Opinion
NOT FOR PUBLICATION
ORDER ON MOTION FOR ORDER OF CONTEMPT FOR VIOLATION OF THE AUTOMATIC STAY
PETER W. BOWIE, Chief Bankruptcy Judge.
This matter came on for evidentiary hearing on debtors' motion for contempt for violation of the automatic stay, and for sanctions.
The Court has subject matter jurisdiction over the proceeding pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b) (2) (A), (O) and 11 U.S.C. § 362(k).
The essential facts are not in dispute. Mrs. Herron is an employee of the Escondido School District. She sued the School District for harassment, but lost the suit." The School District was granted a judgment for its costs in approximately October, 2009. When less formal methods of collection were unsuccessful, the School District commenced garnishment from Mrs. Herron's wages.
The testimony at the hearing was that the Escondido School District does not perform its own payroll function. Rather, the District uses the services and facilities of the San Diego County Office of Education. Employees, including Mrs. Herron, are paid once a month, on the last day of the month. Most employees are paid through direct deposit, but a few receive paper checks through distribution by "truck mail". Unusual or irregular checks would be delivered by the County Office of Education to the school districts it services.
Garnishment of Mrs. Herron's paycheck to make payments on the October, 2009 School District judgment began with the June 30, 2010 paycheck. The sum of $716.00 was deducted and recorded as payable to the Sheriff on her June 30, 2010 pay statement (Exhibit B). In July, 2010 the sum of $658.05 was paid over to the Sheriff effective on the issue date of July 30 (Exhibit C). Then, on August 8, 2010 the Herrons filed the instant case under Chapter 7. In Schedule F, debtors listed Gil Abed, Esq., of the Stutz law firm, as a creditor for both the costs award and for a pending request for attorneys' fees of $160,000. Debtors also listed the Vista, California station of the San Diego County Sheriff's Office, for notice purposes only, because of the garnishment proceedings. Notice was sent through the Bankruptcy Noticing Center by first class mail to the scheduled creditors, including Mr. Abed and the Sheriff's office, on Wednesday, August 11, 2010. Mr. Abed has elsewhere stated without controversion that he received the notice of filing of the bankruptcy on Monday. August 16.
On August 31, 2010, Mrs. Herron received her monthly pay statement, which showed that the garnishment of her pay continued. The sum of $711.09 was deducted and was payable to the Sheriff. She testified she contacted the payroll office that same date and was told by them they would get her a replacement check for the divested funds. Also on August 31, she contacted her bankruptcy attorney, Mr. Houbeck, who prepared a letter to Mr. Abed asserting a violation of the stay and a demand for immediate return of the levied funds (Exhibit G). That letter was apparently sent by facsimile, and it was followed by a second letter the next afternoon (Exhibit H). Meanwhile, on September 1, Mr. Abed sent a copy of the Notice of bankruptcy filing, along with a cover memo asking the Sheriff's Office to "take whatever steps are necessary at this time." (Exhibit I). Mr. Abed also sent a note back to Mr. Houbeck, advising him that the Sheriff's Office had "suggested that the Petition should come from you [Houbeck]. If you have any questions, please contact Mr. Abed at...." (Exhibit J). Mrs. Herron did receive the replacement check for the deducted funds, $711.09, issued by the San Diego County School Districts Office on August 31, 2010.
On November 9, 2010 Mr. and Mrs. Herron filed a motion seeking a contempt funding and damages for violating the automatic stay. They asked for 1) damages of $711.09 (although those funds had already been replaced);" 2) disgorgement of $1,374.05 garnished pre-petition; 3) punitive damages; 4) emotional distress damages in the amount of $2,000; and 5) costs and attorney fees in the amount of $4,500 which were incurred in prosecuting this motion for contempt."
In support of the motion, Mrs. Herron submitted a declaration in which she reiterated the fact not only of the August 31 deduction, but also the June and July prepetition deductions. Even though no legal argument has been advanced to claim any impropriety in the prepetition garnishment by the School District to recover on its 2009 judgment against Mrs. Herron, she stated in her declaration:
3. The levy has caused tremendous hardship to me and my family. These deductions have exhausted me and my family financially and emotionally. It has limited my ability to pay for everyday necessities, like school bus fees for my children, child care, after school care and programs, vehicle repairs, school clothes for the children, medical co-pays, dental bills and church tithes to my church. I have been humiliated at work for the garnishments and the Sheriff and Respondents contact with my employer. This process has hurt my reputation at my employment because my employer thinks I've done something wrong due to the Sheriff's inquiries and Respondents communications.
4. I have suffered severe emotional damages from this. I feel stress, depression, humiliation and guilt for what has happened. My children have had to do without basic necessities as outlined above because of the garnishment. Other children at their school have made fun of them and ridiculed them because I have not had the money to provide for them due to the garnishment.
In the Opposition to debtors' motion. Mr. Abed and the law firm reminded debtors of the Eleventh Amendment's applicability, and debtors replied that they still wanted relief against Mr. Abed and the law firm. At the hearing on the motion, the Court set it for evidentiary hearing. Then, on the date set for the evidentiary hearing, debtors sought to expand the scope of the hearing to claim damages for injury allegedly suffered by Mr. Herron. Respondents were authorized to conduct discovery of his medical condition.
Debtors filed and noticed for hearing a motion to expand the scope of the proceedings, and Respondents opposed. After a continuance for further briefing, the motion to expand the scope was denied, and a new date for evidentiary hearing was set, and the matter was thereafter heard.
At the hearing, Mrs. Herron testified that the family was short of funds on a monthly basis for some months prior to filing bankruptcy. Some months they were unable to pay the full amount of the gas and electric bill. She testified they did not buy school clothes for the children in April, May, June, July or August of 2010. She also testified she was upset and depressed when she lost her lawsuit against the School District and her supervisor, and that the June, July and August garnishments were each humiliating. She felt she should not have to pay costs to the School District.
Discussion
This Court has no authority to review the judgment of the state court which awarded costs to the Escondido School District. The Herrons seem to suggest that Mrs. Herron's paycheck should not have been amenable to garnishment, but they offer no argument for why the garnishments in the June and July, 2010 paychecks were unlawful, much less how they would subject Mr. Abed or the law firm to sanctions for violation of the automatic stay.
The issues before this Court distill down to whether the August 31, 2010 garnishment, made after notice of the bankruptcy filing was received no later than August 16, 2010, violated the automatic stay; if so, whether the violation was willful within the meaning of 11 U.S.C. § 362(k); and, if found to be willful, what sanctions, if any, may be properly awarded.
The threshold question is whether the wage garnishment effected on August 31, 2010 is, itself, a clear violation of the automatic stay because it is an effort to collect, post-petition, on a prepetition debt, in violation of 11 U.S.C. § 362(a)(2). That section expressly applies to both "the commencement or continuation" of efforts to collect on a prepetition debt. That the violation in this case was a continuation of a garnishment lawfully commenced prepetition is no explanation.
Section 362(k)(1) provides in relevant part:
[A]n 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.
The essence of the issue of violation of the automatic stay in this case lies in the failure of Mr. Abed or anyone else in the firm to recognize what has become axiomatic in bankruptcy cases. In Eskanos & Adler, P.C. v. Leetien , 309 F.3d 1210 (9th Cir. 2002), the court stated:
The maintenance of an active collection action alone adequately satisfies the statutory prohibition against "continuation" of judicial actions. Consistent with the plain and unambiguous meaning of the statute, and consonant with Congressional intent, we hold that § 362(a) (1) imposes an affirmative duty to discontinue post-petition collection actions.
309 F.2d at 1215. As early as 1994, the Bankruptcy Appellate Panel recognized that "cases widely agree that a garnishing creditor has an affirmative duty to stop garnishment proceedings when notified of the automatic stay." In re Roberts , 175 B.R. 339, 343 (9th Cir. BAP). See, also, In re Gaytan, 2006 WL 2547869 (Bankr. D.ID 2006); In re Hardesty , 442 B.R. 110, 114 (Bankr. N.D. OH 2010); In re Clemmons , 107 B.R. 488, 490 (Bankr. D.DE 1989). Once a creditor has knowledge of the bankruptcy, it is deemed to have knowledge of the automatic stay. In re Ramirez , 183 B.R. 583, 589 (9th Cir. BAP 1995). Where the creditor has knowledge of the bankruptcy filing, and thus of the automatic stay, the creditor has an affirmative duty to cease collection efforts it has set in motion.
As expressly stated in § 362(k)(1), for a debtor to be able to recover for a violation of the automatic stay it must show that the violation was a "willful" one by the creditor. As reiterated by the Ninth Circuit in In re Pinkstaff , 974 F.2d 113, 115 (1992):
A "willful violation" does not require a specific intent to violate the automatic stay. Rather, the 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.
See, also, Eskanos & Adler, P.C. v. Leetien , 309 F.3d 1210, 1215 (9th Cir. 2002). As already discussed, garnishing a debtor's pay for prepetition debts is an intentional act, and a garnishing creditor has an affirmative duty to stop garnishment when the creditor learns of the bankruptcy filing, and thus the automatic stay. When a creditor has a duty to take some action to cease collection activity, "[f]ailure to act constitutes a willful violation of § 362(a)." In re Clemmons , 107 B.R. 488, 490 (Bankr. D.DE 1989).
As discussed already, the bankruptcy petition was filed on August 8, 2010, notice of the filing was mailed August 11, and it is uncontroverted that Mr. Abed and the firm received the notice no later than Monday, August 16. The record is devoid of any evidence that Mr. Abed or the firm did anything after receipt of the Notice, until after Mr. Houbeck faxed his letter demand to Mr. Abed (Exhibit G). Mr. Abed and the firm had over two weeks to take appropriate steps to stop the garnishment they had set in motion months before. Their duty to do so arose at the moment of the filing of the bankruptcy, and their failure to do so became actionable upon learning of the filing, which was no later than August 16. The fact that they acted with alacrity after receipt of Mr. Houbeck's faxed letter mitigates the time period of damages possibly sustained by Mrs. Herron, but it does not excuse their failure to act. Accordingly, the Court finds and concludes that both Mr. Abed and the firm had notice of the bankruptcy filing no later than August 16, 2010, but took no action to discontinue the wage garnishment until September 1, 2010 even though they had a duty to do so. Therefore, the Court finds and concludes that Mr. Abed and the firm willfully violated 11 U.S.C. § 362(a) (1).
Where, as here, the Court finds that a willful violation of the automatic stay has occurred an award of actual damages to an individual debtor, including attorney's fees, is mandatory. In re Ramirez , 183 B.R. 583, 589 (9th Cir. BAP 1995); In re Taylor , 884 F.2d 478, 482-83 (9th Cir. 1989). The threshold question at this juncture is whether Mrs. Herron sustained any actual damages as a consequence of the established stay violation.
As noted, supra, Mrs. Herron testified at the hearing that funds had been deducted from her June and July, 2010 paychecks, before she filed her bankruptcy petition. She said each garnishment was "humiliating", and that she felt she should not have to pay costs to the school district. When the August paycheck was delivered, she was reasonably surprised because she thought the deduction was supposed to stop because of the filing. She contacted payroll, who told her the funds would be replaced by check. She did receive the replacement check, issued by the County on the same date, August 31, although she did not know the date she actually received it.
Mrs. Herron was asked what impact the August garnishment had. She noted the family was short on funds as of September 1, and she assumed some bills were paid late or at less than the full amount, as in the preceding months. She did not produce any cancelled checks or other evidence of late payments, late charges or penalties incurred for late payments. She testified her husband usually made the mortgage payments, and she believed there was a grace period within which to do so. At one point during her direct testimony, Mrs. Herron said when she learned of the August garnishment, she was "devastated", became "really upset", "depressed", having to face her supervisor, and "humiliated to go to work". She did not explain how she felt all those emotions in the short time on August 31 between learning of the garnishment and being told by payroll she would be issued a replacement check for the full amount. Nor did she explain what was different on August 31 than in prior months in regard to her relationship with her supervisor or being humiliated when going to work. She had so felt in June, July and most of August knowing her wages were being garnished to pay a judgment for costs in favor of the school district. Nothing was different except her legitimate expectation that the garnishment had been stopped because of the bankruptcy filing. The Court can imagine her frustration, even anger, on August 31, as short-lived as it was. But Mrs. Herron has failed to establish any actual damages proximately caused by the improper garnishment that occurred on August 31, 2010.
Notwithstanding that Mrs. Herron has failed to establish actual injury and resulting damages from the stay violation, attorneys' fees and costs may constitute a component of actual damages suffered, so long as they were reasonably incurred as a result of the violation of the automatic stay. The Ninth Circuit Court of Appeals addressed the issue at some length in Sternberg v. Johnston , 595 F.3d 937 (2010). There, the court began by recognizing: "Congress legislates against the backdrop of the American Rule.'" 595 F.3d at 945. After contrasting the "American Rule" with the British, the court observed:" Without a doubt, Congress intended § 362(k)(1) to permit recovery as damages of fees incurred to prevent violation of the automatic stay. In permitting recovery of these fees as damages, § 362(k)(1) is consistent with the American Rule." 595 F.3d at 946.
Later in its opinion, the Sternberg court concluded:
The dictionary defines "actual damages" as "[a]n amount awarded... to compensate for a proven injury or loss; damages that repay actual losses."... Following this definition, the proven injury is the injury resulting from the stay violation itself. Once the violation has ended, any fees the debtor incurs after that point in pursuit of a damage award would not be to compensate for" actual damages" under § 362(k)(1). Under the American Rule, a plaintiff cannot ordinarily recover attorney fees spent to correct a legal injury as part of his damages, even though it could be said he is not made whole as a result. See, e.g., Restatement (Second) of Torts, §914(1) (1979) ("The damages in a tort action do not ordinarily include compensation for attorney fees or other expenses of the litigation.") The same is true here. The context and goals of the automatic stay support this narrower understanding, and it is the one we adopt.
It appears to this Court that Mrs. Herron may be eligible to recover Mr. Houbeck's fees and costs associated with the two letters his office prepared and sent to Mr. Abed to have the garnishment ended and the funds restored to Mrs. Herron, as did occur. If Mrs. Herron and/or Mr. Houbeck seek to recover such fees and costs, Mr. Houbeck shall file and serve on Mr. Abed and the firm, within thirty (30) days of the date of entry of this decision, an application for fees and costs consonant with this decision and the Sternberg decision of the Ninth Circuit. Mr. Abed and the firm shall have fourteen (14) days from the date of service of any such application to file any opposition. Thereafter, Mrs. Herron and/or Mr. Houbeck shall have seven (7) days within which to file any reply. Thereafter, the matter will again be under submission.
The remaining issue is Mrs. Herron's request for punitive damages for violation of the automatic stay. Section 362(k)(1) says punitive damages require "appropriate circumstances". That has been refined to require "egregious, intentional misconduct." In re McHenry , 179 B.R. 165, 168 (9th Cir. BAP 1995). No such conduct by Mr. Abed or the firm has been shown in this case. To the contrary, Mr. Abed and the firm moved quickly to stop the garnishment once Mr. Houbeck brought it to their attention. In addition, the school district the same day made efforts to restore the deducted funds.
For all the foregoing reasons, the Court finds and concludes that Mr. Abed and the firm willfully violated the automatic stay within the meaning of 11 U.S.C. § 362(k). However, the debtors have failed to establish any actual damages as a result of the stay violation except possibly for limited attorney's fees and costs, as to which a procedure has been established to make application for fees and costs. Finally, no factual basis whatsoever has been shown to support an award of punitive damages.
IT IS SO ORDERED.