FILED NOV 27 2018 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
In re: BAP No. CC-18-1092-SFL
MORDECHAI ORIAN and YUN RU, Bk. No. 9:16-bk-10514-DS
Debtors.
MORDECHAI ORIAN; YUN RU,
Appellants,
v. MEMORANDUM*
MORDEHAI ASAF; LIORA ASAF,
Appellees.
Argued and Submitted on October 25, 2018 at Pasadena, California
Filed – November 27, 2018
Appeal from the United States Bankruptcy Court for the Central District of California
* This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential value, see 9th Cir. BAP Rule 8024-1. Honorable Deborah J. Saltzman, Bankruptcy Judge, Presiding
Appearances: William Charles Beall of Beall & Burkhardt argued for appellants; Michael N. Sofris of Action Legal Team argued for appellees.
Before: SPRAKER, FARIS, and LAFFERTY, Bankruptcy Judges.
INTRODUCTION
This is an appeal from an order awarding damages under § 362(k).1
The damages award consists only of attorney’s fees the debtors incurred as
a result of the willful stay violation of appellees Mordehai and Liora Asaf.
The Asafs failed to promptly dismiss a lawsuit in Hawaii state court (the
“Hawaii Action”) once they discovered that they had filed the case in
violation of the stay. The bankruptcy court disallowed over half of the
$11,322.50 in fees debtors requested and their $77.60 in expenses, stating
only that the disallowed fees and costs were “unreasonable, excessive, or
did not result from the violation.” The bankruptcy court also denied the
debtors’ request for punitive damages.
On appeal, the debtors challenge the disallowance of their fees and
1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all “Rule” references are to the Federal Rules of Bankruptcy Procedure. All "Civil Rule" references are to the Federal Rules of Civil Procedure.
2 expenses. While the entirety of the record suggests why the bankruptcy
court disallowed some of these fees, it does not enable us to fully
understand or meaningfully review the balance of the disallowed fees.
Because we simply cannot tell why the bankruptcy court found certain fees
not allowable, we must VACATE and REMAND for further findings.
The debtors also challenge the bankruptcy court’s denial of punitive
damages. They do not dispute the bankruptcy court’s statement of the legal
standard for awarding punitive damages under § 362(k). Rather, they only
challenge the bankruptcy court’s finding that the debtors did not prove a
reckless or callous disregard for the law or the debtors’ rights necessary for
punitive damages. Because this finding was not clearly erroneous, we
AFFIRM the denial of punitive damages.
FACTS
A. The Debtors’ Bankruptcy Filing And The Commencement Of The Hawaii Action.
The debtors commenced their bankruptcy case by filing a voluntary
chapter 11 petition in March 2016. The case was converted to chapter 7 in
September 2016. Neither the mailing matrix nor the schedules of creditors
listed the Asafs.
Without knowledge of the bankruptcy filing, the Asafs filed the
Hawaii Action against the debtors in the Third Circuit Court for the State of
Hawaii in April 2016. The complaint sought partition, an equitable lien and
3 damages regarding a parcel of agricultural property located in Captain
Cook, Hawaii. The Asafs served the summons and complaint on the
debtors in June 2016. Shortly after being served, the debtors filed a notice of
bankruptcy filing and automatic stay in the Hawaii Action. In July 2016,
the state court entered an order holding the Hawaii Action in abeyance
“pending the outcome of the bankruptcy case.” The Asafs took no further
action in the Hawaii Action after entry of that order.
B. The Relief From Stay Proceedings.
Roughly fourteen months later, in September 2017, the Asafs filed a
motion for relief from stay in the bankruptcy court seeking to resume the
Hawaii Action. Among other relief requested, the Asafs asked the
bankruptcy court to annul the stay with respect to the commencement of
the Hawaii Action. The Asafs asserted that annulment was appropriate
because the debtors had commenced their bankruptcy case in bad faith and
without listing the Asafs as one of their creditors. The Asafs conceded that
they commenced the Hawaii Action postpetition, but they insisted that
they were unaware of the bankruptcy filing at that time.
The debtors opposed the relief from stay motion. They pointed out
that there was no dispute that the Hawaii Action was commenced in
violation of the stay, that the action was void, and that the Asafs learned of
the bankruptcy case shortly after the Hawaii Action was commenced. They
further noted that, in spite of their obligation to promptly remedy their stay
4 violation, the Asafs waited well over a year to seek annulment of the stay.
The debtors also disputed that their bankruptcy case was filed in bad faith.
As the debtors put it, they could not have filed bankruptcy to impede the
Hawaii Action because the bankruptcy was filed before the Hawaii Action
even existed.
On November 7, 2017, the bankruptcy court held a hearing on the
Asafs’ relief from stay motion. The bankruptcy court stated several times
that the filing of the Hawaii Action violated the stay and was void. It
specifically considered and rejected the Asafs’ request for stay annulment,
holding that the Asafs had not factually established the requisite “balance
of equities” for such relief. The court also denied the Asafs’ request for
mandatory abstention. As the bankruptcy court explained, the state court
action that was the subject of the Asafs’ abstention request was filed in
violation of the stay and was void.
During the hearing, the debtors announced their intent to seek
contempt sanctions for the continuing stay violation if the Hawaii Action
was not dismissed. In response, the Asafs claimed that they were powerless
to dismiss the Hawaii Action because it was stayed. The bankruptcy court
did not comment on this issue.
On November 7, 2017, the bankruptcy court entered its order
denying the relief from stay motion. The Asafs did not appeal.
5 C. The Show Cause Proceedings.
1. The Motion For An Order To Show Cause.
On November 17, 2017, the debtors filed their ex parte motion
seeking an order to show cause why the Asafs should not be held in
contempt in light of their continuing violation of the stay. Even though the
motion was framed as one to show cause regarding contempt, it sought
relief under § 362(k). More specifically, the motion requested actual
damages under § 362(k) in the form of attorney’s fees and costs and also
requested punitive damages, citing the statutory language and case law
decided under that statute.2
In his declaration in support of the motion, debtors’ counsel noted
the debtors’ demands for the dismissal of the void Hawaii Action made
during the relief from stay proceedings. Following the conclusion of the
relief from stay proceedings, counsel stated that he exchanged emails with
the Asafs’ California counsel and reiterated his demand for dismissal of the
Hawaii Action. According to the debtors’ counsel, the Asafs responded by
asserting that the debtors had no standing to enforce the automatic stay.
The debtors’ counsel replied by pointing out that Eskanos & Adler, P.C. v.
2 What now is designated as § 362(k) formerly was designated as § 362(h), until Congress amended the statute in 2005 as part of its Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109–8, 119 Stat. 23 (“BAPCPA”). Thus, case law decided before the enactment of BAPCPA identifies the relevant statutory provision as § 362(h). See Hunsaker v. United States, 902 F.3d 963, 966 n.1 (9th Cir. 2018).
6 Leetien, 309 F.3d 1210 (9th Cir. 2002), was inconsistent with the Asafs’
standing argument. But there was no further response to the debtors’
demand for dismissal.
The Asafs opposed the debtors’ motion. As an initial matter, the
Asafs challenged the debtors’ right to seek ex parte relief. They also
maintained that the debtors could not recover any attorney’s fees as
§ 362(k) damages because the debtors incurred them in the process of
enforcing the automatic stay. In support of their argument, the Asafs cited
Sternberg v. Johnston, 595 F.3d 937 (9th Cir. 2010), which the Ninth Circuit
had overruled in America's Servicing Co. v. Schwartz-Tallard (In re
Schwartz-Tallard), 803 F.3d 1095, 1098-1101 (9th Cir. 2015) (en banc).
On December 5, 2017, the bankruptcy court issued its order to show
cause why the Asafs should not be held in contempt (“OSC”). The OSC
further raised the issue of whether the Asafs should be held liable for
punitive damages and for the debtors’ attorney’s fees and costs incurred in
defending against the relief from stay motion and in bringing their motion.
The Asafs dismissed the Hawaii Action on December 8, 2017, but
they only did so after the debtors filed their § 362(k) motion and after the
court issued its December 5, 2017 OSC.
2. The Show Cause Proceedings After Issuance Of The OSC.
On December 26, 2017, the Asafs responded to the OSC. They noted
their dismissal of the Hawaii Action on December 8, 2017. They also argued
7 that their actions were merely an attempt to perfect or maintain a
prepetition lien and were excepted from the automatic stay under
§ 362(b)(3). They denied that their actions willfully violated the stay and
also reiterated the attorney’s fees argument they made in their initial
response to the debtors’ motion, again relying upon the overruled Ninth
Circuit decision, Sternberg v. Johnston. The Asafs also argued that their
effort to annul the stay in the relief from stay motion was not itself a
violation of the stay, and any fees incurred by the debtors related to that
motion could not be recovered as damages under § 362(k).
On January 2, 2018, the debtors replied to the Asafs’ OSC response.
The debtors first pointed out that the bankruptcy court previously
determined that the Hawaii Action was filed in violation of the stay. The
debtors further challenged the Asafs’ argument contending that the Hawaii
Action was well beyond the scope of the exception to the automatic stay
provided for in § 362(b)(3) to perfect, or maintain, a lien. Additionally, the
debtors reiterated that the Asafs’ stay violation had been willful because
the Asafs knew in June 2016 that the Hawaii Action had been filed
postpetition and they failed to remedy their stay violation for roughly the
next 18 months. This failure continued even after the bankruptcy court
ruled in November 2017 that the Hawaii Action was void and the debtors
had demanded dismissal of the Hawaii Action. Finally, the debtors argued
that the Asafs’ construction of Leetien and reliance on Sternberg v. Johnston
8 bolstered the request for punitive damages. The debtors maintained that
the Asafs’ arguments were specious and were made to unduly increase the
costs of litigation.
3. The First Show Cause Hearing.
In January 2018, the matter was reset for hearing several times in
large part because of mudslides that occurred in the Santa Barbara area. At
this same time, the matter was reassigned to a new bankruptcy judge. In
light of the reassignment, the debtors ordered and submitted the transcript
from the relief from stay hearing to facilitate the newly-assigned
bankruptcy judge’s understanding of the prior rulings with respect to the
Hawaii Action and the automatic stay.
On February 1, 2018, the bankruptcy court held its initial hearing on
the OSC. At the outset of the hearing, the bankruptcy court granted the
debtors’ request that it take judicial notice of the relief from stay hearing
transcript. The court further stated that Judge Carroll’s findings made at
that hearing should be treated as the court’s findings “by everyone” at the
OSC hearing. The court additionally noted that Judge Carroll clearly found
that the Hawaii Action was filed in violation of the stay. The court
identified the following issues as questions that needed to be resolved: (1)
when (if ever) did the stay violation become willful; (2) when did the Asafs
comply with their duty to remedy the stay violation; and (3) assuming they
9 did not timely comply, what are the damages.3
The debtors acknowledged that their only actual damages consisted
of attorney’s fees to address the stay violation. As for punitive damages,
the debtors claimed that the specious arguments made by the Asafs, first to
support their refusal to dismiss the Hawaii Action and later to defend
against the OSC proceedings, evidenced the Asafs’ bad faith and justified a
punitive damages award.
In response to the debtors’ comments, the Asafs in essence contended
that there was no proof that the debtors asked the Asafs’ Hawaii counsel to
dismiss the case or that it was legally possible under Hawaii law to
immediately dismiss the Hawaii Action upon demand. The Asafs next
reiterated their argument that, so long as the Hawaii Action was stayed,
they had no affirmative obligation to remedy the stay violation by
dismissing the void Hawaii Action.
The court then ruled that the Asafs willfully violated the automatic
stay. According to the court, the mere continued existence of the Hawaii
Action was not a willful stay violation because the Hawaii Action was
3 Later on at the same hearing, the bankruptcy court revisited the relief from stay findings after the Asafs questioned whether Judge Carroll ever found that there was a stay violation. In response, the bankruptcy court noted: “I think it’s clear Judge Carroll at the time of the relief from stay motion hearing did find that action was filed in violation of the stay.”
10 being held in abeyance by order of the Hawaii circuit court.4 However, the
court explained that the Asafs’ filing of the relief from stay motion was
evidence that the Asafs were willfully violating the automatic stay by
pursuing the action. Still, the bankruptcy court ruled that punitive
damages were not justified. As the bankruptcy court explained, punitive
damages under § 362(k) required a showing of reckless or callous disregard
for the law or the rights of others. According to the court, in its view, the
record presented did not support a finding of reckless or callous disregard.
The court concluded that the debtors were entitled to recover their fees
incurred in defending against the relief from stay motion and set the
matter for the debtors to prove up their fees and costs on March 13, 2018.
4. The First Order On The Asafs’ Willful Stay Violation.
Shortly after the first hearing on the OSC, the debtors lodged a
proposed form of order. The proposed form of order incorporated by
reference the reasoning of the court given at the February 1, 2018 hearing as
its findings of fact and conclusions of law. The Asafs then filed an objection
4 At the final hearing on the OSC, held on March 13, 2108, the bankruptcy court modified its finding regarding how and when the willful stay violation occurred:
The real issue is that there were a series of findings already made by the Court, by Judge Carroll, regarding the Hawaii action being a violation of the stay, and, as I found at the last hearing, the failure to dismiss that action was evidence that the violation of the stay had become willful.
Hrg. Tr. (March 13, 2018) at 4:11-13.
11 to the proposed form of order. The Asafs complained that it was impossible
to tell if the court meant this order to be its final act for appeal purposes.
The Asafs further objected that the proposed order contained none of the
oral findings of fact, conclusions of law, and rulings the court made at the
February 1, 2018 hearing. The Asafs insisted that the bankruptcy court’s
oral finding that they willfully violated the stay by filing the relief from
stay motion was novel. They urged the court to memorialize this finding in
writing, for appeal purposes.
The debtors filed a short reply in support of the proposed form of
order. The debtors maintained that, by way of its oral findings and
conclusions, the court really meant the following:
As the undersigned heard the Court, the filing of a complaint in Hawaii after the filing of the petition was the stay violation. The Asafs action in attempting to prosecute that action through the filing of a Motion for Relief from the Automatic Stay was clear evidence that the stay violation had converted to a willful violation, and that therefore the Debtors were entitled to relief under § 362(k) for all damages suffered by the Debtors on and after the filing of the Motion for Relief from the Automatic Stay on September 13, 2017.
Response to Objection to Proposed Order (Feb. 12, 2018) at 1.
On February 27, 2018, the bankruptcy court entered its first order on
the OSC. The order specified that the Asafs were in “willful violation of the
automatic stay,” and scheduled the matter for the prove up hearing. As to
the Asafs’ objection to the form of the order, the court stated in a footnote:
12 The court has reviewed the objection to the order lodged by the Asafs and the Debtors’ response, and agrees with the arguments made in the response. The court’s finding at the hearing on this matter, as well as the court’s prior finding, is that the filing of the Hawaii action was a violation of the automatic stay. Continuing to prosecute that action (including through the filing of the motion for relief from the automatic stay) was evidence that the stay violation was a willful one. Any comment made at the hearing inconsistent with this finding was a misstatement.
Order After Hearing On Order To Show Cause In Re Contempt (Feb. 27,
2018) at p. 2 n.1.
On March 3, 2018, the Asafs filed an opposition to the entered order.
They titled the opposition an objection to the court’s proposed findings of
fact and conclusions of law and request for clarification. The objection in
large part questioned the footnote the court added to the entered order.
The Asafs maintained that it was impossible to tell from the order what
actions, other than the filing of the relief from stay motion, the court
viewed as a continuation of the Hawaii Action and hence a willful violation
of the automatic stay. The Asafs characterized the hearing as a proceeding
on contempt, and argued that an evidentiary hearing was required to
determine the willfulness of the Asafs’ stay violation. The Asafs argued
that the procedures the court followed and its findings were insufficient to
support the court’s contempt finding.
13 5. The Debtors’ Damages Prove-Up.
To establish their damages, the debtors submitted the declaration of
their counsel William Beall. Beall generally described his billing practices,
and he attached to his declaration his billing statements covering both the
relief from stay and show cause proceedings through February 6, 2018. The
billings included fees for the relief from stay proceedings totaling $2,565,
fees for the show cause proceedings totaling $5,415, and costs for the show
cause proceedings of $77.60 for the transcript from the relief from stay
proceedings. Beall stated that the size of the bills increased largely as a
result of the Asafs’ specious arguments. Beall further indicated that some
of this increase was attributable to the January 2018 mudslides, the
resulting continuances of the first show cause hearing, and the
reassignment of the bankruptcy case from Judge Carroll to Judge Saltzman.
On February 23, 2018, the Asafs filed an opposition to the fee prove
up declaration. The opposition raised virtually no challenge to the
reasonableness of the fees or the necessity of the services performed.
Instead, the Asafs mainly argued that only $1,686.50 of the fees related to
the OSC proceedings were compensable because the remainder were
incurred after the stay violation had been remedied by the dismissal of the
Hawaii Action. The Asafs also argued that none of the debtors’ fees
incurred in defending against the relief from stay motion were
compensable. The latter argument mostly recapped the Asafs’ contentions
14 that the relief from stay motion was not, itself, a violation of the stay –
willful or otherwise.
On February 27, 2018, the debtors filed their reply to the Asafs’
damages prove-up opposition. In relevant part, the debtors supplemented
their billings to include fees for the show cause proceedings from and after
February 6, 2018, in the total amount of $3,342.50. The debtors also
included a request for projected fees of $475 for the estimated amount of
time for the final show cause hearing.
6. The Final Hearing And The Damages Order.
On March 13, 2018, the bankruptcy court held its final show cause
hearing. At the outset of the hearing, the bankruptcy court reiterated its
statement from the February 27, 2018 order that the filing of the relief from
stay motion was not a stay violation. Rather, the court explained, the
continued existence of the Hawaii Action was evidence that the stay
violation had become willful. The bankruptcy court then repeatedly asked
the parties to address the issues of the amount and reasonableness of the
fees requested. The Asafs focused their argument on why the fees for the
relief from stay proceedings were not compensable at all. They also
restated their argument that the fees for the OSC proceedings incurred
after the Hawaii Action was dismissed were not compensable. The debtors
responded directly to the arguments the Asafs made. As for the
reasonableness and amount of the fees, the debtors pointed out that the
15 Asafs never specifically disputed that issue. The court then took the matter
under submission.
On March 27, 2018, the bankruptcy court entered its order awarding
the debtors $5,415.00 in fees. The court calculated the allowed fees as
follows:
1. Attorney’s fees of $1,805.00 related to the Debtors’ “Ex Parte Motion for Order to Show Cause” . . . Docket No. 216.
2. Attorney’s fees of $1,045.00 after the court’s issuance of its “Order to Show Cause in re Contempt of Violation of 11 U.S.C. § 362(a)(1), (5), and (6)” (the “OSC,” Docket No. 220), for appearance at the OSC hearing, preparation of order and notice of lodgment, and preparation of declaration regarding damages;
3. Attorney’s fees of $522.50 related to a dispute over the form of the Contempt Order;
4. Attorney’s fees of $1,567.50 related to responding to the Respondents’ brief opposing the Debtors’ claims for damages; and
5. Attorney’s fees of $475 to attend the March 13, 2018 hearing regarding damages.
Order Awarding Damages (Mar. 27, 2018) at p. 3.
The court then disallowed the remaining balance of $5,985.10
“because the fees and costs submitted are unreasonable, excessive, or did
not result from the violation.” Order Awarding Damages (Mar. 27, 2018) at
16 p. 3. The order did not otherwise explain the basis for the fees allowed or
disallowed. The debtors timely filed a notice of appeal of the award of
damages for the stay violation.
JURISDICTION
The bankruptcy court had jurisdiction over this matter pursuant to 28
U.S.C. § 1334 because it concerned the scope and enforcement of the
automatic stay. See Yellow Express, Inc. v. Dingley (In re Dingley), 514 B.R.
591, 597 (9th Cir. BAP 2014), aff'd on other grounds, 852 F.3d 1143 (9th Cir.
2017). We have jurisdiction under 28 U.S.C. § 158.
ISSUES
1. Did the bankruptcy court abuse its discretion when it disallowed
$5,985.10 of the fees and costs the debtors requested?
2. Did the bankruptcy court commit clear error when it found that the
Asafs had not acted with reckless or callous disregard for the law or
the debtors’ rights?
STANDARDS OF REVIEW
We review for an abuse of discretion the amount of fees and costs
awarded as damages under § 362(k). Eskanos & Adler, P.C. v. Roman (In re
Roman), 283 B.R. 1, 7 (9th Cir. BAP 2002); see also In re Schwartz-Tallard, 803
F.3d at 1101 (holding that § 362(k) makes fee awards mandatory to the
extent they arise from prosecuting an action for damages under the statute,
but also holding that the amount of fees awarded is a matter subject to the
17 court’s discretion).
The bankruptcy court abuses its discretion if it applies the wrong
legal standard or its findings of fact are clearly erroneous. Olomi v. Tukhi (In
re Tukhi), 568 B.R. 107, 112-13 (9th Cir. BAP 2017) (citing United States v.
Hinkson, 585 F.3d 1247, 1261–62 (9th Cir. 2009) (en banc)). The court’s
factual findings are not clearly erroneous unless they are “(1) illogical, (2)
implausible, or (3) without support in inferences that may be drawn from
the facts in the record.” Id.
DISCUSSION
Importantly, the Asafs did not appeal the bankruptcy court’s
determination that they willfully violated the automatic stay. The only
order on appeal is the award of damages, the only appellants are the
debtors, and the only issues appealed are the partial denial of the debtors’
attorney’s fees and the decision not to award punitive damages. Moreover,
while the parties and the court have referenced contempt, the underlying
motion, order, and appeal involve damages under § 362(k) only. Section
362(k) provides in relevant part that, “an individual injured by any willful
violation of a stay provided by this section shall recover actual damages,
including costs and attorneys’ fees, and, in appropriate circumstances, may
recover punitive damages.” § 362(k)(1). An award of costs and attorney’s
fees is mandatory upon a finding that the stay was willfully violated.
Though courts are statutorily authorized to award punitive damages for
18 willful stay violations, the decision to do so remains committed to the
bankruptcy court’s discretion.
A. Denial Of Attorney’s Fees.
In aggregate, the debtors requested allowance of $11,400.10 in fees
and costs as damages, and an award of punitive damages, under § 362(k).
Of that amount, the bankruptcy court disallowed $5,985.10, and denied
punitive damages. The bankruptcy court explained that it was disallowing
this amount “because the fees and costs submitted are unreasonable,
excessive, or did not result from the violation.” Order Awarding Damages
(Mar. 27, 2018) at p. 3. The debtors challenge the amount of fees and costs
disallowed. Their argument is twofold: (1) the bankruptcy court’s finding
was insufficient; and (2) the finding was clearly erroneous.
1. Governing Legal Standards.
a. Reasonable Attorney’s Fees As An Element Of Damages.
The debtors do not dispute that the bankruptcy court applied the
correct legal standards. In In re Schwartz-Tallard, 803 F.3d at 1101, the Ninth
Circuit, sitting en banc, held that a § 362(k) damages award must include
the debtor’s reasonable attorney’s fees incurred in prosecuting an action for
damages under the statute. But Schwartz-Tallard emphasized that
bankruptcy courts have discretion over the amount of fees awarded and
that the fees must be reasonable: “Only an award of fees reasonably
19 incurred is mandated by the statute; courts awarding fees under § 362(k)
thus retain the discretion to eliminate unnecessary or plainly excessive fees.
Sound exercise of this discretion will provide a sufficient check on any
abuses that might otherwise arise.” Id.
Consequently, even though fees and costs are an element of actual
damages under § 362(k), the same principles that govern the award of
professional compensation under § 330 also guide the allowance of fees
and costs under § 362(k). In re Roman, 283 B.R. at 9-11; Sundquist v. Bank of
Am., N.A. (In re Sundquist), 566 B.R. 563, 588 (Bankr. E.D. Cal. 2017),
partially vacated on other grounds, 580 B.R. 536 (Bankr. E.D. Cal. 2018).
Hence, the reasonable value of services typically is determined by using the
“lodestar” approach and by considering the particular circumstances of
each case.5 In re Roman, 283 B.R. at 11; In re Sundquist, 566 B.R. at 594-95.
Because there was no challenge to the reasonableness of the hourly rate
billed, we focus upon the reasonableness of the hours billed.
In the context of § 362(k), the reasonableness inquiry also must
include an examination of whether the debtor had the ability to mitigate
the amount of damages incurred and whether the debtors exercised that
ability. In re Roman, 283 B.R. at 12; In re Sundquist, 566 B.R. at 594-95. One
5 Under the lodestar approach, the bankruptcy court determines the reasonable amount of fees by multiplying the number of hours reasonably spent by the reasonable hourly rate of the professional. Law Offices of David A. Boone v. Derham–Burk (In re Eliapo), 468 F.3d 592, 598 (9th Cir. 2006).
20 way to determine whether the debtors complied with their duty to mitigate
is to consider who caused the attorney’s fees to be incurred – the debtors or
their creditor. See In re Roman, 283 B.R. at 12.
b. Determining Reasonableness - Discretion And Methodology.
The bankruptcy court has broad discretion in determining what
amount of fees is reasonable under the circumstances. Koncicky v. Peterson
(In re Koncicky), Appeal No. W-07-1170-MkPaJ, 2007 WL 7540997, at *3 (9th
Cir. BAP Oct. 19, 2007); see also Gates v. Deukmejian, 987 F.2d 1392, 1398 (9th
Cir. 1992) (“The district court has a great deal of discretion in determining
the reasonableness of the fee and, as a general rule, we defer to its
determination . . . .”).6 We necessarily afford considerable deference to the
bankruptcy court’s reasonableness assessment because of its first-hand
experience with the attorney’s services and performance during the course
of the bankruptcy proceedings. Thomas v. Namba (In re Thomas), Appeal No.
CC-07-1053-PaBaK, 2007 WL 7541008, at *12 (9th Cir. BAP Nov. 5, 2007)
(citing Red Carpet Corp. of Panama City Beach v. Miller (In re Red Carpet Corp.
of Panama City), 902 F.2d 883, 891–92 (11th Cir. 1990)).
The Ninth Circuit’s decision in Leichty v. Neary (In re Strand), 375 F.3d
6 Both the debtors and the Asafs have cited to Gates, a federal civil rights decision, to support their respective arguments on appeal. While the prevailing concerns and circumstances in civil rights cases and bankruptcy cases differ somewhat, we find Gates helpful in articulating what courts generally must do when they determine what constitutes a reasonable award of attorney’s fees.
21 854 (9th Cir. 2004), exemplifies the extent of deference we must afford the
bankruptcy court’s reasonableness determination. There, the bankruptcy
trustee’s attorney sought, in total, $34,457 in fees. Of this amount sought,
$19,065 arose from the trustee’s litigation against the Internal Revenue
Service (“IRS”). Id. at 857. The bankruptcy court only allowed half of the
IRS litigation fees sought, finding that the minimal potential benefit to the
estate from the IRS litigation did not justify the attorney’s aggressive
pursuit of this litigation. Id. at 859-61. On appeal, the Ninth Circuit upheld
the bankruptcy court’s determination and disallowance of 50% of the
attorney’s IRS-related fees. The Ninth Circuit explained that the
bankruptcy court appropriately took into account the degree of potential
benefit from the IRS litigation and reasonably determined the allowable
amount of IRS-related fees. Id.
It is instructive to compare the Ninth Circuit analysis in In re Strand
with its analysis in Gates, where the district court allowed a discounted fee
request of the plaintiffs’ attorneys arising in a civil rights action in the
amount of $5,627,399.66. Gates, 987 F.2d at 1396. In Gates, the attorneys
voluntarily had reduced their fee request by making $108,495.80 in specific
“billing judgment” deductions and by agreeing to a 10% across-the-board
deduction. Id. at 1398. The district court held that the “lodestar amount is
reasonable and justified by ample documentation.” Id. at 1397.
Additionally, the court reasoned that the voluntary reduction
22 “compensated for any overbilling or duplication the court found suggested
in the record.” Id. On the other hand, the defendants claimed that the
plaintiffs’ voluntary reduction did not adequately account for overstaffing,
lumping, use of inexperienced attorneys, duplication, and excessive
conferences amongst the attorneys. Id. at 1398.
The Ninth Circuit again began its analysis recognizing the general
rule of deference afforded district courts in exercising their discretion as to
the reasonableness of fees. Id. The Ninth Circuit acknowledged that,
particularly in the case of voluminous billings, district courts are not
expected to allow and disallow billing entries on an item-by-item basis. Id.
at 1399-1400. Nor was the district court, under the circumstances of that
case, required to expressly reject each and every one of the defendants’
objections. Id. at 1400. The Ninth Circuit reasoned that such attention to
detail would constitute an “unnecessary expenditure of precious, and
already strained, judicial resources.” Id. Indeed, the court recognized the
utility of percentage reductions of fees in certain instances. Id.
Nonetheless, the Ninth Circuit vacated the district court’s allowance
of the fees. Id. at 1402. The Ninth Circuit held that, in order to permit the
appellate court to conduct its review of the district court’s allowance and
disallowance of fees, the district court must provide a “concise but clear”
explanation for its fee award. Id. at 1398 (citing Hensley v. Eckerhart, 461
U.S. 424, 485 (1983)). This requires “some indication of how it arrived at
23 the amount of compensable hours for which fees were awarded to allow
for meaningful appellate review.” Id. (citing Cunningham v. County of Los
Angeles, 879 F.2d 481, 485 (9th Cir. 1988)). Further explaining this
requirement, the Ninth Circuit wrote, “[a]lthough we do not require ‘an
elaborately reasoned, calculated, or worded order . . . [and] a brief
explanation of how the court arrived at its figures will do, . . . something
more than a bald, unsupported amount is necessary.’” Id. (quoting
Chalmers v. City of Los Angeles, 796 F.2d 1205, 1211 n.3 (9th Cir. 1987))
(internal citation omitted).
According to the Ninth Circuit, the district court’s cursory statement
approving the discounted fee request, “affords us no explanation as to how
the court arrived at ten percent as the correct reduction and thus, it does
not allow for us meaningfully to assess its determination.” Id. at 1400.
We acknowledge that Gates is a federal civil rights case involving a $5
million fee request that warranted heightened scrutiny of the fees
requested. Even so, this Panel has applied almost identical reasoning in its
bankruptcy decisions, when the bankruptcy court’s ruling did not
adequately explain the allowance and disallowance of much smaller fee
requests. See, e.g., Lobel & Opera v. United States Tr. (In re Auto Parts Club,
Inc.), 211 B.R. 29 (9th Cir. BAP 1997) ($137,033.50 in fees); In re Dutta, 175
B.R. 41 (9th Cir. BAP 1994) ($25,046.00 in fees).
For instance, in In re Dutta, we vacated and remanded for further
24 findings, where the bankruptcy court disallowed $6,502.50 of $25,046 in
requested attorney’s fees. Id. at 47-48. In disallowing these fees, the
bankruptcy court relied on a preprinted checklist form of order. Id. at 45. In
the form order, the bankruptcy court ticked off roughly half the fifteen
stated grounds for disallowing fee requests, including but not limited to
the following: “lumping of services,” “excessive phone calls with
client/others,” “excessive time spent on task,” “duplication of services,”
“necessity for service,” and “rate is in excess of prevailing local rates.” Id.
On appeal, we noted that the record did not appear to support several of
the grounds the bankruptcy court ticked off as justifying the disallowance
of fees. Id. at 46-47. We held that the bankruptcy court’s reasonableness
determination must include a “clear and concise explanation” of the fees
allowed and disallowed, citing the same Supreme Court authority the
Ninth Circuit relied on in Gates. See id. at 46 (citing Hensley, 461 U.S. at 437).
We concluded:
While a trial court need not necessarily explain its analysis in terms of elaborate mathematical calculations, for example, it must provide sufficient insight into its exercise of discretion to allow an appellate court to exercise its reviewing function. In the absence of such a sufficient explanation, the fee award must be remanded to provide such an explanation.
Id.
Meanwhile, in In re Auto Parts Club, the bankruptcy court disallowed
two thirds of the roughly $150,000 in fees and costs requested by counsel
25 for the official committee of unsecured creditors. In re Auto Parts Club, Inc.,
211 B.R. at 30-31. The sole reason the bankruptcy court offered for the
disallowance concerned the lack of benefit to the estate from counsel’s
services. Id. at 34-36. The bankruptcy court explained that, once the
interested parties agreed to sell the debtor’s business, counsel should have
drastically scaled back its services in light of the fact that additional
services after that point were of little or no prospective benefit to the estate.
As in In re Dutta, the In re Auto Parts Club panel vacated and
remanded for further findings. Id. at 36. We explained that the bankruptcy
court made no findings explaining why counsel should receive significant
reductions for services performed before agreement was reached for the
sale of the debtor’s business or why absolutely no compensation should be
allowed for services provided after the sale was agreed to. Id. Nor was it
evident from the record why the court disallowed the fees in this manner.
In sum, Gates, In re Auto Parts Club, and In re Dutta collectively stand
for the proposition that, when the bankruptcy court determines the amount
of fees to allow and disallow, it must give a clear and concise explanation
of how it arrived at its figures. As explained below, the bankruptcy court
did not sufficiently explain why it disallowed over half of the fees
requested by the debtors’ counsel.
26 2. Analysis Of The Amounts Allowed And Disallowed.
Although the bankruptcy court attributed the fees it allowed to
various tasks, it did not similarly attribute the fees and costs it disallowed.
Instead, it merely stated that $5,985.10 in fees and costs were disallowed as
excessive, unreasonable or unrelated to the stay violation. Unfortunately,
neither the fees allowed or disallowed wholly match the billings submitted
by the debtors’ counsel. Therefore, we cannot tell from the face of the
court’s order which fees troubled the court or which specific grounds for
disallowance the court relied upon. That said, the bankruptcy court did
break down the allowed fees into components and provide some
identification that tracks the billing statements. Together with the
declarations of the debtors’ counsel and the parties’ statements on appeal,
we are largely able to identify which fees were allowed, and then deduce
what fees and costs were disallowed.
a. Fees Arising From Relief From Stay Motion.
The debtors requested a total of $2,565.00 (incurred in September,
October and November7) for defending against the Asafs’ relief from stay
motion. Because the bankruptcy court did not attribute any of the fees it
allowed to the discrete matter involving the defense of the relief from stay
7 The debtors’ fees in November included more than just work on the relief from stay motion. However, the billing statement segregated the time related to the relief from stay motion, thereby facilitating the evaluation of the debtors’ fees with respect to this task.
27 motion, we can deduce that it disallowed these fees in their entirety.8
Nor is the reason for that disallowance subject to legitimate dispute.
Of the three reasons the bankruptcy court gave for disallowing fees, only
the causation ground – not related to the stay violation – explains the total
disallowance of these fees. Moreover, these fees were the focus of much of
the Asafs’ arguments. The entirety of the record has given us a clear and
concise understanding of the basis for the bankruptcy court’s disallowance
of this subset of fees.
Although the bankruptcy court originally considered the Asafs’
motion for relief from stay as evidence of their willful violation of the stay,
it ultimately disallowed all fees the debtors requested as arising from their
defense of the relief from stay motion. We agree with the bankruptcy court
that the debtors’ fees related to the relief from stay motion did not arise
from the stay violation for purposes of awarding damages under § 362(k).
It is well settled that ”[t]he automatic stay does not apply to proceedings
initiated against the debtor if the proceedings are initiated in the same
8 Generally speaking, Rules 7052 and 9014(c) make Civil Rule 52(a) applicable in most adversary proceedings and contested matters. Civil Rule 52(a)(1) requires the bankruptcy court to render factual findings. However, the Ninth Circuit has held that Civil Rule 52(a) does not apply to motions for attorney’s fees. D'Emanuele v. Montgomery Ward & Co., Inc., 904 F.2d 1379, 1388 (9th Cir.1990), overruled on other grounds by City of Burlington v. Dague, 505 U.S. 557 (1992); see also In re Dutta, 175 B.R. at 47 (applying D'Emanuele’s holding to bankruptcy court fee application proceedings). Even so, this does not obviate the need for a “clear and concise explanation” for the bankruptcy court’s reasonableness determination. In re Dutta, 175 B.R. at 47.
28 bankruptcy court where the debtor’s bankruptcy proceedings are
pending.” Snavely v. Miller (In re Miller), 397 F.3d 726, 730 (9th Cir. 2005). In
fact, the Ninth Circuit has indicated that a timely relief from stay motion
seeking annulment is a potential remedy for a stay violation rather than a
continuation of it. See Schwartz v. United States (In re Schwartz), 954 F.2d 569,
573 (9th Cir. 1992) (“If a creditor obtains retroactive relief under section
362(d), there is no violation of the automatic stay, and whether violations of
the stay are void or voidable is not at issue.”); see also In re Biehl, Case No. 6:
13-bk-26277-MH, 2017 WL 1040941, at *3 (Bankr. C.D. Cal. Mar. 13, 2017)
(holding that a stay annulment motion is not, itself, a violation of the
automatic stay).
The debtors’ argument on this point is short but somewhat difficult
to follow. They rely on the standard of review for factual findings – the
clearly erroneous standard – and contend that the bankruptcy court’s
determination that the relief from stay-related fees did not arise from the
stay violation was not supported by the record. The debtors’ argument
misses the point. Based on the authorities set forth above, as a matter of
law, the $2,565.00 the debtors incurred in defending against a bona fide
stay annulment motion did not arise from the stay violation.9 Accordingly,
out of the disallowed fees and costs totaling $5,985.10, we agree with the
9 The result might be different if the stay annulment motion lacked any factual or legal basis.
29 bankruptcy court that $2,565.00 for work related to the relief from stay
motion was not compensable under § 362(k). This leaves $3,342.50 in
disallowed fees and $77.60 in costs to examine.
b. Fees And Costs Incurred Regarding The Order To Show Cause.
Based upon the billing statements, the debtors’ counsel sought
additional fees for November (exclusive of the fees for relief from stay) and
December, 2017 through February 2018. The parties agree that the
remainder of the fees billed in November relate to the OSC, and were
allowed by the bankruptcy court. The billing entry descriptions match the
subject matter descriptions in the court’s order for the debtors’ motion for
the OSC. Moreover, the fees for the additional November billings tie to the
specific amount the court allowed as related to the debtors’ motion for OSC
- $1,805.00.
The bankruptcy court also allowed $1,045.00 for “issuance of its
‘Order to Show Cause in re Contempt for Violation of 11 U.S.C. 362(a)(1),
(5), and (6)’ ... for appearance at the OSC hearing, preparation of order and
notice of lodgment, and preparation of declaration regarding damages.”
The award in the order appears to match both the substance and amount
for three of the five billing entries for the debtors’ counsel’s original
February statement (February 1-6, 2018). The two remaining entries for
this statement are both for one-tenth of an hour, totaling $95.00. The first of
30 these entries is for calendaring dates, while the second entry is for an email
to the client regarding mediation. It appears that the bankruptcy court
disallowed these entries as excessive or unreasonable. The entry for
calendaring dates reasonably could be construed as non-legal work that
constitutes overhead and is not compensable as attorney fees. See In re
Nucorp Energy, Inc., 764 F.2d 655, 659 n.5 (9th Cir. 1985). As for the entry for
the email, the bankruptcy court presumably concluded that this time entry
related to mediation activities and not to the stay violation.
The bankruptcy court next allowed $522.50 “related to a dispute over
the form of the Contempt Order.” The first three billing entries for the
second February statement, covering February 8-12, 2018, specifically relate
to this dispute and match the amount allowed. Additionally, the court
allowed attorney fees in the amount of $475.00 to attend the March 13, 2018
damages hearing. This matches the billing entry for March 13, 2018, for
$475.00 to attend the damages hearing.
Finally, the court allowed $1,567.50 “related to responding to the
Respondents’ brief opposing the Debtors’ claims for damages.” Given the
structure of the order and the chronological progression of the other
amounts allowed, these fees appear to relate to seven billing entries
between February 23-27, 2018. However, these entries total $2,345.00.
Through a process of elimination, one can combine several of the entries to
arrive at the $1,567.50 allowed by the court. Unfortunately, there are two
31 combinations of entries possible to reach this result. Unlike the other
categories, the court’s description for this component of the fees allowed
does not provide any additional insight as to which fees were disallowed.
We are unable, therefore, to conclude which fees were awarded and which
were disallowed in the second February billing statement.
Based upon the fees specifically allowed by the bankruptcy court we
can also surmise that certain other fees were disallowed. Specifically, the
description of the allowed fees suggests that all of the billing entries for
December 2018 and January 2018 were disallowed. Unlike the fees
allowed, there is no discussion as which of the disallowed fees were
“unreasonable, excessive, or did not result from the violation.” Ultimately,
we are left to speculate as to which fees were allowed and which were
disallowed. And as to the disallowed fees, we must further speculate as to
why they were disallowed. Although the reasons that some of the fees
were disallowed appear more apparent than others, we must still
speculate. The court’s order did not provide a clear and concise statement
as to which fees were disallowed or why such fees were disallowed.
c. Disallowance Of Costs.
Finally, the debtors requested reimbursement of only one expense:
the $77.60 cost of the transcript from the relief from stay hearing. Given the
specific amounts the bankruptcy court allowed and the balance disallowed,
the bankruptcy court must have disallowed this cost. It is unclear why the
32 bankruptcy court did so. On this record, this cost seems neither excessive
nor unreasonable. Clearly, the ordering and submission of the transcript
was related to the OSC proceedings and played an integral role at the
February 1, 2018 show cause hearing. During that hearing, the bankruptcy
court twice referred to the findings made at the relief from stay hearing
that the Hawaii Action was filed in violation of the stay and was void. In
addition, the transcript evidenced the debtors’ demand, made in open
court, for the dismissal of the Hawaii Action. If the Asafs harbored any
doubt about the status of the Hawaii Action as a continuing stay violation
and the need to fully dispose of it, that doubt must have ended at the time
of the relief from stay hearing. The hearing transcript made this clear. The
utility of this transcript was bolstered by the fact that different judges
presided over the relief from stay proceedings and the show cause
proceedings.
That being said, we ultimately are left to speculate why the
bankruptcy court disallowed the transcript cost. Because we must remand
for further findings on the remaining unallocated portions of the
disallowed fees, the bankruptcy court may amend its findings in relation to
denial of this cost (in case we have misconstrued the basis for the
bankruptcy court’s disallowance), or the court may reconsider the
disallowance of this cost if it chooses to do so.
33 d. Closing Remarks On Analysis Of Fees Disallowed.
While the record suggests much of the court’s reasoning, it does not
enable us to understand all of it. Accordingly, we conclude that the court’s
findings were not sufficiently clear and concise to permit meaningful
appellate review. Although the fees relating to the motion for relief from
stay present a discrete subset, and the record supports denial of those fees,
because we must remand this matter for further explanation we are not
inclined to sever one component. Rather, we will remand the totality of the
matter in the hope of avoiding any further confusion. On remand, the
bankruptcy court on further consideration may do any of the following:
(1) provide further explanation why the subject fees were excessive,
unreasonable, or unrelated to the stay violation; (2) provide an alternate or
different basis for their disallowance (e.g., failure to mitigate); or
(3) reconsider the allowance or disallowance of those fees.
3. Denial Of Punitive Damages.
Section 362(k) specifically provides for the award of punitive
damages in “appropriate circumstances.” The bankruptcy court relied
upon established Ninth Circuit law holding that punitive damages cannot
be awarded under § 362(k) unless the stay violator acted with “‘reckless or
callous disregard for the law or rights of others.’” Snowden v. Check Into
Cash of Wash., Inc. (In re Snowden), 769 F.3d 651, 657–58 (9th Cir. 2014)
(quoting Goichman v. Bloom (In re Bloom), 875 F.2d 224, 228 (9th Cir. 1989)).
34 Generally speaking, there are two underlying purposes for punitive
damage awards: to punish outrageous conduct and to deter future similar
conduct. Smith v. Wade, 461 U.S. 30, 54 (1983) (citing Restatement (Second)
of Torts § 908(1) (1977)). As stated in Smith:
The focus is on the character of the tortfeasor's conduct – whether it is of the sort that calls for deterrence and punishment over and above that provided by compensatory awards. If it is of such a character, then it is appropriate to . . . assess punitive damages . . . . To put it differently, society has an interest in deterring and punishing all intentional or reckless invasions of the rights of others . . . .
The debtors do not challenge the bankruptcy court’s application of
punitive damages law. Rather, they dispute the bankruptcy court’s finding
on the Asafs’ reckless and callous disregard for their rights. According to
the bankruptcy court, the debtors did not show that the Asafs acted with
reckless or callous disregard. The debtors effectively contend that the
bankruptcy court should have inferred the requisite state of mind from the
Asafs’ specious litigation positions in the relief from stay proceedings and
the show cause proceedings. This quintessentially is an issue of fact. Id. at
52.
For purposes of this discussion we will assume without deciding that
most of the Asafs’ litigation positions were specious. We further will
assume that the bankruptcy court could have inferred the requisite state of
35 mind from the way the Asafs conducted themselves in the relief from stay
proceedings and the show cause proceedings. Nonetheless, we are not
persuaded that the bankruptcy court’s key punitive damages finding was
clearly erroneous. While many of the litigation positions the Asafs took
were at best misguided, the positions were not necessarily indicative of a
reckless or callous disregard. Furthermore, there was other evidence in the
record that militated against a finding of reckless or callous disregard. The
record reflects that, for over a year, the continued existence of the stayed
Hawaii Action was a complete non-issue for both parties. And when the
parties’ focus did return to the Hawaii Action, the first (and only) thing the
Asafs voluntarily did was seek an annulment of the stay – which would
have remedied the stay violation.
It is also worth noting that the extent and degree of the misconduct
involved in this matter, the degree and nature of harm caused to the
debtors, and the level of reprehensibility of the misconduct are relatively
minimal. This is especially so when compared to the misconduct of the
stay violators in the above-referenced punitive damages cases. See, e.g., In
re Snowden, 769 F.3d at 654-55; In re Sundquist, 566 B.R. at 591-92, 611–12. It
is appropriate to consider factors like these in the process of assessing the
propriety of awarding punitive damages. In re Sundquist, 566 B.R. at 610. In
concluding that the record presented did not support a finding of reckless
or callous disregard, this is exactly what the bankruptcy court did.
36 We are not saying that we condone the Asafs’ delay in dismissing the
Hawaii Action or that this delay was legally permissible. Rather, we
conclude that under the particular circumstances of this matter the
bankruptcy court’s controlling punitive damages finding was logical,
plausible and supported by the record.
CONCLUSION
For the reasons set forth above, we AFFIRM the bankruptcy court’s
denial of punitive damages. As to the award of attorney fees, we VACATE
AND REMAND for further proceedings as specified in the body of this
decision.