Opinion
Case No. 12-33165
06-23-2015
In re: ADAM J. BALLARD, Debtor
Copies to: Default List Edward J. Murphy (Counsel for the United States), electronically served
Chapter 7
Decision Denying the United States' Motion for Summary Judgment
I. Introduction
This decision addresses whether the United States should be granted summary judgment concerning the debtor's motion seeking damages for a willful stay violation.
As the IRS noted in its motion for summary judgment, the true party in interest is the United States. See Flynn v. IRS (In re Flynn), 169 B.R. 1007, 1014 (Bankr. S.D. Ga. 1994), aff'd in part, rev'd in part on other grounds sub. nom United States v. Flynn (In re Flynn), 185 B.R. 89 (S.D. Ga. 1995). For convenience of the reader, the court refers to the IRS because this litigation concerns its actions.
II. Jurisdiction
This court has jurisdiction pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O).
III. Summary Judgment Standard
The standard to address the IRS' motion is contained in Federal Rule of Civil Procedure 56 and is applicable to contested matters through Bankruptcy Rules 7056 and 9014 and states, in part, that a court must grant summary judgment to the moving party "if the movant shows there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). In order to prevail, the moving party, if bearing the burden of persuasion at trial, must establish all elements of its claim. Celotex Corp. v. Catrett, 477 U.S. 317, 331 (1986). If the burden is on the non-moving party at trial, the movant must: 1) submit affirmative evidence that negates an essential element of the nonmoving party's claim or 2) demonstrate to the court that the nonmoving party's evidence is insufficient to establish an essential element of the nonmoving party's claim. Id. at 331-32. Thereafter, the opposing party "must come forward with 'specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citations and emphasis omitted); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-51 (1986). All inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Matsushita, 475 U.S. at 586-88.
IV. Findings of Fact
On May 26, 2012 the IRS issued a continuous pre-petition wage levy on Adam Ballard's employer (Mary L. Clinton Declaration, ¶ 2, IRS exhibit 1). The IRS received three payments, which were credited by the IRS against Ballard's 2006 federal income tax liability. doc. 15, p. 6 - 8; IRS exhibit 2 (Ballard 2006 Income Tax Transcript). The employer paid $377 on June 21, 2012, which the IRS received on June 29, 2012. The employer also paid $439 on June 28, 2012, which the IRS received on July 2, 2012. Ballard filed a petition under Chapter 7 of the Bankruptcy Code on July 3, 2012 (doc. 1). On July 5, 2012 the employer paid $365.60, which the IRS received on July 12, 2012. July 5, 2012 was also the date that the Clerk sent electronic notice to the IRS of Ballard's bankruptcy petition (doc. 10) and Ballard's counsel sent a fax to the IRS advising of the bankruptcy filing. Ballard exhibit B.
Ballard argues that the Mary L. Clinton affidavit is hearsay and inadmissible pursuant to Federal Rule of Civil Procedure 56 (applicable by Federal Rules of Bankruptcy Procedure 7056 and 9014). Clinton is a Revenue Officer Advisor for the IRS and based her affidavit on her personal review of IRS records and is admissible under Federal Rule of Civil Procedure 56(c)(4) (applicable by Federal Rule of Bankruptcy Procedure 7056) ("An affidavit or declaration used to support or oppose a motion must be made on personal knowledge, set out facts that would be admissible in evidence, and show that the affiant or declarant is competent to testify on the matters stated."). Further, the declaration, based on an IRS prepared transcript and history report, is admissible under the public record hearsay exceptions in Federal Rules of Evidence 803(8) and (10). United States v. Griffin, 191 F.3d 453, 1999 WL 775912, at *2 (6th Cir. 1999) (table decision); Taylor v. IRS (In re Taylor), 2014 WL 1884333, at *8 (Bankr. E.D. Tenn. May 12, 2014). It also appears the records could be admissible at a hearing under Federal Rules of Evidence 803(6) and (7) if the factual predicate for a business record was established. Finally, the Clinton declaration complies with 28 U.S.C. § 1746, which allows both affidavits and unsworn declarations under penalty of perjury.
In order to track taxpayers which file bankruptcy, the IRS uses a computer system it refers to as the Automated Insolvency System (AIS). See IRS exhibit 4. The IRS recorded Ballard's bankruptcy information into AIS on July 6, 2012. IRS exhibit 3. On July 10, 2012 the AIS notes that the IRS released the wage levy and noted it had not received any post-petition funds. However, the single post-petition payment of $365.60 was received two days later, on July 12, 2012.
Ballard asserts that his counsel sent the IRS a letter on September 13, 2012, but the IRS only concedes Ballard's counsel intended to send the letter. Besides the July 5, 2012 fax, when the stay violation issue was not yet clear, this letter, copied to the local United States Attorney, was the only extrajudicial contact the debtor had with the IRS to resolve the issue now before the court. The letter (Ballard exhibit C) states as f0llows:
There is no presumption of receipt unless Ballard can provide evidence the letter was properly addressed, had sufficient postage and was deposited in the mail. Bratton v. Yoder Co. (In re Yoder Co.), 758 F.2d 1114, 1118 (6th Cir. 1985).
September 13, 2012
Internal Revenue Service
Centralized Insolvency Operations
PO Box 7346
Philadelphia, PA 19101-7346
RE: Adam J. Ballard , Chapter 7 Case Number 12-33165
Social Security Number: [number redacted]
To Whom It May Concern:
Please be advised that my client, Adam J. Ballard, filed the above referenced bankruptcy case in the United States Bankruptcy Court for the Southern District of Ohio, Western Division at Dayton, on July 3, 2012. The Internal Revenue Service levied Mr. Ballard's wages as follows:
| Date | Amount |
|---|---|
| June 21, 2012 | $376.99 |
| June 28, 2012 | $439.26 |
| July 5, 2012 | $365.60 |
Mr. Ballard demands these funds levied on June 21, 2012 and June 28, 2012 be returned to him pursuant 11 U.S.C. §522(h) and 11 U.S.C. §547 as these funds are exempt wages pursuant to O.R.C. 2329.66. Additionally, Mr. Ballard demands return of the funds levied on July 5, 2012 because the automatic stay imposed pursuant to 11 U.S.C. §362 was in effect. Therefore, please immediately return these funds to Mr. Ballard or he will consider filing a Motion for Contempt in the Bankruptcy Court. You may mail these funds directly to my office at the address listed above.
If you have any additional questions or concerns, please feel free to contact the office.
Best regards,
[signature of Andrew J. Ziegler]
Andrew J. Zeigler
Copy to: United States Attorney, 602 Federal Building, 200 W. Second Street, Dayton, Ohio 45402
Enclosures: June 21, 2012, June 28, 2012 and July 5, 2012 Paystubs
This is the correct Clerk Registry address for the IRS. See Fed. R. Bankr. P. 5003(e).
On November 6, 2012 Ballard was granted his Chapter 7 discharge (doc. 13) and the IRS was sent electronic notice of the discharge by the Clerk on November 7, 2012 (doc. 14). This case had no assets available for creditors and the court's review of the claim registry shows that the IRS did not file a proof of claim or otherwise participate in the case. See Chapter 7 Trustee's Report of No Distribution docket entry (Sept. 13, 2012).
The standard "no asset" notice of bankruptcy and meeting of creditors instructing creditors not to file proofs of claim unless later instructed to do so was sent to all creditors, including the IRS, on July 5, 2012 (doc. 8).
The AIS shows that on November 13, 2012 an IRS employee noticed the post-petition levy payment in processing Ballard's discharge. IRS exhibit 3. The refund was approved by the IRS on November 14, 2012 and the refund was subsequently issued by the IRS. Id. However, on November 15, 2012, the Debtor filed a "Motion for an Order of Contempt and Damages for Violation of the Discharge Injunction." (doc. 15). The IRS' records do not indicate any evidence of receiving this motion either. Clinton Declaration, ¶ 3. The IRS asserts that it "eventually became aware of the motion due to its being served on the United States Attorney's Office." Clinton Declaration, ¶ 5. The IRS issued the refund of the $365.60 in November 2012 and there is no dispute that Ballard received the refund. See Clinton Declaration, ¶ 4; doc. 20, ¶ 12. The IRS' position is that the refund of the $365.60 was not made in response to the Debtor's motion, but rather, occurred solely due to the IRS' own discovery that it was holding those funds when it reviewed the AIS information after receiving notice of Ballard's discharge. Ballard's counsel requested $817 in attorney fees from the IRS in December 2012, but no settlement was reached. Ballard exhibit D.
Consistent with the letter, debtor counsel framed the issue as contempt, but later amended his motion to pursue relief under 11 U.S.C. § 362(k).
The certificate of service shows it was sent by ordinary mail to the claim registry address of the IRS and also to the Commissioner of the IRS by certified mail. doc. 15. The court has no evidence as to whether the address for the Commissioner is correct.
V. Analysis
A. Did the IRS Not Violate § 362(a)(6) As a Matter of Law?
The IRS first requests that this court determine as a matter of law that it did not violate § 362(a)(6) of the Bankruptcy Code. The court cannot make such a determination based upon the record in this case.
Upon the filing of a bankruptcy petition, the automatic stay enjoins creditors from taking most actions to collect a pre-petition debt against the debtor and property of the bankruptcy estate. In re Cousins, 404 B.R. 281, 286 (Bankr. S.D. Ohio 2009); 11 U.S.C. § 362(a). The automatic stay provides a "breathing spell" to the debtor from collection actions by his creditors. Id. One of the purposes of the automatic stay "is to alleviate the financial strains on the debtor." State of California Emp't Dev. Dept. v. Taxel (In re Del Mission Ltd.), 98 F.3d 1147, 1151 (9th Cir. 1996). Actions taken in violation of the automatic stay are "invalid and voidable and shall be voided absent limited equitable circumstances." Easley v. Pettibone Mich. Corp., 990 F.2d 905, 911 (6th Cir. 1993).
Specifically, Ballard argues that the IRS' post-petition levy and the four month hold of those funds constituted a willful violation of § 362(a)(6), which prohibits "any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title[.]" "[A] course of conduct violates § 362(a)(6) if it (1) could reasonably be expected to have a significant impact on the debtor's determination as to whether to repay, and (2) is contrary to what a reasonable person would consider to be fair under the circumstances." Pertuso v. Ford Motor Credit Co., 233 F.3d 417, 423 (6th Cir. 2000) (cited in Harchar v. United States (In re Harchar), 694 F.3d 639, 648 (6th Cir. 2012).
Based on the Debtor's motion, the court is considering this matter under § 362(a)(6) and not 362(a)(3), which concerns actions against property of the estate. Therefore, the standing issues raised by the IRS as to § 362(a)(3) are moot. However, the court pauses to briefly address the argument of the IRS that they could have sought to annul the stay nunc pro tunc to keep the $365.60 post-petition wages based upon its pre-petition lien. doc. 66, n. 6. The answer to this argument is the IRS did not make that choice and so this court cannot opine upon nor give weight to actions the IRS might have taken to justify the actions it did take.
The IRS argues that the temporary retention of the $365.60 was not an intentional act. Essentially, the IRS argues that its bankruptcy review of its data regarding Ballard inadvertently missed the third capture of Ballard's wages because when an IRS employee first reviewed the data and released the continuous levy on Ballard's wages on July 10, 2012, the funds had not yet been received by the IRS and entered into the AIS system. The funds were then received and entered into the AIS system on July 12, 2012 and no further review was conducted until Ballard's discharge was issued, with the levied funds being discovered on November 13th through the routine procedures employed by the IRS following receipt of knowledge of a taxpayer's bankruptcy discharge. The IRS appears to be saying that rather than a matter of an intentional violation, the four plus month hold of the funds was just a function of the AIS computer process and the IRS' internal bankruptcy review procedures.
The IRS concedes creditors sometimes have an affirmative obligation to terminate pre-petition acts under § 362(a)(6), but states it did so when it, through its "quick action," released the continuous levy. However, there is no dispute that the continuation of the post-petition levy and the subsequent holding of the funds were intentional acts. The IRS was aware of the bankruptcy petition, but did not cure the violation by returning the funds until over four months later. Nor did the IRS institute a procedure which would have notified an appropriate IRS employee that it had received such levied funds after it had released the levy. Thus, under the IRS' apparent logic, if it would have taken two years for Ballard to have received his discharge, the IRS would not have discovered that it was holding the funds for two years absent intervention by Ballard and such a hold would not constitute a violation of the stay. This logic and argument defies well-established law.
Retention of funds by an entity which should not have been paid those funds because of the intervention of the automatic stay may by itself constitute a violation of the stay. Del Mission, 98 F.3d at 1151; Carlsen v. Internal Revenue Service (In re Carlsen), 63 B.R. 706, 710-11 (Bankr. C.D. Cal. 1986) (IRS violated the stay without any affirmative action taken to obtain the wages when it received and kept the wages post-petition). As stated by one court, "creditor inaction can often be as disruptive to the debtor as affirmative collection efforts." In re Miller, 22 B.R. 479, 481 (D. Md. 1982) (citations omitted).
While many of the cases in which these principles have been stated involved property of the estate and violations of § 362(a)(3) ("any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate"), the same principles may apply to violations of § 362(a)(6), depending upon the facts of the particular case. See Bank of Am., N.A. v. Johnson (In re Johnson), 479 B.R. 159 (Bankr. N.D. Ga. 2012) (thorough discussion of stay violations related to garnishment (proceedings); Krivohlavek v. Boys Town Fed. Credit Union (In re Krivohlavek), 405 B.R. 312 (B.A.P. 8th Cir. 2009) (Creditor's post-petition receipt of automatic payment and application of that payment to debtor's account violated § 362(a)(6)). Thus, maintaining control over bankruptcy estate funds may violate § 362(a)(3), while maintaining or exerting control over the debtor's funds may violate § 362(a)(6).
The mere receipt or temporary retention of funds under circumstances such as this may not violate the stay if the creditor acts diligently to return or send the funds to the appropriate party. See Harchar, 694 F.3d at 648 (minimal delay caused by IRS' manual processing of debtors' tax return prior to filing a motion to modify the debtors' Chapter 13 plan did not violate § 362(a)(6)); Carlsen, 63 B.R. at 710; and Abrams v. Southwest Leasing & Rental, Inc. (In re Abrams), 127 B.R. 239, 243 (B.A.P. 9th Cir. 1991) (court must consider whether the asserted stay violation was inadvertent and, if so, whether the creditor remedied the stay violation immediately upon notice of the bankruptcy). However, the burden to return or send property to the rightful party or to take other affirmative action to address the creditor's rights falls upon the possessor of the funds; "it does not fall on the debtor to pursue the possessor." Del Mission, 98 F.3d at 1151; In re Abrams, 127 B.R. 239, 243 (B.A.P. 9th Cir. 1991). As stated by this court:
This responsibility is placed on the creditor and not on the debtor or the trustee as the defendants suggest because "to place the onus on the debtor, ... to take affirmative legal steps to recover property seized in violation of the stay would subject the debtor to the financial pressures the automatic stay was designed to temporarily abate, and render the contemplated breathing spell from his creditors illusory".Ledford v. Tiedge (In re Sams), 106 B.R. 485, 490 (Bankr. S.D. Ohio 1989) (Waldron, J.) (citing In re Miller, 22 B.R. 479, 481 (D. Md. 1982)). See also Rosegren v. GMAC Mortgage Corp., 2001 U.S. Dist. LEXIS 13119 (D. Minn. Aug. 7, 2001) (once creditor receives actual notice of the debtor's bankruptcy, the burden is on the creditor to prevent violations of the automatic stay).
The IRS argues or implies that it should not be found to have violated Ballard's stay because the retention of the funds was not the result of any intentional act of an IRS employee, but merely a glitch in the AIS system. Similar arguments concerning the volume and complexity of matters which the IRS encounters and glitches in IRS processes have been addressed on different occasions by the courts and consistently rejected. See In re Price, 103 B.R. 989, 992-93 (Bankr. N.D. Ill. 1989) (stay violation not excused for IRS computer error); Stucka v. United States (In re Stucka), 77 B.R. 777, 783 (IRS "may not shield their violations of the automatic stay . . . by erecting a blind of 'complexity'"). See also In re Solis, 137 B.R. 121, 133 (Bankr. S.D.N.Y. 1992) (IRS charged with knowledge of its employees and agents).
Because the IRS did not immediately send the post-petition levied funds to Ballard, but rather, retained the funds for over four months, this court cannot as a matter of law conclude that this retention did not violate the stay. The court must determine at the trial whether the delay and the apparent limitations of AIS was reasonable. A material factual issue exists about whether the four months that elapsed prior to releasing the funds was too long. See In re Kuziewski, 508 B.R. 678, 685 (Bankr. N.D. Ill. 2014) (failure to take "reasonable steps" to terminate certain acts to remedy a stay violation in itself violates the automatic stay); In re Hellums, 772 F.2d 379, 381 (7th Cir. 1985) ("We hold that Congress intended the stay of section 362(a)(6) to apply to the automatic (as well as coerced) transfer and application of post-petition funds to the pre-petition debts of Chapter 7 debtors); In re Holland, 21 B.R. 681, 688 (Bankr. N.D. Ind. 1982) ("inactivity on the part of a creditor which permits the forces of collection to go forward is as offensive to the automatic stay as is activity"). Thus, consistent with Pertuso and Harchar, material issues of fact remain for the court to determine whether the IRS' course of conduct violated § 362(a)(6) because its conduct (1) could reasonably be expected to have a significant impact on Ballard's determination as to whether to repay, and (2) is contrary to what a reasonable person would consider to be fair under the circumstances. Pertuso, 233 F.3d at 423; Harchar, 694 F.3d at 648.
B. If the IRS Did Violate § 362(a)(6), Was the Violation "Willful"?
Second, the IRS requests the court to determine as a matter of law that if it did violate § 362(a)(6), that its violation was not "willful" as that term is used in § 362(k)(1). Again, the court cannot make such a determination as a matter of law based upon the record before it and the case law defining "willful" within the Sixth Circuit.
Section 362(k) of the Bankruptcy Code provides, with an exception not relevant in these circumstances, that "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." 11 U.S.C. § 362(k)(1) (emphasis added). A willful violation occurs "when the creditor knew of the stay and violated the stay by an intentional act." TranSouth Fin'l Corp. v. Sharon (In re Sharon), 234 B.R. 676, 687 (B.A.P. 6th Cir. 1999). Accord In re Knaus, 889 F.2d 773, 775 (8th Cir. 1989) and In re Bloom, 875 F.2d 224, 227 (9th Cir. 1989). The creditor need not have a specific intent to violate the stay or even awareness that the conduct does violate the stay. Sharon, 234 B.R. at 687-88; In re Daniels, 206 B.R. 444, 445 (Bankr. E.D. Mich. 1997). A creditor's good faith belief that an intentional action does not violate the stay is not a defense under § 362(k). Sharon, 234 B.R. at 688.
The IRS asks this court to reconsider following Sharon and its progeny. Sharon held that a stay violation is willful if the creditor knew of the stay and committed an intentional act. Id. at 687. The court declines the invitation because the court agrees with the principles enunciated in Sharon and also because of the importance of following Sixth Circuit B.A.P. decisions within the Sixth Circuit. See In re Burns, 435 B.R. 503, 514 n.11 (Bankr. S.D. Ohio 2010) ("In general, this court intends to follow the decisions of the Sixth Circuit Bankruptcy Appellate Panel.").
In this case the IRS admits that it knew of the bankruptcy and bankruptcy stay as early as July 6, 2012 when it entered Ballard's bankruptcy filing into the AIS system. The retention of the levied funds occurred following this receipt of knowledge of Ballard's bankruptcy. Although its retention of the funds may have been inadvertent and without an intent to violate the stay or to enforce a claim against Ballard; its act of retaining the funds was intentional and it was under a duty to prevent violations of the stay. There is no evidence presently before the court that the IRS instituted a procedure which would have notified an appropriate IRS employee that it had received such levied funds after it had released the levy. Under those facts, the court cannot find as a matter of law that its conduct in retaining the levied funds was not "willful" under Sharon.
C. Were the Damages Which Ballard Alleges Proximately Caused by the IRS' Actions?
Third, the IRS asserts that it is entitled to summary judgment because the damages which Ballard asserts he has suffered were not proximately caused by the IRS' actions. The court denies summary judgment on this basis also because the court determines that there is a material issue of fact as to what damages Ballard may have incurred as a result of any violation of the automatic stay committed by the IRS.
The burden of establishing entitlement to damages is on the individual seeking damages. Sharon at 687; Cousins v. CitiFinancial Mortgage Co. (In re Cousins), 404 B.R. 281, 289 (Bankr. S.D. Ohio 2009). In order to recover damages, the debtor must show by a preponderance of the evidence that a violation was committed willfully and that he was injured. Grine v. Chambers (In re Grine), 439 B.R. 461, 466 (N.D. Ohio 2010).
The IRS argues that Ballard did not suffer any injury and that the attorney fees incurred by Ballard due to his counsel's filing of the amended motion were not reasonable and necessary because they were necessitated by legal deficiencies in Ballard's original motion. The IRS also makes the point that none of the attorney fees incurred affected the actions of the IRS. Stated another way, the IRS asserts that it did not release the $365.60 due to Ballard's counsel's letter or a motion, but due to the post-petition levy being found during its routine administrative procedures. In addition, the IRS argues this court should consider following the holding in Sternberg v. Johnston, 595 F.3d 937, 847 (9th Cir. 2010) that attorney fees incurred after the stay violation ends are not compensable as actual damages under § 362(k)(1).
Ballard's original motion was based on a discharge violation, but later amended to address a stay violation instead of a discharge violation. Nothing in the record suggests the IRS violated the discharge injunction in this case.
The Sternberg decision has been "sharply criticized." Duby v. United States (In re Duby), 451 B.R. 664, 675 (B.A.P. 1st Cir. 2011) (citing Grine v. Chambers (In re Grine), 439 B.R. 461 (N.D. Ohio 2010), which noted that substantial precedent allows fees for prosecuting § 362(k) cases). Attorney fees incurred in rectifying a stay violation are compensable damages under § 362(k). Debtors must be able to address willful stay violations and any attorney fees incurred in rectifying stay violations should not be borne by the debtor. The question is not whether the debtor's counsel work product led to the IRS's return of the funds but whether those actions were reasonable and necessary at that time. See Duby, 451 B.R. at 676 (the fee shifting provisions of § 362(k) make it more likely for debtors' counsel to vindicate their clients rights. Without such a provision, debtors often cannot pay hourly fees and damages awarded render a contingency fee impracticable). If a creditor willfully violates the stay and refuses to pay any attorney fees, the debtor may need to initiate litigation to collect those fees if a fair settlement cannot be reached. Once a stay violation occurs, both the creditor and debtor take significant risks in pursuing litigation rather than agreeing upon a settlement. Of course, a party has no obligation to settle any litigation. However, both parties take the risk of accumulating counsel fees which may or may not be paid at the conclusion of the litigation.
Interestingly, In America's Serv. Co. v. Schwartz-Tallard (In re Tallard), 765 F.3d 1096 (9th Cir. 2014), the majority of the three judge Panel determined that Sternberg did not apply when a debtor was defending a creditor's appeal of a previous finding of a stay violation, despite that the award included counsel fees. The dissent believed Sternberg controlled. The Ninth Circuit ordered this appeal re-heard en banc. 774 F.3d 959 (9th Cir. 2014).
However, while this court determines that attorney fees incurred in addressing a stay violation may be the sole damages recovered by a debtor for a stay violation, debtors' counsel are cautioned to use an appropriate level of circumspection in addressing such matters. While attorney fees incurred in pursuing stay violations may be recovered, it elevates the always relevant question of what reasonable efforts were made by the debtor or his counsel to resolve any stay violation amicably prior to pursuing litigation? Did the debtor or his counsel take specific steps to minimize attorney fees? The court agrees with other decisions that when damages are solely based on counsel fees, the court must be vigilant in not promoting a "cottage industry" of stay violation litigation. In re Beback, 2013 WL 5156706, at *3 (Bankr. M.D. Fla. Sept. 12, 2013) (the reasonableness standard for attorney fees based on court's reluctance to foster a "cottage industry" of "satellite fee litigation."). "Attorneys are not at liberty to incur large legal fees simply because those fees will be shifted to their adversaries pursuant to Section 362[(k)]." Rosegren v. GMAC Mortgage Corp., 2001 U.S. Dist. LEXIS 13119 (D. Minn. Aug. 7, 2001); In re Robinson, 228 B.R. 75, 85 (Bankr. E.D. N.Y. 1998). Counsel is under a duty to address the matter in the most professional, expeditious manner. Price v. Pediatric Academic Assoc., Inc. (In re Price), 175 B.R. 219, 222 (S.D. Ohio 1994).
Conversely, counsel representing creditors accused of violating the automatic stay also may wish to act with circumspection. Because the debtor's attorney fees incurred in remedying a stay violation may be awarded to the debtor, counsel for the creditor may wish to address the matter in the most economical manner so as not to expose the creditor to additional damages incurred during the stay litigation. See In re Voll, 512 B.R. 132, 142 (Bankr. N.D.N.Y. 2014) ("[C]reditors may not deny that a violation of the stay was willful then, after forcing the debtor to litigate the matter, baldly claim that debtor-counsel's fees were unreasonable or unnecessary.").
In this instance, the only evidence of Ballard's counsel's efforts to resolve this matter extra-judicially - once the problem became apparent - was a single letter to the IRS copied to the United States Attorney. Further, only a portion of that letter addresses the asserted stay violation, with the remainder of the letter addressing the pre-petition garnishment of Ballard's wages. Moreover, Ballard has not yet provided evidence beyond the letter itself that it was sent or that the IRS or the United States Attorney's office received it.
Furthermore, the causation argument the IRS makes is a factually driven dispute. While the IRS argues that its own diligence in finding the levied funds resulted in the payment of the funds, Ballard disputes this assertion, arguing instead that his counsel's letter followed by his motion resulted in the payment of the funds. The near simultaneous timing of the payment of the funds and the filing of the motion renders such a factual determination difficult. In addition, even if the payment of the funds to Ballard was initiated by the IRS on its own, the filing of the motion may still have been reasonable conduct caused by the IRS' four month retention of the funds if Ballard and his counsel were not aware that the funds had been disbursed as of that time.
Evidence of any efforts to attempt to resolve the stay violation will be probative of what, if any, attorney fees may be recoverable. Such evidence, or a lack thereof, may either support the award of attorney fees and may be indicative of the amount of attorney fees that may be appropriate (or may support the denial of attorney fees or the limiting of attorney fees) if the court determines that reasonable measures to bring the matter to the attention of the appropriate persons were not taken. Conversely, reasonable attorney fees incurred in remedying the stay violation or caused by the stay violation may be awarded. In summary, the reasonableness and necessity of attorney fees and costs incurred in pursuing a violation of the stay must be determined on a case-by-case basis upon the evidence presented to the court. In re Beebe, 435 B.R. 95, 102 (Bankr. N.D.N.Y. 2010); Voll, 512 B.R. at 132.
In addition to the conditions and limitations on the recovery of damages for a stay violation imposed by § 362(k) and case law interpreting it and its predecessor provision, the award of attorney fees as damages in this case is also controlled and limited by 26 U.S.C. §§ 7430 and 7433(e). These are provisions that are part of the Internal Revenue Code and are intended to place restrictions on the recovery of attorney fees against the IRS. Section 7433(e) allows a taxpayer to petition the bankruptcy court for damages if the United States violates the automatic stay. Section 7430 provides that the taxpayer must be the "prevailing party," which means that the IRS' position in the litigation must not have been "substantially justified." 26 U.S.C. § 7430(c)(4)(B). Substantial justification is based upon the facts of the case. William Comer, 958 F.2d at 140. See also In re Parker, 279 B.R. 596 (Bankr. S.D. Ala. 2002) (to be awarded damages the debtor must prevail against the United States in a court or administrative proceeding in connection with the collection of a tax and the position of the IRS must not have been substantially justified). Substantially justified means "justified to a degree that could satisfy a reasonable person" or "a reasonable basis both in law and fact." William Comer Family Equity Pure Trust v. Comm'r, 958 F.2d 136, 139-40 (6th Cir. 1992) (quoting Pierce v. Underwood, 487 U.S. 552, 563-65 (1988)). The statute itself also provides guidance in making the "substantially justified" determination. See 26 U.S.C. § 7430(c)(4)(B). --------
For all these reasons, the court cannot grant the IRS summary judgment on the basis that Ballard's damages were not proximately caused by the IRS' conduct.
VI. Summary and Conclusion
The court finds that there is a material question of fact as to whether the IRS committed a willful violation of the stay provided by § 362 that warrant damages. Summary judgment is not appropriate because § 362(k) provides that actual damages, which include attorney fees, shall be awarded upon a finding of a willful stay violation and an injury to an individual debtor. That injury can include counsel fees to resolve a stay violation. However, such fees may be awarded only to the extent that they are reasonable and necessary. Cousins, 404 BR. at 289; Harris v. Memorial Hosp. (In re Harris), 374 B.R. 611, 616 (Bankr. N.D. Ohio 2007). Also, damages are only available against the IRS if its legal position in this litigation is ultimately determined not be substantially justified. Finally, if the court concludes that Ballard or his counsel failed to make a reasonable effort in these circumstances to resolve the matter extra-judicially, the court may award limited attorney fees to Ballard as damages to compensate for the initial efforts made by Ballard and his counsel to resolve this matter. See Grine, 439 B.R. at 466 (noting that a debtor is under a duty to mitigate damages). Nevertheless, none of these issues can be resolved as a matter of law upon this record. Through a separate order the court will schedule an evidentiary hearing to determine all of these issues. For these reasons, the IRS's motion for summary judgment is denied.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: June 23, 2015
/s/ _________
Guy R. Humphrey
United States Bankruptcy Judge Copies to: Default List Edward J. Murphy (Counsel for the United States), electronically served