Chapter 7
In May 2007, UAC obtained a judgment against Youssef in Orange County Superior Court for $5,826.00. UAC obtained a wage withholding order, and began to garnish Youssef's wages, in the amount of $50 per pay period.
On November 13, 2009, Youssef filed a chapter 7 petition along with supporting schedules. Both UAC and its state court attorney were properly listed on Schedule F, in which Youssef acknowledged he owed an undisputed debt to UAC of $5,826.00. To stop the garnishment, on November 17, Youssef's bankruptcy counsel faxed a document entitled "Notice of Stay of Proceedings and Notice of Bankruptcy Filing" to UAC; an electronic confirmation stamp appearing on the document shows it was received by UAC at 6:58 p.m. that same day. The sworn declaration of Debbie Rubenfield ("Rubenfield Declaration"), the legal/administrative manager of UAC, states that UAC received the Notice of Stay "on or about 18 November 2009." In addition, on November 18, 2009, the bankruptcy court mailed a notice of the Youssef bankruptcy filing to UAC. An additional notice concerning the bankruptcy case was filed with the state court by Youssef's attorney on November 23, 2009, and a copy was served on the attorney for UAC.
The Rubenfield Declaration states that "on or about" November 18, 2009, she prepared a Notice of Bankruptcy Filing which she sent to the Orange County Sheriff directing him to halt the garnishment, along with a copy of the Stay of Proceedings she received from Youssef's attorney (the "Garnishment Termination Notice").
Despite its knowledge of the bankruptcy case, on December 22, 2009, UAC cashed a $40 garnishment check it received from the Orange County Trust Revolving Fund. The check shows UAC's internal reference number for Youssef's account on its face. UAC cashed additional Youssef garnishment checks on December 28, 2009, January 15 and 17, and February 9 and 22, 2010. The total withheld from Youssef's paychecks for these six garnishments was $300.00.
On January 15, 2010, Youssef filed a Motion for Order Enforcing Automatic Stay and Awarding Actual and Punitive Damages Pursuant to 11 U.S.C. § 362(k) (the "Enforcement Motion") in the bankruptcy court. In the motion, Youssef alleged that, in repeatedly garnishing his wages, UAC had knowledge of the bankruptcy filing, had deliberately violated the automatic stay, and had refused to desist from the violation, even after receiving multiple notices about the bankruptcy filing. Youssef sought awards of actual damages in the sum of $200,
On January 22, 2010, Youssef's attorney's office contacted the Orange County Sheriff's office and was advised that UAC's garnishment of Youssef's wages was still active, and that the Sheriff's office had not received any documents from UAC terminating the garnishment. Youssef's attorney contacted the Orange County Sheriff again on January 27 and January 29, 2010, and was advised that the garnishment had not been withdrawn.
Youssef's counsel contacted UAC on January 27, 2010, informing its representative that the Sheriff's office was continuing to garnish Youssef's pay. In response, a UAC employee informed him that it had sent the Garnishment Termination Notice to the Sheriff on November 20, 2009.
The bankruptcy court conducted its first hearing on the Enforcement Motion on February 23, 2010. In its tentative ruling issued prior to the hearing, the court wrote: "Award actual damages of $200. Continue [hearing] to evaluate wilfulness and whether imposition of punitive damages is also appropriate." UAC did not appear at this hearing; Youssef was represented by counsel. The bankruptcy court continued the hearing to April 6 to allow UAC to appear, to consider increasing the actual damages to $300 to compensate for the latest garnishments, and to consider whether attorney's fees and punitive damages were appropriate.
At the continued hearing on April 6, 2010, UAC and Youssef were represented by counsel. The bankruptcy court ordered UAC to pay $300 in actual damages to Youssef within 72 hours of entry of its order. The hearing was continued yet again to May 11 to consider the request for attorney's fees and punitive damages.
One focus of the April 6th hearing was Youssef's argument that the Rubenfield Declaration contained false statements. The copy of the Notice of Stay allegedly sent by UAC to the Sheriff on November 20, 2009, and provided to Youssef's counsel on January 27, 2010, contained an evidence stamp that was placed on the documents on January 5, 2010, and thus, Youssef pointed out, could not have been sent to the Sheriff in November. Counsel for UAC represented to the bankruptcy court that he had prepared the January 27, 2010 communication to Youssef's counsel, and that he prepared and printed the Notice of Stay on his office's computer, but that his software program only saves the release, not the attachments. Counsel for UAC represented that he copied the Notice of Stay with the evidence notation from Youssef's Enforcement Motion filed on January 15, 2010, which had the notation, and sent it with the Notice of Filing to Youssef on January 27, 2010.
The final hearing concerning the Enforcement Motion occurred on May 6, 2010. Youssef and UAC were represented by counsel. The bankruptcy court's tentative ruling for this hearing stated: "[UAC] should revise its procedures so as to more promptly respond to bankruptcy proceedings. Actual damages have apparently been paid, so the issue is whether fees or punitive damages are appropriate. Award $200 in attorney's fees payable to debtor's counsel."
After considering the arguments of counsel, the bankruptcy court adopted its tentative ruling awarding $200 in attorney's fees to Youssef, and denying punitive damages. The court explained,
Hr'g Tr. 10:9-16 (May 6, 2010) (emphasis added).
The bankruptcy court entered an order consistent with its ruling on June 9, 2010. Youssef filed a timely notice of appeal on June 22, 2010.
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.
Whether the bankruptcy court abused its discretion in denying punitive damages and in awarding only $200 in attorney's fees.
A bankruptcy court's assessment of damages under § 362(k)(1) is reviewed for an abuse of discretion.
Under § 362(a), the filing of a bankruptcy petition operates to automatically stay all creditor collection actions against the debtor. In this fashion, the statute seeks to ensure the orderly administration of the debtor's bankruptcy estate to protect the creditors' right to equality of distribution, to provide a breathing spell from collection activity for the debtor, and to maintain the status quo.
The automatic stay has teeth. Section 362(k)(1)
UAC disagrees with the bankruptcy court's finding that it committed a willful (or as it characterizes the statute, an intentional) violation of the automatic stay. According to UAC, in November 2009, upon receiving notice of the bankruptcy filing, UAC immediately sent a release of the garnishment to the Orange County Sheriff. Later, when it was informed that the Sheriff did not have the release, UAC prepared and sent a second release, and the record evidences that the Sheriff thereafter stopped the garnishment. In UAC's view, it "acted reasonably and that there was no intentional violation of the automatic stay." UAC Br. at 8.
The adequacy of UAC's actions in notifying the Sheriff to stop the garnishment has been hotly contested in the bankruptcy court, and again in this appeal. Of course, the bankruptcy court decided that a willful stay violation did occur and, while it protests in its brief on appeal, UAC has not cross-appealed that aspect of the court's decision. We therefore accept that ruling.
Moreover, on this record, whether UAC failed to timely notify the Sheriff to cease collection actions is of no moment in determining whether it committed a willful violation of the stay adequate to support an award of damages under § 362(k)(1). That is because, even assuming that UAC did promptly notify the Sheriff to stop the garnishment, a willful violation nonetheless occurred when it continued to deposit the garnishment checks it was receiving from the county. "[T]he willfulness test for automatic stay violations merely requires that: (1) the creditor know of the automatic stay; and (2) the actions that violate the stay be intentional."
UAC argues that in cashing the garnishment checks, it did not intend to violate the automatic stay. It argues that it routinely receives checks on many debtor accounts over long periods of time, and therefore as a practical matter, it cannot determine if the deposit of particular checks may violate a bankruptcy stay. But again, UAC's argument is legally irrelevant for purposes of § 362(k)(1). "Once a creditor knows that the automatic stay exists, the creditor bears the risk of all intentional acts that violate the automatic stay regardless of whether [or not] the creditor means to violate the automatic stay."
Finally, in another contention missing the point, UAC argues that Youssef could have avoided his predicament by notifying the Sheriff about the automatic stay when he discovered that the garnishments had not stopped. Of course, the record shows that Youssef's attorney did contact the Sheriff no less than three times in late January. But even if he had not done so, the Bankruptcy Code imposes no such burden on a debtor. The duty to cure violations of the automatic stay rests, squarely and solely, on the creditor violating the stay, not the debtor.
The bankruptcy court correctly ordered UAC to pay Youssef the $300 in post-bankruptcy garnished wages as "actual damages" resulting from UAC's stay violation. However, we are compelled to disagree with the bankruptcy court's analysis and conclusion concerning Youssef's request for attorney's fees. In awarding Youssef what we consider under the circumstances to be a token amount, the bankruptcy court explained to his attorney: "I agree that $200 is not a sufficient compensation for all the time you had spent. I have to find a balance. Since the principal amount is only $300, an attorney's fee of two-thirds of that amount is at least significant." In our view, in taking this approach, the bankruptcy court applied an incorrect legal standard, and thereby abused its discretion, in calculating Youssef's attorney's fees award.
Section 362(k)(1) provides little guidance as to the proper standard a bankruptcy court should apply in awarding attorney's fees as part of actual damages for a willful stay violation.
As near as we can tell, there is no support in the case law for the bankruptcy court's approach in setting the amount of Youssef's attorney's fees based on whether it is a "significant" portion of the actual damage award, as opposed to consulting the extent, nature and value of the attorney services rendered. Here, the bankruptcy court did not undertake any determination of whether the amount requested by Youssef for attorney's fees was reasonable in light of the services performed by his attorney in successfully, and necessarily, prosecuting the Enforcement Motion. Indeed, the bankruptcy court's observation that "$200 is not a sufficient compensation for all the time you had spent," on its face, suggests that its award is not a reasonable one. In our view, this method clashes with the precedents requiring the bankruptcy court to examine the requested attorney's fees for reasonableness in amount, and since the bankruptcy court applied an incorrect rule of law in determining the amount of the mandatory award of attorney's fees to be awarded to Youssef, it abused its discretion.
Accordingly, we VACATE the bankruptcy court's award of attorney's fees and REMAND this matter for a reasonableness determination of the fees requested by Youssef in the bankruptcy court.
Unlike an award of actual damages, including attorney's fees, which is mandatory for willful violations of the automatic stay, an award of punitive damages can only be made "in appropriate circumstances." § 362(k)(1). The standard for imposition of punitive damages for violation of the automatic stay is whether the violator engaged in "egregious, intentional misconduct."
We are also guided by the Ninth Circuit's decision approving imposition of punitive damages in
In this case, the bankruptcy court expressly found that UAC's conduct in the bankruptcy case was not egregious.
Hr'g Tr. 10:4-7 (emphasis added). Instead, throughout this contest, the bankruptcy judge focused his concern on deficiencies in the management procedures of UAC. For example, in its tentative ruling for the hearing on May 11, 2010, the bankruptcy court made explicit that: "[UAC] should revise its management procedures so as to more promptly respond to bankruptcy proceedings." Fairly construing the record, it appears the bankruptcy judge concluded that UAC's conduct stemmed from administrative mistakes, and did not, in this case, constitute an abuse of the legal process.
It is unclear from the record whether, in garnishing Youssef's wages after bankruptcy, UAC acted maliciously, or merely negligently. While it is perhaps a close call, and there is some evidence in the record to suggest that UAC was more than merely inattentive to correcting its mistakes, we decline to conclude that the bankruptcy court abused its discretion in denying punitive damages.
We AFFIRM the bankruptcy court's denial of punitive damages. However, because the bankruptcy court applied an incorrect legal standard for calculating the mandatory award of attorney's fees resulting from UAC's willful violations of the automatic stay, we VACATE that award and REMAND this matter to the bankruptcy court for further proceedings consistent with this decision.
