Parker: Sweet Decision On Stay Violations

I don’t know just what makes Parker such a treat for me, but it delivers multiple thrills to my bankruptcy lawyer heart.

• It’s a stay violation case with a BIG sanctions award.

• It’s a clearly, simply written opinion that lays out the circuit law on multiple issues.

• It hits hard at HOA hubris.

• It analyzes when a claim arises.

It looks at surrender and vesting, mysteries near and dear to my heart.

And It’s local to my practice in Northern California. Find it at In re Parker, Case No.: 19-cv-2588-YGR (N.D. Cal. Mar. 22, 2021).

Here’s how the case unfolded.

Conduct of the Chapter 13

After several years of state court litigation with her homeowner’s association, Parker filed Chapter 13 in October, 2014, owing over $150,000 to the HOA for her condominium. Her confirmed plan provided for the surrender of the property in full satisfaction of her debt to the HOA, the mortgage lender, and the country taxing authority. Those secured creditors were granted relief from the stay by terms of the plan, which vested property in Debtor at confirmation.

Notwithstanding the plan provision, the HOA sought and received an order three months after confirmation vacating the automatic stay. Eight months later, in November, 2015, Debtor filed a motion for sanctions for violation of the automatic stay. While that motion was pending, Debtor’s discharge was entered on December 1, 2015.

All throughout that time period, the HOA was hard at work, trying to collect its claim.

Claimed violations of automatic stay

Debtor’s stay violation motion pointed to six categories of actions by the HOA that debtor contended violated the stay.

1. Late payment demand covering pre and post petition periods.
2. Disciplinary fines for asserted violations of CCR’s, citing post petition periods.
3. Retroactive assessment of pre and post petition dues
4. Post filing “settlement offer” with threat of expanded litigation if not accepted in 48 hours.
5. HOA’s lease of Debtor’s condo to third party, post confirmation.
6. Demands for payment of post petition assessments in April, 2016, including accelerated assessment for current year.

Claimed violations of the discharge

Debtor also asserted that the HOA violated the December 2015 discharge by its demand for payment in item 6 above, and by continuing to collect rent on the condo unit, still standing in debtor’s name, post discharge.

In broad strokes, after a five day trial, the bankruptcy court ruled for debtor on the automatic stay violations, and for the HOA on the discharge violation claims. Citing the 9th circuit’s ruling in Taggart, the bankruptcy court excused actions allegedly in violation of the discharge on the basis that there was “fair doubt” on the part of the creditor that the action was wrongful. Cert in Taggart was granted by the Supreme Court weeks before the bankruptcy court trial, but neither party requested a stay.

Both parties appealed.

On appeal

The District Court, methodically and concisely, addressed the multifaceted issues. I will highlight the pieces of this tale that have the most application in the broader bankruptcy world. Read the decision for all of the juicy bits.

Stay extends post confirmation

Creditor argued that the stay was not in effect after the condo revested in Debtor at confirmation and thus post confirmation payment demands couldn’t violate the stay. No, said the district court, 362(a)(6)) protects “property of the debtor ” and does not terminate until the earliest of dismissal, closure, or entry of discharge. 362(c)(2)).

Rebuffing the claim that the post petition assessments included in the demands weren’t prepetition claims, the District Court cited Goudelock, 895 F.3d 633 (9th Cir. 2018) for the proposition that post petition assessments are claims arising pre-petition and dischargeable. Trying to collect those post petition assessments violates the stay.

Further, the confirmed plan provided that the stay was modified, not terminated, to allow secured creditors to exercise their existing lien rights against the collateral. Modification of the stay did not permit the HOA to demand payment as a required step under state law to create a new lien on the condo.

Finally, stamping the payment demands as “For Information Only” didn’t save the day for the HOA. The district court concurred with the court below that language of the demand threatening acceleration of the entire year’s assessments was coercive and that it was intended to harass Debtor.

Settlement demand to counsel

The appeals court rejected the contention of the HOA that the settlement letter sent to debtor’s counsel days after the commencement of the case was protected, good faith settlement negotiations. The “settlement letter” demanded $25,000 plus legal fees and required acceptance within 48 hours, or the litigation would be expanded. The bankruptcy court committed no error in finding from the tone, context and content of the letter that it was coercive.

So, you don’t get a pass sending your collection threats to debtor’s counsel.

So what, the property was surrendered

The HOA argued that, having surrendered the condo by the terms of the confirmed plan, debtor had no remaining rights in the unit, and therefore, its lease of the condo to a third party was blameless.

Not so fast, said the appeals court. “Surrender does no more than give secured creditors the opportunity to foreclose on their secured rights in the collateral.” Surrender doesn’t confer ownership; ownership and the right to possession remained in the debtor. As property of the debtor, the stay prevented the HOA from leasing it out.

The damage tab

Emotional damages

The bankruptcy court’s award of emotional distress damages for stay violations of $5000 was affirmed despite the challenge that there was no corraborative evidence. No additional evidence is needed if “violator’s conduct was egregious or if circumstances make it obvious that a reasonable person would suffer significant emotional harm” citing Gugliuzza, 852 F.3d 884 (9th Cir. 2017).

I cheer the growing recognition that emotional distress is real and significant. It has always seemed to me that the attitude of bankruptcy courts too often is that stay violations are mere annoyances, to be suffered by debtors without compensation. It feels like bait and switch to tout bankruptcy as a relief from creditor collection action, then fail to enforce the promised peace.

Punitive damages

Ten thousand dollars in punitive damages was upheld on appeal. Punies are appropriate where there is a showing of reckless or callous disregard for the law or the rights of others, said the court. The finding that the HOA waged a campaign to flout bankruptcy law and collect on its claim was supported by the numerous and repeated stay violations. The appeals court rejected the proffered defense that its subjective belief in the rightness of its actions protected it from consequences. That subjective standard applies in contempt proceedings, on the law as it was at the time, not in stay violation actions.

Personal liability of HOA officers

The bankruptcy court was correct in finding that it could hold both the principal HOA and its agents, HOA officers, liable for actions violating the stay. Rejected was the defense that state law protected officers of non profits when they act in good faith and exercise reasonable care. The officers argued that they had a good faith belief that the notices and demands sent to Debtor were appropriate; the appeals court retorted that the damages were imposed for signing the lease on the condo to a third party, and there was no evidence presented on that issue.

And then, the attorneys fees

The trial court awarded Debtor $369,346 in attorneys fees, reduced from the $438,890 requested. The same standard for allowance of attorneys fees found in Section 330 applies to fee awards under 362(k). The HOA’s assertion on appeal that Debtor failed to mitigate her damages got no traction. One test for the required mitigation is examination of which party caused the fees to be incurred. The bankruptcy court got it right, said the appeals court, when it recounted the myriad of ways that the HOA violated the stay.

Debtor’s cross appeal

Debtor raised two issues on appeal, and was successful on both. First, Debtor contended that she was entitled to damages for the condo rents collected after the discharge terminated the stay. The appeals court agreed, citing Snowden, 769 F.3d 651 (9th Cir. 2014) for the proposition that damages for stay violation can run beyond the end of the stay. The creditor had an “affirmative obligation to return any property it had wrongfully seized…” The issue was remanded for further findings.

Finally, the Supreme Court’s decision in Taggart (139 S. Ct. 1795 (2019), entered after the bankruptcy court’s decision, mandated remand of the issue of violation of the discharge injunction. The trial court had found it was unable to rule for Debtor on the discharge violation issue because the 9th CIrcuit’s decision in Taggart protected a creditor who believed, even unreasonably, that the discharge did not apply to its action. The Supreme Court reversed Taggart, and this dispute will return to bankruptcy court.

There you have In Re Parker, the automatic stay and its remedies post petition, post confirmation, and post discharge.