Opinion
19-12981-MKN
05-10-2022
In re: JOANNE W. ENG, Debtor.
ORDER ON MOTION TO DETERMINE CONTEMPT OF COURT PURSUANT TO 11 U.S.C. SECTIONS 105 AND 362 AND REQUEST FOR PUNITIVE DAMAGES, ATTORNEY'S FEES AND SANCTIONS
In this Order, all references to "ECF No." are to the number assigned to the documents filed in the above-captioned Chapter 13 proceeding as they appear on the docket maintained by the clerk of the court. All references to "AECF No." are to the number assigned to the documents filed in Adversary Proceeding No. 21-01126-mkn. All references to "Section" or "§§ 101-1532" are to the provisions of the Bankruptcy Code. All references to "FRBP" are to the Federal Rules of Bankruptcy Procedure.
MIKE K. NAKAGAWA UNITED STATES BANKRUPTCY JUDGE.
On March 9, 2022, the court heard the Motion to Determine Contempt of Court Pursuant to 11 U.S.C. Sections 105 and 362 and Request for Punitive Damages, Attorney's Fees and Sanctions ("Contempt Motion"), brought in the above-captioned case. The appearances of counsel were noted on the record. After arguments were presented, the matter was taken under submission.
BACKGROUND
On May 11, 2019, a "skeleton" voluntary Chapter 13 petition was filed by Joanne W. Eng ("Debtor"). (ECF No. 1). The bankruptcy petition was filed on the Debtor's behalf by the Law Office of Erik Severino. A Notice of Chapter 13 Bankruptcy Case ("Bankruptcy Notice") was issued scheduling a meeting of creditors as required by Section 341 ("341 Meeting") for June 25, 2019. (ECF No. 6). The 341 Meeting was concluded on August 8, 2019. The deadline for creditors to file a proof of claim in this bankruptcy case was July 22, 2019, and November 7, 2019, for governmental units. The Bankruptcy Notice also set a deadline of August 26, 2019, for creditors to object to discharge and to dischargeability of debts ("Dischargeability Deadline"). The case was assigned for administration to Chapter 13 panel trustee Kathleen A. Leavitt ("Trustee Leavitt").
On June 18, 2019, Debtor filed an amended voluntary petition, her schedules of assets and liabilities ("Schedules") along with her statement of financial affairs ("SOFA"), and an initial Chapter 13 plan ("Plan #1"). (ECF No. 14). Debtor's Schedule "E/F" listed Legal Recovery, LLC ("Legal Recovery"), as creditor holding a nonpriority unsecured claim in an unknown amount, based on "Pending Case No.: CGC 15-548357." Item 9 of the SOFA requires the Debtor to list all lawsuits and court actions to which the Debtor was a party within one year before the filing of her bankruptcy petition, but no pending case is disclosed.
On July 3, 2019, Trustee Leavitt filed Trustee's Opposition to Confirmation of Debtor's Plan #1 Combined With Trustee's Recommendation for Dismissal. (ECF No. 22).
On July 3, 2019, Debtor filed an amended SOFA. (ECF No. 23). Item 9 of the amended SOFA lists a pending action as Legal Recovery, LLC v. Martin Lee Eng, et al., denominated CGC 15-548357 pending in the Superior Court of California, County of San Francisco ("California Action").
On July 25, 2019, Trustee Leavitt filed a further Trustee's Opposition to Confirmation of Debtor's Plan #1 Combined With Trustee's Recommendation for Dismissal. (ECF No. 25).
On August 8, 2019, Trustee Leavitt filed an amended Trustee's Opposition to Confirmation of Debtor's Plan #1 Combined With Trustee's Recommendation for Dismissal. (ECF No. 28).
On August 20, 2019, Legal Recovery filed a notice of joinder to Trustee Leavitt's amended opposition to confirmation of Debtor's Plan #1. (ECF No. 29).
On August 26, 2019, the Dischargeability Deadline expired with no objections having been filed.
Upon completion of the payments required by a confirmed Chapter 13 plan, the individual debtor ordinarily receives a discharge pursuant to Section 1328(a) subject to any timely objections brought under FRBP 4007(c).
On August 28, 2019, Debtor filed another amended SOFA as well as amended Schedule "A/B." (ECF Nos. 30 and 31). Debtor's amended Schedule "A/B" listed, inter alia, 6 separate checking, savings and brokerage accounts, 3 separate business-related properties described as Lombard Flatts, LLC, Kearny Washington LLC, and Hong Kong, China Group LLC, and 3 separate individual retirement accounts.
On November 8, 2019, Legal Recovery filed its motion for relief from the automatic stay to continue the California Action ("RAS Motion"). (ECF No. 36). In its RAS Motion, Legal Recovery represented that "Debtor's insurance carrier has an opportunity to settle this matter within the applicable liability limits of the Debtor's automobile policy. Thus, Legal Recovery, LLC's right and ability to recover through the Debtor's insurance policy constitutes cause under 11 U.S.C. § 362(d)(1)." RAS Motion at 6:12-16.
At the hearing on the RAS Motion, counsel for Legal Recovery was specifically asked and specifically acknowledged that relief from stay was limited to pursuit on the applicable insurance policy.
On November 15, 2019, this court entered an order confirming Debtor's Chapter 13 Plan #1 ("Confirmation Order"). (ECF No. 39). The confirmed Chapter 13 plan provides for the Debtor to commence monthly payments to the Chapter 13 trustee for sixty months beginning on June 11, 2019, and for 100% of all claims to be paid. Additionally, the confirmed plan provides for any scheduled property of the bankruptcy estate to vest in the Debtor upon plan confirmation. No appeal of the Confirmation Order was taken.
Under Section 1327, one of the effects of confirming a Chapter 13 plan is to vest the scheduled property of the estate in the Chapter 13 debtor, unless the plan or court order provides otherwise. 11 U.S.C. § 1327(b). The more important effect of confirming a Chapter 13 plan is that it binds the debtor and each creditor, "whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan." 11 U.S.C. § 1327(a). Having received notice of commencement of the Chapter 13 proceeding, Legal Recovery appeared in the case, retained bankruptcy counsel, and did not file a proof of claim, did not object to discharge, and did not object to plan confirmation. Legal Recovery is bound by the confirmed Chapter 13 plan and will be subject to a Chapter 13 discharge.
On December 3, 2019, a Chapter 13 Trustee's Notice to Debtor(s) and Creditors of Filed Claims, Classification, and Proposed Distribution was filed. (ECF No. 40).
According to the claims register maintained by the clerk, only two nonpriority unsecured claims have been timely filed totaling $4,316.83. It is not clear whether the Debtor already has made sufficient payments under her confirmed Chapter 13 plan to satisfy 100% of the filed claims. Absent any applicable exception, it appears that the prepetition claim of Legal Recovery would be subject to a Chapter 13 discharge.
On December 11, 2019, the RAS Motion was heard and orally granted for lack of opposition. The relief was limited to allowing Legal Recovery to pursue any insurance coverage that may be applicable to its claim against the Debtor. Counsel for Legal Recovery was directed to prepare and submit a proposed order consistent with the court's oral ruling.
On January 10, 2020, the order on the RAS Motion submitted by counsel for Legal Recovery was entered ("RAS Order"). (ECF No. 45).
The order confirming the Chapter 13 plan was entered on November 15, 2019. The RAS Order submitted by counsel for Legal Recovery was not consistent with the court's oral ruling on December 11, 2019. Instead, the order states that the RAS Motion "is granted to the extent it was not inconsistent with the Chapter 13 Plan." In other words, nothing in the inaccurate RAS Order submitted by its counsel allowed Legal Recovery to take acts in violation of the Chapter 13 plan.
On September 1, 2021, Debtor filed a notice removing the California Action to the bankruptcy court, and the removed action was assigned Adversary Proceeding No. 21-01126-mkn. (ECF No. 46 and AECF No. 1). Attached to the removal notice is a copy of a second amended complaint filed in the California Action that names the Debtor as well as multiple individual and non-individual defendants.
On September 9, 2021, Debtor's counsel filed a motion to withdraw as counsel for the Debtor in the Chapter 13 proceeding. (ECF No. 47). The motion was noticed to be heard on October 13, 2021. (ECF No. 48).
On September 9, 2021. Legal Recovery filed a motion to remand the California Action back to the San Francisco County Superior Court ("Remand Motion"). (AECF No. 5).
The document is entitled "Creditor's Opposition to Debtor's Joanne Eng's Notice of Removel (pursuant to 28 U.S.C. §§ 1334(e), 1141)d 1452(a); Fed. R. Bankr. Pro. 9027" but seeks to remand the California Action or to dismiss the Chapter 13 proceeding.
On September 23, 2021, an order was entered approving an ex parte stipulation for attorney William C. Devine, Esq., to substitute as Debtor's counsel instead of and in place of Erik C. Severino as attorney for Debtor. (ECF No. 51).
On October 1, 2021, former counsel's prior motion to withdraw was withdrawn. (ECF No. 52).
On December 3, 2021, Debtor filed opposition to the Remand Motion. (AECF No. 25). On December 9, 2021, Legal Recovery filed a reply in support of the Remand Motion. (AECF No. 29).
On December 10, 2021, Debtor filed the instant Contempt Motion seeking to hold Legal Recovery in civil contempt for a variety of reasons, and to obtain a variety of sanctions, including compensatory damages, punitive damages, and attorney's fees. The Contempt Motion was noticed to be heard on January 12, 2022, but was supplemented and renoticed to be heard on January 26, 2022. (ECF Nos. 54, 55, 56, and 57).
Attached as Exhibit "1" to the Contempt Motion is a proposed Statement of Decision that Legal Recovery apparently submitted to the trial court in the California Action.
Attached as Exhibit "2" to the supplement is a copy of the trial court Register of Actions in the California Action indicating continued proceedings through December 10, 2021.
On January 14, 2022, Legal Recovery filed a corrected opposition ("Opposition") to the Contempt Motion. (ECF No. 62).
On January 25, 2022, the court entered an order denying the Remand Motion because it relied on the RAS Order that was improvidently entered. (AECF No. 37). The same order denying the Remand Motion also vacated the RAS Order and directed counsel for Legal Recovery to submit an order accurately reflecting the court's oral ruling made at the hearing on December 11, 2019. (AECF No. 37).
On January 26, 2022, the court continued the Contempt Motion to February 23, 2022, f status. (ECF No. 63).
On February 10, 2022, counsel for Legal Recovery having again failed to submit a proposed order accurately reflecting the court's oral ruling on the RAS Motion, the court entere an amended order: (1) vacating the prior RAS Order, and (2) granting relief from stay effective January 10, 2020, solely with respect to any insurance coverage applicable to the claims agains the Debtor in the California Action. (ECF No. 64).
On February 16, 2022, a supplement to the Opposition was filed by Legal Recovery ("Supplemental Opposition") in regard to the Contempt Motion. (ECF No. 67).
With its Supplemental Opposition, Legal Recovery provides a copy of a Statement of Decision and Judgment entered in the California Action on October 7, 2021. Legal Recovery argues that the claims it asserted against the Debtor and others in the California Action that it commenced in 2015 somehow were not claims that preceded the Debtor's commencement of the instant Chapter 13 in 2019. On that basis, it maintains that its actions do not seek to recover a prepetition claim in violation of the automatic stay. Under Section 101(5)(A), however, a claim constituting a debt dischargeable in bankruptcy encompasses any "right to payment, whether or not such right is…liquidated, unliquidated, …matured, unmatured, disputed, undisputed…" Whether the Debtor engaged in actionable misconduct after the commencement of her Chapter 13 proceeding is immaterial to whether an unmatured claim existed on the petition date. Under Section 101(12), a debt to Legal Recovery existed on the petition date and is subject to discharge. Because Legal Recovery failed to commence a proceeding to determine dischargeability of its claims against the Debtor, entry of a Chapter 13 discharge would enjoin any post-discharge efforts to collect such claims as a personal liability of the Debtor.
On March 2, 2022, Debtor filed a reply in support of the instant Contempt Motion. (EC No. 69).
DISCUSSION
The instant Contempt Motion alleges that Legal Recovery violated the automatic stay under Section 362(a)(5) and 362(a)(6) by continuing prosecution of the California Action. As result of the alleged violation, Debtor seeks recovery of statutory sanctions under Section 362(k civil contempt sanctions under Section 105(a), or sanctions under the court's inherent authority Amongst the various forms of sanctions, Debtor seeks actual damages including emotional distress, punitive damages according to proof, and recovery of attorney's fees and costs. Because Debtor seeks sanctions under several legal bases, different standards will apply.
For statutory sanctions under Section 362(k), Debtor must demonstrate under a preponderance of the evidence standard that Legal Recovery willfully violated the automatic stay. Knowledge of the automatic stay and intentional acts that violate the stay must be proven. See Havelock v. Taxel (In re Pace), 67 F.3d 187, 191 (9th Cir. 1995); see also Koeberer v. California Bank of Commerce (In re Koeberer), 632 B.R. 680, 687 (B.A.P. 9th Cir. 2021). If proven, Section 362(k) expressly authorizes an injured individual to recover actual damages, including costs and attorney's fees. Actual damages under Section 362(k) may include emotional distress. See Dawson v. Washington Mu. Bank, F.A. (In re Dawson), 390 F.3d 1139, 1146-48 (9th Cir. 2004). Additionally, Section 362(k) provides that punitive damages may be awarded in appropriate circumstances. See, e.g., Sundquist v. Bank of America, N.A. (In re Sundquist), 566 B.R. 563, (Bankr. E.D. Cal. 2017) (lender's egregious violation of the automatic stay warranted $45 million punitive damages in addition to $1,074,581.50 in actual damages).
For civil contempt sanctions under Section 105(a), Debtor must demonstrate under a clear and convincing evidence standard that the creditor acted without an objectively reasonable basis warranting a finding of civil contempt. See, e.g., Suh v. Anderson (In re Moo Jeong), 2020 WL 1277575, at *4 (B.A.P. 9th Cir. Mar. 16, 2020) ("To hold a party in contempt, the movant must show by clear and convincing evidence that the party violated a specific and definite courts order….The automatic stay qualifies as a specific and definite court order."). Compensatory damages for civil contempt under Section 105(a) are available, including emotional distress damages. See Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, 507 (9th Cir. 2002). Unlike punitive damages specifically authorized under Section 362(k), a bankruptcy court may only award relatively mild, noncompensatory fines under Section 105(a). See Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1196 (9th Cir. 2003).
For civil contempt sanctions imposed under the court's inherent power, there must be a finding of "either bad faith, conduct tantamount to bad faith, or recklessness 'with an additional factor such a frivolousness, harassment, or an improper purpose.'" Fink v. Gomez, 239 F.3d 989, 994 (9th Cir. 2001); see also Mahaffey v. Milner (In re Crystal Cathedral Ministries), 2021 WL 2182975, at *7-8 (B.A.P. 9th Cir. May 28, 2021). The finding must be supported by clear and convincing evidence. See In re Nelson Ricks Cheese Co., Inc., 2021 WL 1731765, at *3 (Bankr. D. Idaho Apr. 30, 2021) ("Although the specific burden of proof is unsettled in the Ninth Circuit, the general view is that bad faith or willful misconduct must be proven by clear and convincing evidence."). Sanctions for such bad faith or improper conduct may include an award of attorney's fees and costs incurred as a result of the misconduct. See Chambers v. NASCO, Inc., 501 U.S. 32, 45-46 (1991).
In response, Legal Recovery raises a number of arguments, some of which appear to reflect an ignorance of basic bankruptcy law. Material factual disputes exist, many of which may require testimony of the parties, principals of the parties, and perhaps the attorneys involved. Having considered the arguments and record presented, the court concludes that the Contempt Motion sufficiently alleges conduct by Legal Recovery requiring an evidentiary hearing as a contested matter under FRBP 9014. A scheduling conference will be held to address the conduct of any discovery, the anticipated length of any evidentiary hearing, and the desire, if any, for a settlement conference..
The most startling example may be Legal Recovery's following assertion:
A creditor may choose not to participate in a plan after evaluating all of a Chapter 13 debtor's debts and the proposed repayment plan. Perry v. Certificate Holders of Thrift Sav., 320 F.2d 584, 589 (9th Cir. 1963). 11 U.S.C. § 1327(c) provides that the property that vests in the Debtor is "free and clear of any claim or interest of any creditor provided for by the plan." Here, Plaintiff did not participate in the plan and hence is not bound by it other than the fact that plaintiff will not participate in distributions from the bankruptcy estate.Opposition at 9:6-13 (emphasis added). Inasmuch as Legal Recovery apparently is aware of Section 1327, it is baffling that it could reach the conclusion that it is not bound by the confirmed plan when Section 1327(a) expressly provides otherwise. See note 4, supra. Moreover, the Ninth Circuit opinion that Legal Recovery cites was decided fifteen years before the Bankruptcy Code was enacted, i.e., Section 1327 did not even exist at the time the case was decided.
IT IS THEREFORE ORDERED that a scheduling conference on the Motion to Determine Contempt of Court Pursuant to 11 U.S.C. Sections 105 and 362 and Request for Punitive Damages, Attorney's Fees and Sanctions brought by Joanne W. Eng, Docket No. 54, will be held on June 9, 2022, at 10:00 a.m. At the conference, counsel for the parties must be prepared to discuss the scheduling of an evidentiary hearing in this matter, including discovery deadlines, briefing schedules, and any interest in a judicial settlement conference.