ILC E-Bulletin: In re Preserve, LLC (9th Cir. BAP) – BAP analyzes the distinctions between 362(k) and contempt sanctions with respect to violations of the automatic stay

The following is an independent case analysis of the matter prepared by ILC member Judy Descalso of the Law Offices of Judith A. Descalso in San Diego and Escondido, California, with editorial contributions from ILC member Gregory M. Salvato of Salvato Law Offices in Los Angeles. It has been reproduced below.

Insolvency Law Committee E-Bulletin: In re Preserve, LLC (9th Cir. BAP) – BAP analyzes the distinctions between 362(k) and contempt sanctions with respect to violations of the automatic stay

May 21, 2019

Dear constituency list members of the Insolvency Law Committee, the following is a case update.

SUMMARY

In Ress Fin. Corp. v. Beaumont 1600, LLC (In re Preserve, LLC), 2018 WL 4292023, filed September 7, 2018, the Bankruptcy Appellate Panel of the Ninth Circuit vacated the Bankruptcy Court’s grant of attorney’s fees arising from a stay violation and remanded the case to the Bankruptcy Court for further proceedings. The BAP reversed on the grounds that (1) the trustee should have filed the contempt action as a contested matter as opposed to an adversary proceeding; (2) the trustee was ineligible to recover damages under section 362(k) because a trustee is not an “individual” within the meaning that section; and (3) the court was required to determine, under the clear and convincing standard of review, that the contemnor had knowledge of the stay and intended to violate it before awarding civil contempt damages. The BAP overturned the Bankruptcy Court’s Order awarding $424,118.98 in damages against the foreclosure trustee and remanded to determine whether the evidence met this standard.

FACTS

After defaulting on its confirmed Sixth Amended Chapter 11 Plan, the Bankruptcy Court converted the case to a case under Chapter 7 and granted the lender relief from stay to pursue its state law remedies. The trustee under the deed of trust, National Financial Lending (“NFL”) and its agent, Ress Financial Corporation (“Ress”), commenced a non-judicial foreclosure. However, the debtor’s counsel and the trustee’s counsel both notified Ress that, due to pre-bankruptcy reconveyances, the lender had released its lien on two of the debtor’s parcels that were erroneously included in the Notice of Default, and that proceeding with the foreclosure would constitute a violation of the automatic stay. Ress nevertheless continued, asserting the reconveyances were not valid. The trustee filed a complaint seeking declaratory relief and damages for stay violations. Ress rescinded the NOD, but continued to litigate. On summary judgment, the court determined that the attempted foreclosure was a violation of the automatic stay. After trial, the court determined that defendants’ violation of the stay was willful and intentional, that Ress’s belief that it was acting in accordance with applicable non-bankruptcy law was reckless and unreasonable, and further, that recordation of a Notice of Trustee’s Sale was a slander of title. Upon the parties’ subsequent fee applications, the Bankruptcy Court awarded fees totaling $424,118.98 against Ress and NFL.

REASONING

The BAP first considered appellant’s argument that the trustee should have proceeded by motion instead of by adversary proceeding, but held that such error “if any” was harmless.

On the merits, the BAP held that although a bankruptcy trustee is not eligible to recover damages under section 362(k) because a trustee is not an “individual,” a trustee may recover damages for violations of the automatic stay as a sanction for ordinary civil contempt. For this, the trustee must meet the clear and convincing standard for obtaining contempt sanctions.

The automatic stay qualifies as a specific and definite court order, and in determining whether the contemnor violated the stay, “the court is to focus on whether the contemnor’s conduct complied with the stay, not its subjective belief or intent. To find a willful violation of the stay under either the contempt standard or under section 362(k), a bankruptcy court need not find bad faith or subjective intent, but only that the defendant knew of the automatic stay and that the defendant’s actions were intentional. However, the standard for awarding damages differs. Damages are mandatory under section 362(k), but damages are discretionary under the court’s contempt power. Under section 362(k), a party with knowledge of bankruptcy proceedings is charged with knowledge of the automatic stay, but in the contempt context, the party must not only know of the stay but also that the stay applies to its conduct. In other words, in a contempt proceeding, knowledge of the stay may not be inferred simply because the creditor knew of the bankruptcy. Even an unreasonable belief that the stay does not apply to a creditor’s claims would preclude a finding of contempt.

The BAP noted that a plaintiff seeking contempt sanctions must show by “clear and convincing evidence” that the contemnors violated a specific and definite order of the court. The Bankruptcy Court’s application of a “preponderance of the evidence standard” was error. The clear and convincing standard applies to the issue of whether the stay has been violated as well as the issue of the contemnor’s knowledge and intent. And the evidence offered by the movant must “place in the ultimate factfinder an abiding conviction that the truth of its factual contentions are highly probable.”

Thus, the BAP remanded to the Bankruptcy Court to determine whether the trustee had established by clear and convincing evidence that Ress knew that the stay applied to its conduct and then acted intentionally to violate the stay. The BAP indicated that the Bankruptcy Court should award only those attorney’s fees incurred in litigating an issue that flows from the stay violation.

AUTHOR’S COMMENTARY

This ruling highlights the distinction between an individual seeking a remedy for a stay violation under section 362(k) – which the BAP characterized as a “robust remedy” – and the remedies provided as a sanction for ordinary civil contempt. A trustee is not eligible for the former and the standards for the latter are very high. While creditors may get a “free pass” because of the high burden of proving intent to violate the stay for contempt damages, those creditors would remain liable for injuries to individuals for actual damages and, possibly, punitive damages under Section 363(k).

Ninth Circuit affirms Chapter 13 plan for SLO client, finding good faith and eligibility under Bankruptcy Code section 109(e).

In 2010, Debtor filed a Chapter 7 bankruptcy case and obtained a discharge, including a discharge of her personal liability on the debts secured against her residence. More than four years later, Debtor filed for Chapter 13 relief. On her Chapter 13 bankruptcy schedules, Debtor identified her residence and the debts secured by the residence, including the junior lien of the lender. Since the amount of the senior lien exceeded the value of the residence, Debtor indicated her intent to avoid the junior lien. On Schedule D of her bankruptcy petition, Debtor listed the junior lien as a secured debt of $0 and identified her intent to avoid the lien. On Schedule F, Debtor listed the junior lien as an unsecured debt.

The Ninth Circuit affirmed the Bankruptcy Appellate Panel and the Bankruptcy Court’s orders determining that the Debtor was eligible for Chapter 13 relief under Bankruptcy Code section 109(e). The junior lender’s lien was unsecured because the amount of the senior lien exceeded the value of the residence. This was readily ascertainable from the bankruptcy schedules, which were made in good faith. The lender’s resulting unsecured junior lien was unenforceable because the Debtor’s personal liability had been previously discharged in a Chapter 7 case. Therefore, the Bankruptcy Court correctly determined that the lender’s debt did not place Debtor over the debt limits for the purpose of section 109(e) eligibility because the lender held neither an allowed secured claim where its lien was avoidable under section 506(a), nor an allowed unsecured claim because the Debtor’s personal liability on the debt had been discharged by her previous Chapter 7 bankruptcy case.  

The Ninth Circuit also affirmed the Bankruptcy Court’s determination that the Chapter 13 petition was filed in good faith because none of the relevant factors for evaluating bad faith were present. There was no evidence of misrepresentation, serial bankruptcy filings, filings to defeat state court litigation, or egregious behavior. Furthermore, the Ninth Circuit rejected the lender’s argument that the filing of a Chapter 13 petition after receiving a prior Chapter 7 discharge is bad faith per se because that conclusion is unsupported by the Bankruptcy Code and case law.

Federal Bar Association's 15th Annual Bankruptcy Ethics Symposium - November 16, 2018

November 16, 2018
Time: 9:00 a.m.
Roybal Federal Building, Conference Room 283
255 E. Temple St., Los Angeles, CA 90017

Click here to register online
Click here for flyer and additional event information

Coffee, Bagels, Pastries provided

SPEAKERS

Honorable Martin R. Barash, United States Bankruptcy Court
Honorable Robert N. Kwan, United States Bankruptcy Court
 Honorable Barry Russell, United States Bankruptcy Court
Ron Maroko, Office of the United States Trustee
Kristin Ritsema, Office of Chief Trial Counsel, State Bar of CA
Jolene Tanner, U.S. Attorney’s Office
Ellen A. Pansky, Pansky Markle Attorneys at Law
Elmer Dean Martin III, Elmer Dean Martin III, a Professional Corporation
Daniel M. Cislo, Cislo & Thomas LLP
J. Scott Bovitz, Bovitz & Spitzer

Program Chair: Joseph Boufadel, Salvato Law Offices


9:00 a.m. - 12:45 p.m. | Four Programs

  • How Not to be Befuddled by Bankruptcy Tax

  • Outsourcing, Delegating, and Abdicating: What Are Your Professional Responsibilities?

  • The Ethical Lawyer’s Dilemma: Information Technology in the Era of the iPhone, Software as a Service, and the Internet of Things

  • The New California Rules of Professional Conduct: How They Will Affect Your Bankruptcy Practice


MCLE: 3.5 Hours Legal Ethics. This activity has been approved for Minimum Continuing Legal Education Credit by the State Bar of California. The FBA certifies that this activity conforms to the standards of approved education activities prescribed by the rules and regulations of the State Bar of California governing minimum continuing legal education.

Cost: $25 (FBA members); $35 (CDCBAA and LABF members);
$40 (non-members). At Door $50
Judges and Clerks - No Charge

ABI Published Article: "There and Back Again: Perspectives on Practicing Law While Parenting"

American Bankruptcy Institute
December 2017 Journal
Chapter 8 Humor

By Joseph Boufadel

"At a recent outing of the Monday Night Lawyers Movie Club in Los Angeles, I bombarded the group with photographs of my daughter. As a proud new parent, I assumed that everyone would love to see pictures of my favorite (and only) “mini-me” daughter, Emma, with her big brown eyes and curly dark hair. What’s not to love? After enduring the onslaught of pictures and stories, J. Scott Bovitz1 of Bovitz & Spitzer retaliated.

Bovitz: Cute photos. You should write a Chapter 8 Humor article — you know, a personal-interest story about how becoming a parent has impacted your practice.

Boufadel: I’m not comfortable writing about myself.

Bovitz: Do it. Aren’t you a millennial? Talking about yourself should come easily. Plus, maybe at least a few readers of the ABI Journal will find it interesting and refreshing to hear a different perspective on being a parent today as a bankruptcy litigator.

I know what many of you are thinking: “Who wants to hear from only a millennial?”2 Good question. Luckily, I agree with you and recruited my mother-in-law, who kindly agreed to compare notes on her experiences parenting a bunch of millennials. Some of you probably know her as Lisa Hill Fenning, who has also been an ABI member since 1992. She was a bankruptcy judge in Los Angeles from 1985-2000, when she returned to practice to pay for college for my then-future wife, Danielle, and Danielle’s three siblings.3 Along the way, she found time to sit on the boards of ABI and NCBJ, handle a bunch of mega-cases, and do some other good bar stuff. And, from my personal perspective, her kids still managed to turn out OK (“OK” equals “terrific” if they are reading this).

What follows is a discussion about our experiences in practicing law and being a parent during the 1980s, 1990s and now, and how the tools available to attorneys have evolved since that time..."

Bankruptcy Appellate Panel affirms Court's Orders confirming Chapter 13 Plan and denying creditor's motion to dismiss on eligiblity grounds

Asset Management Holdings, LLC v. Aleli A. Hernandez, BAP No. CC-16-1228
(BAP 9th Cir. Apr. 11, 2017)


Salvato Law Offices successfully defended an appeal by a lienholder attacking the debtor's Chapter 13 plan confirmation for lack of good faith and seeking dismissal of the Chapter 13 case on eligibility grounds under Bankruptcy Code Section 109(e). The Bankruptcy Court denied the creditor's motion to dismiss and confirmed the Chapter 13 plan. The Bankruptcy Appellate Panel affirmed.

INTRODUCTION

Debtor filed a chapter 7 case in 2010 and obtained a discharge, including a discharge of her personal liability on two debts secured by deeds of trust against her residence. More than four years later, Debtor filed a subsequent chapter 13 case. On her schedules, Debtor listed her residence and the two debts secured by that residence. Because the amount of the senior lien exceeded the value of the residence, Debtor indicated her intent to avoid the junior lien held by Appellant’s predecessor-in-interest pursuant to § 506(a). She listed the debt to the junior lienholder on Schedule D as a secured debt of $0, and again on Schedule F as an unsecured debt of $278,396.71.

Appellant Asset Management Holdings, LLC (“AMH”) objected to confirmation for lack of good faith and moved to dismiss the chapter 13 case on eligibility grounds. The bankruptcy court ruled that Debtor’s debts did not place her over the eligibility limits because the debt to AMH did not need to be included in the eligibility calculation. The court found that the debt should not be treated as secured because the lien was avoidable under § 506(a), nor should it be treated as unsecured because Debtor’s personal liability on the debt had been discharged in her prior chapter 7 case. The bankruptcy court also found that the plan was filed in good faith. Accordingly, the court denied the motion to dismiss and confirmed the plan, and AMH appealed.

We AFFIRM.

***

Federal Bar Association-LA's 14th Annual Bankruptcy Ethics Symposium on November 17

November 17, 2017
Time: 9:00 a.m.
Roybal Federal Building, Conference Room 283
255 E. Temple St., Los Angeles, CA 90017

Click here to register online
Click here for flyer and additional event information
 

SPEAKERS
    Honorable Barry Russell, United States Bankruptcy Court
Honorable Meredith A. Jury, United States Bankruptcy Court
 Honorable Martin R. Barash, United States Bankruptcy Court
Ron Maroko, Office of the United States Trustee
J. Scott Bovitz, Bovitz & Spitzer
Michael T. O’Halloran, Law Office of Michael T. O’Halloran
Carey Caruso, Law Office of Carey Caruso
Kenneth D. Sulzer, Constangy, Brooks, Smith & Prophete, LLP
Jade Brewster, Constangy, Brooks, Smith & Prophete, LLP

Program Chair: Joseph Boufadel, Salvato Law Offices


9:00 a.m. - 12:45 p.m. | Morning Programs

  • An Ounce of Discipline

  • A mixed bag of ethical issues arising with client retention, client management, and termination of the attorney-client relationship

  • Benefits, Pitfalls, and Ethical Considerations of Corporate Chapter 7 Bankruptcy

1:00 p.m. - 3:00 p.m. | Afternoon Programs

  • Competence Issues/Substance Abuse:  Carey Caruso, Law Office of Carey Caruso

  • Elimination of Bias - Recognizing and Adjusting for Bias in the Legal Profession:  Kenneth D. Sulzer and Jade Brewster of Constangy, Brooks, Smith & Prophete, LLP


MCLE: 3.5 Hours Legal Ethics; 1 Hr. Substance Abuse; 1 Hr. Elimination of Bias. This activity has been approved for Minimum Continuing Legal Education Credit by the State Bar of California. The FBA certifies that this activity conforms to the standards of approved education activities prescribed by the rules and regulations of the State Bar of California governing minimum continuing legal education.

Cost: $25 (FBA members); $35 (CDCBAA and LABF members);
$40 (non-members). At Door $50
Afternoon Session Only $20; FBA Member (Afternoon Only) - No Charge
Judges and Clerks - No Charge

Ninth Circuit affirms nondischargeable judgment based upon issue preclusion

Hai Lecong v. Ashley Tran, No. 15-60039 (9th Cir. Feb. 13, 2017)


Salvato Law Offices successfully defended an appeal by the plaintiff attacking the nondischargeable judgment entered by the Bankruptcy Court. 
 

"Hai Lecong appeals the grant of summary judgment in favor of Ashley Tran, entered by the bankruptcy court and upheld by the Bankruptcy Appellate Panel (BAP), which held that the debt was nondischargeable under 11 U.S.C. § 523(a)(2)(A). We affirm.  ***
The doctrine of issue preclusion applies to dischargeability proceedings pursuant to § 523(a). Grogan v. Garner, 498 U.S. 279, 284 n.11 (1991). Issue preclusion, or collateral estoppel, bars relitigation of factual issues that have been adjudicated in a prior action. Under the principles of “full faith and credit,” 28 U.S.C. § 1738, federal courts give prior state-court judgments the same preclusive effect as the courts of the state from which the judgment derived. Cal-Micro, Inc. v. Cantrell (In re Cantrell), 329 F.3d 1119, 1123 (9th Cir. 2003). Therefore, we apply California’s collateral-estoppel principles.  ***
We disagree with Lecong’s argument that the first three requirements of issue preclusion are not met in this case. Section 523(a)(2)(A) of the Bankruptcy Code excepts from discharge any debt for money, property, services, or credit obtained by “false pretenses, a false representation, or actual fraud.” ***
The jury verdict also affirms that these questions were actually litigated and necessarily decided. An issue is “actually litigated” when both parties “presented evidence and witnesses in support of their positions, and . . . had the opportunity to present full cases.” Lucido, 795 P.2d at 1225. Here, both parties presented evidence and argued the merits of the fraud claim. To conclude that an issue was “necessarily decided,” California “courts have previously required only that the issue not have been ‘entirely unnecessary’” to the judgment in the initial proceeding. Id. at 1226. In reaching the verdict in this case, the question of fraud was not “entirely unnecessary” in the initial proceeding. No public policy factors weigh against application of the doctrine. Therefore, Tran has met the burden of establishing the threshold requirements of issue preclusion. The bankruptcy court and the BAP did not abuse their discretion in applying the doctrine. AFFIRMED."
 

NY Times quotes Gregory Salvato in art recovery case

Artists Fight to Get Works Back from Ace Gallery by Jori Finkel
April 20, 2016

LOS ANGELES — Lawsuits by artists and collectors, seeking the return of consigned works, demanding profits, or both, have never stopped Douglas Chrismas, the founder of Ace Gallery, from doing business. An early champion of trailblazers like Robert Irwin, Richard Serra and Michael Heizer, Mr. Chrismas has spent nearly 50 years helping to start or jump-start the careers of artists here, even as he was scrutinized for sometimes failing to pay when works sold.

But on April 6, Mr. Chrismas lost the keys to his gallery, after failing to make a $17.5 million court-ordered payment to settle his debts in a long-running Chapter 11 bankruptcy case. Sam Leslie, a bankruptcy trustee, took over as what he calls a “de facto C.E.O. of the reorganized business,” which includes a 30,000-square-foot mega-gallery in a historic Art Deco building in the mid-Wilshire district, and a space in Beverly Hills.

De Wain Valentine is one of a handful of artists who filed claims during the bankruptcy case, seeking back payments or return of artwork, bringing to light the sort of artist-dealer disputes that often remain behind closed doors...

He is seeking the return of eight early, experimental sculptures, made in resin or acrylic, consigned to Ace in 2010 to 2012. The group includes a study for his monumental “Gray Column” sculpture once featured at the Getty Museum. His claim placed their value at around $1.45 million.

“The artworks are not on display at the gallery,” said Mr. Valentine’s lawyer, Gregory Salvato, “so we don’t even know for sure whether they’ve been sold or if they’re in storage.”

Asked in an interview last week why he had not returned the eight artworks, Mr. Chrismas said, “It’s complex because we believe De Wain owes the gallery a large chunk of money.”

Mr. Salvato responded, “We have absolutely no idea what he is talking about.” Mr. Valentine said, “He’s never advanced me any money.”

Reversal of $3 million judgment affirmed on appeal in published opinion

Dhawan v. Biring, 241 Cal.App.4th 963 (Cal. App. 2d Dist., October 28, 2015)

Salvato Law Offices successfully reversed a $3,200,000 default judgment entered more than seven years earlier that was affirmed by the California Court of Appeal in a published decision.

A recent California Court of Appeal decision re-affirmed the longstanding rule that damages in a default judgment cannot exceed the amount of damages claimed in the complaint, and that a later-filed statement of damages specifically identifying the damages sought is no substitute for an amended complaint, at least in an action not involving personal injury or wrongful death. Dhawan v. Biring, 241 Cal.App.4th 963 (Cal. App. 2d Dist., October 28, 2015).

In Dhawan, The Second District Court of Appeal held that a default judgment is void on its face and subject to attack at any time where the default judgment awards damages that exceed the relief demanded in the complaint, citing Code of Civil Procedure Section 580(a). A complaint seeking monetary damages must state the amount of damages sought. Code of Civil Procedure Section 425.10(a)(2). Any amount awarded in excess of the amount stated in the complaint is beyond a court’s jurisdiction to grant, and the resulting judgment is void. Section 580(a). Furthermore, service of a statement of damages under Code of Civil Procedure Section 425.11 or 425.115 only satisfies the requirements of Code of Civil Procedure Section 580 when the law prevents a plaintiff from stating an amount of damages in the body of the complaint; i.e., in personal injury or wrongful death cases, or where the plaintiff is seeking punitive damages. In all other cases, a statement of damages does not substitute for an amended complaint, as it does not provide formal notice of the actual damages sought in compliance with the requirements of Section 580(a).

The plaintiff in Dhawan filed a complaint that did not specify the amount of damages, seeking merely an award of damages “according to proof.” Defendants failedto answer the complaint. At the default hearing -- likely at the instigation of the trial judge – the plaintiff moved to vacate the default so that he could personally serve a statement of damages on the defendants. Plaintiff subsequently filed and served a statement of damages, identifying each category of damages and the amount sought. Defendants again did not respond, and a default judgment was entered.

Nearly seven years later, defendant Biring moved to vacate the default judgment, contending that a default judgment in excess of the amounts demanded in the complaint is void, and merely voidable, because the award was in excess of the trial court’s jurisdiction. (Code Civ. Proc. § 580(a)). That is, the trial court did not have the power to enter a default judgment that exceeded the relief sought in the complaint, and such an excess damage judgment could be set aside at any time. (Code Civ. Proc. § 473(d)). The trial court agreed and vacated the default judgment. On appeal, plaintiff argued that defendants had actual notice of the lawsuit and the precise amount of damages sought, as they did not contest receipt of the statement of damages. At most, plaintiff argued, the judgment was merely voidable, and not void. And, as the time period to challenge a voidable judgment had long since passed, the default judgment should not have been overturned.

The Court of Appeal rejected each of the plaintiff’s arguments and affirmed the court’s order setting aside the default judgment. Even though it contained the same information, a statement of damages was not a substitute for a properly amended complaint. And, where the plaintiff had sought only “damages according to proof,” the original trial court had exceeded its jurisdiction in awarding any damages at all.

Article on Bankruptcy Removal & Remand

Article by Gregory Salvato and J. Scott Bovitz. Dated December 8, 2010.

Download written materials.

This paper summarizes the removal procedure under 28 U.S.C. § 1452 and Federal Rule ofBankruptcy Procedure ("FRBP") 9027. We will answer these questions.

  1. What claims can be removed under 28 U.S.C. § 1452?
  2. Who may remove claims under 28 U.S.C. § 1452?
  3. What are the limitations on removal jurisdiction?
  4. What should the notice of removal contain?
  5. Where does a party file a notice ofremoval?
  6. What are the deadlines for removing a claim?
  7. May a party remove fewer than all claims in the action?
  8. When does removal take effect?
  9. Where do removed cases "go"?
  10. If a matter is removed before an answer is filed, when is the responsive pleading due?
  11. When a state court action is removed, what is a party to do? a. Deadline for a motion to remand. b. Motion to remand under 28 U.S.C. § 1452(b). c. Motion to abstain.
  12. Can and order ofremand or abstention be reviewed on appeal?
  13. Can a court award sanctions for improper removal?
  14. Why bother to remove claims from state court to bankruptcy court?