FYI: 9th Cir Allows Atty Fees for Violation of Automatic Stay to Establish and Remedy the Violation, Affirms Emotional Distress and Punitive Damages Awards

The U.S. Court of Appeals for the Ninth Circuit recently held that a debtor seeking damages for violation of the automatic stay is entitled to attorneys’ fees under 11 U.S.C. § 362(k), but may recover fees only up to the time the stay violation ended and the fees must be related to remedying the stay violation itself. 

 

The Court held that “[t]he bankruptcy laws do not permit a stay violator to undermine the remedies available under § 362(k) by forcing a bankruptcy petitioner to accept a conditional offer in lieu of pursuing fair compensation and attorneys’ fees.”

 

A copy of the opinion is available at:  http://cdn.ca9.uscourts.gov/datastore/opinions/2014/09/12/13-35291.pdf

 

The borrower (“Debtor”) obtained a $575 payday loan from a lender (“Creditor”) secured by a post-dated check.  Debtor filed chapter 7 bankruptcy without directly advising Creditor, and listed the Creditor’s unsecured claim in her petition.  After a number of supposedly harassing phone calls to Debtor’s place of employment, the Creditor allegedly used an electronic funds transfer to debit Debtor’s bank account for the amount due, overdrawing her account by $816.88, including bank charges.

 

Debtor filed a motion for sanctions in the bankruptcy court, alleging that Creditor willfully violated the automatic stay provision of the bankruptcy code, 11 U.S.C. § 362, and sought a return of the funds and overdraft fees, emotional distress and punitive damages, and attorney’s fees.

 

Prior to trial, the Creditor denied any liability and offered to repay the loan amount, bank fees, and three hours of attorneys’ fees, for a total of $1,445.  Debtor rejected the settlement offer.

 

The bankruptcy court found that the Creditor willfully violated the automatic stay, and awarded emotional distress damages of $12,000 as well as the $575 loan amount, $370 in bank fees, $12,000 in punitive damages, and $2,538.55 in attorneys’ fees, for a total of $27,483.55.  The bankruptcy court determined that Debtor was entitled to attorneys’ fees incurred up to the date of the Creditor’s settlement offer only, because the offer effectively terminated the stay violation.

 

Creditor appealed the bankruptcy court’s emotional distress, punitive damages, and fee awards.  After two rounds of appeals, the district court upheld the award for emotional distress and punitive damages, but denied Debtor’s attorneys’ fees incurred as a result of the appeal.  In so ruling, the district court held that those fees were not incurred in an effort to enforce the stay, but in pursuit of a damages award for a stay violation.

 

On subsequent appeal to the Ninth Circuit, the Court began by analyzing the award for emotional distress and punitive damages.

 

As you may recall, 11 U.S.C § 362(k) permits an award of emotional distress damages if the bankruptcy petitioner “(1) suffer[s] significant harm, (2) clearly establish[es] the significant harm, and (3) demonstrate[s] a causal connection between that significant harm and the violation of the automatic stay.”  In re Dawson, 390 F.3d 1139, 1149 (9th Cir. 2004).

 

In addition, Section 362(k)(1) provides for punitive damages upon “showing of reckless or callous disregard for the law or rights of others.”  In re Bloom, 875 F.2d 224, 228 (9th Cir. 1989). 

 

The Ninth Circuit held that the district court did not err in confirming the emotional distress award, because the record sufficiently established that the Debtor suffered emotional harm from the collection calls to her place of employment. 

 

Similarly, the Ninth Circuit held that the bankruptcy court applied the correct legal standard in awarding punitive damages, and supported its award with findings that Creditor failed to provide policies and procedures or employee training regarding debt collection following a bankruptcy filing.

 

Next, the Court turned to the issue of attorneys’ fees.  In Sternberg v. Johnston, the Ninth Circuit established a brightline rule that attorneys’ fees incurred in an attempt to collect damages are not recoverable once the stay violation ended.  Sternberg v. Johnston, 595 F.3d 937, 948 (9th Cir. 2010).  The issue before the Court is whether the Creditor’s settlement offer had terminated the stay violation. 

 

In a recent decision, the Ninth Circuit permitted recovery of attorneys’ fees incurred in defending an appeal from a bankruptcy court decision finding a violation of the automatic stay.  See In re Schwartz-Tallard, No. 12-60052, 2014 WL 4251571 (9th Cir. August 29, 2014).  The debtor in Schwartz-Tallard was entitled to fees because she was forced to defend the appeal to validate the bankruptcy court’s ruling that a violation of the stay had occurred, and to preserve her right to collect the pre-remedy damages awarded by the bankruptcy court.  Id. at *3. 

 

Similarly, here, the Ninth Circuit found that the bankruptcy court abused its discretion when it determined that the Creditor’s settlement offer marked the end of the stay violation.  Relying on In re Abrams, 127 B.R. 239 (B.A.P. 9th Cir. 1994), the Court explained that the Creditor had an affirmative obligation to return any property it had wrongfully seized from the bankruptcy estate.  Instead of returning that property with no strings attached, the Creditor denied that it violated the stay and issued a settlement offer with implied conditions.

 

Put in another way, the Court explained that the Debtor had to proceed with the litigation in order to establish a violation of the automatic stay.  The fees the Debtor incurred after the settlement offer were incurred to put an end to the violation of the automatic stay.  In the Court’s own words, “[p]ermitting the violator to short-circuit the remedies available under § 362(k)(1) by making a conditional offer to return the property wrongfully seized in violation of the automatic stay would undermine the remedial scheme of § 362(k).”

 

Relying on In re Campion, 294 B.R. 313, 315, 318 (B.A.P. 9th Cir. 2003), where the Ninth Circuit declined to find that an automatic stay violation is remedied by a Rule 68 offer of judgment, the Court determined that the district court had erred in finding the Creditor’s settlement offer was an actual “tender.”  The Creditor did not return the property it had wrongfully seized at the time of its offer.  Thus, the Ninth Circuit concluded that the stay violation actually terminated on the date when the bankruptcy court found a violation of the automatic stay, and the Debtor was entitled to her fees up to that date.

 

Lastly, the Ninth Circuit upheld the bankruptcy refusal to issue a sanctions award because the record supported its finding that the Creditor’s approach to the bankruptcy litigation was not in bad faith.

 

Accordingly, the Ninth Circuit affirmed the order on emotional distress, punitive damages, and sanctions.  The Court reversed the order affirming the award of attorneys’ fees, and remanded for a recalculation of the fees.

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

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FYI: Fla App Ct Holds Res Judicata Does Not Bar New Foreclosure Action Based on New Defaults

The District Court of Appeal of the State of Florida, Fourth District, recently held that res judicata does not render a mortgage unenforceable or preclude a subsequent foreclosure action based on a default not alleged in the prior action.

 

A copy of the opinion is available at:  http://www.4dca.org/opinions/Sept.%202014/09-24-14/4D13-1992.op.pdf

 

A borrower (“Borrower”) executed a note and mortgage to purchase the property at issue. The mortgage and note were later sold and assigned to another entity (“Lender”).  Borrower defaulted on the note and failed to pay homeowner association fees assessed by her homeowner association (“HOA”).

 

Lender’s predecessor in interest filed suit to foreclose in August 2007, alleging a default in the payment due on April 1, 2007 and accelerating the balance due.  The complaint named HOA as a co-defendant because of its potential junior lien interest.

 

Because the Lender delayed the prosecution of its foreclosure action, the trial court dismissed the suit.  Later, Lender filed a second foreclosure action as a result of the trial court’s involuntary dismissal of the first.

 

Between the dismissal of the first foreclosure action and the Lender’s filing of its second foreclosure action, HOA obtained title to the subject property by foreclosing its own homeowner association lien and purchasing the property at the court-ordered foreclosure sale.

 

As to Lender’s second foreclosure action, Lender alleged a default on a scheduled payment; indicated that all payments left due and owing were accelerated; and named HOA as a co-defendant in an effort to foreclose its inferior homeowner association fee lien.  HOA moved for final summary judgment, arguing that the involuntary dismissal of Lender’s first foreclosure action operated as an adjudication on the merits pursuant to Florida Rule of Civil Procedure 1.420(b), and thus, Lender was barred from re-litigating the claim.  The trial court granted HOA’s summary judgment motion.

 

HOA also filed a counterclaim to quiet title on the basis of res judicata and sought a court order removing Lender’s mortgage as an encumbrance on the property.  At trial on HOA’s counterclaim, HOA argued that because res judicata barred Lender from filing further foreclosure suits, Lender’s mortgage was no longer enforceable as a lien on the property.

Following the trial, the trial court entered judgment on the counterclaim in favor of HOA.  The trial court held that HOA’s title was quieted against Lender’s claim; Lender’s mortgage was released and no longer encumbered the property; and Lender was enjoined from seeking to foreclose the mortgage.

 

As you may recall, borrowers, home owners associations, and others have been arguing that there is a dispute under Florida law as to whether res judicata precludes a subsequent foreclosure action based on a default occurring after the dismissal of a prior foreclosure action, regardless of an adjudication on the merits in a prior action, and whether the doctrine of res judicata necessarily bars successive foreclosure suits where a lender sought to accelerate payments on the note in the first suit. 

 

Courts have held that res judicata does not bar the later foreclosure action, because a new default -- based on a different act or date of default not alleged in the dismissed action -- creates a new cause of action that is not barred by res judicata.  See Singleton v. Greymar Assocs., 882 So. 2d 1004, 1008 (Fla. 2004); Star Funding Solutions, LLC v. Krondes, 101 So. 3d 403, 403 (Fla. 4th DCA 2012).

 

The Appellate Court in this case agreed with Lender that despite an adjudication on the merits in a prior action to foreclose a mortgage, res judicata did not render the mortgage unenforceable by precluding enforcement actions on subsequent defaults.  Nor did an acceleration of debt in the initial action impact the Court’s res judicata analysis. 

 

The Appellate Court explained that, while a foreclosure action with an acceleration of debt may bar a subsequent foreclosure action based on the same event of default, it would not bar subsequent actions and acceleration based upon different events of default. See Singleton, 882 So. 2d at 1008.  Accordingly, the Court held that the mortgage remained enforceable based on subsequent defaults.

 

The Court turned to HOA’s quiet title claim.  The Court reasoned that because each payment default created a basis for a subsequent foreclosure, the note and mortgaged remained a valid and enforceable lien against the property, and did not, as a matter of law, constitute a cloud on the property supporting a quiet title claim.  See Kaan v. Wells Fargo Bank, N.A., 981 F. Supp. 2d 1271, 1274 (S.D. Fla. 2013).

 

Accordingly the Appellate Court reversed the trial court’s rulings and remanded the matter.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

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FYI: Cal App Ct Reverses Dismissal of Borrower's Breach of Contract and Fraud Claims Relating to HAMP Mod, Including Those Against Servicer's Employees

The California Court of Appeal, Fourth District, recently reversed the dismissal of borrowers’ allegations that a loan servicer breached a contract to modify the borrowers’ loan, as the borrowers were making plan payments under a HAMP trial period plan agreement when the servicer foreclosed. 

 

In so ruling, the Fourth District held that the borrowers stated claims for breach of contract and fraud, including against the servicer’s employees who made the alleged misrepresentations.

 

A copy of the opinion is available at:  http://www.courts.ca.gov/opinions/documents/G050049.PDF.

 

In 2009, the borrowers (Borrowers) applied to have their loan modified in 2009.  In November 2011, the servicer (Servicer) allegedly informed Borrowers that they had been approved for a trial period plan under a Fannie Mae modification program.

 

According to Borrowers’ complaint, they were told that all they had to do was make three monthly payments of $957.43, starting on December 1, 2011.  Supposedly, if they made the payments, then they would move to the next step – verification of financial hardship. If they passed that test, they alleged their loan would be permanently modified.

 

Borrowers allegedly made the first two payments for December 2011 and January 2012.  A representative of Servicer allegedly told them in December that Servicer had received the December and January payments and that foreclosure proceedings had been suspended.  However, toward the end of January 2012, the subject property was sold at a trustee’s sale.

 

Borrowers filed suit in pro persona (pro se).  After a series of demurrers and amended complaints, the trial court dismissed the action.  The trial court reasoned that the trial period plan agreement was not a binding loan modification agreement, and Borrowers had no right to any guaranteed loan modification.

 

The Fourth District reversed the dismissal of Borrowers’ claim for breach of contract.  The Fourth District held, “[I]f the borrower complied with all terms of the TPP Agreement – including making all required payments and providing all required documentation – and if the borrower’s representations remained true and correct, the servicer had to offer a permanent modification.”  citing West v. JPMorgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 788.

 

The Fourth District reasoned that by taking “TARP money, lenders had to follow Treasury Department guidelines for restructuring loans.  [The lenders do] not have discretion to set their own criteria for handing out loan modifications.”

 

The Fourth District also reversed the trial court’s dismissal of Borrowers’ claims for promissory fraud, fraudulent misrepresentation, and promissory estoppel.

 

As you may recall, a cause of action for promissory fraud requires the plaintiff to allege that the promissor did not intend to perform at the time the promise was made, that the promise was intended to deceive and induce reliance, that it did induce reliance, and that this reliance resulted in damages. Lazar v. Superior Court (1996) 12 Cal.4th 631, 637; Building Permit Consultants, Inc. v. Mazur (2004) 122 Cal.App.4th 1400, 1414-1415.

 

In support of their claim for promissory fraud, Borrowers alleged that Servicer never intended to modify their loan – notwithstanding the representations made in the TPP agreement and those supposedly made by the parade of Servicer representatives who communicated with them – but rather allegedly intended to foreclose all along.

 

The Fourth District found that these allegations were sufficient to state a claim for promissory fraud.

 

Borrowers brought their claim for fraudulent misrepresentation against Servicer, Servicer’s CEO, a member of Servicer’s board of directors, and several of Servicer’s employees.

 

The Fourth District reversed the dismissal with respect to Servicer and its employees who allegedly made the supposed misrepresentations. 

 

The Appellate Court held that Borrowers had sufficiently pled fraudulent misrepresentation by alleging that representatives of Servicer had supposedly assured them that the payments submitted per the TPP agreement had been received and credited and that the foreclosure proceedings had supposedly been suspended.

 

With respect to Servicer’s employees who allegedly made the supposed misrepresentations, the Fourth District reasoned that “[i]f a tortious act has been committed by an agent acting under authority of his principal, the fact that the principal thus becomes liable does not, of course, exonerate the agent from liability … The fact that the tortious act arises during the performance of a duty created by contract does not negate the agent’s liability.” citing Shafer v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003) 107 Cal.App.4th 54, 68.

 

The Fourth District did, however, affirm the dismissal of Servicer’s CEO and the member of its board of directors.  The Fourth District found that Borrowers had alleged no facts showing that either of these defendants had personal knowledge of or involvement in any promises or misrepresentations supposedly made to Borrowers.

 

The Appellate Court also affirmed the dismissal of Borrowers’ claim for an accounting.  A cause of action for accounting requires a showing of a relationship between the plaintiff and the defendant, such a fiduciary relationship, that requires an accounting or a showing that the accounts are so complicated they cannot be determined through an ordinary action at law. (citing Brea v. McGlashan (1934) 3 Cal.App.2d 454, 460.)

 

Borrowers alleged that Servicer supposedly misapplied the loan payments they made from March 2010 through November 2011 and that there were “surplus” funds left over from the trustee’s sale.

 

The Appellate Court first determined that the issue of surplus funds had been resolved in another case.  With respect to the supposedly misapplied loan payments, the Fourth District found that “it appears this issue can be folded into the fraud and breach of contract causes of action.”

 

Generally, “[a]n action for accounting is not available where the plaintiff alleges the right to recover a sum certain or a sum that can be made certain by calculation.” (citing Teselle v. McLoughlin (2009) 173 Cal.App.4th 156, 179.)

 

Accordingly, the Fourth District affirmed the dismissal of Borrowers’ claim for accounting.

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.com

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
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