Saturday, December 13, 2014

Ninth Circuit Upholds $300,000 Punitive Damages in Light of $1 Actual Damages

By Michael Fuller, The Underdog Lawyer ®

On Wednesday, the Ninth Circuit Court of Appeals upheld a $300,000 punitive damages jury verdict, in light of only $1 nominal damages suffered by the consumer.


Juries may generally impose punitive damages to deter undesirable corporate conduct. However, the Supreme Court has prohibited punitive damages in amounts that are "grossly excessive" in light of the actual damages awarded.

See Related Story by The Oregonian's Laura GundersonJudge cuts Oregon woman's award in Equifax case from $18.4 million to $1.62 million



Wednesday's en banc opinion, State of Arizona v. Asarco, involved a large copper mine that intentionally violated an employee's civil rights.

The jury compensated the employee $1 nominal damages, and $869,750 punitive damages. After trial, the judge reduced the punitive damages amount to the statutory maximum of $300,000, and the copper mine appealed.


The Ninth Circuit determined that the $300,000 punitive damages verdict was Constitutionally permissible, based on the defendant's (1) size, (2) prior notice of the $300,000 statutory maximum, and (3) its reprehensible conduct and mind set.

Friday, November 28, 2014

Violate Bankruptcy Stay, Skip Court, Avoid Punitives, says Appellate Panel


Earlier this week, the Eighth Circuit Bankruptcy Appellate Panel reversed an award of punitive damages against a landlord who willfully violated the Bankruptcy Code's automatic stay.


Eviction Violates Automatic Stay

The case involved a consumer-tenant in an active chapter 13 bankruptcy.

The consumer's landlords, Eldon Bugg, and his son, Danny Bugg, wrongfully changed the locks on his rental home, then damaged his vehicle by towing it without permission.


At trial, the bankruptcy court determined the landlords violated the automatic stay, and imposed $2,000 punitive damages against the father, who failed to personally appear to testify.

Punitive Damages Reversed on Appeal

On appeal, the Appellate Panel reversed the award of punitive damages against the father who skipped trial.

The Panel acknowledged that punitive damages may be appropriate based on (1) the nature of the creditor's conduct, (2) the nature and extent of harm to the debtor, (3) the creditor's ability to pay damages, (4) the level of sophistication of the creditor, (5) the creditor's motives, (6) and any provocation by the debtor.


However, the Panel reasoned that the bankruptcy judge didn't, "make specific findings of fact as to Eldon Bugg's motive or egregious conduct in violating the stay."

Commentary

It's unclear why the Panel reversed the punitive damages award on an abuse of discretion standard, when its own account of the record seemed to justify sanctions.

The Panel's opinion explains that the trial judge specifically found that the father (1) previously misled the court, (2) intentionally violated the automatic stay, (3) left his son hung out to dry by skipping trial, and (4) caused severe disruption and harm to the consumer's life and property.

The opinion doesn't indicate that the consumer provoked the violation, and the fact that the landlord was in business for profit justified an inference that he had the ability to pay the modest $2,000 award, and his prior motions practice and representation by counsel proved he was somewhat sophisticated.

Of the six "punitive damages" factors the Panel cited as persuasive, only the fifth "motive" factor appears not to have weighed in favor of the consumer.

Tuesday, November 25, 2014

Ninth Circuit Bankruptcy Appellate Panel Vacates Discharge Contempt Order

By Michael FullerThe Underdog Lawyer ®

Earlier this month, the Ninth Circuit Bankruptcy Appellate Panel clarified the procedural requirements necessary to hold a creditor in contempt for willful violation of the discharge order.

See related New York Times article: Debts Canceled by Bankruptcy Still Mar Consumer Credit


The Panel's recent opinion, Yen v. Pedroche, involved a creditor whose gambling debts were discharged in bankruptcy. 

The bankruptcy judge held the creditor in contempt of the discharge order based on his attempt to re-recorded his judgment against two consumers after bankruptcy.


On appeal, the Panel remanded the case back to bankruptcy court for a determination as to whether the creditor actually believed the discharge order applied to his claim.

The Panel reasoned that, "The bankruptcy court made no factual finding that Yen knew that the discharge injunction applied to his claim."

The Panel's reasoning appears to contradict its prior December 2013 opinion called In re Chionis. Oddly, Bankruptcy Judges Pappas and Kurtz took part in both opinions.

In Chionis, a creditor violated the discharge injunction by continuing litigation in mistaken reliance on a “no discharge” provision in his contract. However, the bankruptcy judge refused to hold the creditor in contempt because he subjectively believed the discharge order did not apply to him.


The Panel reversed the bankruptcy judge in Chionis, holding that the creditor’s choice to ignore warnings and refusal to do research or take precautionary measures constituted contempt.

Although the Yen and Chionis opinions reached opposite conclusions, their reasonings were distinguishable in at least two regards.

First, the bankruptcy judge in Chionis held a trial, as opposed to Yen, where the contempt order was based solely on the written record.

Second, the creditor in Chionis had multiple warnings that his lawsuit violated the discharge order. In Yen, the record did not reflect any prior warnings.

Regardless of these distinctions, the Panel's Yen holding is troubling, to the extent it may condition a consumer's "fresh start" on whether they can prove a creditor's illegal conduct was actually intended to violate the discharge injunction.

In the Ninth Circuit, consumers have no inexpensive way to remedy discharge violations.



No matter how minor the violation, it cannot be resolved in small claims court or mediation. Rather, the Walls v. Wells Fargo opinion requires consumers to hire special bankruptcy counsel to re-open their bankruptcy cases and pursue contempt remedies.

Requiring clear and convincing evidence of a creditor's actual subjective intent to violate the discharge injunction will prohibit many consumers from enforcing their "fresh starts".

For this reason, bankruptcy courts should continue to rely on Chionis for the proposition that a creditor who chooses to remain ignorant of the bankruptcy rules should do so at its own peril.

Ignorance of the bankruptcy laws is no excuse for consumers, and discharge violators should be held to the same standard.

Sunday, November 23, 2014

Mortgage Company Denies Gay Portland Widower Equal Protection

By Jason Reynolds, Oregon Consumer League

Brooks married his domestic partner, Jimmy, in 1982. They remained partners for 16 years but their hand-made marriage certificate was never recognized under Oregon law.


See related article: Openly Charitable Judge to Decide Same-Sex Marriage Case

The couple eventually purchased a Portland home together in 1996.

“I made the down payment,” says Brooks, “And we put the title and loan in Jimmy’s name because he was expected to live longer than me.”

When Jimmy died in 1998, Brooks remained in the home and continued to pay the mortgage.


The loan was later transferred to Green Tree Mortgage LLC in 2011. Green Tree eventually initiated foreclosure proceedings in 2013 to sell the home and recover its equity.

On October 29, 2014, Brooks halted the foreclosure by removing it to federal bankruptcy court.

In legal documents filed yesterday, Green Tree argued Brooks has no protections under the bankruptcy automatic stay because he was not on the loan or title.

The mortgage company’s motion to remand states, “It is Green Tree’s position that the real property at issue in this matter is not even property of the estate.” Read Green Tree's Motion and Brooks' Response.

Brooks and his team of pro bono attorneys disagree.

“Green Tree’s trying to deny him equal protection under the Bankruptcy Code,” says pro bono attorney Michael Fuller, with the law firm OlsenDaines.

“If Brooks was a straight widower, this would largely be a non-issue,” says Fuller.

“Oregon law allows married couples to hold property for the benefit of each other, regardless of the record title holder,” Fuller argues.

“We find Green Tree’s position meritless, inequitable, and personally offensive,” he says.

Green Tree’s attorney, Katrina Glowowski, refused to comment.

Brooks says his health is failing and he hopes to spend his final days in the home he made with Jimmy.


“So long as he continues to make the monthly payments, he’s legally entitled to remain in his home,” says Fuller.

“This is a fight we’re prepared to take on appeal if necessary,” he says.

The matter is set for a preliminary hearing in Portland bankruptcy court on December 9.

Monday, November 17, 2014

Supreme Court to Decide Bankruptcy Mortgage Strip Issue

By Michael FullerThe Underdog Lawyer ®

This morning the Supreme Court agreed to resolve a circuit split as to whether consumers can wipe out wholly unsecured second mortgage liens in chapter 7 bankruptcy.


The practice of "lien stripping" is widespread across the country in chapter 13 bankruptcy. The practice is allowed under chapter 7 of the Bankruptcy Code only in the 11th Circuit.


The 11th Circuit relies on its 1989 opinion Folendore to allow chapter 7 debtors to strip Bank of America's unsecured second mortgages. However, the Supreme Court's 1992 opinion Dewsnup v. Timm held that mortgage lien rights are not altered in chapter 7.


The two 7th Circuit opinions accepted on cert today are:


Commentary

This joint cert shows good case selection by Bank of America's appellate team.


The Roberts Court's bankruptcy case selection has been very non-controversial. True nerds will recall that recent unanimous SCOTUS bankruptcy opinions include:


Even Ransom v. FIA (2011) and Hamilton v. Lanning (2010) and were unanimous with the exception of Justice Scalia.

I expect the Supreme Court to rule 8-1 in Bank of America's favor. (Scalia wrote the dissent in Dewsnup).

Until Congress changes 11 U.S.C. § 506, consumers across the country must rely solely on the provisions of chapter 13 to wipe out unsecured second mortgage liens.

Wednesday, October 29, 2014

Bankruptcy Court Cannot Award Appellate Fees, Panel Rules

By Michael FullerThe Underdog Lawyer ®

Yesterday, the Ninth Circuit Bankruptcy Appellate Panel ruled that trial courts cannot reimburse consumers for the litigation expenses they incur defending frivolous appeals of contempt orders.


The case, In re Wallace, involved a family who had filed bankruptcy, in part, to stop a lawsuit against them by a creditor.

Creditors Cannot Continue Lawsuits after Bankruptcy

After the bankruptcy discharge order was entered, the creditor was held in contempt for continuing its lawsuit against the Wallace Family.

The creditor appealed the contempt order twice, but lost on appeal both times. The bankruptcy court affirmed its award of damages against the creditor, but denied the Family's request for reimbursement of attorney fees they incurred on appeal.


In its opinion, the Panel held that bankruptcy courts cannot compensate consumers for the attorney fees they incur defending contempt orders on appeal and remand.

The Panel relied on a prior Ninth Circuit opinion, In re Del Mission, Ltd., to justify its holding.

In the Del Mission case, the opinion held that section 105(a) of the Code does not permit bankruptcy courts to award fees incurred on appeal. The opinion reasoned that Appellate Procedure Rule 38 authorizes only appellate courts, not bankruptcy courts, to award reimbursement for defending a frivolous appeal.

As a result of the Panel's opinion, the Wallace Family is left with a $16,000 bill for successfully defending a sanctions award of just $3,000 damages.

Commentary

The unfair result in this case highlights the problem with the American Rule, which generally requires parties to pay their own attorney fees, even when they win.

In this case, the Wallace Family was forced to give up their fresh start, despite having done nothing wrong, just to enforce their discharge.

As the Wallace Family now knows, the American Rule gives wealthy parties greater access to justice, and discourages underdogs from fighting for what's right. But God Bless America.


Kudos to Nevada attorney Christopher Burke for continuing to raise meritorious consumer bankruptcy issues before the Ninth Circuit on appeal.

Win, lose, or draw, Burke's hard-fought cases (Schwartz-Tallard, In re Mwangi, etc.) continue to shape the landscape of consumer bankruptcy litigation. With any luck, Congress might review some of the unintended consequences highlighted in his cases (In re Mwangi in particular) before it enacts the next round of Bankruptcy Code amendments.

Respectfully, I agree with the Panel in this case. FRAP 38 provided the Wallace Family the opportunity to petition the appellate court for fee reimbursement on appeal.

Consistent with the Supreme Court's March 2014 holding in Law v. Seigel, the Panel correctly decided that a bankruptcy judge's equitable powers under section 105(a) cannot conflict with remedies provided for elsewhere in the Bankruptcy Code or federal rules.

Monday, October 6, 2014

Supreme Court to Resolve Bankruptcy "Fees on Fees" Issue

By Michael FullerThe Underdog Lawyer ®

On Thursday the Supreme Court agreed to hear an appeal from the Fifth Circuit concerning the discretion of judges to award "fees on fees" under section 330 of the Bankruptcy Code.


Click here to read the Supreme Court's Order granting writs for certiorari in Asarco LLC v. Baker Botts.

What are "Fees on Fees"?

After bankruptcy professionals successfully litigate an issue on behalf of the estate, they must apply for fee compensation. Fee applications can be highly contested and cost professionals tens of thousands of dollars to defend.

"Fees on fees" are the fees incurred defending a fee application.


"Fees on fees" are generally not available under the American Rule, which says that each party must bear its own expenses.

However, "fees on fees" are commonly provided for under consumer protection statutes to encourage law enforcement by private litigants with little money or bargaining power.

The Circuits are split as to whether section 330 of the Bankruptcy Code allows judges to award so-called "fees on fees" for successfully defending a fee application.

The Circuit Split



The 11th Circuit (Grant v. George Schumann et al (1990)), and now the 5th Circuit, do not allow "fees for defense of fees" because defending a fee application does not "benefit a debtor’s estate" and is not "necessary to case administration."

The 11th and 5th Circuits acknowledge that "fees on fees" are allowed in the consumer protection context, such as FDCPA, automatic stay, and civil rights litigation. However, these courts feel that unlike consumer protection, Congress did not intend to encourage depletion of the estate under section 330 through "satellite fee litigation".

Other courts, including the 9th Circuit (In re Smith (2002)), allow "fees on fees" under section 330. These courts reason that compensating professionals for defending fee applications is discretionary so long as the work is "reasonable and necessary."

Effect on Consumer Bankruptcy Litigation

The Supreme Court's decision should have little impact on consumer bankruptcy litigation under the automatic stay and discharge injunction for a few reasons.

First, unlike section 330, Congress passed sections 362(k) and 524 to encourage Code enforcement through litigation.

Second, litigation under 362(k) and 524 protects (rather than depletes) the estate and typically serves to reign in overreaching creditors.