BAP Holds Sovereign Immunity Bars Emotional Distress Damages Against United States for Violation of Automatic Stay; Awards Attorney’s Fees as Sole Damages for Violation of Discharge Injunction – By Dan Lake

Duby v. United States, Nos. NH 10-052, NH 10-057, 2011 Bankr. LEXIS 2356 (B.A.P. 1st Cir. June 28, 2011)

The United States Bankruptcy Appellate Panel for the First Circuit affirmed the bankruptcy court’s award of attorney’s fees for the defendant’s violation of an automatic stay, while reversing the bankruptcy court’s $3,000 sanction against the defendant for violating a discharge injunction. The defendant, the United States Department of Agriculture (USDA), made repeated collection attempts during the Chapter 11 debtor’s automatic stay, despite receiving actual notice of the debtor’s petition and of the automatic stay. After receiving notice of the discharge of the debtor’s loan, USDA again made repeated collection attempts on the loan. The debtor brought an adversary proceeding against the USDA, seeking attorney’s fees, punitive damages, and emotional distress damages. The bankruptcy court found that First Circuit case law barred punitive and emotional distress damages, but awarded attorney’s fees to the debtor and sanctioned the USDA for violating the discharge injunction. The BAP affirmed in part and reversed in part, upholding the award of attorney’s fees and the bar on emotional distress damages, while finding that the sanction was in error as it was punitive in nature and expressly excepted from the waiver of sovereign immunity.

The BAP first addressed the issue of whether a court could order the federal government to pay emotional distress damages under Section 362(k)(1) of the Bankruptcy Code. Section 362(k)(1) allows for a debtor to recover “actual damages” from a party who willfully violates an automatic stay. However, a court cannot award damages against the federal government unless the United States expressly and unequivocally waives sovereign immunity. Section 106(a) of the Bankruptcy Code waives sovereign immunity as to Section 362 and the “actual damages” provision contained within. In United States v. Rivera Torres (In re Rivera Torres), 432 F.3d 20 (1st Cir. 2005), the First Circuit held that Congress did not unequivocally waive sovereign immunity for emotional damages. The First Circuit in In re Rivera Torres performed a temporal analysis of the Bankruptcy Code, finding that there was no consensus as to whether “actual damages” included emotional distress. Congress amended the Section 106 in 1994, and would have clearly waived sovereign immunity if it intended to clear up the confusion. In this case, the debtor sought reversal of In re Rivera Torres, arguing that the First Circuit erroneously used a legislative history analysis while ignoring the plain text of Section 106(a)(3), which waives sovereign immunity as to judgments awarding money recoveries. While the Eleventh Circuit had held that Section 106(a) waives sovereign immunity as to “necessary and appropriate” money damages, the BAP and bankruptcy court was obligated to follow the binding First Circuit precedent of In re Rivera Torres.

The debtor also attempted to distinguish In re Rivera Torres as only applying to a violation of a discharge injunction, and not to a violation of an automatic stay. The debtor argued that the First Circuit’s discussion of Section 362, the automatic stay provision, was not essential to its holding and was therefore non-binding dicta. Furthermore, Section 362(k)(1) provides for the recovery of “actual damages,” which should include emotional damages under existing First Circuit case law. The BAP disagreed with the debtor’s argument, finding that the debtor offered no reason as to how, using the In re Rivera Torres temporal analysis, the panel could find that the United States clearly waived sovereign immunity as to emotional damages from violation of an automatic stay.

The BAP next addressed the issue of whether the bankruptcy court’s award of attorney’s fees was in error. The USDA first argued that the debtor incurred no attorney’s fees until after the termination of the automatic stay, and that the bankruptcy court improperly calculated the fees under Section 362(k), the automatic stay provision. The BAP held that the bankruptcy court was not in error, as the court could have analyzed the attorney’s fees as compensatory damages under Section 105(a), the discharge injunction provision, which uses the same standard as Section 362(k). The USDA also argued that the debtor’s adversary proceeding was unnecessary, as the debtor suffered no actual damages other than emotional damages, which are not recoverable under In re Rivera Torres. The BAP disagreed, noting that the debtor’s counsel contacted the USDA to persuade the agency to cease its collection efforts. The USDA declined to stop its actions, and an adversary proceeding was necessary to defend the debtor’s rights. The BAP also found that “actual damages” of Section 362(k)(1) include attorney’s fees and therefore the debtor had suffered an injury that required redress, despite a lack of other damages.

The USDA also argued that the BAP should adopt the Ninth Circuit rule that attorney’s fees incurred long after the violation of an automatic stay are not recoverable. In Sternberg v. Johnston, 595 F.3d 937 (9th Cir. 2010), cert. denied, 131 S. Ct. 102 (2010), the Ninth Circuit held that the “actual damages” provision of Section 362(k)(1) was ambiguous, and concluded that actual damages could not include legal fees incurred to redress the underlying injury of an automatic stay violation. The BAP noted that other courts had criticized Sternberg, while finding that the statutory text was unambiguous and that Congress clearly intended for creditors to pay for legal fees incurred to redress a violation of an automatic stay. Without allowing for attorney’s fees, a debtor’s attorney would be less likely to pursue enforcement of the automatic stay and would also encourage creditors to harass a debtor during the stay without fear of paying legal fees. Stating that the purpose of the automatic stay is to preserve the status quo, the BAP held that the attorney’s fees in this case, as reduced by the bankruptcy court, were recoverable.

Finally, the USDA argued that the bankruptcy court’s $3,000 sanction for violation of the discharge injunction was an impermissible punitive sanction, because the USDA had no opportunity to purge the contempt. The USDA had ceased its collection efforts long before the debtor commenced the adversary proceeding. The BAP agreed with the USDA’s argument, noting that “the ability to purge one’s contempt is a pre-requisite for a non-compensatory coercive civil contempt sanction.” The BAP found the sanction to be punitive in nature, as the bankruptcy court indicated that the sanction was to “prevent further violations,” and because the debtor suffered no damage other than the attorney’s fees already compensated for under Section 362(k)(1). Section 106(a)(3) of the Bankruptcy Code specifically excepts punitive damages from the waiver of sovereign immunity, therefore, the bankruptcy court was in error to punitively sanction the USDA.

CLE Committee Seeks Input and Volunteers for Brown Bag Luncheon Program and CLE Programs

The CLE Committee of the Bankruptcy Section organizes the monthly Brown Bag Luncheon program. For those not familiar, the Brown Bag Luncheon Series provides opportunities for members and non-members to eat their lunch at the BBA headquarters and simultaneously attend an informal seminar. Attendees can bring their own lunch, or pay a minimal amount to have the BBA provide it. During lunch a seminar will take place on a pre-assigned topic. There are usually 3 – 5 speakers and often there are handouts. There is no fee to attend these lunches unless lunch is purchased from the BBA. The organizers strive to have an even number of business and consumer topics addressing everyone’s concerns. Some topics may be general enough to cover both areas, i.e. changes in local rules. Please see the dates below for 2011-2012.

In addition, the CLE Committee organizes up to four (4) CLE seminars requiring payment to attend. There will be official written materials provided and CLE credit given.

The Co-Chairs of the Committee would like members of the Bankruptcy Section to review the following questions and provide any feedback by October 1.

1. Would you be interested in volunteering to chair a Brown Bag Luncheon or CLE Seminar?

2. Would you be interested in speaking at a Brown Bag Luncheon or CLE Seminar?

3. Do you have ideas for potential subject matters for Brown Bag Luncheons or CLE Seminars?

Please provide feedback to the CLE Chairs:

Daniel Carragher (Business seminars)
Day Pitney, LLP
(617) 345-4638
Fax: (617) 345-4745
[email protected]

Ann Brennan (Consumer seminars)
Ann Brennan Law Offices
(781) 878-6900
Fax: (866) 739-0168
[email protected]

2011-2012 BROWN BAG LUNCHEON DATES:

September 13, 2011 – Consumer Update
October 11, 2011 – (Business)
November 8, 2011 -(Consumer)
December 13, 2011 – (Business)
January 10, 2012 -(Consumer)
February 14, 2012 – (Business)
March 13, 2012 – (Consumer)
April 10, 2012 – (Business)
May 8, 2012 – (Consumer)
June 12, 2012 – (Business)

Chapter 11 Bankruptcy Venue Reform Bill Pending Before Congress

On September 8, 2011, the Subcommittee on Courts, Commercial and Administrative Law of  the House Judiciary Committee heard testimony from four experts including Chief Judge Frank J. Bailey of the United States Bankruptcy Court for the District of Massachusetts on a bill pending before Congress to alter venue requirements in chapter 11 bankruptcy cases.   The bill, officially known as the Chapter 11 Bankruptcy Venue Reform Act of 2011, H.R. 2533 (the “Bill”), was introduced to the House on  July 14, 2011 and would implement changes to the current venue rules for commencing Chapter 11 bankruptcy cases.

The Law and Public Policy Committee of the Bankruptcy Law section has prepared a brief Overview of the Bill which can be found below the jump.  The full text of the Bill can be found by clicking here.  Transcripts of the testimony of the  witnesses before the subcommittee (including Chief Judge Bailey) can be accessed by clicking here.  

The Bankruptcy Law Section will continue to monitor progress of the Bill and provide periodic updates to this blog.

Overview of the Chapter 11 Bankruptcy Venue Reform Act of 2011, H.R. 2533

On July 14, 2011, Representatives Lamar Smith of Texas, John Conyers, Jr. of Michigan, Howard Coble of North Carolina, and Steve Cohen of Tennessee introduced the Chapter 11 Bankruptcy Venue Reform Act of 2011, H.R. 2533 (the “Bill”).  The Bill proposes changes to the current venue rules for commencing bankruptcy cases in order to limit “forum-shopping” by potential debtors.  The Bill has been referred to the House Committee on the Judiciary.  On September 8, 2011, the Subcommittee on Courts, Commercial and Administrative Law of the House Judiciary Committee heard testimony from four experts including Chief Judge Frank J. Bailey of the United States Bankruptcy Court for the District of Massachusetts.   Below is an overview of the present provision on bankruptcy venue and the changes proposed by the Bill.

Existing Venue Provision Under 28 U.S.C. § 1408

            Section 1408 of Title 28 the United States Code governs venue in chapter 11 cases.  As presently written, Section 1408 provides that a debtor may file its bankruptcy case (i) in any district court where the debtor’s domicile, residence, principal place of business, or principal assets are located, or (ii) in any district court where an affiliate, general partner, or partnership of the debtor has a case pending. 28 U.S.C. § 1408.  Pursuant to Section 1408, many companies are eligible to file their bankruptcy cases in either the Southern District of New York or the District of Delaware because they are either incorporated in those jurisdictions or follow affiliates which are eligible to file there.

Changes Proposed by H.R. 2533

The Bill contemplates several changes to the current venue provision under Section 1408 in an attempt to promote fairness by ensuring maximum participation by stakeholders in a bankruptcy case.  Specifically, the Bill revises Section 1408 as follows:

(b) [a] case under chapter 11 of title 11 in which the person that is the subject of the case is a corporation may be commenced only in the district court for the district—

(1) in which the principal place of business in the United States, or principal assets in the United States, of such corporation have been located for 1 year immediately preceding such commencement, or for a longer portion of such 1-year period than the principal place of business in the United States, or principal assets in the United States, of such corporation were located in any other district; or

(2) in which there is pending a case under chapter 11 of title 11 concerning an affiliate of such corporation, if the affiliate in such pending case directly or indirectly owns, controls, or holds with power to vote more than 50 percent of the outstanding voting securities of such corporation.”

By narrowing the scope of Section 1408 to require a chapter 11 debtor to file a bankruptcy petition in the district where either the debtor’s principal place of business or principal assets are located, the Bill seeks to eliminate chapter 11 filings in jurisdictions where a particular debtor has little or no presence.  

First Circuit Affirms District Court’s Holding that Automatic Stay Tolls Massachusetts Obsolete Mortgages Statute, Despite Mortgagee’s Failure to Record Timely Extension

Shamus Holdings, LLC v. LBM Financial, LLC (In re Shamus Holdings, LLC), 54 Bankr. Ct. Dec. 221 (1st Cir. 2011)

By Dan Lake

The United States Court of Appeals for the First Circuit affirmed a district court decision holding that a mortgage remains in force during an automatic stay, notwithstanding the mortgagee’s failure to record a timely extension under the Massachusetts Obsolete Mortgages Statute. The Obsolete Mortgages Statute, Mass. Gen. Laws ch. 260, § 33, requires a mortgagee to commence enforcement of a mortgage within five years after the end of the stated term or face forfeiture. A mortgagee can extend the limitations period by simply recording a notice of extension. In this case, the mortgage term ended on September 9, 2003 and the mortgagee failed to enforce the mortgage at any point thereafter. The mortgagor filed a voluntary Chapter 11 petition in 2007, triggering an automatic stay, and in 2009 filed suit to discharge the mortgage as time-barred by the Obsolete Mortgages Statute. The First Circuit held that the Bankruptcy Code’s automatic stay and tolling provisions combined to preserve the mortgagee’s right to enforce the mortgage, despite its failure to enforce the mortgage or record a timely extension.

The Obsolete Mortgages Statute provides a five year statute of limitations for enforcing a mortgage, while allowing a mortgagee to toll the limitations period by recording an extension of the mortgage. However, this statute operates in combination with the Bankruptcy Code’s automatic stay provision, which “gives debtors breathing room by stopping collection efforts . . . and permitting their resumption only when the stay is lifted by the bankruptcy court or dissolved by operation of law.” Also applicable is Section 108(c) of the Bankruptcy Code, which tolls state statutes of limitations for creditors barred from taking action against a debtor because of an automatic stay. Section 108(c) provides that a state statute fixing a period for commencing or continuing a civil action that has not expired before the date of a debtor’s bankruptcy petition shall expire at the later of (1) the end of such period or (2) thirty days after the termination or expiration of the automatic stay. The mortgagor in this case argued that because the Obsolete Mortgages Statute allows for an extension, the statute does not “fix . . . a period for commencing . . . a civil action” as required by the text of Section 108(c) and therefore, the automatic stay should not toll the statute. The First Circuit rejected this argument, noting that Massachusetts law provides a mortgagee with two choices to respond to a default: the mortgagee may enforce the mortgage within the statutory period or extend the period by recording an extension. The statute does not require a mortgagee to record an extension. The mortgagor in this case filed the bankruptcy petition before the expiration of the five year limitations period, preventing the mortgagee from enforcing the mortgage. The court found that the Obsolete Mortgages Statute fell squarely within the tolling provision of Section 108(c), preserving the mortgagee’s option to commence judicial foreclosure following the termination of the automatic stay.

The mortgagor also argued that the extension procedure fit into the Section 362(b)(3) exception to an automatic stay for acts to perfect an interest in property. The court disagreed with this characterization of the extension procedure, as it found that the choice of which option to take in response to a default is entirely up to the mortgagee. Because there is no case law or statutory language suggesting that recording an extension is mandatory, the extension process cannot be viewed as an act to perfect an interest in property.

Finally, the First Circuit dismissed the mortgagor’s argument that the Obsolete Mortgages Statute trumps the Bankruptcy Code’s automatic stay provision because state law, and not federal law, defines real property rights. This argument fails because a creditor’s rights in bankruptcy arise from the substantive law that created the debtor’s obligations, subject to any contrary language in the Bankruptcy Code. Therefore, when a provision of the Bankruptcy Code speaks directly to the issue at hand, the federal bankruptcy law applies. Here, Massachusetts law defines the underlying rights and obligations of the parties, while Section 108(c) controls because it speaks directly to the tolling of state statutes of limitations.

YELLOW RIBBON EVENT – VOLUNTEER OPPORTUNITY

We are currently looking for volunteers to assist members of the military at the following Yellow Ribbon event:

Saturday August 20, 2011 at the Newton Marriott.  The event starts at 8 a.m. and we do not expect any formal legal sessions at this event – we simply need volunteers to staff the BBA table starting at 10:00 a.m. to assist with legal questions. 

Please contact Don Lassman at [email protected] if you are interested in helping out.

ANNUAL MASSACHUSETTS VETERANS STANDDOWN – VOLUNTEERS NEEDED

Homeless and in-need Veterans and their families are invited to attend Massachusetts Stand Down 2011 on Friday August 26th and Saturday August 27th. This year’s event is at a new location and will be held at the IBEW Local 103 at 256 Freeport Street in Dorchester. The two day event will provide many services to homeless and at-risk veterans including housing assistance, job assistance, medical aid, clothing and much more! Bring your DD-214 or VA card as proof of veteran status. For the third consecutive year, Volunteers of America Massachusetts is the lead agency for this event.
We are looking for volunteers to staff a table for legal services on August 26 from 8-4 (hopefully we can do this in shifts if we get enough volunteers) and on August 27 from 8 – noon.
If you are interested in volunteering, please contact Don Lassman at [email protected]

Call for Volunteers to Prepare a Bankruptcy Law Handout for the Military

There are a number of substantive law handouts prepared by the JAG for service members and these are available at Yellow Ribbon Events that the BBA has been attending and supporting over the past year.  Don Lassman thinks it would be helpful if there were a similar handout for Bankruptcy and is wondering if anyone might be interested in taking on the project of preparing the handout.  Please let him know if you have any interest by contacting him at Donald R. Lassman, Esq., P.O. Box 902385, Needham, MA  02492, 781-455-8400 (phone), 781-455-8402(fax), [email protected]

Dodgers File for Bankruptcy, Increasing Tension With Selig

The Los Angeles Dodgers filed for bankruptcy in a Delaware court Monday, a move that is expected to give a quick jolt of cash to the troubled team but also to ratchet up the fight between the owner, Frank McCourt, and Bud Selig, Major League Baseball’s commissioner, who last week rejected a proposed television deal by the team that was worth $2.5 billion to $3 billion.  To read more from the NY Times, click here.

Training Materials Now Available Online

The training materials provided at the May 5, 2011 Free Training Opportunity for Attorneys Interested in Helping Veterans and Active Members of the Military and Their Families Experiencing Financial Difficulties are now available online.  Click here to view the Primer on Bankruptcy-Related Provisions Applicable to Service Members.  To view the powerpoint presentation entitled Commercial, Consumer, and Bankruptcy Law Issues Affecting Members of the Military Training Session, click here.