In re Smith
| Decision Date | 19 November 2021 |
| Docket Number | 1:19-bk-10645-NWW |
| Citation | 636 B.R. 521 |
| Parties | IN RE: Cynthia Leigh SMITH, Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Tennessee |
Eron H. Epstein, Eron H. Epstein, Attorney at Law, Chattanooga, TN, for Debtor.
Douglas R. Johnson, Johnson & Mulroony, PC, Chattanooga, TN, for Special Counsel.
Where domestic relations law and bankruptcy law collide, the resulting landscape is fraught with peril. This contested matter is an example of why divorcing spouses and their counsel must have a thorough understanding of the proscriptions of the automatic stay.
Before the court is the debtor's Motion for Contempt and Sanctions against her former spouse, James R. Smith ("Mr. Smith"). The motion asserts that Mr. Smith violated the automatic stay with the postpetition filing of a Petition for Contempt, Breach of Marital Dissolution Agreement, and Damages against the debtor in the Circuit Court of Hamilton County, Tennessee ("State Court Action"). The debtor seeks to recover damages pursuant to 11 U.S.C. § 362(k)(1). Mr. Smith, of course, opposes the motion.
A final hearing on the motion was held on September 30, 2021. On October 1, 2021, the court entered an order finding that Mr. Smith had willfully violated the automatic stay.1 The debtor timely filed an Application for Damages seeking to recover attorney's fees and expenses totaling $14,921.09. Mr. Smith timely objected to the application. Neither party requested an evidentiary hearing because there are no material facts in dispute. Having considered the motion, application, and Mr. Smith's opposition thereto, the court grants the debtor's motion in part.
The court has jurisdiction over this contested matter pursuant to 28 U.S.C. § 1334(b). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2).
The debtor and Mr. Smith ended their marriage on January 13, 2016. The marital dissolution agreement ("MDA") divided the couple's real property, awarding the debtor property in Bridgeport, Alabama ("Alabama Property"), and awarding Mr. Smith property in Chattanooga, Tennessee ("Chattanooga Property"). The MDA required the debtor to quitclaim her interest in the Chattanooga Property to Mr. Smith and to refinance the mortgage encumbering the Alabama Property to remove Mr. Smith from the secured indebtedness.2 The debtor did not comply.
In December 2018, Mr. Smith filed a petition for contempt against the debtor in the Circuit Court of Hamilton County, Tennessee, seeking to compel the debtor to comply with the MDA. On February 4, 2019, the state court orally ordered the debtor to quitclaim her interest in the Chattanooga Property to Mr. Smith and afforded her an additional ninety days to refinance the Alabama Property.
No order was entered reflecting the state court's ruling until July 25, 2019. Nonetheless, on February 4, 2019, Mrs. Smith executed a quitclaim deed transferring her interest in the Chattanooga Property to Mr. Smith. The debtor has yet to refinance the indebtedness secured by the Alabama Property.
One week after the state court hearing, on February 14, 2019, the debtor initiated this pending chapter 13 case. Mr. Smith was mailed notice of the commencement of the bankruptcy case. The deadline to file non-governmental proofs of claim was April 25, 2019. Mr. Smith did not file a proof of claim.
The debtor's chapter 13 plan was confirmed on April 19, 2019, without objection from Mr. Smith. Pursuant to the confirmed plan, creditors holding nonpriority, unsecured claims, such as Mr. Smith, are to be paid in full. However, because Mr. Smith failed to file a timely proof of claim, he has no allowed claim and receives no distribution under the confirmed plan.
The confirmed plan makes no provision for the refinancing of any indebtedness secured by the Alabama Property. Instead, if completed, the plan will bring current both the first and second mortgages over the term of the plan.
Meanwhile, Mr. Smith sought to sell the Chattanooga Property and to purchase a new residence. By early March 2019, both the Chattanooga Property and a new residence were under contracts to sell and to purchase, respectively. Presumably, the debtor's bankruptcy case and the debtor's failure to refinance the indebtedness secured by the Alabama Property hampered the dual closings.3 This is the point at which insult becomes injury.
On July 10, 2019, Mr. Smith, with knowledge of the debtor's pending bankruptcy case, commenced the State Court Action against the debtor, seeking entry of a judgment in a later-amended amount of $23,179.13 in damages. The filing contended that his damages were attributable to the debtor's failure to comply with the prepetition MDA, and Mr. Smith sought a nondischargeable judgment.4
The State Court Action proceeded in fits and starts throughout 2020 and during the first quarter of 2021. During that time, the debtor was represented by two attorneys, one representing her in connection with the State Court Action and the other representing her in connection with her bankruptcy case. Nonetheless, the debtor failed to assert that the filing of the State Court Action violated the automatic stay.
On June 3, 2021, the court approved the debtor's application to hire Johnson & Mulroony, PC, to replace her counsel in the State Court Action. During a pretrial conference held in state court on May 14, 2021, the debtor's new counsel for the first time contended that the State Court Action violated the automatic stay. The action was placed in a holding pattern as the attorneys jousted over whether it should be dismissed or merely rendered dormant. The debtor maintained that the case should be dismissed, perhaps with prejudice, because it was filed after the bankruptcy petition date in violation of the automatic stay. By contrast, Mr. Smith maintained that the State Court Action should be stayed until the completion of the bankruptcy case because the damages at issue were excepted from discharge pursuant to 11 U.S.C. § 523(a)(5) or (15).
On June 22, 2021, the debtor filed the pending motion for contempt against Mr. Smith seeking actual damages, including attorney's fees, emotional distress damages, and punitive damages pursuant to 11 U.S.C. § 362(k). Mr. Smith opposed the motion contending that: (a) the debtor waived the automatic stay by failing to assert it earlier; and (b) the claim was nondischargeable because Mr. Smith's claim for damages flowed from the debtor's breach of the MDA.
On August 19, 2021, Mr. Smith finally voluntarily dismissed the State Court Action—approximately two and a half years into the debtor's bankruptcy case, over three months after the debtor raised the automatic stay in state court, and almost two months after the pending motion was filed and a subsequent hearing was held. After multiple hearings, the court held orally that Mr. Smith willfully violated the automatic stay and entered an order to that effect, reserving any issue of damages caused by the violation for further consideration.
The debtor's application for damages seeks to recover the attorney's fees and expenses of Johnson & Mulroony, P.C., totaling $14,921.09. Markedly, the application includes no claim for emotional distress damages or legal fees that may have been incurred by the debtor's initial counsel retained to defend the State Court Action.5
The filing of a petition for relief under the Bankruptcy Code "operates as a stay, applicable to all entities." 11 U.S.C. § 362(a). Thus, when a debtor files for bankruptcy, the stay is triggered automatically.6
The breadth of the automatic stay is considerable. Relevant to this case, the automatic stay prohibits the "commencement or continuation" of an action or proceeding against the debtor to collect a prepetition debt. Id. § 362(a)(1). Furthermore, the automatic stay prohibits: (a) the "enforcement" against the debtor of any judgment obtained before the filing of a bankruptcy petition; and (b) any act to "collect, assess, or recover" a prepetition claim against the debtor. Id. § 362(a)(2), (6).
Courts have long recognized that the automatic stay is a fundamental debtor protection. See, e.g. , Midlantic Nat'l Bank v. New Jersey Dept. of Env't Prot. , 474 U.S. 494, 503, 106 S.Ct. 755, 88 L.Ed.2d 859 (1986). The automatic stay affords the debtor a "breathing spell" from all collection efforts, relieving her of financial pressures while proposing a repayment plan. Fed. Land Bank of Louisville v. Glenn (In re Glenn) , 760 F.2d 1428, 1436 (6th Cir. 1985) ; see also In re Schaefer Salt Recovery, Inc. , 542 F.3d 90, 100 (3d Cir. 2008). The automatic stay also serves the interests of the debtor's creditors by facilitating an orderly administration of the bankruptcy estate and prohibiting any individual creditor from single-handedly carving up the debtor's assets. See City of Chicago v. Fulton , ––– U.S. ––––, 141 S. Ct. 585, 589, 208 L.Ed.2d 384 (2021) ; Chao v. Hosp. Staffing Servs., Inc. , 270 F.3d 374, 382–83 (6th Cir. 2001) ; Boucher v. Shaw , 572 F.3d 1087, 1092 (9th Cir. 2009) ; Hunt v. Bankers Trust Co. , 799 F.2d 1060, 1069 (5th Cir. 1986). Serving the interests of both debtors and creditors, the Supreme Court recognized expressly that the automatic stay preserves the status quo existing at the time the bankruptcy petition is filed. Fulton , 141 S. Ct. at 590 (quoting Nken v. Holder , 556 U.S. 418, 429, 129 S.Ct. 1749, 173 L.Ed.2d 550 (2009) ) ("[T]he term ‘stay’ is commonly used to describe an order that ‘suspend[s] judicial alteration of the status quo.’ ")). Accordingly, the automatic stay is akin to the sanctuary afforded by the medieval church of Europe. Once a person crossed the threshold of the church, all those in pursuit were made to halt.
Congress included multiple exceptions to the automatic stay. See 11 U.S.C. § 362(b). For example, postpetition attempts...
To continue reading
Request your trial