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.