Opinion
Case No. 10-31750-dof
09-29-2011
In re: SARAH ELIZABETH KOVAL, Debtor.
Chapter 7 Proceeding
Hon.
Opinion Regarding Debtor's Motion for Order to Show Cause Why Michael J. Smith
Should Not be Held in Civil Contempt for Violations of the Automatic Stay
The Debtor, Sarah Koval, filed a "Motion for Order to Show Cause Why Michael J. Smith Should Not be Held in Civil Contempt for Violations of the Automatic Stay" based on allegations that Mr. Smith continued efforts in state court to collect on a pre-petition debt. Mr. Smith responded to the motion contending he took no action beyond preserving the status quo. The Court conducted evidentiary hearings on November 16, 2010, and January 24, 2011, at which the Debtor and Mr. Smith testified. The parties filed post hearing briefs. The Court makes the following findings of fact based upon the pleadings, including the parties' supplemental briefs and exhibits, and the testimony from the evidentiary hearing, whether or not specifically referred to in this Opinion.
Findings of Fact
The Debtor filed her voluntary Chapter 7 petition on March 29, 2010, and the Chapter 7 trustee entered a Report of No Distribution on May 20, 2010. The order discharging the Debtor was entered on July 21, 2010. The Bankruptcy Notification Center sent notice of the Debtor's bankruptcy filing by first-class mail to those listed on her creditor matrix on March 31, 2010. Mr. Smith was listed on that matrix, but for some reason the notice was not delivered.
Mr. Smith states that notice to him was clearly noted as undeliverable. The Debtor acknowledges that the notice to Mr. Smith "bounced", but was without knowledge as to the reason for this because Mr. Smith's address was correct.
Mr. Smith filed a motion in the 35th District Court in Plymouth, Michigan, on March 31, 2010, for sanctions because the Debtor failed to pay a prior judgment in the amount of $1,281.97 entered on March 3, 2010, by that court. Mr. Smith did not have knowledge of the Debtor's bankruptcy filing when he filed his state court motion. The state court set a May 12, 2010, hearing date on Mr. Smith's motion.
On or about April 28, 2010, Mr. Smith received a motion for relief from stay filed by another creditor in this case. Mr. Smith testified he was on vacation on that date and did not review the motion until May 7, 2010. From this motion Mr. Smith had reason to believe that the Debtor had filed bankruptcy. He then contacted his counsel to investigate whether the Debtor did in fact file bankruptcy. On May 12, 2010, Mr. Smith contacted the state court and, at their direction, faxed a letter requesting that the court adjourn the scheduled hearing one month because he had "received information" that the Debtor filed a bankruptcy petition and therefore could not proceed with the hearing, although he also noted the lack of any formal notice personally. Mr. Smith also stated that if the adjournment was "unacceptable," then the state court should dismiss the motion and he would "refile it at a later date once [he had] this matter sorted out." The state court adjourned the hearing to June 9, 2010, and sent the Debtor a notice to appear.
Mr. Smith testified that between May 12 and June 2, 2010, his counsel took further steps to confirm the Debtor's bankruptcy. On June 2, 2010, Mr. Smith then filed another motion in state court titled, "Motion to Adjourn Motion for Sanctions and Costs." In that motion, Mr. Smith stated he had "confirmed" the Debtor filed bankruptcy, but alleged that the Debtor had not listed him as a creditor. He also alleged that the Debtor "has not been truthful in her Petition" and the Chapter 7 Trustee was "currently investigat[ing] these matters" with the "possible" outcome of dismissal or "similar sanction[]" against the Debtor. Mr. Smith requested a four to six week adjournment because "the process [was] ongoing and the outcome [had] yet to be determined." The state court adjourned the hearing on the sanctions motion to July 21, 2010, and sent the Debtor another notice to appear.
The Debtor testified she received a courtesy phone call from the state court instructing her not to appear at the June 9, 2010, hearing. The Debtor further testified she then contacted her former bankruptcy counsel who faxed the state court notice of her bankruptcy filing. The state court called again on June 9, 2010, to inform the Debtor she still needed to appear on July 21, 2010 to prove she listed Mr. Smith as a creditor in her schedules. The state court's docket includes an entry on June 9, 2010, that "per Mary Ann D." the July 21 hearing was to remain scheduled because Mr. Smith objected to not being named as creditor in the bankruptcy. The Debtor received these calls while at work on June 9, and testified the calls interrupted her work for about three hours because she had to leave her desk and step outside to take the calls.
The Debtor's former counsel thereafter attempted to contact Mr. Smith by phone, but Mr. Smith declined to speak to him. The Debtor's former counsel then sent Mr. Smith a letter, dated June 9, 2010, informing him of the Debtor's bankruptcy and the existence of the automatic stay. Mr. Smith received that letter on June 14, 2010.
Subsequently, the state court entered an order administratively staying the sanctions motion. Mr. Smith received notice of that order on July 15, 2010. Mr. Smith then received the notice of the Debtor's discharge on July 25, 2010. On that same day, Mr. Smith filed a notice of voluntary dismissal of his sanctions motion in state court.
With respect to damages, the Debtor testified the June 9, 2010, calls from the state court put her behind schedule and made her unable to concentrate at work that day. She testified she lost work time dealing with the calls and ended up behind for that day. However, she still received a full day's pay for June 9, 2010, despite the interruptions. The evidence is that the Debtor did not take any time off from work to attend any scheduled hearing. As a result of the June 9, 2010, calls from the state court, the Debtor contacted her current counsel and later drove to his office to secure representation. The Debtor also testified that she had placed a deposit on a vacation scheduled for the week of the July 21, 2010, hearing, but did not indicate if she lost that deposit money.
Statement of Jurisdiction
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334, 28 U.S.C. § 157, and E.D. Mich. LR 83.50. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) (matters concerning the administration of the estate).
Applicable Authorities
Section 362(a)(1) states, in pertinent part, that the filing of a bankruptcy petition "operates as a stay . . . of - the . . . continuation . . . of a judicial, administrative, or other action or proceeding against the debtor that was . . . commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title."
Section 362(k)(1) states 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."
Discussion
Under § 362(k)(1), "three elements must be established before damages will be awarded for violation of the automatic stay: (1) the violation must have occurred; (2) the violation must have been committed willfully; and (3) the violation must have injured the individual seeking damages." In re Skeen, 248 B.R. 312, 316-17 (Bankr. E.D. Tenn.2000) (citation omitted). "As the individuals seeking recovery, the debtors have the burden of proof." Id. (citing TranSouth Fin. Corp. v. Sharon (In re Sharon), 234 B.R. 676, 687 (B.A.P. 6th Cir. 1999)). Element one is not at issue here. As made clear at the evidentiary hearing by the parties, Mr. Smith filed his sanctions motion after the Debtor filed bankruptcy, but without knowledge of the Debtor's bankruptcy. Thus, Mr. Smith's filing of the state court motion for sanctions technically violated the automatic stay. "A technical violation occurs when a creditor violates the provisions of § 362(a) without knowledge that an active bankruptcy case is pending." Skeen, 248 B.R. at 317 (citation and quotation marks omitted). Mr. Smith's violation was willful
The main dispute is whether Mr. Smith's adjournments of the hearing on the state court sanctions motion, rather than the dismissal of the motion or complete postponement of the motion until the Debtor's case was dismissed or closed, constitutes a willful violation of the stay. "A willful violation occurs 'when the creditor knew of the stay and violated the stay by an intentional act.'" In re Grine, 439 B.R. 461, 466 (Bankr. N.D. Ohio 2010) (quoting Sharon, 234 B.R. at 687). "It does not require proof of a specific intent to violate the stay. Rather, it requires that the acts that violate the stay be intentional." Id. (citations omitted). All that is required is "that the creditor knows of the bankruptcy and engages in deliberate conduct that, it so happens, is a violation of the stay. Moreover, where there is actual notice of the bankruptcy it must be presumed that the violation was deliberate or intentional." In re Daniels, 206 B.R. 444, 445 (Bankr. E.D. Mich. 1997) (citations, internal alterations, and quotation marks omitted). Section 362(k)(1) effectively "creates strict liability." Id. (citation omitted). "Not even . . . good faith reliance on an attorney's advice" will "relieve a willful violator of the consequences of the act." Id. (citations and internal quotation marks omitted).
The Debtor's post-hearing brief argues that the adjournments constituted the continuation of a pre-petition proceeding in violation of the stay and that 11 U.S.C. § 108 tolled the 28-day limit under Michigan Court Rule 2.405, thereby providing Mr. Smith with sufficient protection to withdraw his sanctions motion. Mr. Smith counters that the adjournments simply preserved the status quo and he discontinued any taking any further action. He compares the adjourning of the hearing to a postponement of a foreclosure sale until after the case is dismissed or closed. Mr. Smith also argues that had he dismissed his sanctions motion he would have been precluded from refiling pursuant to state law. The Debtor replies that Mr. Smith did not dispute that 11 U.S.C. § 108(c) would have extended the applicable 28-day time period for 30 days after the expiration of the automatic stay, and that adjourning a hearing is an assertion that he has the right to reschedule hearings on a pre-petition action.
The Court finds that Mr. Smith's actions are a willful violation because he adjourned the state court hearing, rather than withdrawing or dismissing the motion or otherwise expressly postponing the hearing until the expiration of the stay or the dismissal or closure of the Debtor's bankruptcy case. Mr. Smith testified he first had reason to believe the Debtor filed bankruptcy when he received another creditor's motion for relief from stay on April 28, 2010. His counsel conceded that Mr. Smith had constructive notice of the Debtor's bankruptcy as of May 12, 2010.
Mr. Smith's June 2, 2010, motion expressly stated he had "confirmed" the Debtor filed a bankruptcy petition, but he still failed to halt further proceedings and instead sought a further adjournment of the hearing. Mr. Smith incorrectly contended to the state court that there was a question as to whether the Debtor listed him as a creditor on her schedules. This caused the state court to contact the Debtor twice on June 9, 2010, by telephone to inform her that she must appear at the July 21, 2010, hearing to explain the alleged omission. Even after Mr. Smith received a telephone call from the Debtor's former counsel and received the letter on June 14, 2010, informing him of the Debtor's petition, Mr. Smith took no action to fully inform the state court of the nature of the automatic stay. At no time did Mr. Smith seek to have the state court administratively stay its proceedings until either the stay was lifted or expired. The state court eventually entered its own administrative stay and only after that did Mr. Smith withdraw his sanctions motion.
The Court disagrees with Mr. Smith that the repeated adjournment of his hearing simply maintained the status quo, akin to the postponement of foreclosure proceedings. The circumstances before this Court are distinguishable from those cases, such as the case of Worthy v. Worldwide Fin'l Servs., Inc., 347 F. Supp. 2d. 502 (E.D. Mich. 2004), cited by Mr. Smith, because there the mortgagee postponed a scheduled foreclosure sale until after the bankruptcy case closed. Mr. Smith did not expressly postpone or otherwise suspend the scheduled hearing on his sanctions motions once he had knowledge of the Debtor's bankruptcy. Contrary to Mr. Smith's argument that nothing happened here, when Mr. Smith adjourned the hearings he caused new notices to appear to be sent to the Debtor, along with calls from the state court directing the Debtor to appear. The notices required the Debtor's appearance at the July 21, 2010, hearing and she prepared for that hearing expecting to have to tell the state court why she purportedly omitted Mr. Smith from her schedules. This was not maintaining the status quo; it continued the hearing to another date with the clear expectation that a decision would be rendered on that new date.
Moreover, the Court rejects Mr. Smith's assertion that he could not withdraw his state court motion because to do so would forever bar his motion. First, Mr. Smith's own May 12, 2010, letter to the state court unambiguously gave that court the option to dismiss the motion and he would re-file the motion at a later date. This express permission to dismiss directly contradicts any argument that withdrawing the motion would somehow forfeit his ability to bring the motion again. Second, Mr. Smith cites no authority for the proposition that he could not later re-file other than Michigan Court Rule 2.405. That rule merely requires the motion to be filed within 28 days of the judgment, which Mr. Smith did. The Debtor contends 11 U.S.C. § 108(c) preserved Mr. Smith's right to file the motion until 30 days after the expiration of the stay. Therefore, there is no basis for finding that Mr. Smith could not voluntarily dismiss or withdraw his motion.
In summary, after examining all the circumstances the Court finds Mr. Smith willfully violated the automatic stay by not affirmatively seeking an administrative stay of his state court action or voluntarily withdrawing his motion for sanctions. By choosing instead to seek adjournments of the hearing, Mr. Smith continued his hearing rather than maintaining the status quo. The status quo that should have been maintained was that no hearing would take place on the sanctions motion until the stay was lifted or the Debtor's bankruptcy case was dismissed.
Debtor's damages are limited to reasonable attorney's fees
As the Court has found that Mr. Smith willfully violated the stay, the remaining issue is the extent, if any, of the Debtor's damages. The Debtor's motion seeks actual damages of $250, costs and attorneys' fees, and punitive damages of $1,250.00. "Where a willful violation of the automatic stay has occurred . . . § 362(k) mandates the award of actual damages, including costs and attorneys' fees, caused by the violation." Grine, 439 B.R. at 468 (citation omitted). "As the individual seeking recovery, the Debtor has the burden of proof on the issue of damages." In re Russell, 441 B.R. 859, 862-63 (Bankr. N.D. Ohio 2010) (citing Sharon, 234 B.R. at 687).
The Debtor failed to show the existence of compensatory damages. By the Debtor's own testimony she did not miss any work on June 9, 2010, and received a full day's pay despite the three-hour interruption. At most, the Debtor was put behind in her work or lost productivity and was unable to concentrate. While the Debtor argued at the hearing that she was emotionally distressed due to the continued hearing, there was no testimony regarding any medical bills or other evidence tending to corroborate her claim of emotional distress. "[A] damage award must not be based on mere speculation, guess, or conjecture." Archer v. Macomb County Bank, 853 F.2d 497, 499 (6th Cir. 1988) (citation and internal quotes omitted). Courts have refused to allow damages for willful stay violation where a debtor simply claimed to be "'stressed out', 'nervous' and 'nauseous'" about pending hearings. Meis-Nachtrab v. Griffin (In re Meis-Nachtrab), 190 B.R. 302, 308 (Bankr. N.D. Ohio 1995). Even where a debtor testified she was "'torn-up,' shaken, and nervous the rest of the day as a result of the telephone calls," a court precluded that debtor from receiving compensatory damages where "there was no evidence that she sought medical relief or that the anxiety caused by [the creditor's] collection efforts rendered her incapable of going about her daily routine." Skeen, 248 B.R. at 319. "[T]he law has always been wary of claims of emotional distress as they are so easy to manufacture. Consequently, in the absence of highly unusual circumstances, strong corroborating evidence must be offered, usually in the form of medical evidence, to sustain an award of damages for emotional distress." In re Pawlowicz, 337 B.R. 640, 646-47 (Bankr. N.D. Ohio 2005). Here, there is no strong, corroborating evidence of any emotional distress sufficient to permit an award of emotional injury.
The Debtor has also failed to meet her burden of proving punitive damages. Courts have found that when considering whether to award punitive damages for a willful stay violation, factors to consider are: "[1] the nature of the creditor's conduct, [2] the nature and extent of harm to the debtor, [3] the creditor's ability to pay, and [4] the level of sophistication of the creditor." Pawlowicz, 337 B.R. at 648 (citation omitted). With respect to the first factor, an award of punitive damages "require[s] egregious misconduct on the creditor's part such as that which is taken in arrogant defiance of federal law." Russell, 441 B.R. at 863. For example, "egregious intentional misconduct" was found where a creditor unlawfully retained possession of a debtor's car after having actual notice of the automatic stay, verbally abused the debtor for making efforts to regain possession, and caused inconvenience and time loss. Davis v. Gatorwheel, Inc. (In re Davis), 265 B.R. 453, 457 (Bankr. N.D. Fla. 2001) (awarded $4,500 in punitive damages with only $169.00 in actual damages awarded). The Court is not persuaded the circumstances here are of a similar level of egregiousness necessary to sustain an award of punitive damages.
Finally, the Debtor requests costs and attorneys' fees. Mr. Smith argues the Debtor cannot recover attorneys' fees where there is no actual, compensatory damages awarded. However, courts have held that "[s]ection 362(k) explicitly provides that any attorney fees incurred by a debtor as the result of a stay violation are compensable as actual damages." Russell, 414 B.R. at 863 (no compensatory damages awarded because creditor returned garnished funds). Another court was "persuaded by those courts holding that attorneys' fees may be awarded under § 362(k) even if no other amounts are awarded as actual damages[,]" noting that "[o]ther bankruptcy courts in the Sixth Circuit have generally adopted this position." Grine, 439 B.R. at 471 (collecting cases). The Court agrees with these courts and finds that the Debtor is entitled to reasonable attorneys' fees as actual damages under Section 362(k) despite no other compensatory damages. "This is a case where counsel's intervention was both necessary and appropriate to stop the violation and address the problem." Id. at 473. As with other situations where attorneys' fees are awarded, the amount must be reasonable. Id. at 472.
Accordingly, counsel for the Debtor is requested to submit a pleading detailing the fees and expenses incurred as a result of the violation of the automatic stay as noted in this Opinion. Counsel for Mr. Smith shall have 21 days after the filing of this pleading to respond. The Court will then review the pleadings and determine if a hearing is necessary.
Counsel for the Debtor is requested to prepare an order consistent with this Opinion for submission after obtaining approval of counsel or complying with the Court's notice of presentment procedure.
Daniel S. Opperman
United States Bankruptcy Judge