ROBERT KWAN, Bankruptcy Judge.
Pending before the court are: (1) the Order Granting Debtor Wayne L. Borders's Application for Order to Show Cause re: Contempt Against Mortgage Lender Services Inc., Electronic Case Filing No. ("ECF") 16 (referred to herein as "OSC"), filed and entered on September 28, 2016; (2) the Motion of Mortgage Lender Services Inc. for Reconsideration of Order Granting Debtor Wayne L. Borders's Application for Order to Show Cause re: Contempt against Mortgage Lender Services, Inc. (referred to herein as "Reconsideration Motion"), ECF 23, filed on October 12, 2016; and (3) the Motion of Mortgage Relief Services, Inc., for Relief from the Automatic Stay (referred to herein as "Stay Relief Motion"), ECF 24, filed on October 24, 2016.
The OSC was set for hearing on November 30, 2016. The Reconsideration Motion was noticed for hearing on November 15, 2016 at 2:30 p.m. The Stay Relief Motion came before the court for hearing on November 15, 2016 at 10:30 a.m., and the following appearances were made: Thomas R. Phinney, of the law firm of Parkinson Phinney, appeared for Mortgage Lender Services, Inc. (referred to herein as "MLS"), William J. Smyth, of the law firm of SW Smyth LLP, appeared for Debtor Wayne L. Borders (referred to herein as "Debtor"), Elan S. Levey, appeared for the United States Department of Housing and Urban Development (referred to herein as "HUD"). At the hearing on the Stay Relief Motion on November 15, 2016, the court discussed all three of these matters, the OSC, the Stay Relief Motion and the Reconsideration Motion, with counsel for the parties appearing at the hearing. The court expressed its initial view that the disposition of all three matters depended on whether Debtor's equitable interest in the subject real property held through his mother's trust was property of the bankruptcy estate and subject to the automatic stay. The court inquired of counsel whether there was any other evidentiary matter or issue to be resolved before the court ruled on the question of whether Debtor's interest was property of the estate, and all counsel indicated that there was not. Thereupon, the court set a further hearing on the Stay Relief Motion for November 30, 2016 at 2:00 p.m., the same time as the scheduled hearing on the OSC, and also continued the hearing on the Reconsideration Motion from November 15, 2016 at 2:30 p.m. to the same date and time. By further order entered on November 23, 2016, the court continued on its own motion the hearings on all three matters from November 30, 2016 at 2:00 p.m. to December 14, 2016 at 11:30 a.m.
Having considered the moving and opposition papers on these three matters and the arguments of the parties in their papers and at the hearing on November 15, 2016, and the other papers and pleadings related to these matters, pursuant to Local Bankruptcy Rule 9013-1(j)(3), the court determines that oral argument on the OSC and Reconsideration Motion is not necessary, dispenses with oral argument on the OSC and the Reconsideration Motion, vacates the scheduled hearings on the OSC and the Reconsideration Motion, takes these matters under submission, but leaves the hearing on the Stay Relief Motion now set for December 14, 2016 at 11:30 a.m. on calendar and will hear argument on the Stay Relief Motion at the time, and further rules as follows.
On September 14, 2016, Debtor filed his Application for Order to Show Cause as to Why Wells Fargo Bank, N.A., Fidelity National Title Company, Mortgage Lender Services, Inc., and the United States Secretary of Housing and Urban Development Should Not Be Held in Contempt for Violation of the Automatic Stay and Order Them to Pay Compensatory and Punitive Damages (referred to herein as the "Application"). ECF 12, filed on September 14, 2016. Through the Application, Debtor sought an order to show cause against MLS and others for foreclosing on the subject real property located at 8714 La Salle Ave., Los Angeles, California 90047 (the "Property") in violation of the automatic stay. At the time of the foreclosure, title to the Property was held in the name of the 2004 Ethel Mae Borders Revocable Living Trust (the "Trust"), a trust created by Debtor's mother in which Debtor is a beneficiary. Declaration Establishing the 2004 Ethel Mae Borders Revocable Trust, Application, Exhibit A and Schedule A attached thereto; see also, Declaration of Tara Campbell at 1-6 and exhibits thereto, attached to the Reconsideration Motion. The trust instrument contained the following spendthrift trust provision applicable to trust beneficiaries like Debtor: "No interest in the principal or income of any trust created under this Declaration shall be anticipated, assigned, encumbered, or subjected to creditor's claim or legal process before actual receipt by the beneficiary." Application, Exhibit A at 10.
On September 28, 2016, the court filed and entered the OSC, which ordered MLS to respond and show cause why it should not be held in civil contempt for violation of the automatic stay. ECF 16. MLS timely filed its response to the OSC, ECF 43, which incorporates by reference, its Reconsideration Motion, ECF 23, which, among other things, requested that the court add Novad and HUD as respondents to the OSC. Debtor, HUD and Novad filed written responses to the Reconsideration Motion. ECF 31, 33 and 35. MLS filed separate replies thereto. ECF 39, 40 and 41.
Before the court addresses whether the foreclosure by MLS as foreclosure trustee against the Property was in violation of the automatic stay, as a threshold matter, the court must determine whether the Property, or more specifically, any interest of Debtor in the Property, constitutes property of the bankruptcy estate. Under the terms of the Trust, of which Debtor is a beneficiary, set forth in the trust instrument, Declaration Establishing the 2004 Ethel Mae Borders Revocable Trust, Application, Exhibit A at 1, "[u]pon the death of Settlor, the Trustee shall divide the residue of the Trust Estate into equal shares, one such share for each then living Settlor's child, outright and free of trust, provided they survive Settlor by thirty (30) days." Application, Exhibit A at 3. The trust instrument recited that Ethel Mae Borders was the Settlor of the Trust and that she had 7 children, including Debtor, who were identified in the trust instrument as "Settlor's children." The facts are undisputed that the Settlor of the Trust, Ethel Mae Borders, passed away on August 16, 2015 as indicated on the certified copy of her death certificate attached as Exhibit C to the Application, that Debtor, her son, survived the Settlor by 30 days, and that the trustee of the Trust did not distribute any interest in the Property, the Trust's residue, which included its ownership of the Property as part of the undistributed trust corpus, to Debtor before MLS conducted the foreclosure sale of the Property. Accordingly, it appears that based on the express terms of the Trust set forth in the trust instrument, Debtor had and has an equitable interest in the Property through his right to a share of the trust residue.
The court must now address the legal question of whether the spendthrift trust provision of the Trust shields the Property from becoming property of the estate. See, 1 March, Ahart and Shapiro, California Practice Guide: Bankruptcy, ¶ 6:153 at 6-21 (2015)
("The debtor's interest as beneficiary of a trust is property of the estate unless it is protected by a valid spendthrift provision"), citing, In re Cutter, 398 B.R. 6, 19 (9th Cir. BAP 2008). The court considers this legal question to be a matter of California law because the trust instrument specifies that the trust is to be governed by California law. Application, Exhibit A at 9 (Article X.E states: "The validity of the Declaration and construction of its beneficial provisions shall be governed by the laws of the State of California in force from time to time. . . ."). The applicable law on this question of whether the spendthrift trust provision of the Trust shields the Property from becoming property of the estate under California law is set forth in the decision of the Ninth Circuit in In re Neuton, 922 F.2d 1379 (9th Cir. 1990), which states:
922 F.2d at 1383, citing inter alia, California Probate Code §§ 15300-15307 (and in particular, § 15306.5). Specifically, pursuant to 11 U.S.C. § 541(c)(2)(stating that a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a bankruptcy case) and California Probate Code § 15306.5 (providing that despite the general enforceability of spendthrift trust provisions, a judgment creditor may obtain a court order to satisfy a judgment against a debtor from payment made by a trust not to exceed 25 percent of what the debtor as a trust beneficiary would otherwise receive), the Ninth Circuit held that 25 percent of a trust distribution due to a Chapter 7 bankruptcy debtor from a spendthrift trust is property of his bankruptcy estate within the meaning of 11 U.S.C. § 541(a)(1) and is not excluded from the estate pursuant to 11 U.S.C. § 541(c)(2). In re Neuton, 922 F.3d at 1382-1383. Accordingly, under these authorities, 25 percent of Debtor's equitable interest in trust assets (i.e., apparently, a 1/28 interest, assuming there are seven surviving children of the Settlor, in the trust residue, including the undistributed corpus which includes in turn the Property) to be distributed to him as a trust beneficiary being a surviving child of the Settlor, including a share in ownership of the Property, is property of the bankruptcy estate.
Debtor contends that in foreclosing the Property after he filed his bankruptcy petition, MLS violated the automatic stay under 11 U.S.C. § 362(a)(3), which provides that a petition filed under Chapter 7 of the Bankruptcy Code operates as a stay of "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 bankruptcy court may hold a party in civil contempt for a willful violation of the automatic stay. In re Goodman, 991 F.2d 613, 619-620 (9th Cir. 1993). The Ninth Circuit in In re Dyer, 322 F.3d 1178 (9th Cir. 2003) set forth the standard for finding a party in civil contempt:
322 F.3d at 1190-1191 (internal citations and quotations omitted). Moreover, 11 U.S.C. 362(k)(1) provides 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." "[T]he statute provides for damages upon a finding that the defendant knew of the automatic stay and that the defendant's actions which violated the stay were intentional." Id. at 1191, quoting, In re Pace, 67 F.3d 187, 191 (9th Cir. 1995) (discussing 11 U.S.C. § 362(h), which was re-designated as 11 U.S.C. § 362(k)(1) under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005).
It is undisputed that Debtor filed his voluntary petition for relief under Chapter 7 of the Bankruptcy Code, 11 U.S.C., on August 29, 2016, ECF 1, that MLS conducted a foreclosure sale of the Property on August 30, 2016 and that MLS knew of Debtor's bankruptcy petition when it conducted the foreclosure sale of the Property as admitted by MLS in the declaration of its officer, Tara Campbell, after being advised on August 29, 2016 of the bankruptcy filing by counsel for Debtor, Declaration of Tara Campbell at 4-6, attached to the Reconsideration Motion. Accordingly, the court finds that Debtor has shown that MLS knowingly violated a specific and definite order of the court in the automatic stay arising upon the filing of Debtor's bankruptcy case when MLS conducted the foreclosure sale of the Property in which Debtor had an equitable interest on August 30, 2016 despite MLS's knowledge of Debtor's bankruptcy case and the automatic stay which stays acts against property of the estate, including Debtor's equitable interest in the Property. Additionally, because acts in violation of the automatic stay are void, not just voidable, In re Schwartz, 954 F.2d 569, 571 (9th Cir. 1992)(citation omitted), the court determines that the August 30, 2016 foreclosure sale is void.
As to Debtor's request for compensatory damages for MLS's violation of the automatic stay, as the Ninth Circuit has emphasized, "attorneys' fees are an appropriate component of a civil contempt award." In re Dyer, 322 F.3d at 1195 (citation omitted). Because Debtor was required to bring legal action to protect his equitable interest in the Property from a violation of the automatic stay pursuant to the Bankruptcy Code, the court determines that Debtor should be awarded his attorneys' fees and costs of $1,165.10 incurred in bringing this stay violation to the court's attention as the compensatory damages that he requested. Application at 6. The court finds that the attorneys' fees and expenses claimed by Debtor as detailed in the Application are reasonable under the circumstances. Exhibit E to Application.
As to Debtor's request for punitive damages for MLS's violation of the automatic stay, the court exercises its discretion under 11 U.S.C. § 362(k) and awards Debtor punitive damages of $500.00. Debtor through counsel indisputably put MLS on notice that in conducting the foreclosure sale, it was acting in violation of the automatic stay that protected his equitable interest in the Property. In order to vindicate the policies of the Bankruptcy Code to stay creditor action pending an orderly consideration of the interests of the various parties to the bankruptcy case regarding property of the bankruptcy estate, the court should impose punitive damages as the need here to enforce these policies outweigh the minimal burden on MLS to apply for stay relief and demonstrate appropriate circumstances for Debtor to recover punitive damages under 11 U.S.C. § 362(k). While MLS need not have agreed to Debtor's request for a 90 day continuance of the sale, it could have had a motion for relief from the automatic stay heard on regular 21 days' notice pursuant to Local Bankruptcy Rule 9013-1. The amount of $500.00 as sanctions is sufficient to make an example of MLS under the circumstances here.
As to MLS's Reconsideration Motion, the court should deny the motion as procedurally improper. Under Local Bankruptcy Rule 9020-1, MLS had 7 days from service of the original Application for the OSC to object to the issuance of an OSC, but it did not. MLS should not be allowed to ask for reconsideration when it defaulted in responding to the Application in the first instance. Furthermore, MLS in its Reconsideration Motion requests that the court add Novad and HUD as parties to the OSC as other culpable parties, which request is improper for a motion for reconsideration because MLS's request for relief is in itself a motion within the meaning of Federal Rule of Bankruptcy Procedure 9013 and Local Bankruptcy Rule 9013-1 and is seeking, in effect, to amend the original motion for the OSC, which was made by another party. MLS can bring its own motion for indemnification if it wishes, but may not properly "piggyback" its request for relief on the motion of another party.
Based on the foregoing, the court hereby orders as follows:
