issue customer credits equal to $18,720.00. In light of Mr. Berenko’s testimony at the initial evi-dentiary hearing that the potential customer credits could amount to as much as $450,000.00, the Debtor contained this component of damages as much as can be expected.
The Debtor maintains a “WV Fiber Backbone Network Service Level Agreement” (the “SLA”), defining certain service parameters for its customers. The SLA is not executed by the Debtor’s customers. There is no signature space provided on the document. It is provided to customers as part of the documentation for service from the Debtor. WBS argued that under section 8 of the SLA, to receive a credit the Debtor’s customers must provide written notice within 7 days after the end of the month in which the service outage occurred. WBS argued that the Debtor presented no written requests from customers satisfying this provision, implying that the customer credits agreed to by the Debtor were unwarranted. The Debt- or argued that the outage caused by WBS was a “Network Outage” subject to credit under section 4 of the SLA rather than a “Latency or Packet Loss” subject to the written notice provisions of section 8 of the SLA. Roger Berenko, the Debtor’s Vice President of Operations, testified credibly that the Debtor was required to provide customer credits in order to preserve its reputation in the industry and to prevent customer defections, whether or not there was a specific contractual requirement. In closing argument, counsel for WBS conceded that the Debtor had no choice but to provide customer credits under the circumstances. The Court finds that the customer credits agreed to by the Debtor were a direct and foreseeable consequence of the actions of WBS.
The Debtor claims damages for legal fees and related expenses in connection with filing and prosecuting the Motion. WBS argues that the Motion was not necessary, that WBS was in the process of restoring service when the Motion was filed, and that service was fully restored before the first evidentiary hearing on the
The Debtor argued that as a result of the actions of WBS the Debtor will be forced to abandon its relationship with WBS and switch to direct service with Sprint. Mr. Davis testified that the Debt- or does not trust WBS, that the service shut-down has left a “sour taste” in his mouth, and that the Debtor is unwilling to put its customers at risk by remaining with WBS. The Debtor offered testimony of Mr. Davis and of the Debtor’s Director of Engineering, Rory Case, regarding the costs of switching from WBS to Sprint. They estimated the cost at about $20,000.00. (During argument on the second day of evidentiary hearing counsel for the Debtor stated that the cost would be $19,315.00, but the record does not support such an exact figure.) It is not surprising that the Debtor is unhappy with WBS’s actions. However, the Debtor conceded that the service provided by WBS was without incident before WBS took down the Debtor’s service on September 28, 2009, and has been without incident since service was restored. The evidence presented does not support a conclusion that the need to substitute service providers is a direct and necessary consequence of the service outage caused by WBS.
The Debtor alleged that it suffered additional damage as a result of the Debtor’s principal, Mr. Davis, and others having to spend a great deal of time on September 28 and 29, 2009, attempting to restore service through WBS. Mr. Davis testified credibly that there were over 100 man hours spent attempting to resolve the service outage, that he personally devoted the entire day on Monday, September 28th to the issue, and that the actions of WBS caused several major staff members to focus their attention away from their regular duties in order to assist with restoring service. Mr. Davis also testified that he was required to attend three hearings' on the Motion. The Debtor offered no evidence of the value of Mr. Davis’s time or that of his colleagues. As a result, the Court is not able to award damages for this component of the Debtor’s claim.
With regard to the ability of WBS to pay a damages award, including punitive damages, the evidence presented shows that WBS generates approximately $28 million in annual revenue and has positive earnings before interest, taxes, depreciation, and amortization. WBS is expected
The Court finds that the Debtor proved all relevant facts beyond a reasonable doubt.
CONCLUSIONS OF LAW AND ANALYSIS
The actions of WBS in terminating the Debtor’s internet service immediately after the filing of this case, and in attempting to strong-arm a general release from the Debtor, constitute obvious violations of the automatic stay imposed under 11 U.S.C. § 362(a). As an international communication and information services company, the Debtor’s agreement with WBS for provision of internet service is a valuable asset of the estate. Through its arrangement with WBS, the Debtor provides service to tens of thousands of direct and indirect customers. Based on the evidence presented, WBS’s termination of service and attempt to obtain a general release were acts to obtain possession or control over property of the estate in violation of section 362(a)(3) and acts to recover on a pre-petition claim in violation of section 362(a)(6). WBS did not contest that it violated the stay, but instead focused on whether damages should be awarded. The Court set the evidentiary hearings to address the Debtor’s request for compensatory and punitive damages.
Damages may be awarded for violation of the automatic stay when the violation is “willful.”
Jove Eng’g, Inc. v. IRS,
The applicable standard of proof, at least with regard to compensatory damages, is clear and convincing evidence.
Jove Eng’g, Inc.,
In this case, prior to shutting down the Debtor’s internet service, WBS received a letter from Debtor’s counsel on firm letterhead announcing the filing of this chapter 11 case and providing the case number. Although not necessary to a finding that WBS’s actions were willful, the letter specifically implicated the provisions of the automatic stay. A principal of WBS acknowledged receipt of the letter, in writing, prior to WBS terminating the
The willful violation of the stay by WBS caused damage to the Debtor. As a result of WBS shutting down the Debtor’s internet service, the Debtor was unable to provide service to its own customers for a period of 8 to 36 hours depending on the geographic location. In a reasonable attempt to maintain the Debtor’s reputation and goodwill and to retain its customers, and consistent with the Debtor’s written policy, the Debtor agreed to issue customer credits in the aggregate amount of $18,720.00. Based on the evidence presented, these customer credits constitute actual damages to the Debtor as a direct result of WBS’s actions.
In filing and prosecuting the Motion the Debtor incurred legal fees aggregating $33,275.00. Although not necessarily required in this context, the Court considered such fees in light of the criteria set forth in
In re First Colonial Corp. of Am., 544
F.2d 1291, 1299 (5th Cir.1977) and
Johnson v. Georgia Highway Express, Inc.,
As addressed above, the Debtor desires to switch service from WBS to Sprint and requests damages for the related cost. The evidence presented does not support a conclusion that the cost of such undertaking is a necessary consequence of the automatic stay violation in this case. Thus, the Court awards no damages for this component of the Debtor’s claim.
The Debtor requested damages for time spent by Mr. Davis and the Debtor’s employees in responding to the service interruption caused by WBS. The Debtor directs the Court to
In re Dynamic Tours & Transp., Inc.,
Based on the foregoing, under both the Court’s inherent contempt power and under section 105, the Court will award compensatory damages to the Debtor for the willful violation of the automatic stay by WBS in the aggregate amount of $51,995.00.
The Debtor also requests that the Court award punitive damages against WBS. This raises two questions — first, whether this Court has the power to award punitive damages under the circumstances and, second, whether the facts in this case support an award of punitive damages and in what amount.
Nearly every recent decision in the 11th Circuit addressing a request for punitive damages, in the context of violations of the automatic stay, violations of the discharge injunction, and in similar circumstances, cites
Jove Eng’g, Inc. v. IRS,
In Jove, the 11th Circuit Court of Appeals considered alleged violations of the automatic stay by the Internal Revenue Service (the “IRS”) in a case involving a corporate debtor. The corporate debtor requested both compensatory damages in the form of attorneys’ fees and “severe monetary sanctions to induce IRS to cease violating the stay” which the court found to be punitive in nature.
Before addressing the extent of the contempt power under section 105, the 11th Circuit reviewed United States Supreme Court and 11th Circuit case law on the inherent contempt power of the courts, including in bankruptcy matters.
Jove Eng’g, Inc.,
The Jove court then turned to address the power of contempt under section 105. Section 105(a) provides “the court may issue any order, process or judgment that is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. § 105(a). The 11th Circuit stated as follows:
[Section] 105 uses the broad term “any” which encompasses all forms of orders including those that award monetary relief. ... The broad term “any” is only limited to those orders that are “necessary or appropriate” to carry out the Bankruptcy Code. Therefore, the plain meaning of § 105 encompasses any type of order, whether injunctive, compensa-tive or punitive, as long as it is “necessary or appropriate to carry out the provisions of’ the Bankruptcy Code.
Id. at 1554 (citations omitted).
The 11th Circuit’s statement that section 105 encompasses the power to grant punitive relief is not necessary to the court’s decision and is, therefore, dictum. After describing the scope of relief possible under section 105, quoted above, the Jove court addressed the waiver of sovereign immunity under section 106. The court ruled that section 106 limited the debtor to relief against the IRS under section 105, and that section 106 prohibited an award of punitive damages. The remainder of the decision addresses the extent to which the damages claimed by the debtor in that case were punitive in nature, in the context of the limitations of section 106. The 11th Circuit could have ruled based solely on the fact that section 106 excludes punitive damages against a governmental unit, whether or not the court below had the power to award punitive damages under section 105. Instead, the 11th Circuit expressed its view with regard to the scope of the court’s power under section 105. Although not binding, the 11th Circuit’s view is persuasive. 1
It is well settled that this Court has the inherent power to award compensatory damages for willful violations of the automatic stay as this falls within the ambit of the bankruptcy court’s civil contempt power.
See Jove Eng’g, Inc. v. IRS,
Section 105 constitutes express authority to award punitive damages for contempt to the extent necessary or appropriate to carry out the provisions of the Bankruptcy Code. Section 105 “creates a statutory contempt power distinct from the court’s inherent contempt powers.”
Walton,
“[PJunitive damages are awarded in response to particularly egregious conduct for both punitive and deterrent purposes. Such awards are ‘reserved ... for cases in which the defendant’s conduct amounts to something more than a bare violation justifying compensatory damages or injunctive relief.’ To recover punitive damages, the defendant must have acted with actual knowledge that he was violating the federally protected right or with reckless disregard of whether he was doing so.”
In re Wagner,
In the case at hand, WBS intentionally terminated the Debtor’s internet service, knowing that this would bring the Debtor’s business to a halt, after receiving unequivocal written notice of the Debtor’s bankruptcy filing including a specific invocation of the automatic stay. While the Debtor was unable to provide service to tens of thousands of direct and indirect customers, WBS demanded a general release as a condition to restoring service. WBS’s actions constitute “a willful disrespect” and “arrogant defiance of the bankruptcy laws.”
In re White,
The final determination for the Court is to set an amount of punitive damages appropriate in this case. “As a general matter, punitive damages serve both as punishment for wrongful conduct and as a deterrent of future wrongful conduct.”
In re White,
“Perhaps the most important indi-cium of the reasonableness of a punitive damages award is the degree of reprehensibility of the defendant’s conduct.”
Id.
at 575,
Awarding punitive damages of $50,000.00 approximately doubles the compensatory damages awarded in this matter, which are $51,995.00. A one to one ratio of punitive to actual damages is well within the range found constitutional by the United States Supreme Court.
See id.
at 580-83,
ORDER
For the foregoing reasons, the Court hereby ORDERS and ADJUDGES that
1. The Motion is GRANTED;
2. The Debtor is awarded compensatory damages in the amount of $51,995.00 against WBS Connect, LLC;
3. The Debtor is awarded punitive damages in the amount of $50,000.00 against WBS Connect, LLC; and
4. The Court will enter a separate judgment in favor of the Debtor and against WBS Connect, LLC in the total amount of $101,995.00 consistent with this Memorandum Opinion and Order.
Notes
. While the Jove court considered an order of a district court and not a bankruptcy court, there is nothing in Jove to imply that the 11th Circuit's view of section 105 is limited to matters before the district court. Indeed, all matters encompassed by the Bankruptcy Code, including section 105, are subject to referral under 28 U.S.C. § 157(a).