Manzanares v. State Farm Fire & Casualty Co. (In Re Manzanares)Manzanares v. State Farm Fire & Casualty Co. (In Re Manzanares)
MEMORANDUM OPINION, FINDINGS OF FACT, AND CONCLUSIONS OF LAW
This bankruptcy case began when the debtor filed a chapter 7 petition on February 5, 2004. The present dispute predates the bankruptcy, however, and unfortunately for all involved it did not die when the debtor received a discharge on May 6, 2004. What originated as a simple two-car accident and an obligation that both parties acknowledge would have been a dis-chargeable debt has devolved into an amazing comedy of errors featuring a dueling stream of accusations of improper service, lack of notice, violations of the discharge, and legal arguments about the propriety of the debtor’s request for punitive damages against the defendant, State Farm Fire and Casualty Company. Ultimately, the case illustrates that when Hubert Humphrey once observed, “We believe that to err is human; to blame it on someone else is politics,” he might as well have been speaking of litigation. In that regard, it is the Court’s obligation to decipher which party bears the brunt of the blame for this litigious miasma.
The dispute began simply enough. On December 31, 2001, Mercedes Rondon and Roberto Diaz were in a ear accident. Ron-don was at fault and was driving a car owned by the debtor, who is her father-in-law. Neither she nor the debtor were insured at the time of the accident. Further complicating matters, Diaz was also driving a vehicle owned by someone else, namely, Maria Lopez and Loynaz Cordova. Both Diaz and the car’s owners were insured by State Farm. 1 Diaz suffered injuries as a result of the accident, and there was also damage to the car. As the personal injury and collision damages were suffered by two separate insured parties, however, State Farm elected to deal with the claims separately. 2
After deducting the $500 deductible required under Lopez’s insurance policy, State Farm paid roughly $7,000 in collision damages to Lopez for damage to the car. Meanwhile, after exhausting the $10,000 in personal injury benefits available under his State Farm policy, Diaz also made a claim for uninsured motorist benefits. State Farm paid Diaz approximately $4,200 under this portion of his policy. State Farm then referred both matters to its “subrogation unit.” From there, the Lopez claim was referred to an outside attorney, Stephen Shenkman, for collection. Shenkman initiated a subrogation action in state court against the debtor and Rondon, seeking to collect $7,552.36 in damages. Shortly thereafter, the Diaz claim was referred to the law offices of Odalys Nodarse-Busee-mi, who brought an action against the debtor and Rondon in November of 2003 to collect the $4,200 in uninsured motorist benefits.
After these actions were filed, the debt- or filed bankruptcy in February of 2004. The second lawsuit involving the Diaz uninsured motorist claim was listed on the debtor’s schedules. Notice of the bank
The competing complaints about poor or ineffective service arise at this point. State Farm accurately contends that the debtor did not list the collision subrogation action in his schedules, and that Shenkman did not receive personal notice of the bankruptcy. According to the debtor, however, service of the collision subrogation lawsuit (handled by Shenkman) was delivered to a residence owned by his former spouse, and the debtor never received notice of the lawsuit. From the debtor’s perspective, he was only aware of one lawsuit — the Diaz uninsured motorist action — and that is what he scheduled. 3
In any event, Shenkman did not receive notice of the bankruptcy directly from the debtor. Further, State Farm did not notify him that the company had received notice of the bankruptcy in connection with the Diaz lawsuit. Blissfully unaware of the torrent of litigation he was about to unleash, Shenkman negotiated a settlement of the claims against Rondon, the debtor’s daughter-in-law. On November 16, 2004, Shenkman obtained a default judgment in favor of State Farm against the debtor in the amount of $9,211.51. In March of 2005, Shenkman sent a letter to the Florida Department of Highway Safety and Motor Vehicles. In this letter, Shenkman informed the DMV that the debtor did not possess the state-mandated insurance on his vehicle. The letter also referenced the default judgment in the Lopez subrogation action, and requested that the DMV suspend the debtor’s driver’s license.
Unfortunately, some confusion regarding the names of the debtor and his son initially resulted in the suspension of the son’s driver’s license. Shenkman subsequently requested that the son’s license be reinstated and asked again that the debt- or’s license be suspended. This request was granted on or about May 23, 2005. Two days later, the debtor’s attorney contacted Shenkman by letter and enclosed a copy of the debtor’s bankruptcy discharge. The debtor’s attorney noted that the debt was “dischargeable” and that he intended to reopen the bankruptcy proceedings to effectuate that result.
According to Shenkman and State Farm, there were “immediate” discussions between the debtor’s attorney and Shenk-man’s office to resolve the situation. Shenkman claims that it was his understanding that the debtor’s attorney was going to reopen the bankruptcy proceeding and amend the schedules to list this debt. Once that was accomplished, Shenkman agreed to vacate the state court judgment and would direct reinstatement of the driver’s license. However, according to the debtor’s attorney, the debtor also sought to resolve the matter quickly by offering to
On June 22, 2005, the debtor filed this adversary proceeding. State Farm seems to suggest that in doing so the debtor somehow reneged upon the mechanism for resolving the dispute. Admittedly, the debtor did not simply reopen the bankruptcy proceeding and amend the schedules. However, the record clearly demonstrates that the debtor expected Shenkman to take affirmative action once he was presented with evidence that the debt was subject to discharge, if not discharged already. Shenkman did nothing to remedy the situation. Oddly enough, neither did State Farm. Despite being properly served with the adversary complaint, State Farm did not file a timely answer and a default was entered on July 25, 2005. 5 In the interim, the debtor’s attorney contacted Shenkman with a proposed stipulation to vacate the state court judgment, and indicated that the stipulation could resolve the adversary proceeding. This offer was likewise rejected.
The debtor also filed a motion in state court to set aside the default judgment based upon the allegedly deficient notice and the intervening bankruptcy. Rather than concede on this point either, State Farm’s attorney opposed the motion and delayed the hearing on the matter. When the debtor’s motion was heard on August 29, 2005, Shenkman opposed both the request to vacate the judgment and the request to reinstate the debtor’s driver’s license. The state court deferred ruling on the matter until the bankruptcy court addressed the issue. As indicated previously, however, State Farm had failed to file an answer to the adversary complaint and a clerk’s default had been entered. At the adversary pretrial on September 7, 2005, the court granted State Farm’s request to vacate the default and allowed the debtor to amend the complaint to add a claim for punitive damages. Only after all of this did State Farm file a motion to vacate the state court final judgment. On October 5, 2005, the debtor finally learned that his driver’s license had been reinstated.
At this point, the debtor now asks the Court to award both actual and punitive damages against State Farm for alleged violations of the automatic stay and the discharge injunction. The debtor wants an award of actual damages for the wages lost while he could not work as a delivery driver, as well as for the mental anguish and emotional distress associated with the loss of his driver’s license. The debtor also believes that a sizeable punitive damage award and an award of attorney’s fees would be appropriate in order to send a message that this type of behavior is unacceptable, and to encourage State Farm and other similarly-situated creditors to reform their policies. In order to do so, however, there are two principal questions which must be resolved. First of all, the Court must consider whether State Farm re
As to the first issue, it is clear that the so-called “Lopez claim” was not specifically listed on the debtor’s schedules. It is also true that the debtor did not serve a copy of the notice of bankruptcy to State Farm directly through Florida’s Department of Financial Services. A notice of suggestion of bankruptcy was filed in the Diaz lawsuit, and State Farm appears to concede that it received actual notice of the bankruptcy as concerns that claim. 6 State Farm seems to concede that if Shenkman had received a similar notice, the Lopez action would likewise have been dismissed as a result of the bankruptcy.
Nonetheless, State Farm argues that the notice to Attorney Nodarse-Buscemi was defective because it did not sufficiently alert State Farm to the possibility that other claims (besides the Diaz lawsuit itself) were affected by the debtor’s discharge. State Farm contends that in order to properly provide notice, the debtor would have needed to schedule both claims and serve the notice directly on State Farm itself (or, at the very least, notify both attorneys, which State Farm concedes would constitute “actual knowledge” of the bankruptcy, at least in the context of the individual claims in question). Because of this purported defect in notice, State Farm believes that the Lopez claim was not affected by the discharge and that the company did not engage in any “willful” violations of either the automatic stay or the discharge injunction.
Section 524 of the bankruptcy code operates as a post-discharge injunction against the collection of debts discharged in bankruptcy, and is appropriately characterized as “the embodiment of the Code’s fresh start concept.”
In re Riser,
[N]either listed nor scheduled under section 521(1) of this title, with the name, if known to the debtor, of the creditor to whom such debt is owed, in time to permit—
(A) if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the ease in time for such timely filing; or
(B) if such debt is of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim and timely request for a determination of dischargeability of such debt under one of such paragraphs, unless such creditor had notice or actual knowledge of the ease in time for such timely filing and request.
The primary purpose of this discharge exception is fairness to those creditors who, through no fault of their own, were somehow prejudiced by not having the opportunity to protect their rights and assert their interests. The statute recognizes that such creditors might be prejudiced by being denied either a meaningful participation in the distribution of assets or the ability to challenge the dischargeability of their claim for one of the reasons enumerated in §§ 523(a)(2), (a)(4), and (a)(6). Consequently, the code contemplates, and § 523(a)(3) codifies, the notion that debtors are expected to exercise reasonable care and diligence in assembling and filing with the bankruptcy court accurate information concerning their creditors.
In re Blossom,
In
In re Bowen,
Given that the purpose of the exception is one of fundamental fairness, however, the statute also provides that an unscheduled creditor who has “actual knowledge” of the bankruptcy case will nonetheless find its claims discharged. In this regard, the debtor’s duty to afford due process to creditors is “counterbalanced by the creditors’ duty to object to the discharge of a debt if it has
any
notice or knowledge of a Chapter 7 case prior to the expiration of the time limitation” found in the code and bankruptcy rules.
Id.
at 800. Creditors who have timely, actual knowledge of a case but fail to receive “official” notice of it nonetheless have a burden to come forward before the bar date in order to object to the discharge of their claims.
GAC Enters. v. Medaglia (In re Medaglia),
The threshold inquiry under § 523(a)(3) is therefore whether the creditor received notice or possessed “actual knowledge” of the bankruptcy case. A creditor who does not receive “formal” notice of the filing of a bankruptcy case but who nonetheless has actual knowledge shortly after the filing will be bound by the discharge.
In re Green,
[Section 523(a)(3)] is not intended as a safe haven for creditors with actual knowledge of a pending bankruptcy case who neglect to promptly evaluate and advance their interests in the case. Rather, it is intended to act in organic conjunction with numerous other provisions of the Bankruptcy Code and Rules, which operate on the understanding that debtors and creditors in bankruptcy cases have independent obligations to safeguard their own interests in anticipation of the grant of discharge in bankruptcy. The debtor has an absolute duty to identify and schedule all persons or entities who may hold or assert claims against the bankruptcy estate and, hence, to afford adequate notice to creditor-claimants of the effect of the case on their rights (citations omitted). Once the debtor has done this, or once an unscheduled creditor has received actual notice of the pendency of a bankruptcy case, the creditor-claimant has the clear obligation to take affirmative steps to evaluate, advance, and protect its rights.
Put most simply, creditors who learn of a debtor’s bankruptcy are not entitled to sit back and demand “formal” notice. Their claims are subject to discharge unless they take affirmative action in the face of their knowledge. For purposes of the statute, “actual knowledge” means that the creditor possessed knowledge of facts sufficient to apprise the creditor that a case was actually filed, and where the proceeding was pending.
In re Layman,
The statutory language clearly contemplates that mere knowledge of a pending bankruptcy proceeding is sufficient to bar the claim of a creditor who took no action, whether or not that creditor received official notice from the court of various pertinent dates. This furthers the bankruptcy policy of affording a “fresh start” to the debtor by preventing a creditor, who knew of a proceeding but who did not receive formal notification, from standing back, allowing the bankruptcy action to proceed without adjudication of his claim, and then asserting that the debt owed to him is undis-chargeable.
In re Alton,
The present case was a no asset chapter 7, in which there was never a date by which creditors were to file proofs of
On a purely factual level, State Farm offers up a series of what it believes to be salient details. For example, State Farm’s subrogation unit handles “tens of thousands” of claims a year. The Lopez and Diaz claims were separated internally, handled by different claims representatives, and farmed out to different attorneys to litigate. There was apparently no coordination between the claims agents or the attorneys. According to State Farm’s corporate representative, the actions were separated as they involved “separate policies, separate insureds, separate types of claims, separate investigations, and sought separate types of damages.” 8 State Farm complains that because the debtor sent the notice of the bankruptcy to the attorney, rather than to State Farm directly, “there was no process in place” to communicate the matter “to the company as a whole” or to alert the claims representative that other claims might be affected. 9
As indicated previously, this is not the typical § 523(a)(3) case in which the debtor utterly fails to schedule a creditor. State Farm was in fact scheduled, and the notice went to the attorney handling one of the two subrogation matters. State Farm’s argument is that this notice was somehow inherently defective (and that the claims representative’s “knowledge” of the bankruptcy in the context of the Diaz lawsuit cannot satisfy the code’s “actual knowledge” requirement). There are indeed scenarios under which defective notice to a large company can prevent the discharge of a debt. For example, in
National Union Fire Ins. Co. v. Main (In re Main),
Serving the notice of bankruptcy upon the attorney may not strictly conform with the requirements of Fed. R. Bankr.P. 1007(a), which provides that the debtor must file a list containing the “name and address” of each creditor. The forms promulgated by the Judicial Conference of the United States also indicate that the debtor should list the creditor’s name, mailing address, and account number. It must be conceded that listing a creditor in care of an attorney does not properly conform to the letter of these rules.
Barnes v. Sawyer (In re Barnes),
As State Farm has pointed out, there are certainly scenarios under which notice to a single representative might not constitute notice to a huge corporation or governmental agency.
See United States Small Business Admin. v. Bridges,
In
Bridges,
the debtor was personally obligated on two loans to the Small Business Administration. At the same time, the debtor’s corporation was the guarantor on an unrelated loan which was handled by a separate branch of the SBA. Both the corporation and the debtor filed bankruptcy. In the corporate case, the SBA was scheduled as a creditor and received notice
When the SBA filed suit to recover on the personal loans, the debtor argued that the SBA had received “actual knowledge” of the bankruptcy and that the claims were discharged. The court first noted that in the context of a large and “cumbersome agency,” debtors would be wise to take steps to assure “timely and meaningful notice.”
A notice from the bankruptcy court of an individual debtor’s bankruptcy filing alerts a creditor that it has been scheduled in that individual’s bankruptcy case. The SBA received no notices at all regarding [the debtor’s] personal bankruptcy, since [the debtor] failed to schedule it as a creditor. Instead, an attorney in a branch office unconnected with the loans made to [the debtor] discovered [the debtor’s] name and bankruptcy case number in the caption of documents relating to a joint plan of reorganization filed in an ongoing bankruptcy proceeding of the SBA’s known debtor.... It appears that the SBA’s Biloxi office ... reasonably assumed that these notices were merely additional documents in the continuing [corporate] bankruptcy.... Such misinformation cannot satisfy the notice requirements envisioned by the Bankruptcy Code or by the fourteenth amendment’s due process clause.
Id. at 112.
Likewise, in
Senall,
the debtor provided notice of the bankruptcy to a Pasadena branch of the Bank of America National Trust and Savings Association regarding a deficiency claim on an airplane loan. The debtor did not notify the Los Angeles branch of the bank, which served as trustee of a profit sharing plan, of the bankruptcy. The court concluded that notice to one branch was not notice to the other, and stated that “[t]he Debtor never sought to notice the Bank of America in Los Angeles in its capacity as trustee, and the Debtor cannot preclude a challenge to dis-chargeability because of his own failure to notify and schedule his creditors.”
Finally, in Paul the debtor sought to reopen his case in order to schedule an omitted creditor. The debtor had personally guaranteed an obligation that his partnership owed NationsBank. When he filed bankruptcy, he did not schedule this claim, although he did apparently schedule an unrelated NationsBank credit card debt. The court concluded that the debtor failed to demonstrate that the bank had notice of the bankruptcy in the context of the guaranty. The court also found that the bank would be prejudiced if the case were reopened because it would be impossible for NationsBank to object to the treatment of unsecured creditors under the debtor’s confirmed chapter 11 plan. In particular, the court stated:
To simply allege that NationsBank had notice because a credit card debt wasscheduled ignores the fact that Nations-Bank is a $200 billion dollar lending institution with thousands of employees in several states and numerous divisions responsible for different types of loans and obligations. The Debtor has failed to meet his burden of showing that Nati-onsBank had notice that the Debtor was in bankruptcy and that the Debtor was attempting to discharge the obligation related to the guaranty of payment in the bankruptcy case.
State Farm’s argument is that it should be treated in a similar fashion. It points out that the two claims involved “separate State Farm policies and insureds.” Two separate law firms were involved. Only one local attorney received notice, who then informed “one State Farm claims representative.” State Farm contends that as a “large, national insurance company” with thousands of employees and hundreds of offices throughout the United States, it is not only unfair to conclude that State Farm had “actual knowledge” of the debt- or’s bankruptcy but would also violate State Farm’s due process rights.
This, however, is an overly broad reading of the authorities cited, especially under the facts of the case before the Court. As stated in
Bridges,
whether notice to an agency (or, as here, a large, national company) is adequate “depends upon the facts and circumstances of a given case.”
This is perhaps most notable in Bridges, where it was not only important that two different branches of the SBA were involved, but also that one obligation was a corporate debt and the others were personal obligations in the individual debtor’s separate case. While State Farm contends that there are two separate subrogation claims at issue here, they stem from the same set of operative facts and are in fact simply two facets of a singular obligation stemming from one automobile accident. State Farm separated the claims for some sort of administrative convenience, but they were not separate transactions nor do they represent truly separate liabilities along the lines of the claims outlined in Bridges, Senall, or Paul.
Further, while State Farm emphasizes the fact that one seemingly insignificant claims representative received the notice of bankruptcy as regards the Diaz claim, it is important to note that representative’s role. This was not a notice delivered to an isolated agent at one of State Farm’s numerous branches. This was notice received by a member of State Farm’s sub-rogation unit — the very unit State Farm utilizes to handle the prosecution of subro-gation claims. Admittedly, as Mark Weller, State Farm’s corporate representative, testified at trial, that unit handles thousands of claims annually. But if, as the Bridges court noted, a notice of an individual debtor’s bankruptcy “alerts a creditor that it has been scheduled in that individual’s bankruptcy case,” the Court must determine what to make of the fact that a member of the unit dedicated to the prosecution of subrogation claims learned that State Farm had been scheduled in the debtor’s bankruptcy case.
Intriguingly, State Farm’s corporate representative testified that State Farm has a system in place which would have avoided further prosecution of the Lopez claim “if State Farm had been properly served in accordance with Florida law.” According to Mr. Weller, if the notice of
The accounting department then performs a search of State Farm’s database, wherein it could determine whether a claim is left open in our subrogation department against the individual that has filed bankruptcy.
What makes this so curious is his subsequent assertion that a claims representative in that very subrogation department would seemingly not consider doing the same thing, or that it would not be part of State Farm’s standard operating procedure. 12 After all, if a member of State Farm’s subrogation department receives notice of an individual debtor’s bankruptcy, it is at least notice that all subrogation claims against that debtor are potentially subject to discharge, even if it might not be appropriate to extend that notice to other obligations outside the scope of the subrogation unit.
Indeed, there are a number of cases which reflect the fact that a creditor is not entitled to simply sit back and do nothing with the notice it receives. Once a creditor has received actual notice of the case, the creditor has a clear obligation to take “affirmative steps” to evaluate, advance, and protect its rights.
Bowen,
The adequacy of notice often hinges upon the facts of the particular case.
Bridges,
In the present case, the Court is compelled to conclude that there is far too much unity in terms of the corporate de
It is intriguing to contrast this situation with
Paul,
one of the cases cited by State Farm and the one which is perhaps most analogous to the present situation. In
Paul,
NationsBank’s credit card division received notice of the bankruptcy. The debtor’s guaranty of a different debt, handled by a different division within the bank, was not scheduled. The court concluded that the guaranty debt was not discharged. Clearly, however, the disparate nature of the obligations was a critical component of the court’s decision; it would be difficult to see the same outcome arising if, for example, the debtor owed two debts to the same branch or division of the bank and only scheduled one of them. Similarly, the outcome of
Bridges
or
Se-nall
might well have been different if the same branch, unit, or division of the creditor was handling both claims. In such a situation, the unscheduled debt would properly be discharged because the division or unit would be obligated to ascertain which “specific debts” it held might be subject to discharge.
Mandukich,
When the smoke dissipates from State Farm’s arguments, all that is left is a simple reality: the debtor’s liability in both lawsuits was premised upon the fact that he was the owner of a vehicle which was involved in one accident. He was not obligated to State Farm on an unrelated debt in some distant forum. There was, in essence, one “debt” comprised of two components. Both lawsuits were handled by the very unit that received notice of the bankruptcy. State Farm chose to sever its claims into separate lawsuits, and thereafter made a conscious decision, through its agents, not to make any effort to determine whether additional subrogation claims might be subject to the debt- or’s discharge. State Farm clearly had “actual knowledge” of the bankruptcy, and the “unscheduled” Lopez claim was therefore discharged when the debtor received his discharge in May of 2004.
Further, State Farm’s efforts to point out the debtor’s “failure” to notify it of the bankruptcy in the context of the Lopez claim overlooks one essential fact: the debtor was not aware of the claim. The record conclusively establishes that neither lawsuit was actually served at the debtor’s place of residence. They were instead served at the residence of the debtor’s former spouse. The evidence is consistent with the debtor’s story that his son happened to be at the residence when the Diaz lawsuit was served and took the pleadings to his father. It is notable that the debtor interposed a defense to this lawsuit in state court and subsequently listed it on his bankruptcy schedules. He filed no response to the Lopez lawsuit and did not list it in his bankruptcy petition. This inconsistency in behavior can only be explained by the fact that he did not receive
Given this, the debtor was undoubtedly unaware of State Farm’s unilateral election to separate two claims that arose from the same set of operative facts. When the debtor listed the Diaz claim on his schedules, he clearly listed the only claim he thought State Farm held against him. As such, it is inappropriate to demand that the debtor schedule a debt which he does not realize exists.
See Aetna Cas. & Sur. Co. v. Wilson (In re Wilson),
As the Lopez claim was in fact discharged in May of 2004, the Court must now consider whether State Farm violated the discharge injunction. Section 524 provides that the discharge operates as an injunction against the commencement or continuation of an action or any act to “collect, recover, or offset any dischargea-ble debt.” After the debtor’s discharge, Shenkman proceeded to take a judgment against the debtor and also took affirmative steps to suspend the debtor’s driver’s license. The debtor contends that these actions, together with the creditor’s apparent recalcitrance about rectifying the situation once alerted to the existence of the discharge, justify the imposition of actual and punitive damages for a “willful” violation of the discharge injunction. 13
In
Hardy v. United States (In re Hardy),
Under § 105, a creditor may be liable for contempt if it “willfully” violated the discharge injunction.
Id.
at 1390;
see also Jove Eng’g v. IRS,
It is important to note what this test does not require: namely, specific evidence of the creditor’s deliberate intent
In this regard, State Farm argues that Shenkman’s conduct cannot be imputed to the company for purposes of liability. For example, State Farm’s representative stated that the company did not direct Shenkman to obtain a default judgment against the debtor, nor did it tell Shenk-man to request the suspension of his driver’s license. State Farm contends that the first it learned of any of the bankruptcy-related aspects of the Lopez claim was after the debtor filed this adversary proceeding. Accordingly, State Farm suggests that even if it did “know” of the bankruptcy, it did not “intend” to violate the discharge because it never directed Shenkman to do anything.
The debtor acknowledges that Shenk-man did not have any personal knowledge of the debtor’s bankruptcy. But State Farm did; as is discussed above, State Farm’s subrogation unit had actual knowledge of the debtor’s bankruptcy and did nothing about it. Indeed, despite this knowledge, State Farm permitted its agent to continue collection actions against the debtor. State Farm clearly intended that its attorney would prosecute the sub-rogation claim to the fullest extent permitted by law. According to Shenkman, he handled this case much as he did every other case he prosecuted on behalf of State Farm. And State Farm knew that absent instructions to the contrary, Shenkman would carry out the terms of his representation: he would litigate the subrogation claim if necessary, obtain a judgment if possible, and take steps to collect upon that judgment. State Farm clearly “intended” that Shenkman do these very things, or the file would never have been sent to his office in the first place. 14
Had Shenkman been the only one notified of the bankruptcy, failed to inform State Farm, and thereafter continued to prosecute the subrogation action, it would be fair to consider whether State Farm should be punished for the actions of an ostensibly “rogue” agent. In the context of this case, however, State Farm itself was aware of the bankruptcy and simply failed to rein in its hired gun. But for State Farm’s failure to act, there would have been no judgment, no suspension, and no damage to the debtor. In the
Pursuant to the “imputed knowledge” rule of agency, knowledge possessed by an agent is often imputed to the principal for purposes of liability under the theory that when an agent acts in the scope of the agency relationship, there is an “identity of interests” between the principal and agent.
See Siharath v. Citifinancial Servs. (In re Siharath),
It is a well-settled tenet of agency law that a principal’s undisclosed knowledge is not imputed to the agent.
Id.
As the court stated in
Ago v. Begg, Inc.,
In the case of
Faust v. Texaco (In re Faust),
Similarly, in
Siharath,
the creditor received notice of the bankruptcy and attempted to send a letter to its law firm instructing it to cease all collection activities. Unfortunately, the letter was actually sent to the debtor instead of the law firm, and so the attorney continued to pursue collection of the claim, including obtaining a default judgment and sending the debtor a notice of intent to levy upon wages. When the debtor sought damages against both parties, the court granted summary judgment on behalf of the law firm because the attorneys had not been provided with critical information known only to the principal (namely, that the debtor had filed bankruptcy). However, the court allowed the debtor to proceed with certain claims against the creditor, as the court found that the creditor had willfully violated the automatic stay because it
A principal is obligated to provide an agent with adequate instructions and warnings, and a principal may be held responsible for harm which results from the failure to disclose known facts to the agent. See Restatement (Second) of Agency §§ 256, 435, 509, and 510. The clear result of all of this is that when a creditor knows of a debtor’s bankruptcy and its attorney does not, it is the creditor who must bear the ultimate responsibility for the attorney’s collection efforts. If the discharge is violated in such a situation, it must be said to have been violated by the creditor, because it was the creditor who failed to act upon the information in its possession.
The facts before the Court compel the conclusion that State Farm knew of the debtor’s bankruptcy and also intended for its attorney to collect upon the Lopez claim. Clearly, State Farm is responsible for not informing Shenkman of the bankruptcy; State Farm is likewise responsible for the injuries that flowed from Shenk-man’s pursuit of the subrogation claim in violation of the discharge. An award of compensatory damages and attorney’s fees is therefore appropriate.
Hardy,
The debtor has requested an award of actual damages for lost wages, emotional distress, and the upheaval associated with the loss of his driver’s license. The debtor has also asked for punitive damages and attorney’s fees. While State Farm’s actions clearly constitute a willful violation of the debtor’s discharge, under the peculiar facts of this case it is unclear whether State Farm truly acted with the sort of “egregious, intentional misconduct” generally considered necessary for a punitive damage award.
See Siharath,
In addition to the evidence regarding his lost wages, the debtor introduced a “journal” purporting to document his contemporaneous emotional state as he waited for his license to be reinstated. While the journal contains numerous entries which are essentially cut and pasted into the document, several facts cannot be disput
As the months dragged on, the license suspension was undoubtedly frustrating and emotionally draining on the debtor and his family, especially since he made attempts to settle the matter with State Farm only to be unceremoniously rebuffed. Some courts question whether damages for emotional distress can be awarded in the context of a discharge violation.
See Bock,
State Farm argues that since it was not aware of Shenkman’s dealings with the debtor after the license suspension, the extended delay in reinstating the license should not be considered as a component of the damage calculation. However, the complaint in this adversary proceeding was served directly on State Farm on June 27, 2005, just a little over a month after the debtor initially contacted Shenkman about the suspension. Notwithstanding this fact, the debtor’s license was not reinstated until the end of September. State Farm had notice of the issue and again chose to ignore it; the company left Shenkman on his own, and only belatedly appeared after a default was entered for failure to file an answer. State Farm’s culpability for the debtor’s situation is clear.
In order to give full effect to the bankruptcy discharge, creditors who willfully violate the injunction must face the consequences of their actions. Like many creditors, State Farm has sought to minimize the effect of its behavior throughout this case, including its negligent and cavalier attitude once it received actual notice of the bankruptcy and its failure to timely answer the adversary complaint even when directly served. It seeks to place the blame for its conduct upon the debtor, or upon the attorney it hired to prosecute its subrogation claims. Ultimately, however, had State Farm exercised even minimal effort after learning of the debtor’s bankruptcy, there would have been no violation of the debtor’s discharge. Accordingly, based upon the record, the Court concludes that it is appropriate to issue an award of actual damages for lost wages, emotional distress, and the attendant discomfort and costs associated with the Toss of his driver’s license, all of which were the
This decision shall constitute findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052 and Rule 52 of the Federal Rules of Civil Procedure.
Notes
. This coincidence can only be considered unfortunate, as everything else in the case springs from this one simple fact.
. There is some evidence in the record that both "claims” might have initially been processed under one State Farm claim number. For whatever reason, it did not stay that way.
. Apparently, both lawsuits were served on the debtor at the residence of his former spouse. The evidence indicates that the debt- or never resided at this address, although his son (who shares his name) did. When the Diaz lawsuit was served, it appears that the debtor’s son was present and delivered the pleadings to his father. The same cannot be said of the Lopez collision action, and given the evidence of the acrimonious relationship between the debtor and his former spouse (including the entry of a domestic violence injunction), it is perhaps understandable why she did not alert him to the lawsuit.
. It remains a mystery why this offer was rejected. State Farm denies the allegation that it has a policy of requiring "full payment” on a discharged debt, and also contends that Shenkman did not communicate the offer to State Farm. At trial, Shenkman did not clearly describe the basis for his decision, nor did he outline any counterproposals he made. According to his testimony, rather than accept a monetary settlement in exchange for releasing the judgment, he apparently expected the debtor would reopen the bankruptcy to discharge the debt, at which point State Farm would receive nothing for its pains.
. According to the debtor, State Farm was served through the Chief Financial Officer of the State of Florida on June 27, 2005. State Farm has not explained why no answer was filed or why it opted not to take any action until September of 2005.
. To the extent that State Farm was to contend otherwise, the Court finds that the facts conclusively demonstrate the receipt of “actual notice” as concerns the Diaz claim. Not only was the notice of bankruptcy delivered to State Farm’s attorney in that case, but the attorney provided that notice to a State Farm representative, whom State Farm concedes thereafter authorized the dismissal of the Diaz lawsuit.
. As the court noted in
Mooney,
the discharge is a "cornerstone” of bankruptcy law, providing debtors with a "new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”
. As noted during the trial, however, it would appear that at least initially these claims were assigned the same claim number by State Farm’s centralized subrogation unit. From the record, it appears that State Farm's decision to "split” the actions was largely a matter of administrative convenience.
. Intriguingly, this contention seems to be contradicted by Shenkman’s own testimony, in which he states that he has handled subro-gation matters for State Farm for approximately 20 years, and "cannot recall any instance where State Farm advised me about a bankruptcy relating to one of my cases.” According to Shenkman, he "usually” receives bankruptcy notices on behalf of State Farm in the context of his subrogation cases, and he then informs the company about the bankruptcy.
.This can be contrasted to the present case, in which a litigation attorney and a subrogation claims representative were both informed of the bankruptcy.
. The debtor has also noted the ironic reality that when State Farm was served with the adversary complaint in accordance with its alleged "preferred” service mechanism, the company failed to answer and a default was entered. In contrast, notice to Attorney No-darse-Buscemi was forwarded to the company and generated an instruction to dismiss the Diaz lawsuit.
. This seems even more mysterious given Shenkman’s assertion that in twenty years of representing State Farm, the company has never notified him of a pending bankruptcy. Instead, he has "usually” received the notice himself, and forwarded it to the company— ostensibly to the claims representative han-cking the case. If Shenkman's experience was typical, one must assume that State Farm's asserted "system” catches very few of the notices of bankruptcy served upon litigation counsel. This seems highly counterintui-tive, to say the least.
. The parties have argued extensively about whether punitive damages may be awarded in this case. State Farm contends that while punitive damages could be awarded for a violation of the automatic stay under § 362, the debtor has not proven that the stay was in fact violated. State Farm also argues that neither 11 U.S.C. § 105 nor the court’s "inherent powers” permit the imposition of punitive damages for a discharge violation. As the Court declines to award punitive damages for the factual reasons discussed below, these legal issues are not addressed.
. State Farm contends that it never "directed” Shenkman to do certain things, such as obtain a judgment or seek the suspension of the debtor's license. State Farm also says that it was not informed of the discussions between Shenkman and the debtor after the license was suspended. It seems odd that there would be so little contact between State Farm and its attorney, but ultimately the evidence reflects that Shenkman's instructions from State Farm were to collect the subrogation claim from the debtor, and that is exactly what Shenkman attempted to do. State Farm’s implicit suggestion that somehow Shenkman overstepped the bounds of his authority is somewhat disingenuous given that his principal actions were entirely consistent with the stated purpose of his representation. His subsequent conduct once notified of the bankruptcy discharge is admittedly questionable, but State Farm itself compounded the problem by failing to answer the adversary complaint despite direct service.
. These cases also illustrate the reality that few creditors come into bankruptcy court and brag about their violations of either the automatic stay or the discharge. Instead, creditors attempt to minimize the importance of their actions, downplay the "willfulness” of their conduct, and discount the reality of any harm to the debtors. Rare indeed is the creditor who claims to have brazenly disregarded a bankruptcy notice; far more common are those who suggest that the notice was misplaced, misfiled, or misdirected. Under the standards set forth in
Hardy,
such conduct may still result in a "willful” violation of the discharge, and appropriately so. Given that the discharge is the "cornerstone” of the bankruptcy system and is a "critical feature” of virtually every individual bankruptcy,
see Katz,