Cent. Miss. Credit Corp. v. Vaughn

• Decision Date: 04 August 2016
• Docket Number: CASE NO. 3:15-cv-00932-JAR
• Citation: 555 B.R. 803
• Parties: Central Mississippi Credit Corporation, Appellant, v. Peggy Ann Vaughn, Appellee.
• Court: U.S. District Court — Middle District of Alabama

555 B.R. 803

Central Mississippi Credit Corporation, Appellant

v.Peggy Ann Vaughn, Appellee.

CASE NO. 3:15-cv-00932-JAR

United States District Court, M.D. Alabama.

Signed August 4, 2016

Joseph Ellis Watson, III, The Watson Firm, Birmingham, AL, for Appellant.

Anthony Brian Bush, Bush Law Firm, Paul Douglas Esco, Paul D. Esco, Attorney at Law LLC, Montgomery, AL, for Appellee.

MEMORANDUM OPINION AND ORDER

Jane A. Restani, Judge

Appellant Central Mississippi Credit Corporation (“CMCC” or “Appellant”) appeals from a decision of the U.S. Bankruptcy Court for the Middle District of Alabama (the “bankruptcy court”). Appellee Peggy Ann Vaughn (“Vaughn” or “Appellee”) brought an adversary proceeding against CMCC, and the bankruptcy court held that CMCC willfully violated the automatic stay under Appellee's Chapter 13 bankruptcy and awarded $1,500 in actual damages and $50,000 in punitive damages, plus attorneys' fees. Vaughn v. Cent. Miss. Credit Corp. (In re Vaughn) , 542 B.R. 589, 594, 595, 604 (Bankr.M.D.Ala.2015). CMCC challenges the bankruptcy court's willful violation determination, damages awards, and several actions of the bankruptcy court, which CMCC argues violated its due process rights. Br. for Appellant 13–36, ECF No. 6 (“CMCC Br.”). For the reasons stated below, the court affirms in part and vacates and remands in part, the bankruptcy court's order.

BACKGROUND

The court presumes familiarity with the facts of the case as discussed in the bankruptcy court's Memorandum Decision, see In re Vaughn , 542 B.R. at 593–98 ; however, relevant facts and procedural history are recounted here for ease of reference. In late 2013, CMCC filed suit in the Justice Court of Rankin County, Mississippi (the “Mississippi court”) against Peggy Vaughan (“Vaughan”) to collect a debt of $666.26. Id. at 593. In its hand-written complaint, CMCC initially spelled Vaughan's last name correctly, but spelled it incorrectly, as “Vaughn,” elsewhere in the document. Id. Subsequently, the Mississippi court misspelled Vaughan's last name as “Vaughn” in the summons and entered a default judgment against “Peggy Vaughn,” rather than Vaughan, on January 22, 2014. Id.

CMCC then requested a writ of garnishment, again misspelling the last name as “Vaughn,” and when the Mississippi court issued the writ to First Student Management, LLC (“First Student”), the writ as issued also named “Vaughn.” Id. at 594. First Student happens to employ both Peggy Vaughan, the resident of Mississippi and individual from whom CMCC intended to collect the debt, and Peggy Ann Vaughn, the resident of Alabama, Appellee in this proceeding, and at the time, debtor in chapter 13 bankruptcy whose estate was subject to an automatic stay. Id. At no point has Appellee owed any debts to CMCC. Id.

On or about March 26, 2014, Appellee received notice that a portion of her wages would be garnished. Id. at 594 & n. 3. Shortly thereafter, Appellee called CMCC and informed a representative that she did not owe money to CMCC and that she was in Chapter 13 bankruptcy. Id. at 594–95. Appellee later informed her bankruptcy counsel, Paul Esco (“Esco”), of the garnishment, who then called CMCC on April 17, 2014, and again informed a representative of CMCC that Appellee did not owe money to CMCC and that she was in Chapter 13 bankruptcy. Id. at 595. During the April 17, 2014, call with Esco, the CMCC representative acknowledged that a mistake of identity had occurred and promised to resolve the matter. Id. CMCC alleges that a representative relayed this information to a representative of First Student that same day. Id. Neither CMCC nor First Student, however, has a record of any such communication, and the bankruptcy court expressly found that it could not “give credence to such an oblique” assertion. Id. Instead, the bankruptcy court found that “CMCC did nothing to stop [the] garnishment ... through June 2014.” Id. The bankruptcy court found that the only evidence that CMCC notified First Student of the error was by letter on July 14, 2014, weeks after the final garnishment, months after being notified of the error, and days after receiving notice of Appellee's adversary proceeding. Id.

In the interim, Automatic Data Processing (“ADP”), the payroll processor of First Student, withheld wages from Appellee's bi-weekly paycheck on four occasions from April 18, 2014, to June 27, 2014, totaling $666.26. Id. On June 30, 2014, Appellee initiated an adversary proceeding against CMCC, alleging that CMCC willfully violated the automatic stay in her underlying Chapter 13 bankruptcy and seeking damages under 11 U.S.C. § 362(k) (2012). Compl. ¶¶ 1, 15–16, 18–20, DE 1.¹ Vaughn served the complaint on CMCC on July 11, 2014. In re Vaughn , 542 B.R. at 595. Thereafter, as noted previously, on July 14, 2014, CMCC sent a letter to First Student informing First Student of the mistake and asking First Student to issue Vaughn a refund. Id. Appellee received a full refund sometime in August 2014. Id. at 596.

Counsel for Appellee made a discovery request in the adversary proceeding on November 13, 2014. Pl.'s Disc. Reqs., DE 32. CMCC did not answer the interrogatories or provide the requested documents to the satisfaction of the bankruptcy court within the statutory time limit of thirty days. In re Vaughn , 542 B.R. at 596 ; see Fed. R. Bankr. P. 7033 –34. Subsequently, counsel for CMCC, Margaret H. Manuel (“Manuel”), filed a motion to withdraw from representation of CMCC due to a “breakdown in communication.” Mot. to Withdraw, DE 13. After a hearing on January 13, 2015, the bankruptcy court entered orders granting Manuel's motion to withdraw, entered default against CMCC sua sponte, and scheduled an evidentiary hearing for January 27, 2015, to determine damages. Order Granting Mot. to Withdraw, DE 16; Order, Jan. 22, 2015, DE 18 (“Default Order”) (entering default and setting damages hearing). The bankruptcy court mailed a copy of the Default Order entered January 22, 2015, to CMCC. See Default Order at 2. CMCC retained new counsel, Joseph E. Watson, III (“Watson”), but Watson did not attend the evidentiary hearing, and the bankruptcy court issued a default judgment in favor Appellee awarding $50,000 in actual damages, $150,000 punitive damages, and $3,740 in attorneys' fees to be paid by CMCC. Default J., DE 20 vacated , Order 1, Mar. 13, 2015, DE 36.

On February 10, 2015, CMCC moved to vacate the default judgment. Mot. to Set Aside Default J., DE 23. Following a hearing, at which CMCC argued the default judgment was improperly entered and that CMCC had attempted to comply with Vaughn's discovery request, the bankruptcy court granted the motion and vacated the default judgment, citing the disfavor for default judgments and preference for a trial on the merits. Tr. of Hr'g Mar. 10, 2015, at 2–4, 11, DE 62; Order 1, Mar. 13, 2015. The bankruptcy court also extended discovery for Appellee, denied an extension of discovery for CMCC, and instructed CMCC to comply with Appellee's discovery requests. See Order 1–2, Mar. 13, 2015. On July 23, 2015, the bankruptcy court issued an order compelling CMCC to cooperate with discovery requests, including disclosing the materials CMCC had relied on in arguing to vacate the default judgment, but claimed were protected by attorney-client privilege, and awarding attorneys' fees to Appellee pursuant to Federal Rule of Bankruptcy Procedure 7037(a)(5)(A). Order, July 23, 2015, DE 64.

After a trial on November 16, 2015, the bankruptcy court held that CMCC willfully violated the automatic stay and “failed to take adequate steps to rectify its violation for almost five months after it learned of the bankruptcy.” In re Vaughn , 542 B.R. at 593, 604. The bankruptcy court awarded Appellee $1,500 in actual damages and $50,000 in punitive damages, plus attorneys' fees and costs.² Id. at 604.

CMCC challenges the bankruptcy court's order on five grounds. First, CMCC challenges several factual findings of the bankruptcy court. CMCC Br. at 16–19, 27. Second, CMCC argues that it did not commit a willful violation of the automatic stay, as it did not “take[ ] affirmative action to collect from Vaughn” and, once notified, immediately took steps to remedy the mistake. Id. at 13–19. Third, CMCC contests the damages awarded to Appellee by the bankruptcy court. Id. at 19–32. Fourth, CMCC argues that the bankruptcy court violated CMCC's right to due process through the default judgment and unilateral extension of discovery. Id. at 32–35. Finally, CMCC argues the bankruptcy court erred in admitting privileged communications and in denying its motion to stay pending CMCC's interlocutory appeal of the bankruptcy court's order holding that CMCC had waived attorney-client privilege. Id. at 35–36.

Appellee responds that she presented sufficient evidence at trial to support a willful violation of the automatic stay, including CMCC's knowledge of the stay and subsequent failure to take “prompt and appropriate action” to prevent or stop the garnishment. Br. of Appellee 15–21, ECF No. 9 (“Vaughn Br.”). Appellee also argues that the bankruptcy court's damages award, including actual and punitive damages and attorneys' fees, was appropriate. Id. at 21–24, 26–30. Finally, Appellee responds that the bankruptcy court did not violate CMCC's right to due process. Id. at 24–26.

JURISDICTION AND STANDARD OF REVIEW

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 157(a), 1334(b). The court has jurisdiction over this appeal under 28 U.S.C. § 158, acting as an appellate court. See also 28 U.S.C. § 1334(b). In reviewing the bankruptcy court's order, the court reviews conclusions of law de novo and factual findings for clear error. See Brown v. Gore (In re Brown) , 742 F.3d 1309, 1315 (11th Cir.2014) (quoting Educ. Credit Mgmt. Corp. v. Mosley (In re Mosley) , 494 F.3d 1320, 1324 (11th Cir.2007) ). Damages awards are reviewed for abuse of discretion, however, constitutional challenges to excessive punitive damages are reviewed...