United States Bankruptcy Court,
D. Colorado.
In re Charles S. GAGLIARDI, Gloria M. Gagliardi, Debtors.
No. 02-17985 EEB.
March 18, 2003.
Chapter 7 debtors sought to recover damages for creditors' allegedly willful violations of automatic stay. The Bankruptcy Court, Elizabeth E. Brown, J., held that: (1) deed of trust holder, loan servicer and their attorneys violated stay in effect in deed of trust debtors' Chapter 7 case by their conduct, while stay was in effect and while debtors still retained redemptive and other rights in property, in posting notice to quit, commencing state court eviction action, and actually evicting debtors from property; (2) stay violation was willful; (3) legal expenses that debtors incurred as result of creditors' willful violations of stay were themselves type of actual damage that bankruptcy court had to award, even in absence of evidence of other kind of damage; and (4) creditors' conduct warranted punitive damages award.
So ordered.
[1] Bankruptcy 
2392
Scope of
automatic stay is undeniably broad.
Bankr.Code, 11
U.S.C.A. § 362(a).
[2] Bankruptcy 
2392
[2] Bankruptcy
2534
State law
determines whether the debtor had legal or equitable interest in property on
date bankruptcy petition was filed, such that property is included in
bankruptcy estate and is protected by automatic stay. Bankr.Code, 11
U.S.C.A. § § 362(a), 541(a).
[3] Bankruptcy 
2461
Determination as to whether automatic stay
applies to any given activity or property is to be made in first instance by
bankruptcy court, and not by creditor or its attorney. Bankr.Code, 11
U.S.C.A. § 362(a).
[4] Bankruptcy 
2462
Actions
taken in violation of automatic stay are void and of no force or effect, even
when the party taking such action has no actual notice of existence of
stay. Bankr.Code, 11
U.S.C.A. § 362(a).
[5] Bankruptcy 
2397(2)
[5] Bankruptcy
2397(3)
Even after
completion of deed of trust foreclosure sale and issuance of certificate of
purchase to successful bidder at sale, debtors retained interest in property of
kind protected by automatic stay on their Chapter 7 filing, given that debtors still retained legal title,
right of redemption, and legal right of possession. Bankr.Code, 11
U.S.C.A. § § 362(a), 541(a).
[6] Bankruptcy 
2397(1)
Even if
debtors had not filed for Chapter 7 relief until after expiration of their
state law right to redeem property sold at deed of trust foreclosure sale,
debtors' possessory interest in property would itself have been legal or
equitable interest in property, of kind protected by automatic stay.
Bankr.Code, 11
U.S.C.A. § 362(a).
[7] Bankruptcy 
2397(3)
Deed of
trust holder, loan servicer, and their attorneys violated stay in effect in
deed of trust debtors' Chapter 7 case by their conduct, while stay was in
effect and while debtors still retained redemptive and other rights in
property, in posting notice to quit, commencing state court eviction action,
and actually evicting debtors from property, while changing locks on property
and depriving debtors of personal property located therein, without first obtaining relief from stay. Bankr.Code, 11
U.S.C.A. § 362(a).
[8] Bankruptcy 
2392
[8] Bankruptcy
3131
Filing of
"No Asset Report" by Chapter 7 trustee did not have effect of
abandoning any remaining interest that debtors possessed in deed of trust property,
so as to remove property from Chapter 7 estate and protections of automatic
stay. Bankr.Code, 11
U.S.C.A. § § 362(c)(1), 554.
[9] Bankruptcy 
2531
Property
which becomes part of bankruptcy estate remains property of the estate until it
is abandoned. Bankr.Code, 11
U.S.C.A. § 554.
[10] Bankruptcy 
3131
Property of the estate is deemed abandoned
only after: (1) an abandonment order enters, following motion to abandon that
is properly served on creditors and other interested parties; or (2) if asset
is listed in debtor's schedules, but is not otherwise administered by trustee,
in which case it is deemed abandoned at time case is closed. Bankr.Code, 11
U.S.C.A. § 554.
[11] Bankruptcy 
2391
Creditor
and its agents act at their own peril when they usurp bankruptcy court's role
in determining scope of automatic stay, without binding authority that is
clearly applicable to facts at hand.
Bankr.Code, 11
U.S.C.A. § 362.
[12] Bankruptcy 
2467
Creditor
need not have specific intent to violate stay in order for its stay violation
to be "willful," so as to require entry of damages award against it;
it is enough that creditor knew of stay and that it intended to take the
actions found to violate stay.
Bankr.Code, 11
U.S.C.A. § 362(h).
[13] Bankruptcy 
2467
Party's
good faith belief that it had right to engage in act found to violate automatic
stay is not relevant to determination of whether the act was
"willful," or whether damages must be awarded to debtor. Bankr.Code, 11
U.S.C.A. § 362(h).
[14] Bankruptcy 
2461
Even an
innocent stay violation, one committed without knowledge of automatic stay,
becomes "willful," if creditor fails to remedy the violation after
receiving notice of stay. Bankr.Code, 11
U.S.C.A. § 362(h).
[15] Bankruptcy 
2467
Once court
finds a violation of automatic stay to be willful, award of damages for
debtor's injuries is mandatory.
Bankr.Code, 11
U.S.C.A. § 362(h).
[16] Bankruptcy 
2467
Stay
violations were "willful" and warranted award of actual damages against
deed of trust holder, loan servicer and their attorneys, where parties had
notice of debtors' Chapter 7 filing from various sources prior to commencing
eviction proceedings and took no steps to reverse their actions and restore
status quo even when, at such proceedings, the subject of debtors' bankruptcy
was again brought up, but continued with eviction, changed locks to property,
and deprived debtors of personal property which was located therein.
Bankr.Code, 11
U.S.C.A. § 362(h).
[17] Bankruptcy 
2467
Debtors
seeking to recover damages for creditor's willful violation of automatic stay
bear burden of proving their actual damages with reasonable certainty. Bankr.Code, 11
U.S.C.A. § 362(h).
[18] Bankruptcy 
2467
Chapter 7
debtor's testimony that, as result of creditors' willful stay violations, he
suffered apprehension and fear and lost weight and sleep was insufficient,
absent any medical proof or other evidence quantifying debtor's losses, to
support award of actual damages in his favor.
Bankr.Code, 11
U.S.C.A. § 362(h).
[19] Bankruptcy 
2467
Fleeting
and unsubstantiated emotional distress that debtor allegedly suffers as result
of creditor's stay violations is not compensable element of damages.
Bankr.Code, 11
U.S.C.A. § 362(h).
[20] Bankruptcy 
2467
Legal
expenses that Chapter 7 debtors incurred as result of creditors' willful
violations of automatic stay, in enforcing their rights thereunder, were
themselves type of actual damage that bankruptcy court had to award, even in absence of evidence of any other kind of
damage. Bankr.Code, 11
U.S.C.A. § 362(h).
[21] Bankruptcy 
2467
Attorney
fees claimed by Chapter 7 debtors, as actual damages that they incurred to
enforce stay against third parties in violation thereof, would be reduced, to
allow only one half of amount billed by counsel for travel time and to disallow
two hours of research resulting in counsel's citation of superceded case law. Bankr.Code, 11
U.S.C.A. § 362(h).
[22] Bankruptcy 
2468
For a
creditor's willful stay violation to support an award of punitive damages
against it, creditor must have acted with actual knowledge that it was
violating federally protected right or with reckless disregard for whether it
was doing so. Bankr.Code, 11
U.S.C.A. § 362(h).
[23] Bankruptcy 
2468
Primary
purposes for award of punitive damages against creditor violating stay are
punishment and deterrence. Bankr.Code, 11
U.S.C.A. § 362(h).
[24] Bankruptcy 
2468
Five
primary factors considered by court in deciding whether to award punitive
damages for creditor's willful stay violation are: nature of creditor's
conduct, creditor's ability to pay damages, creditor's level of sophistication,
creditor's motives, and any provocation upon part of debtor. Bankr.Code, 11
U.S.C.A. § 362(h).
[25] Bankruptcy 
2468
Conduct on
part of deed of trust holder, loan servicer, and their attorneys when, with
actual knowledge that debtors had filed for Chapter 7 relief and while debtors
still retained redemptive and other rights in deed of trust property, they
posted notice to quit, brought state court eviction action, and actually evicted debtors from property, while
changing locks on property and
depriving
debtors of personal property located therein, warranted award of punitive
damages in amount of $5,000 against deed of trust holder and an additional
$5,000, jointly and severally, against servicing agent and attorneys. Bankr.Code, 11
U.S.C.A. § 362(h).
[26] Bankruptcy 
2468
In
determining appropriate amount of punitive damages award for creditor's stay
violation, court must consider nature of creditor's conduct, its ability to
pay, and amount of actual damages awarded.
Bankr.Code, 11
U.S.C.A. § 362(h).
[27] Bankruptcy 
2468
Amount of
punitive damages awarded for creditor's stay violation should be sufficient to
deter creditor, and other similarly situated parties in future, from
unilaterally determining scope and effect of automatic stay. Bankr.Code, 11
U.S.C.A. § 362(h).
*811
Luis A. Lopez, Virginia H. Louden, Trinidad, CO,
for debtors.
James H. Downey, Dan
E. Miller, Englewood, CO, William
G. Horlbeck, Denver, CO, for creditor.
ORDER IMPOSING SANCTIONS FOR VIOLATION OF THE AUTOMATIC STAY
ELIZABETH
E. BROWN, Bankruptcy Judge.
THIS MATTER came before the Court on the
Debtor Charles S. Gagliardi's September 26, 2002 letter, alleging violations of
the automatic stay by his mortgage holder, LaSalle Bank National Association
("LaSalle"), the loan servicer, EMC Mortgage Corporation
("EMC"), and their attorneys, Dan E. Miller
("Miller") and Downey, Miller & Hopp, LLC ("Downey
Firm") (collectively, the "Respondents"). Following an evidentiary hearing on this
matter, the Court finds that the Respondents' action in proceeding with an
eviction, despite knowledge of the Debtors' bankruptcy, violated the automatic
stay. The Respondents' conduct warrants
the imposition of sanctions in the form of an award of attorney's fees
and costs, as well as punitive damages.
I. FACTUAL BACKGROUND
LaSalle was the beneficiary of two deeds of
trust made by the Debtor, secured by adjacent homes, located at 515 and 517 *812
Clark St., Trinidad, Colorado. LaSalle
foreclosed its deed of trust on the 517 Clark St. property (the "Property") on April 24,
2002. As the successful bidder, LaSalle
received a Public Trustee's Certificate of Purchase. In the absence of a bankruptcy filing, the Debtors' statutory
redemption period of 75 days was due to expire on July 8, 2002. Prior to its expiration, on May 28, 2002,
the Debtors filed a Chapter 7 petition.
Pursuant to Section 108(b), [FN1] the bankruptcy filing extended the end of Debtor's
redemption period sixty days after the entry of the order for relief, to July
29, 2002.
FN1. All references
to "Section" shall refer to Title 11, United States Code, unless
expressly stated otherwise.
The Clerk of the Court served a Notice of
Chapter 7 Bankruptcy Case, Meeting of Creditors, & Deadlines on all
creditors of the Debtors on May 30, 2002.
The record indicates that LaSalle was served through both EMC and James
H. Downey, of the Downey Firm. Although these Respondents claim that they did
not receive the Clerk's Notice, they have confirmed that the addresses used by
the Clerk were accurate.
Carnis Jones, a bankruptcy paralegal from
EMC, the loan servicer, testified that bankruptcy notices are typically
received by EMC in one of three ways: either the debtor's attorney calls and
the call is logged in the file, EMC receives notice directly from the court, or
it receives notice from BANCO, an outside
company with whom EMC contracts to search for bankruptcy filings. Once a bankruptcy filing is noted in a loan
file, the loan shifts to the bankruptcy system and the file is referred to an
outside attorney in the relevant state. Ms. Jones further testified that EMC
utilizes a completely electronic system to track and maintain loan files and
does not maintain paper files. BANCO
performs daily bankruptcy filing searches and notes bankruptcy filings in EMC's
electronic system. BANCO performs its
daily bankruptcy searches and updates by social security number, but EMC's
electronic system is set up according to property addresses. Ms. Jones' research revealed that a
bankruptcy notice was received from BANCO in mid-June, 2002, and placed in the
electronic file for the other home, 515 Clark St. The bankruptcy filing was
only noted by EMC in its file for 515 Clark St. property. It was never listed in the electronic file
for the subject Property.
Ms. Jones testified that EMC does not
normally perform any manual cross-checks of its electronic files when a
bankruptcy filing is loaded into the system, but that such is unnecessary
because EMC customarily places flags or codes to indicate when there is more
than one loan file for a particular debtor.
In this instance, the flags or codes were not in place. She explained that EMC had acquired a
servicing contract for over 70,000 loans in May 2002, which included these two
loans of the Debtor, and EMC had simply not performed all of the standard
safeguards due to this large influx of loans.
If the flags had been created, they
would have stopped all activity on both files until relief from stay had been
obtained.
Miller and Mr. Downey both testified that it
is their practice to track redemption periods and any bankruptcy filing by
placing a notation on the cover of their file, when they receive notice of a
bankruptcy filing. Since the Property's
file listed only the original redemption expiration date of July 8, 2002 and
did not contain any bankruptcy notation, they assert that they *813
could not have received notice of the filing.
In addition, the Downey Firm obtained an update of the foreclosure
certificate from the title company, following the expiration of the original
redemption period. This update,
however, did not apprise them of the bankruptcy filing. This was the extent of the attorneys' due
diligence. Apparently, neither attorney
routinely conducts an electronic search for a bankruptcy filing on PACER before
proceeding, despite its easy access, low cost and widespread use by
practitioners in this district.
When EMC requested that the Downey Firm bring
an eviction action on the Property, Miller contacted Mr. Winter, a real estate
broker in Trinidad, Colorado, to find out whether the Property was occupied.
Mr. Winter testified that, when he inspected the Property on July 10, 2002, the
front door was open, but no one answered the door. As he turned to leave, the Debtor approached him from the 515
Clark St. property. The Debtor informed
him that the Property was occupied by his
mentally handicapped nephew and that he had not yet been able to find other
living accommodations for him. Although
the broker disputes this, the Debtor testified that he told Mr. Winter about
his bankruptcy filing during this initial meeting. The Court found the Debtor to be more credible on this issue. Having come from his creditors' meeting that
same day, the bankruptcy filing was clearly on the Debtor's mind.
After being informed that the Property was
occupied, Miller prepared a Notice to Quit on July 11, 2002, which the Sheriff
posted on the Property on July 18, 2002.
LaSalle received its Public Trustee's Deed on July 22, 2002, which it
recorded on July 23, 2002. On August 8,
2002, having been notified by Mr. Winter that the Property was still occupied,
Miller filed a Summons and Complaint in Unlawful Detainer.
In their Response to the Order to Show Cause,
the Respondents claimed that Miller had no notice of the bankruptcy until after
the eviction had been completed. In
fact, Miller stated that there was no mention of a bankruptcy filing at the
eviction hearing itself. The transcript
of the eviction hearing, however, contains the following exchange:
THE COURT: As I
understand it, Mr. Gagliardi, you're not going to file an answer; is that right?
MR. GAGLIARDI: To
the extent I filed bankruptcy on July 10, and primarily pretty much what I have
right now.
MR. MILLER: I
misunderstood what he said.
THE COURT: He said
he filed bankruptcy on July 10.
MR. MILLER: Was the
redemption period over at the time he filed bankruptcy?
THE COURT: I have
no idea.
MR. MILLER: Because
the redemption period was up on July 8. There's no extension of the redemption
period under Section
108 of the bankruptcy code.
THE COURT: None of
that is before me. This is an FED.
At the evidentiary hearing before this
Court, after having received a copy of this transcript, Miller apologized to
the Court for his faulty memory.
Despite his direct knowledge of a bankruptcy
filing, obtained at least by the time of the eviction hearing, Miller continued
to request a default judgment for possession at the eviction hearing. Having obtained a judgment, Miller then
caused the eviction of the Debtor's nephew from the Property and changed the
locks on September 24, 2002. Furthermore,
it is undisputed that personal property belonging to both the Debtors and their
nephew remained locked *814 in the home at least until the time of the
hearing on this matter.
II. VIOLATIONS OF THE AUTOMATIC STAY
[1] The scope of the automatic stay is "undeniably
broad." [FN2] It stays the
"commencement or continuation ... or other action or proceeding against
the debtor that was or could have been commenced before the [filing of the
bankruptcy]," as well as the enforcement of a pre-petition judgment
against the debtor or property of the
estate.
[FN3] The
stay as to actions against a debtor continues until the case is closed,
dismissed, or a discharge is granted or denied. [FN4]
FN2. Cuffee v.
Atlantic Bus. & Cmty. Corp. (In
re Atlantic Bus. & Cmty. Corp.),
901 F.2d 325, 327 (3d Cir.1990).
[2] It also stays actions to "obtain possession of
property of the estate or of property from the estate or to exercise control
over property of the estate." [FN5] The stay remains
in effect until such property is no longer property of the estate. [FN6] "Property of
the estate" is also very broadly defined to include all of the debtor's
legal and equitable interests in property as of the commencement of the case,
wherever located and by whomever held. [FN7] Whether a debtor has a legal or equitable
interest in property is determined by state law. [FN8]
FN8. See Butner
v. United States,
440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979); In
re Stoltz,
197 F.3d 625, 630-31 (2d Cir.1999); In
re Stephens,
221 B.R. 290 (Bankr.D.Me.1998).
[3][4] The determination of whether the automatic stay applies to
any given activity or property is to be made in the first instance by the
bankruptcy court, not by a creditor or its attorney. [FN9] Actions taken in
violation of the automatic stay are void and of no force or effect, even when
there is no actual notice of the existence of the stay. [FN10] In addition, an
"individual injured by any willful violation of a stay provided by this
section shall recover actual damages, including costs and attorneys'
fees, and, in appropriate circumstances, may recover punitive damages." [FN11]
FN9. In
re Diviney,
225 B.R. 762, 768 (10th Cir. BAP 1998).
FN10. In
re Calder,
907 F.2d 953, 956 (10th Cir.1990); Goichman
v. Bloom (In re Bloom),
875 F.2d 224, 225 n. 3 (9th Cir.1989); 48th
St. Steakhouse, Inc. v. Rockefeller Group, Inc. (In re 48th St. Steakhouse, Inc.),
835 F.2d 427, 431 (2d Cir.1987), cert. denied,
485
U.S. 1035, 108 S.Ct. 1596, 99 L.Ed.2d 910 (1988).
FN11. Section
362(h) (emphasis added).
[5] In determining whether the Respondents violated the stay
by proceeding with the eviction against the Debtors, the Court considers first
whether the Debtors had any remaining interest in the Property on the date of
their bankruptcy filing. Since the
Property is located in Colorado, Colorado law governs this determination. Under Colorado law, title to real property
on which a foreclosure sale has been conducted remains in the property owner
until the expiration of the redemption period, at which time title
automatically vests in the holder of the certificate of purchase. [FN12] *815 The
owner has a right to redeem the foreclosed property within 75 days of the date
of the foreclosure sale. [FN13] Following the expiration of the redemption
period, the former owner retains a possessory interest, which is subject to
defeasance. A former owner of property
(or anyone claiming under him) is considered to be in unlawful detention of the
property after a foreclosure action, only if he retains possession after title
has vested and the new owner has duly
demanded possession thereof. [FN14] The demand for possession is required
to: (a) be in writing, (b) specify the
grounds for the demand for possession and the time when possession must be
delivered, (c) be signed by the person claiming possession, his agent or attorney, [FN15] and (d) be served by delivering a copy to the person
occupying the property or by posting. [FN16] The service or posting of a demand for possession or
notice to quit is a prerequisite to the filing of an eviction action.
FN12. C.R.S.
§ 38-38-501
states in relevant part:
Upon the expiration of the period of redemption allowed to
the owner ... title to the property sold shall vest in the holder of the
certificate of purchase .... Within ten working days after the latest to occur
of the expiration of all periods of redemption, the delivery of the certificate
of purchase ... by the holder to the public trustee ..., and the receipt of all
statutory fees, the public trustee ... shall execute and delivery a deed to the
holder of the certificate of purchase ... confirming the transfer of title to
the property. Failure of the trustee
... to execute and deliver such deed, or to deliver the deed within the time
specified, shall not affect the validity of such deed or the vesting of title.
Under the terms of this statute, title to real property
sold at a public trustee sale does not vest in the holder of the certificate of
purchase or certificate of redemption until
the expiration of the owner's and junior lien holder's redemption periods, at
which time it vests automatically. In
re Thomas,
87 B.R. 654, 656 (Bankr.D.Colo.1988). Prior to that time, title remains in the
mortgagor and the certificate holder acquires only the alternative right to
receive the redemption money or a deed after the time for redemption has
expired. Davis
Mfg. & Supply Co. v. Coonskin Properties, Inc.,
646 P.2d 940 (Colo.App.1982). Accord, In
re Case,
91 B.R. 102 (Bankr.D.Colo.1988).
[6] At the time of the May 28, 2002 bankruptcy filing, the
Debtors had three remaining property interests in the Property: (1) legal title; (2) a right of redemption;
and (3) a legal right of possession.
Even if the Debtors had not filed bankruptcy until July 10, 2002, as Mr.
Gagliardi had mistakenly represented to
Miller, he would nevertheless have retained his possessory interest, which by
itself is an interest protected by the automatic stay. [FN17] As a result, the automatic stay prevented
any commencement or continuation of an act against either the Debtors or the
Property.
FN17. In
re 48th St. Steakhouse, Inc.,
835 F.2d at 430.
[7] In this case, the following actions of the Respondents
constituted violations of the stay: (1)
the posting of the Notice to Quit; (2)
commencement of the eviction action;
and (3) the actual eviction of the Debtors. In addition, changing the locks on the Property, locking inside
the Debtors' personal property (which is also property of the estate), without
first obtaining relief from stay, was an act to exercise control over property
of the estate in violation of Section
362(a)(3).
This particular stay violation was a continuing violation, at least
until the Respondents received an Order granting stay relief on January 21,
2003.
On the other hand, Respondents' request to
the Public Trustee to issue a deed was not an additional violation of the
automatic stay. [FN18] Pursuant to *816C.R.S.
§ 38-38- 501, the vesting of title at the end of the redemption period is automatic
and is not affected by the issuance (or lack of issuance) of a Public Trustee's
Deed, which is merely a ministerial function confirming
the vesting of title. [FN19] At the time the Public Trustee's Deed was
issued and recorded in this case, however, the Debtors' extended redemption
period had not expired and title to the Property had not yet vested in LaSalle. As a result, the July 22, 2002 deed is
invalid.
FN18. See, e.g., In
re Canney,
284 F.3d 362, 375 (2d Cir.2002); Fed.
Land Bank v. Heiserman (In re Heiserman),
78 B.R. 899, 902 (Bankr.C.D.Ill.1987).
FN19. In
re Thomas,
87 B.R. at 656.
Respondents contend that, if the filing date
had been July 10, 2002, as Debtor represented, then their actions would not
have violated the stay because the Debtors no longer held any property interest
protected by the stay, relying on In re St. Clair. [FN20] In St. Clair, the debtors filed their
bankruptcy after both the purchaser at the foreclosure sale had obtained its
deed, and the debtors had been served with a writ of possession. Under New Jersey law, once a writ of
possession issues following a foreclosure sale, the former owner has no further
right of possession. Under these facts,
the St. Clair court held that the automatic stay did not protect the
debtors' possessory interest.
FN20. In
re St. Clair,
251 B.R. 660 (D.N.J.2000), aff'd, 281
F.3d 224 (3d Cir.2001).
The Respondents' reliance on St. Clair
was ill advised for four reasons.
First, the instant case is factually distinguishable from St. Clair. Given the actual filing date of May 28,
2002, the Debtors' right of redemption had not yet ended and, thus, the
purchaser's deed should not have been issued, nor was there a right to
terminate the Debtors' possessory interest.
Even if the filing date had been July 10, 2002, as the Debtor mistakenly
represented, the Debtors would have held a right of possession on this later
date. Since Colorado law requires a proper written demand to be either served
or posted before the former owner's right to possession terminates, and that
had not occurred in this case until July 18, 2002, the right of possession had
not been lawfully terminated before the supposed July 10, 2002 bankruptcy
filing date. In contrast, a state court had already terminated the St. Clair
debtors' possessory interest, prior to their bankruptcy filing.
Second, the St. Clair court found
that, under New Jersey law, a foreclosure action or the enforcement of a
foreclosure judgment was a quasi-in-rem action, affording relief only against
the secured property. Accordingly, it
reasoned that an action to enforce a writ of possession would be an act to
enforce a judgment only against the
property, not the debtor, and, therefore, it would not violate Section
362(a)(1) or (2)'s prohibition against actions
against the debtor. In Colorado, we
have no statutory or case law authority declaring eviction proceedings to be
"in rem" only. In other
Colorado statutes, the legislature has expressly described the relief provided
for in the statute as "in rem." [FN21] Colorado's
eviction statute does not contain this characterization.
FN21. See, e.g.,
C.R.S.
§ 38-22-113(3) ("Proceedings to foreclose and enforce mechanics'
liens under this article are actions in rem ...."); C.R.S.
§ 31-25-1104 ("[T]he taxing authority may institute a proceeding in the nature
of an action in rem ....").
Third, the St. Clair court itself
recognized a split of authority as to whether mere possession, without any
accompanying legal interest, is sufficient to trigger Section
362(a)(3)'s protection of property *817
interests. [FN22] There is no
controlling precedent in this jurisdiction which follows St. Clair's
holding that, without a colorable legal claim to possession, the stay is not
applicable. In the absence of clear
precedent, the Respondent attorneys should have obtained a court ruling on the
stay's application before proceeding with the eviction.
FN22. In
re St. Clair,
251 B.R. at 667 n. 5. See also Cuffee v.
Atlantic Bus. & Cmty. Corp. (In
re Atlantic Bus. & Cmty. Corp.),
901 F.2d 325, 328 (3d Cir.1990) (holding that mere
possession is protected); In
re 48th St. Steakhouse, Inc.,
835 F.2d at 430 (same).
Fourth, the Respondents have interpreted the
holding of St. Clair too broadly.
In analyzing whether the possessory interest held by the debtors was a
sufficient property interest to invoke the stay's protections under Section
362(a)(3), the St. Clair court found that,
in a case where the possessory interest is legally terminated prior to the
bankruptcy filing, there is no violation of Section
362(a)(3) when the purchaser proceeds with an
eviction. The court reasoned that,
since the debtors did not have any good faith, colorable right to continued
possession, an eviction would not implicate any property "of the
estate," nor would it constitute an act to obtain possession of property
"from the estate."
The St. Clair court's ruling appears,
at first blush, to contradict controlling precedent in its own
jurisdiction. The Third Circuit had
previously held in In re Atlantic Business & Community Corp., that
"mere possession of property at the time of filing is sufficient to invoke
the protections of the automatic stay." [FN23] The procedural
contexts of the two cases, however, were
very dissimilar. In Atlantic,
the debtor sought sanctions against the landlord who had demanded immediate
possession from the debtor and then changed the locks, despite his knowledge of
the company's bankruptcy. The landlord
made no attempt to seek stay relief before proceeding to terminate the debtor's
status as a tenant at sufferance. In
this context, the Third Circuit affirmed the award of actual and punitive
damages against the landlord. In St.
Clair, the purchaser of the property sought stay relief immediately after
the bankruptcy filing. The issue
centered around whether the bankruptcy court's order could grant prospective
relief from stay in the event that the debtors dismissed their Chapter 13 case
and re-filed. Before the bankruptcy,
the St. Clair debtors had been extremely litigious in state court,
attempting to delay the inevitable loss of their home. Thus, the St. Clair creditor was not
circumventing the need to obtain a court ruling as to the propriety of its
actions in light of the automatic stay.
It only sought a ruling that would prevent further abuse of process by
the debtors, who had already had their day in both bankruptcy and state court
to determine their right to possession.
The Third Circuit affirmed St. Clair, without issuing an
opinion. Does the fact that the Third
Circuit affirmed St. Clair indicate that it had reconsidered its prior Atlantic
holding that the stay is broad enough to encompass a mere possessory
interest? Or was the Third Circuit's
holding limited to St. Clair's procedural context?
FN23. In
re Atlantic Bus. & Cmty. Corp.,
901 F.2d at 328.
In any event, the Respondents are accurate in
pointing out that the St. Clair court made broad statements to the
effect that, when a debtor has no colorable claim to a continued right of
possession, whether because the tenancy has been legally terminated
pre-bankruptcy, or because the debtor is a trespasser who never had a legal
right or permission to enter upon the land, then the automatic stay does not *818
apply. A colorable claim, like beauty,
however, is in the eye of the beholder.
What if the alleged trespasser had a colorable claim of adverse
possession or a valid claim that the process to terminate a tenancy was
flawed? Should the creditor be allowed
to make the determination as to the debtor's, and the estate's, right to
possession in the first instance? The
impact of allowing creditors to make their own interpretation of the stay's
application can be seen in the instant case, where a creditor made a faulty
assumption that the stay did not apply, based on a mistaken belief in the facts
and the proper application of the law to those facts. If the Respondents had sought stay relief before evicting the
Debtors, they would have discovered that the Debtors still held the right to
legal title to the Property, during the extended redemption period, let alone
the right to continue in possession of it.
This Court does not interpret St. Clair as giving creditors license to usurp the court's
role in determining a debtor's rights.
The St. Clair decision centered around the fact that the creditor
had already obtained a final ruling in state court that the debtors had no
colorable claim to possession.
[8][9][10] In addition to their reliance on St. Clair, the
Respondents argue that the Property was no longer property of the estate
because the Chapter 7 trustee had already filed her "No Asset Report"
in this case, from which creditors could infer that she had no intent to redeem
the Property. Her report was filed on
July 12, 2002, before the Respondents took any action subsequent to the
bankruptcy filing. The trustee's
report, however, is of no legal consequence.
Trustees routinely withdraw these reports when they subsequently
discover assets worth administering.
The Bankruptcy Code allows trustees to change their minds. Property which becomes part of the estate in
a bankruptcy case remains property of the estate until it is abandoned. Section
554 provides the exclusive means by which
property is abandoned. Property of the
estate is only deemed abandoned after:
(1) an abandonment order enters, following a motion to abandon that is
properly served on creditors and other interested parties; or (b) if the asset is listed in the
debtor's schedules, but is not otherwise administered by the trustee, then it
is deemed abandoned at the time of the closing of the case. In this case, no party had filed a motion to
abandon the Property and this case has not yet been
closed.
[11] A creditor and its agents act at their own peril when they
usurp the bankruptcy court's role in determining the scope of the automatic
stay, without binding authority that is clearly applicable to the facts at
hand. Filing a stay relief motion is an
inexpensive form of insurance against a stay violation award.
III. DAMAGES FOR VIOLATION OF THE
AUTOMATIC STAY
A. Actual Damages
[12][13][14][15] In order to impose sanctions against the Respondents for
their violations of the stay, the Court must first find that their actions were
"willful." [FN24] In order for a violation
to be "willful," evidence of specific intent to violate the stay is
not required. Violations are "willful" if the party knew of the
automatic stay and intended to take the actions that violated the stay. A party's good faith belief that it has a right
to the property is not relevant to a determination of whether the act was
"willful" or whether compensation must be *819 awarded. [FN25] Even an innocent stay violation (one
committed without knowledge of the stay) becomes willful, if the creditor fails
to remedy the violation after receiving notice of the stay. [FN26] In effect, the
term "willful" refers to the deliberateness of the conduct, coupled
with knowledge of the filing. It does
not require an intent to violate a court order. Once a court finds a violation
of the stay to be willful, Section
362(h) makes the award of damages for injuries
mandatory. [FN27]
FN25. In
re Diviney,
225 B.R. 762, 774 (10th Cir. BAP 1998). See also, Goichman
v. Bloom (In re Bloom),
875 F.2d 224, 227 (9th Cir.1989); In
re Crysen/Montenay Energy Co.,
902 F.2d 1098 (2d Cir.1990); In
re Atlantic Bus. and Cmty. Corp.,
901 F.2d at 329; Budget
Serv. Co. v. Better Homes of Virginia, Inc.,
804 F.2d 289, 290 (4th Cir.1986). Jardine's
Prof'l Collision Repair, Inc. v. Gamble,
232 B.R. 799 (D.Utah 1999), cited by the
Respondents, applies a narrower definition of willful (requires a deliberate
and intentional violation of the stay) based in part on a Supreme Court case in
the context of a Section 523(a)(6) objection to dischargeability of a debt,
construing the word "willful" as modifying the word
"injury." This construction
is inconsistent with the fact that objections to dischargeability are narrowly
construed because discharge is favored, while the automatic stay is a
fundamental protection given to the debtor designed to stop all activity by
creditors against the debtor or property of the estate during the pendency of a
case, unless and until modified by court order.
FN26. In
re Diviney,
225 B.R. at 776;
In
re Carrigg,
216 B.R. 303, 304-5 (1st Cir. BAP 1998); Taborski
v. United States,
141 B.R. 959, 966 (N.D.Ill.1992); In
re Abrams,
127 B.R. 239, 241-44 (9th Cir. BAP 1991).
FN27. In
re Mullarkey,
81 B.R. 280, 284 (Bankr.D.N.J.1987); Tel-A-Communications
Consultants v. Auto-Use (In re Tel-A-Communications Consultants, Inc.),
50 B.R. 250 (Bankr.D.Conn.1985).
[16] Although all of the Respondents deny having received
notice of the bankruptcy filing, it is clear that they had notice of this
bankruptcy case through at least one of several means. The Court mailed notice of the filing to
both EMC and Mr. Downey at valid addresses shortly after the case was
filed. BANCO, EMC's outside bankruptcy
service, noted the filing in the Debtor's other electronic loan file. Mr. Winter, the broker and Respondents'
agent, was informed of the bankruptcy filing by the Debtor. Finally, Miller was informed of the
bankruptcy during the hearing in the eviction action. Despite their actual
knowledge of the bankruptcy filing through one or more of these means, the
Respondents did not reverse their actions and restore the status quo, as they
were required to do. [FN28] Instead they proceeded with the eviction, removing the Debtor's nephew from
the Property and locking property of the estate inside. Accordingly, the Court finds that
Respondents' actions were willful, entitling Debtors to recover damages.
FN28. See, e.g., Stansbury
v. Chester Housing Authority (In re Stansbury),
1990 WL 59180 (Bankr.E.D.Pa.1990); In
re Lowry,
25 B.R. 52, 56 (Bankr.E.D.Mo.1982).
[17][18][19][20] The Debtors bear the burden of proving actual damages with
reasonable certainty. [FN29] Although Mr. Gagliardi testified that he
suffered apprehension and fear whenever he saw the realtor and that he had lost
weight and sleep due to stress, he did not present any evidence of medical
injury or otherwise quantify these injuries.
Fleeting and unsubstantiated emotional distress is not compensable. The only actual damages in this case, which
are definite and clearly attributable to Respondents' willful violations, are
the Debtors' attorneys' fees and costs incurred when *820 they had to
resort to court intervention to enforce their rights. Respondents argue that
attorneys' fees may not be awarded, without proof of other compensable damages. [FN30] Section
362(h) states, however, that an individual
injured by any willful violation of the automatic stay "shall recover
actual damages, including costs and attorneys' fees." [FN31] The use
of "including" indicates that Congress considered fees as an example
of actual damages by itself. Thus,
Respondents' argument is contrary to the express language of the statute. [FN32]
FN29. Doe
v. United States,
976 F.2d 1071, 1085 (7th Cir.1992); Matter
of Nat'l Marine Sales & Leasing, Inc.,
79 B.R. 442 (Bankr.W.D.Mo.1987).
FN30. Respondents
rely on In
re Whitt,
79 B.R. 611 (Bankr.E.D.Pa.1987) and In
re Still,
117 B.R. 251 (Bankr.E.D.Tex.1990).
FN31. Section
362(h) (emphasis added).
FN32. See, e.g., In
re Robinson,
228 B.R. 75, 85 (Bankr.E.D.N.Y.1998). Accord, In
re Shade,
261 B.R. 213, 217 (Bankr.C.D.Ill.2001); In
re Klein,
226 B.R. 542 (Bankr.D.N.J.1998).
[21] Debtors' counsel filed a Bill of Costs, asserting
attorneys' fees and costs incurred in prosecuting this matter of
$4,852.60. The billing statement
contains detailed time and expense entries.
Counsel's hourly rate of $150.00, is commensurate with or lower than,
the hourly rates typically charged by other professionals
practicing before this Court. The Court
reduces the amount sought by $900, however, allowing only one half of the
amount billed by counsel for travel time and disallowing two hours of research,
which resulted in counsel's citation of superceded case law. Consequently, the Court finds that the Debtors
are entitled to an award of actual damages, based on reasonable costs and
attorney's fees, of $3,952.60.
B. Punitive Damages
[22][23][24][25] In order for punitive damages to be awarded under Section
362(h), the Respondents must have acted with actual
knowledge that they were violating a federally protected right or with reckless
disregard of whether they were doing so. [FN33] The primary purposes of an award of punitive
damages are punishment and deterrence. The
five primary factors to be considered in determining whether to award punitive
damages include: the nature of the
creditor's conduct; the creditor's
ability to pay damages; the level of
sophistication of the creditor; the
creditor's motives; and any provocation
by the debtor. [FN34]
FN33. In
re Diviney,
225 B.R. at 776.
FN34. Id.
at 777. Accord,
In
re Shade,
261 B.R. at 216;
In
re Klein,
226 B.R. 542 (Bankr.D.N.J.1998) (which included
the nature and extent of the harm to the
debtor as an additional factor).
1. Nature of the Creditor's Conduct
Although the Debtor claims that he felt
threatened and intimidated, there was no evidence of any threats or menacing or
violent actions on the part of the Respondents or their agents. On the other hand, the Court finds that both
Respondent Miller, individually and as an agent of the Downey Firm, and Respondent
EMC have demonstrated a reckless disregard for whether they were acting in
violation of the automatic stay. In
order to deter future misconduct, the Court finds that it is appropriate to
award punitive damages.
One could argue for lenient treatment of
Miller and the Downey Firm on the basis that the Debtor told Miller that his
bankruptcy filing occurred on July 10, instead of May 28. It was not Miller's place, however, to then
determine whether the stay applied if in fact the redemption period had expired
prepetition. In addition, counsel had a
higher duty of inquiry when dealing with a pro se debtor. The Debtor *821 explained at the
hearing that he was confused as to his filing date because he thought the date
of the creditors' meeting on July 10 constituted his official filing date. Once Miller heard that the Debtor had filed
for bankruptcy, he could have and should have asked the state court to hold the
matter in abeyance, while he ascertained the truth of the Debtors' filing and
then obtained stay relief.
EMC is also culpable. It
received notice from the Court and from BANCO, but neither notice made its way
into the electronic file on this Property.
While it might appear to be an innocent mistake, the truth is that this
servicing company knew it had not placed sufficient safeguards into its system
as to its acquisition of 70,000 new loans.
Even though it could not assimilate this many loans this quickly,
without compromising its safeguards, it chose to take the loan portfolio
anyway. Apparently, the economic
benefit to EMC from acquiring this portfolio was sufficient that it was willing
to risk this type of exposure. It can
now suffer the consequences of that decision.
2. Creditor's Ability to Pay
The Debtors did not introduce any evidence
regarding the ability of EMC and/or Miller and the Downey Firm to pay sanctions. Nevertheless, the national scope of EMC's
business and the fact that Miller and the Downey Firm have a regular practice
in the foreclosure and bankruptcy fields indicate that they are capable of
paying an award of $5,000 each. If
there had been evidence of their financial net worth, it is quite possible that
a greater award should have been made in order to serve as a sufficient deterrent.
3. Sophistication of the Creditor
EMC is a sophisticated lender, which is
evidenced in part by the sophisticated electronic system that it has adopted
for processing its loan portfolio. It
has also contracted with sophisticated third-party vendors to assist it in tracking bankruptcy filings, such as
BANCO. Miller and Downey both testified
that they have over forty years of combined bankruptcy experience between them.
4. Creditor's Motives
Neither EMC nor Miller acted out of a desire
to exact revenge on the Debtor for filing bankruptcy or some other improper
motive. Their actions reflect, however,
a desire to pursue their economic objectives without being hampered by
compliance with Section
362's requirements. EMC placed corporate profit over these requirements when it
acquired 70,000 loans, without placing adequate safeguards in place. Miller placed his agenda to acquire
possession expeditiously over the rights of the Debtors, when he did not even
bother to confirm the Debtors' filing date, and when he usurped this Court's
role in determining whether the stay applied.
5. Provocation by the Debtor
Respondents argue that in equity they should
not be subject to sanctions for violation of the stay because they were without
actual knowledge of the date of the petition and Mr. Gagliardi's unreasonable
behavior contributed to the creditor's plight.
Respondents rely on In re Calder, [FN35] in support of their position. Calder presents a very different circumstance than the
present case. Calder was himself an
experienced bankruptcy practitioner, who actively litigated the state court
case and did not provide notice of his pending *822 Chapter 13
proceeding, until immediately prior to the
entry of a final judgment, claiming that he "forgot" to mention
it. The Tenth Circuit held that, under
these circumstances, it would be inequitable to allow Calder to claim the protection
of the automatic stay to void the state court judgment. In the present case, the Respondents were
provided with actual notice of the bankruptcy filing in several different ways,
and they either failed or refused to make note of it. There was no evidence to indicate that Mr. Gagliardi
intentionally misled them or that he was abusive of the Respondents or the
bankruptcy process in a way that provoked their actions.
FN35. In
re Calder,
907 F.2d 953 (10th Cir.1990).
6. Amount of Punitive Damage Award
[26][27] In determining the appropriate amount of punitive damages,
the Court must consider the nature of the Respondents' conduct, the ability to
pay, and the amount of actual damages awarded.
The amount of punitive damages should be sufficient to deter the
Respondents, and similarly situated parties in the future, from unilaterally
determining the scope and effect of the automatic stay. [FN36] Courts have
approved a wide range of punitive damages for violations of the automatic stay. [FN37] Given the number
and character of the stay violations, the Court finds that an award of punitive
damages in the amount of $10,000 is
appropriate. Of that amount, EMC, a
large company with significant resources, is ordered to pay $5,000. The Court believes that any lesser amount
would not accomplish the necessary deterrence. Miller and the Downey Firm, who
continue to insist that they can unilaterally determine whether the automatic
stay applies, are ordered to pay the balance of $5,000.
FN36. In
re Diviney,
225 B.R. at 777.
FN37. See, e.g., In
re Diviney,
225 B.R. at 778 (affirming a punitive damages
award of $40,000); In
re Sumpter,
171 B.R. 835, 845 (Bankr.N.D.Ill.1994) (awarding
punitive damages equal to compensatory damages, noting that the creditor was
probably facing financial problems of its own); In
re Shade,
261 B.R. at 216-17 (awarding punitive damages of
$9,000); In
re Lile,
103 B.R. 830 (Bankr.S.D.Tex.1989), aff'd, 161
B.R. 788 (S.D.Tex.1993), aff'd in part, 43
F.3d 668 (5th Cir.1994) (awarding punitive
damages of $100,000).
IV. CONCLUSION
Accordingly, it is hereby ORDERED that:
1. The July 22, 2002 Public Trustee's Deed issued
to LaSalle, the July 11, 2002 Notice to
Quit, and the September 24, 2002 eviction are NULL and VOID;
2. Debtors are hereby awarded actual damages
against Respondents, jointly and severally, in the amount of $3,952.60; and
3. Debtors are hereby awarded punitive
damages in the amount of: (i) $5,000
against EMC, and (ii) $5,000 against Miller and the Downey Firm, jointly and
severally.
290 B.R. 808, 41 Bankr.Ct.Dec. 26
END OF
DOCUMENT