MARK HOULE, Bankruptcy Judge.
On September 30, 2013 ("Petition Date"), Charles Biehl ("Debtor") filed a Chapter 7 voluntary petition. John P. Pringle is the duly appointed Chapter 7 Trustee ("Trustee"). Among the assets of the Debtor's estate is property located at 6 Dover Court in Rancho Mirage, CA (the "Property").
On May 11, 2016, the Debtor filed a motion for an order holding creditor Lawrence Shanahan ("Shanahan") and creditor Nicole Rudat ("Rudat") in Civil Contempt for violation of the § 362 automatic stay ("OSC Motion"). No objection was filed. On May 23, 2016, the Court issued the Order to Show Cause (the "OSC") requiring creditors Shanahan and Rudat (collectively, the "Respondents") to appear and show cause why they should not be:
The original hearing was set for June 22, 2016. Since that time, the parties stipulated twice to a continuance of the hearing. The Order Approving Stipulation to Continue Hearing on OSC on July 14, 2016, set the hearing on September 21, 2016, and required responses by Respondents by August 26, 2016, with any reply due by September 9, 2016.
Respondents timely filed their responses on August 26, 2016. Debtor timely filed his reply on September 9, 2016. On September 21, 2016, the hearing was continued for additional briefing. On October 5, 2016, Shanahan filed a supplemental brief. On October 19, 2016, Debtor filed a reply. On November 8, 2016, this Court entered an interim order finding that the automatic stay had been violated on multiple occasions. Specifically, the Court identified three violations of the automatic stay: (1) the sale of the Property on January 14, 2016; (2) the recording of the deed on January 27, 2016; and (3) Rudat's ongoing failure to reconvey title to the property. Additionally, the Court's interim order entered on November 8, 2016, directed Rudat to reconvey title to the Property by no later than November 16, 2016.
On November 18, 2016, Rudat's attorney, Fritz Firman ("Firman") filed a declaration stating that the Riverside County Recorder's Office rejected the deed of full reconveyance for technical reasons, but he had rectified the error and intended to record the deed on November 21, 2016. On November 21, 2016, Rudat filed a declaration stating that the deed of full reconveyance had been recorded, recordation number 2016-0518800.
On December 14, 2016, Debtor's attorney, Steven Bryson ("Bryson") filed a supplemental declaration regarding additional attorney's fees and costs and appropriate sanctions. On December 21, 2016, Shanahan filed a response. On January 4, 2017, this Court held a further hearing, which was continued to allow the parties a final chance to settle the dispute. On January 13, 2017, Bryson filed a status report indicating that the parties would not be able to reach a settlement.
After the Petition Date, on September 8, 2014, Shanahan obtained a state court default judgment against Debtor in violation of the stay and without having sought relief from the automatic stay. Subsequently, Shanahan applied to the state court for an order to show cause why the Property should not be sold, and on May 19, 2015, Shanahan continued the litigation by filing a supplemental brief in state court in support of the state court order to show cause. As evidence of the fact that Shanahan had knowledge of the bankruptcy filing, Debtor asserts that the supplemental brief filed by Shanahan included a copy of his bankruptcy schedules. The state court ordered that the Debtor's residence be sold on or about July 1, 2015. On November 23, 2015, a Notice of Sheriff's sale was issued setting a sale date for January 14, 2016. Debtor personally had notice of Shanahan's efforts to recover against the Property, in violation of the stay, by no later than July 6, 2015, when Debtor indicated awareness that Shanahan's state court proceedings were still proceeding. Further, on December 4, 2015, Debtor indicated receipt of a writ of execution. Debtor's awareness of continuing stay violations during the latter half of 2015 is documented in his opposition to Rudat's motion to annul the stay. (Doc No. 91-95).
On January 14, 2016, the Property was sold to Rudat at a sheriff's sale. On January 27, 2016, Rudat recorded a sheriff's deed in Riverside County.
On March 14, 2016, Rudat filed a motion for relief from the automatic stay — unlawful detainer, seeking to retroactively annul the stay so as to validate the sheriff's sale and recording of deed. At a hearing on March 22, 2016, the Court continued the matter to allow for additional briefing. On April 6, 2016, Rudat filed a reply. Debtor filed supplemental opposition on April 18, 2016, and Rudat filed a supplemental reply on April 26, 2016.
At the May 10, 2016, hearing, the Court denied the motion, noting that retroactively annulling the stay to validate the sale of the property would not be proper without retroactively validating the state court judgment that authorized the sale. The state court judgment, however, was a proceeding to which Shanahan was a party, not Rudat. The Court concluded that it did not have a sufficient factual basis to validate the void state court judgment, and, even if such a factual basis were present, Rudat's motion did not request that relief. Therefore, the motion was denied. On May 11, 2016, Debtor filed this motion for contempt against Respondents.
Debtor identifies $13,204 in attorney's fees arising from opposing Rudat's motion to annul the stay, and $23,434 arising from the OSC and related proceedings. Debtor also estimates $2,400 in fees relating to the January 4, 2017 hearing. Debtor further requests $15,547.92 in punitive damages against Rudat for continuously failing to reconvey title, equivalent to the amount of Debtor's mortgage payment during the six months that Rudat retained title.
Shanahan's response states that he is not responsible for the fees relating to Rudat's motion to annul the stay. Shanahan further argues that only $9,720 of the fees related to the contempt proceedings should be held against him and that the additional costs represents fees incurred solely due to Rudat's delay in reconveying the Property.
11 U.S.C. § 362(k)(1) (2010) states:
The Court has already held that a willful violation of the stay occurred. Therefore, the remaining issues to be decided are the amount of appropriate damages, and the distribution of liability between Rudat and Shanahan
The Ninth Circuit, until recently, maintained a narrow reading of § 362(k)(1), stating that:
Sternberg v. Johnston, 595 F.3d 937, 947 (9
The Ninth Circuit has most recently expanded its reading of § 362(k)(1) in In re Schwartz-Tallard. 803 F.3d 1095 (9
First, Debtor requests $13,204 in attorney's fees relating to the motion to annul the stay. The filing of a relief from stay motion is not, itself, a violation of the automatic stay for two reasons. First, Rudat's motion does not fit within any of the categories of stayed acts under § 362(a). Second, Rudat's motion is specifically authorized under § 362(d) and, also in accordance with the Court's order of November 8, 2016, the motion is not a violation of § 362(a). See In re Roxford Foods, Inc., 12 F.3d 875, 878 (9
Even though Rudat's motion is not, itself, a violation of the automatic stay, under Sternberg, fees are allowed if the fees are "properly allocable to efforts to enforce the automatic stay and prevent enforcement of [actions] that violated the stay." Schwartz-Tallard specifically extended the application of § 362(k)(1) beyond actions taken as a direct and necessary response to a stay violation. 803 F.3d at 1099 (declining to read into the statute "attorneys' fees incurred to end the stay violation"). Schwartz-Tallard was a narrow ruling, however, specifically limited to the pursuit of damages arising from a stay violation and largely based upon legislative history and policy justifications. See generally id.
Because the narrow ruling of Schwartz-Tallard is inapplicable to this case, the framework of Sternberg, guided by the rationale of Schwartz-Tallard, is the primary guide. The first question, under Sternberg is whether opposing Rudat's relief from stay motion constitutes an action to enforce the automatic stay, whether it constitutes an action to prevent enforcement of an action that violated the stay, or whether is falls outside that definition. See 537 F.3d 948. An objection to a motion for relief from the automatic stay is not an effort to "enforce" the stay. "Enforce" is an active word that contemplates affirmative action by a debtor. See, e.g., In re Pace, 159 B.R. 890, 901 (B.A.P. 9
Additionally, Debtor's opposition to Rudat's motion does not constitute an action to prevent enforcement of an action taken in violation of the automatic stay. Rudat's motion seeks a determination that certain acts taken by Rudat and/or Shanahan did not violate the automatic stay. It does not seek a determination that certain actions taken by Rudat and/or Shanahan should be permitted, despite their violation of the automatic stay. Therefore, a motion to annul the stay does not constitute an attempt to enforce an action in violation of the stay. See, e.g., In re Schwartz, 954 F.2d 569, 573 (9
Even though defending Rudat's motion to annul the stay does not fit within the Sternberg framework, Schwartz-Tallard has expanded the scope of damages based on policy justifications. In this case, however, the policy reasons weigh against awarding Debtor's compensatory damages. Because Rudat's motion is specifically contemplated by the Bankruptcy Code, awarding Debtor compensatory damages for a motion that Rudat was entitled to bring may discourage creditors from filing motions to annul. See, e.g., In re Carter, 2016 WL 1704719 at *5 (B.A.P. 9
Furthermore, the policy rationale requires differentiating between opposing a motion for relief from stay, on the one hand, and affirmatively bringing a motion for contempt based on a stay violation, on the other hand. As discussed above, this distinction encourages debtors to timely assert their rights, and increases judicial economy. In this case, the situation is exacerbated, in part, because Debtor did not take any affirmative action to enforce his rights for an extensive period of time. The state court proceeding initiated by Shanahan against Debtor continued for more than a year post-petition, and resulted in a sale being ordered by the state court, the issuance of a notice of sheriff's sale, the sale of Debtor's property, and the recording of the deed. During all this time, despite ample notice of the actions being taken, Debtor did nothing to enforce his rights or end the stay violation. The exhibits filed by Debtor in opposition to Rudat's motion to annul the stay contain evidence that Debtor clearly knew Shanahan's efforts to sell the property by no later than December 2015. Of additional significance, Shanahan was not given notice of the filing of the bankruptcy case at its inception. Yet, no objection was made by Debtor, nor was any clear notice directed to Shanahan, or, later, Rudat, that their actions were in contravention of the automatic stay until May 2016. Even after Rudat purchased the property and recorded the deed, Debtor did not take actions to enforce the automatic stay until after Rudat sought to annul the stay.
The Court has an obligation to consider Debtor's failure to promptly mitigate the damages. See In re Roman, 283 B.R. 1, 12 (B.A.P. 9
For the foregoing reasons, the Court declines to award any sanction for fees incurred in connection with Rudat's motion to annul the stay.
Next, Bryson requests $25,834 for fees related to the sanctions proceedings. Shanahan contends he should not be held liable for increased litigation costs in the OSC proceedings due to Rudat's delay in reconveying the Property. Shanahan does not, however, explain what the cut-off point is, but, instead, relies on an outdated estimation provided by Bryson at the time of the filing of the original motion for contempt, which estimated costs of bringing the motion to be $9,720. This Court did not formally order reconveyance of the property until November 8, 2016. Therefore, it is difficult to ascertain why Rudat would be solely liable for the costs that were incurred between May 11, 2016 (the filing of the motion) and November 8, 2016. While Rudat clearly failed to reconvey during this period, it is not apparent that any briefing, and, any significant costs incurred, was solely caused by this refusal. During that time, the proceeding was continued once to allow Respondents additional time to file opposition, and a second time to allow for settlement discussions. Therefore, the Court declines to implement a cut-off date after which all costs incurred are to be borne by Rudat.
The Court will, however, relieve Shanahan from liability for costs that were incurred by Debtor as a result of Rudat's failure to abide by the November 8 order. The hearing on January 4, 2017 was to occur regardless of Rudat's compliance (albeit possibly at a different date), and briefing which identified fees was not caused by any non-compliance by Rudat. Reviewing Bryson's billing records reveals the following entries that are clearly caused by Rudat's refusal to reconvey the property:
Additionally, the Court notes that the following entries of Bryson appear to be uniquely attributable to Rudat:
Therefore, Rudat will be solely liable for the $2,384 in fees identified above, leaving $23,450 in requested fees remaining.
Shanahan and his counsel, on the other hand, mounted a vigorous defense during the proceedings. While the Court does not fault Shanahan and his counsel for their spirited defense, many of the requested fee entries do not relate to actions taken by Rudat. The Court finds the following entries relate specifically to defenses of Shanahan:
The above fees total $8,204.50, leaving $15,245.50 in requested fees remaining.
Contained within the time entries for this $8,204.50, however, are fees the Court finds should be reduced because of failure to mitigate by Debtor, as discussed in section C.III, supra. Specifically, Debtor's failure to take action to end the stay violation prior to the sale of the Property and recording of the deed has produced a complicated factual scenario and directly caused additional briefing by both Debtor and Shanahan. Throughout the proceedings, Respondents have, implicitly or explicitly, relied upon Debtor's failure to mitigate damages in constructing their arguments. Furthermore, mitigation by Debtor could have had the effect of eliminating any stay violation by Rudat altogether. On this point, the Court re-emphasizes that Debtor knew, at the latest, as of December 2015, that Shanahan was attempting to recover against the Property, yet failed to take action for more than five months, greatly contributing to the delay and expense of this matter. Because the extent and complexity of these proceedings is attributable in part to Debtor's failure to mitigate damages, the Court concludes that it is equitable to reduce the following billing entries by half, because these time entries are a result of responses by Debtor to Shanahan's arguments that related, explicitly or implicitly, to Debtor's failure to mitigate:
The amounts listed above aggregate $6,420, and, therefore, the Court will impose a reduction of $3,210 from the $8,204.50 identified above. Shanahan will be solely liable for the remainder, totaling $4,994.50 in fees.
Finally, the Court has reviewed the billing records of Bryson and finds the fees to be generally reasonable. The Court notes that the billing records contain some instances of lumping of services or "block billing." The Court is satisfied, however, that it is sufficiently able to ascertain the reasonableness of the fees requested from the records provided. Nevertheless, the Court has identified the following entry as not reasonable and necessary for the underlying matter:
Therefore, the Court will reduce the remaining amount by $160. Respondents will split liability for the remaining $15,085.50, with Rudat and Shanahan each liable for $7,542.75.
Debtor requests punitive damages in the amount of $15,547.92 — equivalent to six months of Debtor's mortgage payment. The standard for imposition of punitive damages for violation of the automatic stay is whether the violator engaged in "egregious, intentional misconduct." McHenry v. Key Bank (In re McHenry), 179 B.R. 165, 168 (9th Cir. BAP 1995). The Ninth Circuit has observed that it has "traditionally been reluctant to grant punitive damages absent some showing of reckless or callous disregard for the law or rights of others." Goichman v. Bloom (In re Bloom), 875 F.2d 224 (9th Cir. 1989). In approving an award of punitive damages, the Bloom court noted that the creditor had taken several steps in pending litigation after receiving formal notice that it was violating the stay and "blatantly attempted to circumvent the jurisdiction of the bankruptcy court by filing an [unjustified] motion to withdraw the reference." Id. One fair reading of the "reckless or careless disregard" standard in Bloom, therefore, apparently refers to a creditor's abuse of the legal process, not to general negligence or failure in business record-keeping. See In re Youssef, 2011 WL 3298903, at *6 (9th Cir. BAP 2011)(unpublished).
Rudat failed to reconvey the recorded deed until November 21, 2016. Rudat's filing of a motion for relief from automatic stay which sought to retroactively annul the stay to allow for the recording is sufficient proof that Rudat knew the recording of the deed violated the automatic stay. Furthermore, Rudat failed to comply with this Court's November 8, 2016 written order directing reconveyance of the property by November 16, 2016, and when given a further 48-hour extension, failed to record the reconveyance again. Ultimately, it took approximately eleven months, and approximately six months after the filing of the OSC, for Rudat to reconvey the property. Rudat's pattern of indifferent behavior towards Debtor's rights and the bankruptcy law constitute the kind of egregious, intentional misconduct that warrants punitive damages. Rudat has not persuaded this Court that her actions are the type of general negligence that would justify a denial of the Debtor's request for punitive damages. Based on the foregoing, the Court is inclined to grant punitive damages.
The Debtor's rationale for the amount of punitive damages sought is valid. In the Court's exercise of discretion, however, the Court will reduce the amount of punitive damages as Debtor has pointed to no significant factual prejudice that he suffered by Rudat's failure to reconvey the recorded deed, and it does not appear that Rudat's delay materially affected Debtor or Debtor's use of the subject property. On the other hand, to be clear, however, the failure to reconvey clearly presents legal prejudice as a cloud on title, and there is little question that this matter would have been largely, or entirely avoided, had Rudat simply reconveyed the deed immediately upon denial of her motion to annul, Therefore, the Court will exercise its discretion and award punitive damages against Rudat in the reduced amount of $5,000.
In accordance with the discussion above, the Court assesses the following damages in favor of Debtor: (1) Rudat is liable for $14,926.75 and (2) Shanahan is liable for $12,537.25, which amounts are to be paid to Debtor within sixty days of entry of this order. IT IS SO ORDERED.
