In re Henry

• Decision Date: 22 August 2001
• Docket Number: No. LA 97-54348-SB.,LA 97-54348-SB.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Central District of California
• Parties: In re Michael J.B. HENRY & Vickie Henry, Debtors. Michael J.B. Henry, et al., Plaintiffs, v. Associates Home Equity Services, Inc., Defendant.

266 B.R. 457 (2001)

In re Michael J.B. HENRY & Vickie Henry, Debtors.

Michael J.B. Henry, et al., Plaintiffs, v. Associates Home Equity Services, Inc., Defendant.

No. LA 97-54348-SB.

United States Bankruptcy Court, C.D. California.

August 22, 2001.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

John B. Sullivan, Severson & Werson, San Francisco, CA.

Andrew W. Caine, Pachulski, Stang, Ziehl & Young, P.C., Los Angeles, CA.

Randall A. Miller, Kathryn M. Trepinski, Sedgwick, Detert, Moran & Arnold, Los Angeles, CA.

OPINION

SAMUEL L. BUFFORD, Bankruptcy Judge.

I. Introduction

The district court has referred to this court the bankruptcy issues in this adversary proceeding, which was filed in that court. After summary judgment proceedings and trial on the merits of the triable issues of fact, the court finds that defendant Associates Home Equity Services, Inc., formerly known as Ford Consumer Finance Co. (collectively referred to herein as "Associates"), violated both the automatic stay and the discharge injunction in the bankruptcy case filed by the debtors in this court.

Because the debtors filed a statement of intention in their bankruptcy case which stated that they intended to keep their home and to make the mortgage payments thereon, the court finds that the secured creditor may reasonably contact the debtors in writing to determine how the debtors intend to pay their mortgage. However, the court finds that few of the approximately 90 contacts with the debtors after the bankruptcy filing were proper, and that most violated the automatic stay or the discharge injunction.

In consequence, the court finds that the debtors are entitled to recover $6,570 that they paid to Associates after they filed their bankruptcy petition (plus interest). The court further assesses $65,700 in punitive damages against Associates for its intentional violation of the automatic stay and the discharge injunction.

II. Facts

Debtors Michael and Vicki Henry filed their chapter 7¹ bankruptcy case on November 19, 1997. Unlike more than 30% of the debtors in this district, the Henrys were represented by counsel in their bankruptcy case. Apart from their house, two fully encumbered motor vehicles and an old motorcycle, their only assets of substantial value were two retirement accounts holding some $7600, one of which provided partial security for a $7000 credit union loan. In addition to five undersecured creditors and unpaid real estate taxes, the debtors had a dozen unsecured creditors.

At the time of the bankruptcy filing, Associates held a first mortgage on the debtors' principal residence with a balance of approximately $119,900. It is not clear whether the value of the house² exceeded the debt owing to the first mortgage holder. Nonetheless, there were also two junior encumbrances on the property.

Together with their bankruptcy petition, the debtors filed their Statement of Intention, which disclosed that they intended to surrender their 1986 Dodge Ram "upon demand," and that they intended to retain their house, their retirement accounts and their 1994 Chevy Astrovan.

The debtors used an obsolete version of Official Form 8 (which had been replaced effective September 1997, two months before they filed their case) that did not track either the statute or the applicable case law. The form has two categories: "Property To Be Surrendered" and "Property To Be Retained." With respect to property to be retained, the form provides five columns. The first two columns, for the description of the property³ and the creditor's name, are straightforward. The three remaining are, "Debt will be reaffirmed pursuant to § 524(c)," "Property is claimed as exempt and will be redeemed pursuant to § 722," and "Lien will be avoided pursuant to § 522(f) and property will be claimed as exempt." No entries are made in any of these columns. Instead, the debtors placed an asterisk after the name of each creditor in the second column, and a line at the bottom of the form that said, "*Debtors are current & continuing payments." With their petition the debtors also filed a "Declaration of Debtor(s) re: Performance under 11 U.S.C. § 521(2)(A) and (B)," which stated that they had complied with these provisions. In fact, the parties agree that the debtors were in default for approximately two payments on their first mortgage on their date of filing.

Curiously, the debtors did not claim that their home was exempt property. Their Form 6, Schedule C ("Property Claimed as Exempt") only lists personal property, two retirement plans, and two small bank accounts. Apparently the debtors did not think it necessary to claim an exemption in their house, because on Schedule A (Real Property) they stated that its equity was $2,304, and that after $11,200 in costs of sale (8% of its fair market value) there was no net equity. See Soost v. NAH, Inc. (In re Soost), 262 B.R. 68, 71-74 (8th Cir. BAP 2001) (holding that, where debtors claimed a $1.00 exemption in real property, the excess equity is property of the estate available for distribution to creditors).

The debtors' chapter 7 case was uneventful. After the meeting of creditors, the trustee filed a no-asset report, and the case was closed on March 17, 1998, a week after the discharge was entered.

The debtors received their discharge on March 9, 1998. The discharge order states in part: "All creditors whose debts are discharged by this order . . . are enjoined from instituting or continuing any action or employing any process or engaging in any act to collect such debts as personal liabilities of the above-named debtor."⁴

After the bankruptcy filing, the debtors made the following mortgage payments to Associates:

                          11/29/97       $1,300
                          1/30/98         1,230
                          2/28/98           400
                          3/5/98          1,240
                          4/98            1,200
                          5/29/98         1,200
                

Ultimately, Associates foreclosed on the debtors' house on November 17, 1998 because the debtors were unable to make their post-bankruptcy payments. In this case Associates purchased the debtor's property at the eventual foreclosure sale⁵, and resold it for $105,000 nine months later. The debtors moved out of the house on January 15, 1999.

III. Analysis

The district court has referred six issues for this court to determine in connection with the plaintiffs' class action:

1. Whether Defendant\'s collection activities violated the automatic stay under § 362 of the Code?

2. Whether Defendant\'s collection activities violated § 524(a)(2) of the Code and the related bankruptcy discharge?

3. Whether Defendant\'s failure to take reasonable steps to reaffirm prepetition debt was a deliberate circumvention of § 524(c) of the Code?

4. Whether Defendant\'s actions constitute civil contempt for violations of the automatic stay under § 362 and § 524(a)(2) of the Code and the related Bankruptcy discharge?

5. Whether Defendant violated any other provisions of the Code?

6. Whether Defendant is liable to Plaintiffs for any damages, sanctions, and costs associated with violations of the Code and the amount of such liability?

The district court retained for itself, and did not refer to this court, matters relating to class-wide discovery, class certification, and matters relating to claims for violations of RICO and the Fair Debt Collection Practices Act. The district court stayed all of the matters that it retained pending this court's determination of the referred issues.

A. Automatic Stay Violations — § 362

1. Applicable Law

Upon the filing of a bankruptcy case, § 362(a) imposes an automatic stay on all creditor collection activities against the debtor. It provides in part: "A petition filed under section 301, 302 or 303 . . . operates as a stay, applicable to all entities, of . . . (4) any act to create, perfect, or enforce any lien against property of the estate; . . . (6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title. . . ." The Senate Report on § 362, when it was enacted in 1978, begins:

The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.

S. REP. No. 95-989, at 54-55 (1979) (emphasis added). While § 362(b) provides eighteen categories of exceptions to the automatic stay, Associates makes no claim that it qualifies for any exception.

Functionally the automatic stay is a combination of a temporary restraining order and a preliminary injunction. It prohibits creditors from engaging in collection activities against a debtor for a limited period of time. The automatic stay differs from a temporary restraining order and a preliminary injunction in six ways: (1) it is automatic upon the filing of a bankruptcy petition and does not require a court order; (2) a debtor is not required to carry any burden of proof or provide any level of evidence to obtain it; (3) a creditor is not entitled to be heard, or even to be given notice, before it is imposed; (4) it requires no bond; (5) it is binding on all creditors, whether or not they have notice of it, and lack of notice is chiefly a defense to punitive damages.

Finally, the automatic stay and the discharge injunction are statutory, and are the same in every bankruptcy case filed in every court in the United States. Walls v. Wells Fargo Bank (In re Walls), 262 B.R., 519, 528 (Bankr.E.D.Cal.2001). Their extent does not depend on individual orders fashioned by individual bankruptcy judges. Id.

The Ninth Circuit has...