In re H Granados Communications, Inc.
In re H Granados Communications, Inc., 2013 Westlaw 6838709 (9th Cir. BAP 2013. Creditor and creditor attorney ordered to pay monetary sanctions for violating bankruptcy automatic stay. The United States Bankruptcy Appellate Panel of the Ninth Circuit ("BAP") recently upheld sanctions of $23,072.09 against a creditor and its counsel in civil contempt under 11 U.S.C. § 105(a) for violation of the bankruptcy automatic stay.
Facts:
In September 2011, Rediger Investment Corporation ("Rediger") through its counsel, the Duringer Law Group, PLC ("Duringer Firm" and, jointly, the "Appellants") commenced an unlawful detainer action in state court against H Granados Communications, Inc. ("debtor") and its president, Henry Granados. Four months later, on January 8, 2012, the debtor filed for bankruptcy relief under Chapter 11.
Debtor listed Rediger on its list of 20 largest creditors and thus Rediger promptly received a Notice of Bankruptcy as well as notices throughout the bankruptcy case. Debtor also filed the Notice of Bankruptcy in the state court action on or about the petition date. Despite these notices, the Duringer Firm continued to prosecute the state court action against debtor during the first three months of 2012: it obtained a default judgment against debtor, filed a declaration of accrued interest, and obtained a writ of execution.
On November 1, 2012, debtor’s counsel, apparently unaware of the state court proceedings beforehand, filed a notice of stay in the state court. One month later, however, the Duringer Firm caused the Los Angeles Sheriff to levy on debtor’s DIP bank account which deprived the debtor of the use of $27,941.26. In response, debtor’s counsel wrote the Sheriff and the Duringer Firm advising of the pending bankruptcy and demanding the release of the levy. Appellants refused.
In December 2012, debtor moved for an order to show cause ("OSC") why Appellants should not be found in contempt under Section 105(a) for willfully violating the automatic stay. The bankruptcy court issued and then heard the OSC. It found that both Rediger and the Duringer Firm willfully violated the stay and therefore held them in contempt. After a continued hearing on the sanctions issue, the court awarded compensatory sanctions for costs incurred as a result of the stay violation, which included attorneys’ fees.
On appeal, the BAP upheld the ruling of the bankruptcy court.
Reasoning:
The BAP found that because the Duringer Firm conceded that the Notice of Bankruptcy was filed in the state court action at the commencement of the bankruptcy, it consequently also conceded that the stay was willfully violated. A party willfully violates the automatic stay if (1) it knew of the automatic stay, and (2) the actions that violated the automatic stay were intentional. In re Dyer, 322 F.3d 1178, 1191 (9th Cir. 2003). As to the second prong, the BAP found that the "Duringer Firm, on behalf of its client Rediger, pursued relief in the State Court Action that violated the stay: namely, moving for and then obtaining a default judgment; filing a declaration of accrued interest; obtaining a writ of execution; and causing the Los Angeles Sheriff to levy on the debtor’s DIP bank account." The BAP also found that the "Duringer Firm also failed to take affirmative action to undo the effects of stay violative action after receiving the November 2, 2012 notice; it did not vacate, and it did not cancel, the default judgment."
Appellants challenged the sanctions award on three grounds: (1) under Sternberg v. Johnson, 595 F.3d 937 (9th Cir. 2010), damages for stay violations under Section 105(a) are limited to efforts to enforce the stay or remedy the violation, (2) debtor must show the Appellants’ actions interfered with the debtor’s reorganization efforts, and (3) the charges awarded were beyond the scope authorized by Ninth Circuit and United States Supreme Court authority and were otherwise unreasonable.
The BAP flatly rejected each argument. First, the bankruptcy court awarded sanctions under Section 105(a). Sternberg did not address that statute and therefore "does not limit the availability of contempt sanctions, including attorney fees, for violation of the automatic stay, where otherwise appropriate." Sternberg, 595 F.3d at 946. Second, when calculating damages for civil contempt violations under Section 105(a), it is irrelevant whether a creditor’s stay violation interferes with a debtor’s reorganization efforts. The several cases cited by Appellants in support address damages under the predecessor of Section 362(k) and are therefore inapposite. Third, attorneys’ fees and costs incurred in litigating issues which flow from the stay violation are proper under Section 105(a). Moreover, based on the detailed records submitted in support by debtor, and the bankruptcy court’s prior approval, the BAP found the debtor’s requested fees and costs reasonable and supported by evidence.
Comment:
It is hardly surprising that the BAP upheld the bankruptcy court’s finding that Appellants willfully violated the automatic stay. Even if Appellants had not conceded the point, the record clearly demonstrates that Appellants knew of the stay and that pressing forward with the unlawful detainer complaint and eventually levying on debtor’s DIP account, were intentional acts.
It is equally unsurprising that the BAP rejected debtor’s arguments concerning the validity and reasonableness of debtor’s fee requests. The authority cited by Appellants was either inapposite or, worse, contrary to the point they were trying to make. In challenging fees, the Ninth Circuit requires that a party expressly identify the time entries that are objectionable. This opinion offers an important reminder to practitioners to identify and address the relevant underlying statutes. Here, Appellants seem to attack debtor’s sanction request with authority analyzing Section 362(k) rather than Section 105(a).
Finally, this opinion offers another reminder that if you prevail on a contested motion which will likely be appealed, you should consider preparing an order setting forth findings of fact and conclusions of law. The bankruptcy court did not make detailed findings of fact and conclusions of law but the record here provided the BAP with a "full, complete, and clear view of the issues on appeal." That may not always be the case. First Yorkshire Holdings, Inc. v. Pacifica L 22, LLC (In re First Yorkshire Holdings, Inc.), 470 B.R. 864, 871 (9th Cir. BAP 2012). A party can avoid a lot of problems on appeal by putting forth a little effort crafting detailed findings of fact and conclusions of law at the trial court level.
This case report is from the California State Bar Insolvency Committee e-newsletter of 2/3/14