Opinion
BANKRUPTCY NO: 12-06689-MM7
2013-09-10
In re: TREASURES, INC., Debtor,
WRITTEN DECISION - NOT FOR PUBLICATION
CHAPTER: 7
MEMORANDUM DECISION AND
CIVIL CONTEMPT ORDER TO PAY
DAMAGES FOR FAILING TO TURN
OVER PROPERTY OF THE ESTATE
JUDGE: Margaret M. Mann
This Memorandum Decision awards civil contempt sanctions ("Contempt Order") to the estate of debtor Treasures, Inc. ("Debtor"), a failed furniture retailer, in resolution of this Court's Order To Show Cause Why APJL Consulting, LLC ("APJL") Should Not Be Held In Contempt And Ordered To Pay Damages For Failing To Turn Over Property Of The Estate ("OSC").
As the Court approved auctioneer for the Debtor's furniture sales, APJL had possession and control of a bank account that held the sales proceeds of Debtor's furniture. When the auctions were over in September 2012, APJL did not pay Debtor its share of the proceeds, totaling $184,000. When Debtor made a demand for turnover of the funds and an accounting, APJL refused to pay Debtor its money and has to date not provided a full accounting. Nor has APJL sought relief from stay to retain the money. By the time the Court entered the OSC in April 2013, APJL had spent much of the money for its own benefit. APJL's defense to turnover and the OSC has primarily been that it was entitled to keep the money under the parties' agreement. This defense, even if asserted in good faith, and there is significant evidence to the contrary, does not release APJL's obligation to seek stay relief before retaining Debtor's money. Due to the fiduciary duties it owed the estate as a Court approved professional, APJL had no justification for its retention of the funds without an accounting.
As a result of APJL's stay violations, the estate has incurred actual damages measured by the loss of its funds, and attorneys' fees attempting to correct the stay violation. The Court will thus award both attorneys' fees and actual damages against APJL to Debtor by this Contempt Order.
I. Jurisdiction
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(b) and 1334, and constitutional authority to enter final findings of fact and conclusions of law in this dispute. Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 2601-02 (2011). Bankruptcy courts have authority to enter final orders to address violations of the automatic stay. See Turner v. First Cmty. Credit Union (In re Turner), 462 B.R. 214, 220 (Bankr. S.D. Tex. 2011) (finding jurisdiction to determine violations of the automatic stay); Heflin v. Santander Consumer USA, Inc. (In re Heflin), 464 B.R. 545, 547 (Bankr. D. Conn. 2011) (same).
II. Need for Evidentiary Hearing
Because of the gravity of civil contempt proceedings, the Court has given APJL multiple opportunities to explain its conduct over the past year. The shifting explanations APJL has provided have led the Court down a convoluted path to this resolution. Yet while the process has been somewhat confusing, it has generated an extensive record of evidence, including contradictory admissions by APJL's principal, Allen Parvizian, in the six declarations he has filed with the Court regarding the OSC proceedings. While the Court has generally found Parvizian not to be credible for this reason, the factual findings made in support of this Contempt Order need not be based upon a credibility determination. Instead, this ruling is based on facts on which there is no material dispute. For this reason, an evidentiary hearing is not necessary to award the contempt damages here. See ZiLOG, Inc. v. Corning (In re ZiLOG, Inc.), 450 F.3d 996, 1008 (9th Cir. 2006) (where no facts are in dispute, an evidentiary hearing is not necessary to award contempt damages for automatic stay violations).
These six declarations were filed on the following dates:
October 29, 2012 (Docket #137)
February 22, 2013 (Docket #195)
March 14, 2013 (Docket #204)
April 25, 2013 (Docket #222,223)
June 6, 2013 (Docket #249)
July 17, 2013 (Docket #273)
Specifically because the facts are admitted by APJL, the record reflects no dispute as to the facts as to the following legal issues germane to this Contempt Order:
(i) APJL, as a Court approved professional, owed fiduciary duties to the estate.
(ii) APJL withheld property of the estate; i.e., Debtor's funds held in a bank account controlled by APJL in which APJL only held a security interest.
(iii) APJL had knowledge of the automatic stay at least as of October 1, 2012 when Debtor specifically asserted the automatic stay and demanded payment of its money.
(iv) APJL never sought relief from stay to retain the money.
(v) APJL asserted two reasons for refusing to turn over the funds: it had offset the moneys due to Debtor against $103,759 in credit card fees and a manager's salary that APJL had claimed Debtor owed to it both prepetition and post-petition, and it had also offset the funds against previous overpayments of draws made to Debtor.
(vi) APJL failed to disclose these two offset claims against Debtor to the Court at the time of its employment.
(vii) APJL has failed to date to provide an accounting to support its claim it had overpaid Debtor.
(viii) APJL has raised no factual dispute regarding the amount of damages. The amount of attorneys' fees incurred by the estate was not challenged, and the Court can calculate from APJL's own evidence the amount of funds that were on hand at the time of the stay violation that have not been received by Debtor.
There remain hotly disputed issues regarding the parties' rights under their agreement and as to whether APJL's actions were taken in bad faith. These disputed issues are reserved to be resolved in the adversary proceeding pending for this purpose. After the adversary proceeding is resolved, it may be that APJL can establish a secured or administrative claim to the funds it is paying back to the estate as actual damages, but it may also be that Debtor prevails. In either case, the automatic stay protected these funds so that they would be available for allocation in the proper manner, and APJL violated the stay by unilaterally taking the funds before the Court could resolve the dispute.
III. Factual Background
A. The Agreement and APJL's Employment
Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on May 8, 2012. At that time, APJL had been providing liquidation and augmentation services to Debtor pursuant to an earlier agreement dated July 11, 2011 (the "Agreement"), under which APJL agreed to provide necessary personnel, such as the auctioneer and office manager, for Debtor's furniture sales. APJL also provided financing for Debtor to purchase furniture to augment the Debtor's inventory and improve the auction outcome. The Agreement provided APJL signatory control over a bank account (the "Augmentation Account") that held the proceeds from sale of Debtor's furniture. Although other bank accounts were anticipated in the Agreement, the undisputed evidence is that the Augmentation Account was the only one actually established; and it is the only account at issue here. Under the Agreement, APJL was to disburse the funds in the Augmentation Account according to the following terms of the Agreement:
(i) first, to pay the Consultant Fee, (ii) second, if Additional Furniture is provided by Consultant to the Sale on a consignment basis, to pay for such Additional Furniture as it is sold and delivered; and if Additional Furniture is provided by Consultant other than on a consignment basis, to pay the invoice cost plus billed freight of such Additional Furniture, (iii) third, to pay for the PMST Fee due to the Consultant, (iv) fourth, to pay back all monies advanced by the Consultant to the Sale, and (v) fifth, a draw from the Augment Account to the Company of 30% all deposits during an Accounting Week; [and (vi)] sixth, to the remainder to the Company.Agreement, Docket 105-4, Exhibit A, ¶7. Whether APJL did allocate the funds as provided in the Agreement will be resolved in the adversary proceeding.
According to the Agreement, APLJ was to forward to Debtor all sales taxes collected from customers so Debtor could pay these taxes, but further specified that any funds so forwarded were first to be considered a payment of sales taxes collected. Id. at ¶6. Despite these provisions of the Agreement, the parties actually handled the sales taxes in a different manner: APJL provided a weekly accounting of sales taxes collected and then Debtor provided an invoice to APJL for it to pay. Also in August 2012, APJL increased Debtor's draw to 40% instead of the 30% specified in the Agreement.
On application by Debtor, and supported by Parvizian's declaration, the Court approved APJL continuing to provide these services under the Agreement nunc pro tunc to the petition date. Debtor claimed it was winding down its business and needed APJL's services for its "going out of business sales." Although Debtor and APJL claimed they sought Court approval of APJL's employment only out of an abundance of caution, neither 11 U.S.C. § 327(a) nor Bankruptcy Rule 6005, deems court approval of the estate's retention of auctioneers to be optional. The US Trustee initially objected to APJL's employment due to inadequate disclosure by APJL of its connections with parties in interest. The US Trustee specifically sought clarification of whether APJL was a creditor from its previous dealings with Debtor. The US Trustee also sought further explanation regarding APJL's consignment of furniture for the auction and its affiliated entity's involvement, HFR Rugs.
Unless otherwise stated all section references refer to title 11 of the United States Code.
In response, APJL filed a second declaration signed by Parvizian that provided some additional detail about the US Trustee's questions. Although APJL admitted that it had been providing services to and had received payments from Debtor post-petition, it stated that it had no other connections with Debtor. APJL did not disclose any of the following in response to the US Trustee's objection:
The most shocking incident of lack of candor with the Court was when Parvizian claimed he never signed the declaration he submitted to disclose bis connections with the estate even though he sent his signed declaration from his personal email. See APJL's Reply to Opposition of Debtor to Application for Order Approving Auctioneer's Fees, Docket #137, at 7; see also Debtor's Ex Parte Application for OSC, Docket #146, at 7.
(i.) APJL was a prepetition creditor due to its outstanding charges against Debtor, (ii.) APJL had not done an accounting of its services to determine the extent to which it was a creditor.
(iii.) APJL did not consider itself prohibited from enforcing any of its claims against
Debtor's funds by the need to seek Court approval for such enforcement, (iv.) APJL had made payments post-petition to entities who were insiders of APJL.
In fact, APJL expressly stated it was not a creditor of the Debtor. APJL's application for employment also gave the misleading impression that there would be no outstanding claims under the Agreement by explaining in Parvizian's declaration the weekly allocation process that had been established to regularly resolve any such claims.
APJL's disclosure stated: "Prior to the Debtor filing bankruptcy on May 8, 2012, APJL invoiced and received payment for all services it provided to the Debtor under the terms of the Agreement." See Supplemental Declaration of Allen Parvizian in Support of the Debtor's Application to Employ APJL as Auctioneer, Docket #105-4, at ¶4.
In reliance upon these incomplete and misleading disclosures, the Court approved APJL's employment under the terms of the Agreement on a nunc pro tunc basis in an order entered on August 28, 2012 ("Employment Order"). The Employment Order specifically restricted APJL's receipt of compensation without further court order, and did not prospectively grant relief from stay for APJL to enforce any rights against the Augmentation Account. Had the Court been aware that APJL had prepetition and post-petition claims against Debtor that it could offset against Debtor's funds under the Agreement, it could not have approved the employment of APJL under § 327. These claims prevented APJL from establishing the disinterested status it needed in order to be employed. These undisclosed claims also left Debtor vulnerable to the cash flow crisis it suffered here.
See Employment Order, Docket # 108, at |4 ("Payment to the Auctioneer of the compensation and reimbursement of the expenses herein authorized shall be made only after compliance by the Auctioneer with Local Bankruptcy Rule 6005 and notice to creditors as required by Local Bankruptcy Rules 2002 and 6005-4.")
B. The Offsets
It took only a few weeks after the Court approved APJL's employment in August 2012 for Debtor's vulnerability to APJL's undisclosed creditor's rights to cause problems for Debtor. When Debtor and APJL undertook their regular weekly allocation process for the week ending September 20, 2012, to settle their respective rights to the sales proceeds collected in the Augmentation Account, Debtor presented APJL documentation justifying a net disbursement to Debtor in the amount of $110,000. While APJL did not dispute this amount was due, it only disbursed $11,000 to Debtor on September 25, 2012, and withheld the remaining $99,000. APJL withheld the remaining $99,000 from this disbursement claiming it was entitled to offset it against what was later calculated to be $103,759 in charges Debtor owed APJL for credit card fees and manager salary. The following week, APJL did not dispute nor disburse any of the $85,000 Debtor claimed to be due under its weekly settlement documentation, even though at least part of those funds had been collected from customers to pay sales taxes. APJL did not justify its refusal to disburse the second week's payment at the time, but later claimed it had overpaid Debtor its weekly draws, and was justified to withhold the sales taxes to ensure it would not suffer any losses on its credit lines or with its suppliers. Since APJL's accounting is not yet completed, the claim of overpayment is unsupported.
APJL's failure to disburse this money to Debtor caused a major cash shortfall for Debtor. Debtor's counsel sent an email on September 25, 2012, to APJL's counsel demanding an accounting and requesting that APJL freeze the Augmentation Account since it held property of the estate. APJL did neither, and Debtor's counsel followed up with an email attaching an October 1, 2012 letter that demanded payment of the total $184,000 Debtor had not received from the Augmentation Account. The October 1st letter specifically claimed the automatic stay had been violated. APJL does not dispute receiving either of these communications.
The September 25, 2012 email reads:
As you may be aware, APJL manages a Treasures furniture-account bank account, which contains money that is property of the bankruptcy estate. It is in both parties' best interest to ensure the transparency, speed and accuracy of the final reconciliation process, as well as to protect property of the estate. Therefore, Treasures requests that all funds remain untouched in the bank account during the reconciliation process, and that APJL make no disbursements without Treasures' written consent until a final reconciliation is completed.
The October 1, 2012 letter states:
Treasures demands that APJL provide by no later than close of business tomorrow, October 2, 2012: (i) immediate delivery to Treasures of the requested QuickBooks reconciliation documentation flash drive, (ii) immediate freezing of the account with no disbursements made without written authorization from Treasures CRO, Mike Bergthold, which authorization will be granted for appropriate charges, and (iii) immediate payment to Treasures of $184,000, consisting of a $99,000 balance owed from the 9/20/12 weekly settlement and $85,000 owed from the 9/27/12 weekly settlement. Please be advised that among other things, failure to meet these demands constitutes willful violation of the automatic stay and conversion of the property of the estate, which is punishable by sanctions. Treasures will be forced to take legal action, not least of which includes withdrawal/objection to APJL's fee application for auctioneer services.
On October 4, 2012, Debtor filed a status report advising the Court that APJL had not released to it $184,000 of the sales proceeds. Then, on October 15, 2012, Debtor objected to APJL's compensation based upon Debtor's claim to these funds and also on the ground that APJL had made false disclosures to the Court about its prepetition creditor status. APJL responded to Debtor's fee objection asserting it was not obligated to make any payments to Debtor because the funds in the Augmentation Account were not property of the estate but APJL's own funds. APJL also asserted its offset rights to justify not making the payments to Debtor. When APJL failed to comply with Debtor's demand to turn over the moneys it was due, Debtor brought an Ex Parte Application for the OSC on November 2, 2012 ("OSC Motion"), which APJL opposed on similar grounds to those stated in response to the compensation objection.
Both the OSC Contempt Motion and the objection to APJL's compensation were heard on November 29, 2012. The Court found that APJL failed to disclose its prepetition creditor status and related entity relationship and accordingly denied APJL's compensation. As for the OSC Motion, the Court found APJL's claim that it, rather than Debtor, owned the funds in the Augmentation Account to be incredible for three reasons: 1) APJL was defined as a secured creditor by the Agreement, 2) the Augmentation Account held the proceeds of sale of Debtor's furniture, and 3) APJL's claim it used its own funds to pay itself a debt owed it by Debtor was illogical. The Court granted the OSC motion, and orally ordered APJL to turn over $103,759 to Debtor subject to an accounting by APJL. The Court warned APJL that the stay damages would continue to accrue until it turned over the funds. The Court also ruled that any remaining disputes regarding the accounting of the funds in the Augmentation Account would need to be resolved in a separate adversary hearing. The Court ordered Debtor to lodge the OSC, but its counsel failed to do so, apparently because the conversion of the case to Chapter 7 displaced Debtor's counsel. For apparently the same reason, the order requiring APJL to turn over all compensation previously received in the amount claimed of $37,649 was not entered until June 10, 2013. APJL has timely complied with that order, but has appealed it.
At this November 29, 2012 hearing, the Court also heard the Motion to Dismiss. The Court denied the Motion to Dismiss but converted the case to a Chapter 7 case.
The numbers submitted by APJL have not been consistent. While Parvizian later recalculated the amount of the APJL offset due to the office manager to $27,666.68, and the credit card fees to $70,884.57, that had not previously been charged against Debtor's share of the Augmentation Account, he has not paid the Debtor the difference.
Transcript of Hearing held on November 29, 2012, Docket # 172, at 16-17.
Id., Docket # 172, at 51-52.
C. The OSC Order
The OSC was not lodged until February 15, 2013, when the newly appointed Chapter 7 Trustee did so. APJL objected to the OSC as lodged and submitted a further declaration from Parvizian, along with 147 pages of accounting records in support of its objection. Parvizian reversed his initial denial that the Augmentation Account contained Debtor's property and admitted that APJL was just a secured creditor. Parvizian justified the $ 103,759 offset claiming he had simply forgotten to assert these offsets earlier.
After entering a scheduling order to try to resolve APJL's inconsistent explanations of what had happened to Debtor's funds, the Court held a hearing on the objections to the lodged OSC on March 28, 2013. It thereafter entered its own OSC on April 2, 2013. As amended, the OSC ordered APJL to show cause: 1) why it should not be ordered to return Debtor's funds in the amount of $171,346 to the Augmentation Account, and 2) why it should not be found in contempt and liable for damages for violating the automatic stay. The OSC also ordered the Chapter 7 Trustee to bring an adversary proceeding to resolve the accounting dispute, which he has done and is pending. A hearing on the OSC was scheduled for May 2, 2013, and was thereafter continued to June 13, 2013.
Later amended on April 12, 2013 to correct an error.
The Court increased the amount to be turned over to $171,346 from the $103,759 stated in its oral ruling at the November 29, 2012 hearing because it realized that its reasoning applied equally to the sales tax portion of the disputed funds.
D. Response to OSC
In response to the OSC, APJL did not refute the amount of attorneys' fees or other damages claimed by the estate as contempt damages. Instead, APJL argued that it did not '"take the $171,346.17" the Court ordered be turned over, although it admitted that it refused to turn over to Debtor $ 184,000 of its own money because of its offset claims. APJL also elaborated upon its assertion it was not required to pay Debtor its share of the sales proceeds because it had overpaid Debtor its weekly draws, which left insufficient funds to pay the sales taxes. After the hearing, the Court allowed further briefing on the OSC by both APJL and the Chapter 7 Trustee on APJL's defenses to the OSC. APJL then filed a supplemental brief and a new Parvizian declaration that averred it was impossible for APJL to turn over Debtor's funds to it since APJL needed these funds to pay other expenses that APJL would otherwise have been liable. APJL also claimed it ultimately complied with its turnover obligation on June 17, 2013, by turning over the remaining funds in the Augmentation Account of $27,958.75. The Court took the matter under submission at the hearing on June 13, 2013 and now rules on the issues.
TV. Stay Violation
The Court finds multiple stay violations under the undisputed facts here. The funds in the Augmentation Account were property of the estate under § 541(a)(7), subject to APJL's security interest. As property of the estate, APJL was obligated to turn over the funds in the Augmentation Account under § 542 upon the Debtor's demand. Debtor made such a demand for payment of $184,000 on October 1, 2012, and asserted that a stay violation would result if APJL failed to do so. See United States v. Whiting Pools, Inc., 462 U.S. 198, 206-07 (1983) (requiring turnover of property of the estate). "[T]he failure to return property of the estate with knowledge of the bankruptcy is a violation of both the automatic stay and of the turnover requirements of the Bankruptcy Code." Abrams v. Sw. Leasing & Rental, Inc. (In reAbrams), 127 B.R. 239, 242-43 (B.A.P. 9th Cir. 1991); see also Mwangi v. Wells Fargo Bank, N.A. (In re Mwangi), 432 B.R. 812, 822 (B.A.P. 9th Cir. 2010).
While APJL claims it was entitled to Debtor's share of the funds due to its offset claims and other contractual rights, these disputed claims do not relieve APJL of its turnover obligations, even though it was a secured creditor under the Agreement. Whiting Pools, 462 U.S. at 207 (IRS, even as a secured creditor must comply with turnover obligation); see also California Empl. Dev. Dep't v. Taxel (In re Del Mission), 98 F.3d 1147, 1151-1152 (9th Cir. 1996) (retention of disputed state taxes violated the automatic stay because: "To effectuate the purpose of the automatic stay, the onus to return estate property is placed upon the possessor; it does not fall on the debtor to pursue the possessor."). The Court's earlier approval of the Agreement also did not relieve APJL from its obligation to turnover the funds when the dispute arose. APJL was required to seek relief from stay before taking action to affect Debtor's property, even under an assumed agreement and it failed to seek such relief. See Carroll v. Tri-Growth Centre City, Ltd. (In re Carroll), 903 F.2d 1266, 1271 (9th Cir. 1990) (stay under § 362(a)(3) violated where creditor, without getting stay relief at the time, terminated post-petition court approved agreements that had not granted relief from prospective stay, even though creditor's action did not involve collection of a prepetition debt).
APJL's offset claims are not a defense to turnover under the circumstances before the Court. Although § 362(a)(7), which specifically prescribes that a setoff is a stay violation, is not directly applicable, a different subsection of § 362(a) applies. Section 362(a)(7) is not directly applicable here since APJL did not offset its claims against a prepetition debt it owed to Debtor; rather, Debtor's right to its sales proceeds arose post-petition. Even regarding post-petition offset situations, relief from stay must be requested and is not necessarily justified. See In re Gunn, 2008 Bankr. LEXIS 2227, at *2-3 (Bankr. N.D. Cal. Aug. 11, 2008) (unpublished) (declining to grant relief from stay to allow post-petition offsets (citing In re TLC Hospitals, Inc., 224 F.3d 1008 (9th Cir. 2000))). Additionally, under § 362(a)(3), a creditor's retention of funds of a debtor can be a prohibited exercise of control over debtor's property in violation of the stay. Citizens Bank of Maryland v. Strumpf, 516 U.S. 16, 20-21 (1995); Del Mission, 98 F.3d at 1151.
APJL asserts a defense to turnover under § 542(b). This subsection of § 542 justifies a creditor, with prepetition offset rights against a prepetition debt it owes the Debtor, to temporarily not pay the debt without violating the turnover or automatic stay requirements of the Bankruptcy Code. The creditor must still promptly seek stay relief. Strumpf 516 U.S. at 20-21. APJL cannot rely on § 542(b) to defend its contempt for two reasons. First, APJL never bothered to seek stay relief. Mwangi, 432 B.R. at 820 (bank's refusal to turn over funds to a debtor even where no offset rights are asserted is a violation of the automatic stay if no relief is requested).
Second, because the funds in the Augmentation Account belonged to Debtor, not APJL, § 542(b) is not applicable because the offsets were not of different debts owed by one to the other. Under § 542(b) an offset can only be a defense to a payment of a debt. But APJL did not merely owe Debtor a debt; it was holding Debtor's own money. For this reason § 542(a), requiring turnover of property of a debtor regardless of whether there are offset rights, is germane here. APJL could not retain Debtor's money based on its offset claims without violating the automatic stay. Del Mission, 98 F.3d at 1151.
A. Knowledge of the Automatic Stay
Neither Debtor as a corporation nor the Chapter 7 Trustee may seek contempt damages under § 362(k). That statutory remedy is only available to individual debtors. Havelock v. Taxel (In re Pace), 67 F.3d 187, 192 (9th Cir. 1995). Contempt damages are nevertheless available under § 105 in this case. Id.
Under § 105, "[t]he standard for finding a party in civil contempt is well settled: The moving party has the burden of showing by clear and convincing evidence that the contemnors violated a specific and definite order of the court." Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1190-91 (9th Cir. 2003) (quoting Renwick v. Bennett (In re Bennett), 298 F.3d 1059, 1069 (9th Cir. 2002)). The movant must prove that the creditor (1) knew the automatic stay was applicable and (2) intended the actions which violated the injunction. Id.; see also ZiLOG, Inc., 450 F.3d at 1007-08. "Knowledge of the injunction, which is a prerequisite to its willful violation, cannot be imputed; it must be found." ZiLOG, Inc., 450 F.3d at 1008; see also Dyer, 322 F.3d at 1191-92 (contempt sanctions upheld where creditor admitted having notice of the automatic bankruptcy stay, yet took no steps to remedy his violation of the stay).
The Court finds clear and convincing evidence of a knowing stay violation, but only as of October 1, 2012. On September 25, 2012, after the dispute over the funds arose, Debtor's attorney sent APJL an email explaining that the funds in the Augmentation Account were property of the estate, stating "APJL manages a Treasures furniture-account bank account, which contains money that is property of the bankruptcy estate." Counsel did not, however, demand turnover at that time or mention the automatic stay. Counsel merely requested that "APJL make no disbursements without Treasures' written consent until a final reconciliation is completed." The Court does not find that this email clearly and convincingly gave APJL knowledge of the automatic stay under Dyer, 322 F.3d at 1191-92 (imposing a higher standard of proof for awarding contempt damages for stay violations than the statutory standard under § 362(k), by requiring that the alleged contemnor be advised that its conduct violated the automatic stay).
There is no doubt, however, that as of October 1, 2012, APJL knew Debtor was asserting an automatic stay violation. In its letter, Debtor's counsel explicitly advised APJL that "failure to meet these demands [that APJL pay Debtor its $184,000 of sales proceeds and freeze the account] constitutes willful violation of the automatic stay and conversion of the property of the estate, which is punishable by sanctions." This clear communication is convincing to the Court that APJL had knowledge of the automatic stay at least as of October 1, 2012.
B. APJL's Conduct Was Not Justified
1. APJL's Good Faith in Asserting its Contract Defenses is Irrelevant
APJL's primary defense to the OSC is that it was only asserting its contract rights and it acted in good faith. Whether APJL actually believed in its defenses in good faith need not be decided at this time, however. As Dyer, 322 F. 3d at 1191, reasoned in affirming an award of contempt damages:
In determining whether the contemnor violated the stay, the focus "is not on the subjective beliefs or intent of the contemnors in complying with the order, but whether in fact their conduct complied with the order at issue." Hardy v. United States (In re Hardy), 97 F.3d 1384, 1390 (11th Cir. 1996) (internal citations omitted); accord McComb v. Jacksonville Paper Co., 336 U.S. 187, 191, 93 L. Ed. 599, 69 S. Ct. 497 (1949) (Because civil contempt serves a remedial purpose, "it matters not with what intent the defendant did the prohibited act.").See also In re Taylor, 884 F.2d 478, 483 (9th Cir. 1989) (good faith is irrelevant to awarding compensation for stay violations).
Carroll, 903 F.2d at 1272, illustrates why relief from stay must be sought before a counterparty to a contract can affect the debtor's contract rights, regardless of how righteous the counterparty believes its rights to be. In Carroll, the Ninth Circuit, reversing the bankruptcy court and district court's contrary decisions, found a creditor who terminated a post-petition court approved agreement with the debtor had violated the automatic stay by not seeking relief from stay in advance. The creditor's basis for terminating the contract was so sound that the bankruptcy court had previously denied the debtor's motion for a preliminary injunction against the termination of the contract. Yet the Ninth Circuit held that the defense of the injunction was not tantamount to moving for stay relief, and the creditor's failure to do so violated the automatic stay. Id. at 1273; see also Ozenne v. Bendon (In re Ozenne), 337 B.R. 214, 221 (B.A.P. 9th Cir. 2006) (landlord's violation of the automatic stay was willful for purposes of damages regardless of the landlord's good faith belief that the debtor no longer owned the property). Similarly here, even if APJL's intention in withholding Debtor's money was pure, it was still obligated to seek relief from stay.
While the Court need not find APJL to have acted in bad faith to award contempt damages, the facts present a prima facie case of bad faith, due to APJL's denial that it had ever signed its disinterestedness disclosure, its failure to fully disclose its connections, its abuse of its undisclosed creditor status to take funds from the estate, and its breaches of fiduciary duties. The good faith issue is nevertheless disputed and therefore cannot be the basis of contempt sanctions without an evidentiary hearing. ZiLOG, Inc., 450 F.3d at 1008. Because the Court did not hold an evidentiary hearing, it will not award punitive damages or rely upon its inherent authority to sanction bad faith conduct. See Chambers v. NASCO, Inc., 501 U.S. 32, 46 (1991); Hale v. United States Tr., 509 F.3d 1139, 1148 (9th Cir. 2007); Fink v. Gomez, 239 F.3d 989, 992 (9th Cir. 2001) (citing Chambers, 501 U.S. at 46-47). This issue is reserved for later determination.
2. APJL was not Entitled to Ignore the Stay until the OSC was Entered
APJL claims it did not violate the automatic stay because it promptly complied with the OSC when it was entered in April 2013 by turning over the remaining funds in the Augmentation Account at that time. APJL is mistaken that it was entitled to ignore the automatic stay until the Court issued its OSC, however. "[T]here can be no doubt that the automatic stay qualifies as a specific and definite court order." Dyer, 322 F.3d at 1190-91 (awarding contempt damages against secured creditor who recorded a deed of trust believing it to be within his legal rights without a court order compelling him to do so). Even without a court order, the October 1, 2012 email notified APJL of the stay and potential sanctions and was sufficient notice to trigger APJL's liability for damages. Hansbrough v. Birdsell (In re Hercules Enters.), 387 F.3d 1024, 1028 (9th Cir. 2004).
Supplemental Brief of APJL, Docket #273, at 11 (July 17, 2013).
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3. As a Fiduciary, APJL's Creditor Rights do not Justify its Actions
APJL's third defense to the contempt sanctions requested is that as a secured creditor its actions were justified under the Agreement, and it cannot be liable for contempt. As noted above, even if this were the case, APJL was not free to refuse to turn over Debtor's funds without relief from stay. See Carroll, 903 F. 2d at 72; Temecula v. LPM Corp. (In re LPM Corp.), 300 F.3d 1134, 1137 (9th Cir. 2002) (court order requiring immediate payment of post-petition rent as an administrative priority did not relieve the landlord of the necessity of obtaining relief from the automatic stay before proceeding with a writ of execution).
APJL's asserted justification for its retention of funds without completing an accounting is also not valid in light of the fiduciary duties it owed the estate as an approved auctioneer under § 327(a). Herzog v. Stopol, Inc. (In re Cornerstone Prods.), 416 B.R. 591, 608 (Bankr. E.D. Tex. 2008); see also Salazar v. McCormick (In re Crestview Funeral Home, Inc.), 287 B.R. 832, 838 (Bankr. D.N.M. 2002) (auctioneer owed a fiduciary duty to estate and should not purchase property of the estate). These fiduciary duties govern APJL's conduct even though it was a secured creditor in the Augmentation Account. See STOUBMOS v. Whitesides, 988 F.2d 949, 959 (9th Cir. 1993) (insider who owed fiduciary duties to creditors was not free to take action on its secured claim that harmed creditors' rights).
Because APJL is a fiduciary, it was not justified in asserting offsetting claims until it could properly account for them. Yet APJL still had not finished its accounting and the Chapter 7 Trustee disputes the claims of overpayment. Leonard v. Optimal Payments Ltd. (In re Nat'l Audit Def. Network), 332 B.R. 896, 907 (Bankr. D. Nev. 2005) (fiduciaries have an obligation to safeguard property of the estate for the debtor); see also May v. Henderson, 268 U.S. 111, 119 (1925); Tivon v. England, 484 F. 2d 639, 641 (9th Cir. 1973). Because APJL bears the burden of proof as a fiduciary, it may have committed defalcation simply by withholding Debtor's funds without completing an accounting to prove its claim of offsets. See Pemstein v. Pemstein (In re Pemstein), 492 B.R. 274, 282 (B.A.P. 9th Cir. 2013) (defalcation includes the failure by a fiduciary to account for money or property that has been entrusted to the fiduciary); see also Otto v. Niles (In re Niles), 106 F.3d 1456, 1462 (9th Cir. 1997) (burden is placed on the fiduciary to. render an accounting, "once the principal has shown that funds have been entrusted to the fiduciary and not paid over or otherwise accounted for").
Apart from its failure to seek stay relief, APJL's actions were not justified in light of its fiduciary duties.
V. Sanctions for Contempt
A. Inability to Comply
APJL defends the OSC by claiming it is unable to comply with the Court's order because at the time the Court entered the OSC on April 2, 2013, the credit card fees and manager salary had already been paid out to creditors and the sales taxes had not been segregated. Inability to comply with a Court order can be a proper defense to contempt sanctions. United States v. Rylandex, 460 U.S. 752, 757 (1983); FTC v. Affordable Media, LLC, 179 F.3d 1228, 1239 (9th Cir. 1999); In re Count Liberty, LLC, 370 B.R. 259, 275 (Bankr. CD. Cal. 2007). To successfully assert this defense, though, APJL, as the alleged contemnor, must establish "categorically and in detail" its inability to comply with the Court's order. Affordable Media, 179 F.3d at 1241; Count Liberty, 370 B.R. at 275. And, "[t]he defense is not available, however, when the person charged is responsible for the inability to comply." Count Liberty, 370 B.R. at 275.
APJL has not met this burden here. As noted above, the stay violation occurred on October 1, 2012, not the later date of the OSC since the automatic stay statutorily serves as the applicable court order. Dyer, 322 F.3d at 1191-92. While there were insufficient funds in the Augmentation Account on June 17, 2013 when only $27,958.75 remained, there were sufficient funds available on October 1, 2012 in the amount of $161,096.86. This sum, together with other sums paid to Debtor after that date, demonstrates that APJL was fully capable of complying with Debtor's turnover demand.
APJL is accountable to the estate for this insufficiency. APJL's failure to turn over or safeguard the funds was within its control since it was the sole signatory on the Augmentation Account. Although it has spent the money, it has not claimed it lacks resources to turn over the funds from other sources. Had it so chosen, APJL could also have frozen the account on October 1, 2012, or requested Debtor to assert the automatic stay against the credit card companies. See Moratzka v. Visa USA (In re Calstar, Inc.), 159 B.R. 247 (Bankr. D. Minn. 1993) (recovery of chargebacks from post-petition deposit is a violation of § 549 and the automatic stay); Sherman v. First City Bank (In re United Sciences of Am., Inc.), 84 B.R. 79, 82 (Bankr. N.D. Tex. 1988) ("To allow parties who dealt with a debtor-in-possession, prepetition, to continue subjectively crediting or off-setting these credit card settlements post-petition would defeat the definition of property of the estate and the policy of the automatic stay."). APJL also could have, indeed, as a fiduciary should have, segregated the funds in the Augmentation Account to enable the sales taxes to be paid.
All of APJL's claims that it was impossible to comply with the automatic stay, even taken at face value, ignore that it alone was "responsible for the inability to comply." Count Liberty, 370 B.R. at 275. As such, they provide no defense to contempt sanctions.
B. Damages
The Court must now turn to quantification of the damages. As part of his compensatory damages, the Chapter 7 Trustee has asserted attorneys' fees incurred by Debtor's counsel in the amount of $33,400.36, fees of Debtor's financial advisor OSAS Inc. ("OSAS") in the amount of $15,662.50, and fees of his own counsel in the amount of $29,000 and $13,112.50. In total, attorneys' fees in the amount of $91,175.36 are requested at this time. These "attorneys' fees are an appropriate component of a civil contempt award," Dyer, 322 F.3d at 1196, and all of these fees were appropriately detailed pursuant to the lodestar method, Youssef v. Union Adjustment Co. (In re Youssef), 2011 Bankr. LEXIS 886, at *17 n.5 (B.A.P. 9th Cir. Feb. 1, 2011) (unpublished) (citing Jordan v. Multnomah County, 815 F.2d 1258, 1262 (9th Cir. 1987)). See also Eskanos & Adler, P.C. v. Roman (In re Roman), 283 B.R. 1, 11 (B.A.P. 9th Cir. 2002) (endorsing the use of the principles used in § 330 as a guide for awarding attorneys' fees as damages for a violation of the automatic stay).
APJL did not specifically object to any part of the fees. Nevertheless, the Court must review them and find them reasonable to exercise its discretion to award them. Roman, 283 B.R. at 11 (analyzing award of attorneys' fees for reasonableness under the abuse of discretion standard). The Court has therefore reviewed the fees and concludes that some of them are not related to the stay violation but instead to other matters. This portion of the fees will be disallowed.
Taking each of the professional fees in turn, OSAS spent approximately 75 hours attempting to evaluate APJL's accounting records and negotiate with APJL over the stay violation. OSAS has an accounting specialty and the Court finds a need for such specialty in reviewing these records due to APJL's poor bookkeeping. Approximately 11 of these hours ($2,550.00) occurred post-conversion and appear related to the adversary proceeding filed by the Chapter 7 Trustee, however. Accordingly, the Court cannot find that these fees are damages from result of APJL's violation of the stay, and awards only $13,102.50 as the reasonable damages resulting from APJL's violation of the automatic stay.
Debtor's attorney spent approximately 66,60 hours on this matter, totaling $33,400.36. Because the Court does not find that APJL had knowledge of the automatic stay by clear and convincing evidence until October 1, 2012, the Court deducts the time counsel spent on or before October 1, 2012, in the amount of $2,691.00. Because this is a complicated matter and Debtor's attorney was the party responsible for bringing this issue to the Court's attention, the Court will award a portion of the requested fees. However, $30,709.36 is excessive given that the Court drafted its own orders to show cause and spent a great deal of time reviewing the underlying accounting itself. Debtor's attorney also failed to upload the orders as directed after the November 28, 2012 hearing which resulted in a two-month delay and possible additional dissipation of funds. For these reasons, the Court will award approximately 75% of Debtor's attorneys' requested fees or $23,000.
The Chapter 7 Trustee requests his attorneys' fees in the amount of $29,000. After reviewing the attorneys' billing, it appears that the fees were largely incurred in efforts to remedy the violation of the automatic stay. However, a few entries appear related to the adversary proceeding on this topic (dated January 18, 2013 in the amount of $487.50; January 22, 2013 in the amount of $112.50; April 12, 2013 in the amount of $262.50; May 21, 2013 in the amount of $112.50; totaling $975.00), and the Court is not inclined to award those. The Court awards the remaining $28,025 in Chapter 7 Trustee's attorneys' fees as damages for the stay violation, but reserves issues as to the $975 of the Chapter 7 Trustee fees as part of the contract dispute.
The Chapter 7 Trustee also requests $13,112.50 for his attorneys' fees in attempting to get an accounting from APJL, preparing for and attending the June 2013 hearing, and responding to APJL's Supplemental Briefing. APJL has not opposed this amount. Because APJL continues to be in violation of the automatic stay by failing to comply in full with the turnover order of the OSC, the Chapter 7 Trustee continues to compile damages by attempting to enforce it against APJL's unsuccessful defense of impossibility and its improper collateral attack on the OSC. See Sckwartz-Tallard v. America's Servicing Co. (In re Schwartz-Tallard), 473 B.R. 340, 349 (B.A.P. 9th Cir. 2012) (finding additional attorneys' fees justified for debtor when debtor was forced to continue to defend her stay on appeal). The Court awards the $13,112.50 as damages to the Chapter 7 Trustee as well.
APJL's noncompliance with its automatic stay obligations and expenditure of the funds in the Augmentation Account for its own purposes has also caused actual damages to the estate in the amount of the deficiency between the funds on hand on October 1, 2012 and what was left when the funds were finally turned over. In its Supplemental Briefing on July 17, 2013 in response to the OSC, APJL admitted $133,265.98 was in the Augmentation Account when counsel initially requested it be frozen on September 25, 2012, and $116,702.74 was in the Augmentation Account on October 1, 2012 when Debtor's counsel informed APJL that it was in violation of the automatic stay. After October 1, 2012, an additional $44,394.12 was also deposited in the Augmentation Account. Had APJL frozen the account on October 1, 2012, $161,096.86 of Debtor's funds would have been preserved. After October 2012, APJL paid Debtor $64,539.62. By June 17, 2013, when APJL turned over the remaining funds in the Augmentation Account to the Chapter 7 Trustee, the balance had dwindled to $27,958.75. Of the original $161,096.86 that was available and could have been turned over to Debtor as of October 1, 2012, $68,598.49 is unaccounted for. These are the actual damages the Court awards to the estate.
VI. Conclusion
This Memorandum Decision constitutes this Court's findings of fact and conclusions of law under Bankruptcy Rule 7052. The Court finds APJL in contempt for knowingly violating the automatic stay by not taming over the Debtor's funds in the Augmentation Account on October 1, 2012.
The contempt sanctions awarded are $77,240.00 in attorneys' fees and $68,598.49 in actual damages, for a total of $145,838.49. For each day that APJL refuses to return the $68,598.49 to the Chapter 7 Trustee, which should have been in the Augmentation Account if it had been frozen on October 1, 2012 as required, APJL will be assessed an additional fine of $100, plus additional attorneys' fees incurred in rectifying its continuing contumacious conduct as an appropriate coercive sanction. The Ninth Circuit has explained:
Whether contempt is criminal or coercive civil is determined by the purpose of the sanction. If the sanction is intended to punish past conduct, and is imposed for a definite amount or period without regard to the contemnor's future conduct, it is criminal. If the sanction is intended to coerce the contemnor to comply
with the court's orders in the future, and the sanction is conditioned upon continued noncompliance, it is civil.Richmark Corp. v. Timber Falling Consultants, 959 F.2d 1468, 1481 (9th Cir. 1992). The Court finds APJL needs coercion to comply with this Court's orders to turn over the funds, as no other approach has worked in the year since the disputes under the Agreement arose in September 2012. APJL can also avoid these additional fees to the Court by simply paying the Chapter 7 Trustee the $68,598.49 in funds it should have turned over in October 2012 within 14 days of entry of this Contempt Order.
The Court will not award coercive sanctions in regard to the $77,240 in total attorneys' fees contempt damages at this time, but will give APJL an opportunity to comply voluntarily.
IT IS SO ORDERED.
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MARGARET M. MANN, JUDGE
United States Bankruptcy Court
See Fifth Status Report, Docket #129, Exhibit 1.
See Fifth Status Report, Docket #129, Exhibit 1.