Sua Sponte

Louis S. Robin
Fitzgerald, O'Brien, Robin & Shapiro
Longmeadow, Massachusetts
Email: louis.robin@prodigy.net

Recently, I received a telephone call from the CLLA's office looking for a reference for a bankruptcy matter in another jurisdiction. My immediate thought was of a college and law school colleague with whom I had remained friendly over the years. However, I could not refer his name - why? - because he was not a CLLA member. I promptly gave two other very qualified names of CLLA members to the caller, and trust that all went well.

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Case Analysis

Cathy Pike
Weber & Rose
Louisville, Kentucky
cpike@weberandrose.com

NINTH CIRCUIT BAP RULES ON AWARD OF EMOTIONAL DISTRESS DAMAGES FOR VIOLATION OF THE AUTOMATIC STAY

Violation of the automatic stay, and the damages flowing from such a violation, have always been a concern of both debtors' and creditors' counsel. However, a landmine of recent authority has surfaced, relating to debtors' claims for emotional distress damages for willful violation of the automatic stay. A recent Ninth Circuit BAP decision, In re Charles E. Stinson , 295 BR 109 (2003), thoroughly explores the state of the law on this extremely unsettled issue.

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Case Law Update

Paige Barr
DePaul University J.D. Candidate
paigebarr@yahoo.com

No Rent Proration. Payment of full month's rent required, even though rent obligation covered in part a period of time after lease's rejection. The court relied on notions of equity and § 365(d) itself. After Chapter 11 debtor rejected office-building lease, vacated premises by fourth day of month, and made prorated rent payment for the three days that it occupied premises, the court ordered the debtor's immediate payment of rent for balance of month. Postpetition rent covering a period of time that extends into the postpetition period is “not a sunk cost that relates to a time before the bankruptcy case, but a charge for the consumption of a resource during the administration of the case . . . , and costs of administration must be paid.” Furthermore, the purpose of § 365(d) is to prevent parties in contractual or lease relationships with the debtor from being left in doubt concerning their status vis-à-vis the estate. Ha-Lo Indust., Inc. v. Center Point Properties Trust , 2003 U.S. App. LEXIS 18165 (7th Cir. June 4, 2003 ).

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Sua Sponte

Recently, I received a telephone call from the CLLA's office looking for a reference for a bankruptcy matter in another jurisdiction. My immediate thought was of a college and law school colleague with whom I had remained friendly over the years. However, I could not refer his name - why? - because he was not a CLLA member. I promptly gave two other very qualified names of CLLA members to the caller, and trust that all went well.

I then made another call - to my old college/law school friend, and disparaged him for not being a League member. He certainly could afford to be a CLLA member, and he would make a wonderful addition to the League. And worst of all, he might have lost out on some business. I promptly sent him an application for membership, which I had done in the past, and will make certain this time that he completes the application.

I ask each one of you to contact at least one colleague and encourage him/her to join the League and the Bankruptcy Section - Here's the application which you can either forward by e-mail or print in order to send it by (snail) mail. One of my hopes for the next year is that we can increase our membership. It betters us all, for many reasons - the camaraderie for which our League is known is increased, the potential for referrals and marketing opportunities is expanded, and revenues are boosted providing us with funds for the benefit of our membership. There is no reason that this sua sponte should not spur over one hundred new members - if (i) only 25% of the Bankruptcy Section's membership reads this, (ii) each one contacts only one person, and (iii) we only have a success rate of 50%, we will still have over 100 new members.

There is also an immediate personal monetary benefit for each of you to do this. The League has introduced a program which provides each member who successfully sponsors a member with a $50.00 reduction in the sponsor's yearly dues for the following year. If you feel guilty (and you should not feel guilty) either forward your savings to the new member or, better yet, take him/her out to lunch one day.

In my first sua sponte, I stated that I hoped to support the average League/Bankruptcy Section member. An increased membership will do that; but like all worthwhile goals, we must work together to support each other.

With that, I want to thank all members who have contributed to the Bankruptcy Section Bulletins that you receive by e-mail. These updates provide recent cases from a variety of courts, and keep us up to date on recent developments. They are not initiated by the League's office or some paid researcher - rather they are provided by League members who come across a recent noteworthy decision. I find them most helpful, and ask each one of you to continue to contribute. Finally, don't be shy about including a decision in which you represent the victorious party - you each deserve credit and publicity for you efforts.

This sua sponte may be a little briefer that others. If so, it will serve to reemphasize your obligation to forward CLLA applications to worthy candidates.

Louis S. Robin
Fitzgerald, O'Brien, Robin & Shapiro
1200 Converse Street
Longmeadow, MA 01106
Phone: 413-567-3131
Fax: 413-565-3131
Email: louis.robin@prodigy.net

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Case Analysis

NINTH CIRCUIT BAP RULES ON AWARD OF EMOTIONAL DISTRESS DAMAGES FOR VIOLATION OF THE AUTOMATIC STAY

Violation of the automatic stay, and the damages flowing from such a violation, have always been a concern of both debtors' and creditors' counsel. However, a landmine of recent authority has surfaced, relating to debtors' claims for emotional distress damages for willful violation of the automatic stay. A recent Ninth Circuit BAP decision, In re Charles E. Stinson , 295 BR 109 (2003), thoroughly explores the state of the law on this extremely unsettled issue.

Charles E. Stinson (“Stinson”) filed a Chapter 11 petition in 1993, which was later converted to Chapter 7. Thereafter, Stinson personally guaranteed a corporate debt. Stinson later received his Chapter 7 discharge in September 1994. The corporate debt was not discharged, in that it was not incurred until after conversion of Stinson's Chapter 11.

In 1995, after Stinson failed to make payments on the guaranteed corporate debt, the creditor filed a state court action against Stinson. Stinson then filed a Chapter 13 petition in April 1996, listing the creditor in his bankruptcy petition. Stinson's Chapter 13 petition was dismissed in July 1996. The creditor thereafter obtained a trial date.

In August 1996, Stinson filed yet another Chapter 13 petition, again listing the creditor in his bankruptcy schedules. Due to his non-attendance at the first meeting of creditors, the Chapter 13 trustee's minutes indicate that Stinson's Chapter 13 petition was dismissed. The dismissal was reported by Stinson's counsel to the creditor's counsel. However, the court did not actually dismiss the case until December 1996.

During the time period between the first meeting of creditors and when the court actually dismissed Stinson's petition, the creditor proceeded to trial in the state court action. Stinson did not appear, and the creditor obtained a judgment against Stinson, and recorded a judgment lien against Stinson's property. The automatic stay had never been terminated to permit the state court action to proceed.

Counsel for the creditor subsequently received a Notice of Dismissal from the bankruptcy court, but he never sought to have the automatic stay retroactively annulled, nor did he seek to have the state court judgment reentered.

Approximately one year later, in late 1997, Stinson's counsel advised the creditor's counsel that the state court judgment had been entered in violation of the automatic stay. Counsel for the creditor again did nothing to remedy the situation. Thereafter, in 1999, the creditor sought to enforce its state court judgment by selling Stinson's home and posting a foreclosure notice at his home.

Stinson filed a complaint seeking, inter alia , to enjoin the creditor from enforcing the state court judgment; claiming damages for violation of the discharge injunction; alleging that the judgment had been obtained in violation of the automatic stay; and asserting a claim for severe emotional distress. In response, the creditor sought to retroactively annul the automatic stay.

The lower court held that the creditor had willfully violated the automatic stay because it (a) failed to confirm that the Chapter 13 had been dismissed prior to proceeding to trial in the state court action, and (b) recorded the judgment liens after receiving notice of the stay violation. The lower court awarded Stinson attorney's fees and granted emotional distress damages, but denied Stinson's punitive damage claim. Moreover, all of Stinson's other claims against the creditor were dismissed. Further, the lower court refused to retroactively annul the automatic stay.

An appeal and cross appeal were filed, whereupon the BAP commented that, if the motion to retroactively annul the stay had been filed in late 1996, the equitable balance may have warranted annulling the stay. However, due to the creditor's delay in seeking such an annulment, the BAP essentially determined that the balance had tipped against the creditor, and found that annulment of the stay was not appropriate at this late date. The court also noted that counsel for the creditor's reliance on Stinson's counsel's statements as evidence of dismissal of the bankruptcy proceeding was “unreasonable”.

Further, the BAP reiterated the elements of “wilful” violation of the stay, which requires that the creditor know of the automatic stay and intentionally perform actions which violate the stay, irrespective of whether the creditor has a good faith belief that it is entitled to the property, or whether the creditor in good faith relies on the advice of counsel. Moreover, the BAP commented that, under §362(h), the party injured by willful violation of the automatic stay must be awarded the entire amount of actual damages “reasonably incurred as a result of a violation” of the stay.

After surveying the precedent set out in other Circuit Court of Appeals decisions, the BAP chose to follow the Seventh Circuit holding that emotional distress is not compensable under §362(h) in the absence of financial injury. ( Aiello v. Providian Fin. Corp. , 239 F.3d 876 [2001]) (Cf. Fleet Mortgage Group, Inc. v. Kaneb , 196 F.3d 265 [1 st Cir. 1999]). Accordingly, the BAP remanded the issue to the lower court, with the guidance that Stinson should only be awarded emotional distress damages if there was a significant economic loss caused by the willful violation of the automatic stay, which in turn caused him emotional injury.

Finally, the BAP determined that punitive damages under §362(h) are only appropriate where the debtor has suffered actual damages, or if the violator's conduct was “malicious, wanton or oppressive”, or if the violator engaged in “egregious intentional misconduct.”

It appears that the standard adopted by the BAP for the Ninth Circuit should be a fairly easy standard to meet. Once the debtor shows that he has suffered a financial loss under §362(h), under the precedent in the Seventh and Ninth Circuits, the debtor can piggyback a claim for damages for incidental emotional distress. Moreover, the First Circuit does not even require evidence of a financial loss, and instead has held that mere “emotional damages qualify as ‘actual damages' under §362(h).”

Cathy S. Pike
WEBER & ROSE, P.S.C.
2400 Aegon Center
400 W. Market Street
Louisville , Kentucky 40202
Phone: 502-589-2200
Fax: 502-589-3400
Email: cpike@weberandrose.com

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Case Law Update

No Rent Proration. Payment of full month's rent required, even though rent obligation covered in part a period of time after lease's rejection. The court relied on notions of equity and § 365(d) itself. After Chapter 11 debtor rejected office-building lease, vacated premises by fourth day of month, and made prorated rent payment for the three days that it occupied premises, the court ordered the debtor's immediate payment of rent for balance of month. Postpetition rent covering a period of time that extends into the postpetition period is “not a sunk cost that relates to a time before the bankruptcy case, but a charge for the consumption of a resource during the administration of the case . . . , and costs of administration must be paid.” Furthermore, the purpose of § 365(d) is to prevent parties in contractual or lease relationships with the debtor from being left in doubt concerning their status vis-à-vis the estate. Ha-Lo Indust., Inc. v. Center Point Properties Trust , 2003 U.S. App. LEXIS 18165 (7th Cir. June 4, 2003 ).

Filing a Chapter 13 Claims Objection Post-Confirmation is Not Too Late. Neither the Bankruptcy Code nor Bankruptcy Rules contain a bar date or deadline for filing objections to claim in a chapter 13 case. Debtor's objection filed post-confirmation was disallowed. A requirement that the allowance of claims under § 502 be fully adjudicated at the time of confirmation is not practicable, and would substantially delay confirmation and creditor payment. Morton v. Morton , 2003 Bankr. LEXIS 1136 (6th Cir. Aug. 6, 2003 ).

No Chapter 13 Reinstitution When Same Debtor Institutes Chapter 7. Reinstitution of the chapter 13 petition deemed impossible given the lack of a stay and subsequent litigation of a separate bankruptcy proceeding involving the same estate. The bankruptcy debtor filed a chapter 13 bankruptcy petition and had the excessive liens stripped from her personal residence. As a result, the debtor no longer qualified as a debtor and the proceeding was dismissed. Rather than appeal, the debtor filed a chapter 11 petition and then converted it to a chapter 7 petition. The appellate court held that the debtor elected to have the rights to her estate addressed in the chapter 7 proceeding. As a result, the debtor's appeal of the chapter 13 dismissal was moot in accordance with U.S. Const. art. III, § 2, cl. 1. Matter of Mendy , 2003 U.S. Dist. LEXIS 15360 (E.D. La. Aug. 19, 2003 ). 

Chapter 13's Anti-Modification of Secured Claims Provision. Finding the application of § 1322(b)(2)'s anti-modification provision inconclusive where the mortgagee holds a security interest that extends beyond the principal residence to other property or other income-producing components of the principal residence, the court concluded the applicability of § 1322(b)(2) depends on the intent of the parties at the time they entered into the mortgage agreement. The relevant portion of § 1322(b)(2) states: “A chapter 13 plan may modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence ….” Since Congress' intent was clear that in including the anti-modification provision it wanted to encourage the flow of capital into the home lending market by reducing mortgages risk in chapter 13 proceedings, determination of § 1322(b)(2) must be done on a case-by-case basis of whether the parties intended the mortgage in question to be primarily residential versus primarily commercial in nature. Litton Loan Servicing v. Beamon , 2003 U.S. Dist. LEXIS 14503 (N.D.N.Y. Aug. 21, 2003 )

The Meaning of “Value” When Selling a DIP's Assets Before Plan Confirmation. A debtor-in-possession cannot sell its property free and clear of all liens under § 363(f)(3) unless the sale price is greater than the aggregate face value of all liens on the property. The relevant portion of § 363(f) states: “A § 363(b) sale can be made ‘free and clear of any interest' in the property of an entity other than the estate if such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property.” The term “value” cannot mean economic value if it is read in the context of the preceding term “greater than.” Economic or “fair market” value is “the amount at which property would change hands between a willing buyer and a willing seller.” Accordingly, the sale price for overencumbered property can never be greater than the aggregate economic value of the liens on the property. WDH Howell v. Criimi Mae Servs., 2003 U.S. Dist. LEXIS 14804 (D. N.J. Aug. 27, 2003 ).

Reimbursement for Secretarial & Clerical Expenses. Acknowledging bankruptcy courts' wide latitude to set reasonable compensation, reimbursement allowed to trustee for secretarial and clerical expenses under § 330(a)(1). Inclusion and full compensation of the secretarial and clerical work is deemed under § 330(a)(1) as “actual, necessary expenses” provided that the work is “properly documented as to the individual performing it, the time involved in performing the service, and the benefit to the individual estate.” Com. Finish Group, Inc. v. Milbank , 2003 U.S. Dist. LEXIS 15338 (N.D. Tex. Aug. 29, 2003 ).

Order Confirming a Chapter 13 Plan is an Implicit Valuation. Recognizing implicit valuations is consistent with both the chapter 13 confirmation procedures and congressional intent underlying § 348(f), an order confirming a chapter 13 plan is an implicit valuation of the debtor's scheduled property. Section 348(f)(1 )(B) mandates bankruptcy courts' application of the aforementioned valuation in a chapter 7 conversion. Furthermore, this conclusion promotes judicial economy since establishing the valuation of property at an early stage in the proceedings ensures both stability and finality. Warren v. Peterson , 2003 U.S. Dist. LEXIS 15448 (N.D. Ill. Sept. 4, 2003 )

A Plan Must be Confirmed Before the § 1146(c) Tax Exemption Applies. Joining the Third and Fourth Circuits, court held §1146(c) requires that a plan be established before the provision's tax exemption “for the issuance, transfer, or exchange of a security, or the making or delivery of an instrument of transfer under a plan confirmed under section 1129” applies. Relying on the temporal nature of “under” in the statute as well as the court's assertion that “confirmed” makes explicit Congress' intent for a plan to be officially confirmed before § 1146(c)'s tax exemption takes effect, § 1146(c) is unambiguous in that it only applies to transfers made after a plan has been confirmed. States of Ill. & Wash. V. Nat'l Steel Corp. , 2003 U.S. Dist. LEXIS 15695 (N.D. Ill. Sept. 8, 2003 ).

Refusal to Receive Offer-In-Compromise Upheld Under § 525(a). An offer-in-compromise is not a “license, permit, charter, franchise, or other similar grant.” Thus, refusal to receive and consider offer-in-compromise is not prohibited by § 525(a) of the Bankruptcy Code. Congress simply did not choose language, which would prohibit any governmental discrimination against bankruptcy debtors. The language “chosen by Congress indicates that the intended scope of [section 525(a)] is the ‘government's role as a gatekeeper in determining who may pursue certain livelihoods' and to prohibit governmental actions punishing bankruptcy debtors' by denying them permission to pursue certain occupations or endeavors.” Holmes v. United States , 2003 Bankr. LEXIS 1135 (Bankr. M.D. Ga. Sept. 12, 2003 ).

Paige Barr
DePaul University J.D. Candidate
200 N. Dearborn St., Apt. 4101
Chicago, IL 60601
(312)782-4428
paigebarr@yahoo.com

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Washington Hot News

September 23, 2003
California Has Debt Collections, ID Theft Law.

On September 10th, Governor Davis (D) signed a bill that blocks debt collectors from pursuing debt from consumers who provide a police report and written statement establishing that they were identity theft victims. The debt collector could recommence collection activities if it determines the debt is not related to identity theft and the debtor is in fact responsible. A person who submits false information to a debt collector under the law would be guilty of a misdemeanor. Davis said the measure is the first of its kind in the nation. The new law takes effect January 1, 2004 .

September 15, 2003
FDCPA bill introduced.

On September 10th, Rep. Garrett (R-NJ) introduced HR 3066 , a bill to amend the Fair Debt Collection Practices Act. It is co-sponsored by, among others, Rep. Andrews (D-NJ) and although similar to the bill he had introduced in previous Congresses, it varies in some significant ways. The bill does contain a provision creating an "attorney practicing as an attorney" exemption as well as language confirming the right to collect during the first 30 days (both being issues supported by the League). The bill does not address a consumers right retain counsel and have fees paid nor limit a consumer's statutory damages amount. The text of the bill can be viewed here .

September 8, 2003
New bankruptcy priority bill introduced.

On September 4th, Rep. Brown (R-SC) introduced HR 3003 , a bill to establish a priority in Title 11 for the payment of claims for duties paid to the United States by licensed customs brokers and sureties on behalf of a debtor.

The text of the bill is provided here .

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