Opinion ID: 781254
Heading Depth: 2
Heading Rank: 2

Heading: Damages/Sanctions Resulting from the Automatic Stay Violation

Text: 50 Although Mr. Lindblade is entitled to enforce his unperfected deed of trust despite the automatic stay violation, the Trustee may nonetheless be entitled to sanctions.
51 Under § 362(h), an individual harmed by a willful automatic stay violation is entitled to collect compensatory damages (including attorneys' fees) and, where appropriate, punitive damages. 12 The parties all agree, however, that the Trustee is ineligible to receive damages under that private cause of action, because she is not an individual. Havelock v. Taxel (In re Pace), 67 F.3d 187, 192 (9th Cir.1995).
52 Nonetheless, we have held that the Trustee may be entitled to recovery for violation of the automatic stay under section 105(a) as a sanction for ordinary civil contempt. Id. at 193; accord Calif. Employment Dev. Dep't v. Taxel (In re Del Mission), 98 F.3d 1147, 1152 (9th Cir.1996). Although the availability of civil contempt sanctions under § 105(a) has a checkered past in our circuit, 13 the recent precedent makes clear that this remedy is available. Renwick v. Bennett (In re Bennett), 298 F.3d 1059, 1069 (9th Cir.2002); Walls v. Wells Fargo Bank, 276 F.3d 502, 507 (9th Cir.2002). 53 Because the Trustee recovers under the contempt authority of § 105(a), rather than under § 362(h), however, the sanction award must conform to the legal standards governing that authority. Walls, 276 F.3d at 507. We have implied, in passing, that the contempt remedy is nearly identical to the remedy available to an individual under § 362(h), except for the permissive nature of the contempt authority. Del Mission, 98 F.3d at 1152. But careful reflection reveals important distinctions between § 105(a) and § 362(h), including, as we will develop, different availability of punitive damages. 54 Walls made clear that § 105(a), as a discrete statutory provision with its own standards and limitations, is simply not a vehicle for enforcing other provisions of the bankruptcy code. In Walls, Wells Fargo Bank attempted to collect a prebankruptcy debt from Marie Walls, in violation of the automatic discharge injunction created by § 524(a)(2). The debtor brought a class action suit against Wells Fargo on behalf of herself and similarly situated debtors. The district court dismissed the suit, concluding that Walls' only remedy was a civil contempt proceeding in bankruptcy court under § 105(a). 55 We affirmed. Noting that it is not up to us to read other remedies into the carefully articulated set of rights and remedies set out in the Bankruptcy Code, we rejected Walls' invitation to read § 105(a) as a catch-all private right of action for the enforcement of other Bankruptcy Code provisions. Walls, 276 F.3d at 507. We further noted that in any event, § 105(a) authorizes only such remedies as are necessary and appropriate to carry out the provisions of [the Bankruptcy Title]. Id. (internal quotation marks and citation omitted). Because the remedies traditionally associated with compensatory civil contempt are adequate to meet the goal of § 105(a), we concluded no further remedy is necessary. Id. 56 So here: Congress chose to exclude the Trustee from the reach of § 362(h). The Trustee therefore has no private right of action for damages resulting from automatic stay violations. We will not strain the language of § 105(a) in a misguided attempt to accomplish by judicial fiat that which Congress chose not to do. Rather, the Trustee, like the debtor in Walls, is limited to the civil contempt remedy provided by § 105(a). 14 We must therefore analyze the current contempt sanctions in this case under the legal standards associated with civil contempt awards. 57
58 The standard for finding a party in civil contempt is well settled: The moving party has the burden of showing by clear and convincing evidence that the contemnors violated a specific and definite order of the court. Bennett, 298 F.3d at 1069. Because the metes and bounds of the automatic stay are provided by statute and systematically applied to all cases, Jove Eng'g v. IRS (In re Jove Eng'g), 92 F.3d 1539, 1546 (11th Cir.1996), there can be no doubt that the automatic stay qualifies as a specific and definite court order. 59 In determining whether the contemnor violated the stay, the focus is not on the subjective beliefs or intent of the contemnors in complying with the order, but whether in fact their conduct complied with the order at issue. Hardy v. United States (In re Hardy), 97 F.3d 1384, 1390 (11th Cir.1996) (internal citations omitted); accord McComb v. Jacksonville Paper Co., 336 U.S. 187, 191, 69 S.Ct. 497, 93 L.Ed. 599 (1949) (Because civil contempt serves a remedial purpose, it matters not with what intent the defendant did the prohibited act.). 60 The threshold standard for imposing a civil contempt sanction in the context of an automatic stay violation therefore dovetails with the threshold standard for awarding damages under § 362(h). Pace, 67 F.3d at 191 (incorporating the willfulness standard of § 362(h) as explicated by Pinkstaff v. United States (In re Pinkstaff), 974 F.2d 113, 115 (9th Cir.1992)). Under both statutes, the threshold question regarding the propriety of an award turns not on a finding of bad faith or subjective intent, but rather on a finding of willfulness, where willfulness has a particularized meaning in this context: 61 [W]illful violation does not require a specific intent to violate the automatic stay. Rather, the statute provides for damages upon a finding that the defendant knew of the automatic stay and that the defendant's actions which violated the stay were intentional. 62 Pace, 67 F.3d at 191; see also Pinkstaff, 974 F.2d at 115; Hardy, 97 F.3d at 1390; cf. Bennett, 298 F.3d at 1069 (describing standard for imposing civil contempt sanctions under § 105(a) for violation of discharge injunction). We review the decision to impose contempt for an abuse of discretion, and underlying factual findings for clear error. FTC v. Affordable Media, 179 F.3d 1228, 1239 (9th Cir.1999). 63 Applying those standards, we cannot conclude that the bankruptcy court abused its discretion in determining that Mr. Lindblade's post-petition recordation of his deed of trust was worthy of sanction. Mr. Lindblade recorded his deed of trust on May 11, 1998, several weeks after learning of the bankruptcy filing. He argues that this post-petition recordation was inadvertent because neither he nor his attorney Teunisse was aware of the bankruptcy when they instigated the recordation. This explanation rings hollow, however, in light of the May 1, 1998 letter from Teunisse to Dyer's counsel, indicating an affirmative intent to proceed with the recordation despite knowledge of the bankruptcy filing. 64 Less clear, however, is whether either Teunisse or Mr. Lindblade was aware of the automatic stay injunction at the time of the recordation. They may not have been familiar with that particular Code provision. In the context of awarding damages under § 362(h), we have stated that a party with knowledge of bankruptcy proceedings is charged with knowledge of the automatic stay. Pinkstaff, 974 F.2d at 115 (citing Carroll v. Tri-Growth Ctr. City, Ltd. (In re Carroll), 903 F.2d 1266, 1272 (9th Cir.1990)). While that holding may be consistent with the congressional intent behind § 362(h), we hesitate to extend that principle to the contempt context. Generally, a party cannot be held in contempt for violating an injunction absent knowledge of that injunction. Bennett, 298 F.3d at 1069 (before sanctions can be imposed for violation of § 524 injunction, a creditor must know that the discharge injunction is applicable); Jove, 92 F.3d at 1555 (contempt appropriate only if party has knowledge of the automatic stay); cf. Fed.R.Civ.P. 65(d) (injunction not binding unless party has actual knowledge of it). 65 But the district court's contempt sanction can be upheld on an alternative ground: Mr. Lindblade had an affirmative duty to remedy his automatic stay violation. Del Mission, 98 F.3d at 1151. Despite letters from the Trustee notifying Mr. Lindblade and Teunisse that the post-petition recordation violated the automatic stay, neither attempted to cure the defect, such as by attempting to undo the recordation process. Nor has Mr. Lindblade demonstrated that such attempts would have been futile. To the contrary, Mr. Linblade continued to press, for a time, his theory that the post-petition recordation, though technically a violation of the automatic stay, should not be rendered void. Rather than take that litigation position, Mr. Lindblade should have conceded the invalidity of the recordation and petitioned for relief from the automatic stay. In all, we cannot say that the bankruptcy court abused its discretion in determining that Mr. Lindblade willfully violated the automatic stay. 66
67 Viewing the bankruptcy court award through the lens of its contempt authority we must, however, reject the Trustees' principal argument on appeal — that the entire award can be sustained as punitive sanctions. 68 As both Walls and Pace emphasize, the contempt authority conferred on bankruptcy courts under § 105(a) is a civil contempt authority. As such, it authorizes only civil sanctions as available remedies. 69 We recently explained the difference between civil sanctions and criminal sanctions: Civil penalties must either be compensatory or designed to coerce compliance. F.J. Hanshaw Enters., Inc. v. Emerald River Dev., Inc., 244 F.3d 1128, 1137-38 (9th Cir.2001). In contrast, a flat unconditional fine totaling even as little as $50 could be criminal if the contemnor has no subsequent opportunity to reduce or avoid the fine through compliance, and the fine is not compensatory. Id. at 1138 (citation omitted). See also Int'l Union, United Mine Workers of Am. v. Bagwell, 512 U.S. 821, 827-34, 114 S.Ct. 2552, 129 L.Ed.2d 642 (1994). This is so regardless of whether the noncompensatory fine is payable to the court or to the complainant. Hanshaw, 244 F.3d at 1138 n. 7. Whether the fine is payable to the complainant may, however, be one relevant factor in determining whether the fine is compensatory or punitive. Id. 70 The sanction award assessed against Mr. Lindblade, if considered without regard to the propriety of the compensatory award as the Trustee suggests, was neither intended to coerce compliance nor intended to compensate the Trustee for actual damages. It was therefore a criminal contempt sanction. 71 We have never authorized punitive ( i.e. criminal) sanctions under the contempt authority of § 105(a). In Del Mission we did state in dicta that [t]he only meaningful difference between awarding damages under § 362(h), as opposed to § 105(a), is that relief under § 362(h) is mandatory, while relief under § 105(a) is discretionary. 98 F.3d at 1152-53. Interpreted broadly, that statement could imply that because punitive damages are available under § 362(h), punitive sanctions must be similarly available under § 105(a). 72 On close inspection, however, we are convinced otherwise. In both Del Mission and the case on which Del Mission relied ( Pace ), the bankruptcy court had awarded only compensatory sanctions, in the form of costs and attorneys' fees. Those cases, therefore, could not and did not consider the availability of punitive sanctions under § 105(a). Moreover, because punitive sanctions are criminal contempt sanctions, we very much doubt that Del Mission decided both implicitly and unnecessarily a difficult issue which has engendered as much debate among our sister circuits as has a bankruptcy court's ability to adjudicate and punish criminal contempt. 15 73 Reaching the issue as one of first impression, we conclude that criminal contempt sanctions are not available under § 105(a). Section 105(a) contains no explicit grant of authority to award punitive damages. Rather, the language of § 105(a) authorizes only those remedies necessary to enforce the bankruptcy code. Walls, 276 F.3d at 507. The sanctions associated with civil contempt — that is, compensatory damages, attorney fees, and the offending creditor's compliance — adequately meet that goal, id. at 507, rendering serious punitive sanctions unnecessary. See also Sosne v. Reinert & Duree (In re Just Brakes Corp. Sys.), 108 F.3d 881, 885 (8th Cir.1997) (holding that the power to punish through punitive sanctions extends beyond the remedial goals of § 105(a)); Griffith v. Oles ( In re Hipp ), 895 F.2d 1503, 1515-16 (5th Cir.1990) (same). 74 Although relatively mild non-compensatory fines may be necessary under some circumstances, Zambrano v. Tustin, 885 F.2d 1473, 1479 (9th Cir.1989); Hanshaw, 244 F.3d. at 1140 n. 10, the language of § 105(a) simply does not allow for the serious punitive penalties here assessed (a minimum of $50,000 and, under the trustee's theory, over $200,000). As we did in Hanshaw, we leave for another day the development of a precise definition of the term serious punitive (criminal) sanctions. Id. (citing cases and implying that any fine above $5,000, at least in 1998 dollars, would be serious, but declining to reach the question). 16 Our interpretation of the language of § 105(a) is reinforced by the fundamental due process considerations we discussed in Hanshaw. That case held that due process requires that an individual accused of criminal contempt receive several procedural protections, including a jury trial, before serious criminal penalties can be imposed. 244 F.3d at 1138 (citing Bagwell, 512 U.S. at 833, 114 S.Ct. 2552). 75 The bankruptcy court is ill-equipped to provide those procedural protections. For example, the bankruptcy court is unable to preside over a jury trial absent explicit consent from the parties and the district court. 28 U.S.C. § 157(e). 17 Further, allowing a non Article III court to adjudicate criminal contempt raises fundamental constitutional questions. 18 These considerations confirm our reading of § 105(a). 76 The proposition that due process prevents a bankruptcy court from imposing serious punitive sanctions under the contempt authority of § 105(a) for an automatic stay violation has been portrayed as being in some tension with the bankruptcy court's authority to impose punitive damages under § 362(h). See Cox v. Delaware, Inc., 239 F.3d 910, 916 (7th Cir.2001) (so stating). We do not see any such tension as pertinent for present purposes. Regardless of the bankruptcy court's ability to award punitive damages under express statutory authorization such as § 362(h), we conclude that additional procedural protections are required where, as here, a court utilizes its broad contempt powers to vindicate its own authority. 77 When a court merely implements the will of Congress — such as by awarding punitive damages to litigants under § 362(h) — there is no concern that a court is abusing judicial power shielded from direct democratic control. In contrast, the contempt power is uniquely liable to abuse, in part because [u]nlike most areas of the law, where a legislature defines both the sanctionable conduct and the penalty to be imposed, civil contempt proceedings leave the offended judge solely responsible for identifying, prosecuting, adjudicating, and sanctioning the contumacious conduct. Bagwell, 512 U.S. at 831, 114 S.Ct. 2552. 78 Additional procedural protections are therefore required before that authority can be used in a punitive fashion. As the Eighth Circuit aptly stated when it held — exactly as we do here — that § 105(a) does not authorize punitive sanctions for automatic stay violations: 79 [T]he power to punish for a statutory violation is a criminal law power. It must be expressly conferred by Congress, and its exercise is often subject to the procedural safeguards that protect the criminally accused ... We conclude that Congress has conferred no power to punish for a violation of § 362(a) other than the punitive damage authority in § 362(h). 80 Just Brakes, 108 F.3d at 885 (emphasis added). See also Cox, 239 F.3d at 917 (refusing to extend bankruptcy court's ability to award punitive damages beyond express congressional grant of that authority in provisions such as § 362(h)). 81 We therefore conclude that when a bankruptcy court exercises the contempt authority of § 105(a), it may not impose serious punitive sanctions. 82
83 Having rejected the Trustee's contention that the entire award can be upheld as punitive sanctions under a criminal contempt authority, we go on to consider the extent to which the sanction award can be sustained as compensatory damages under the civil contempt authority. The bankruptcy court clearly erred in concluding that the Trustee could recover, as compensatory damages, all of the attorneys' fees from the underlying litigation. Some award of attorneys' fees to the Trustee may, however, be appropriate. We emphasize that attorneys' fees are an appropriate component of a civil contempt award. See, e.g., Walls, 276 F.3d at 507. 84 Mr. Lindblade initially took the position that his post-petition recordation was voidable, rather than void. The Trustee was therefore justified in seeking a declaration voiding the recordation. Reasonable attorneys' fees incurred in the process of voiding the violation of the automatic stay were properly awarded as compensatory damages for the violation. 85 A substantial portion of the underlying proceedings, however, was dedicated to determining whether Mr. Lindblade's deed, though unrecorded, was nonetheless enforceable against the Trustee. Mr. Lindblade was entitled to press those claims regardless of the validity of the post-petition recordation. Indeed, the bankruptcy court agreed with Mr. Lindblade that the unrecorded deed, if valid, was enforceable. 86 Another substantial part of the proceedings was devoted to the Trustee's contention that the deed of trust was not secured by a loan, but rather by a gift, in which case the unrecorded deed was a nullity. As that claim is not connected to the recordation issue (and as we have concluded that Mr. Lindblade was correct in that regard as well), sanctions for pressing that claim are not appropriate. 19 87 None of the attorneys' fees incurred by the Trustee in defending against Mr. Lindblade's claim that the unrecorded deed of trust was enforceable, nor any fees relating to the gift/ loan issue, can be sustained as damages flowing from the stay violation. We therefore remand for a determination of the Trustee's actual damages flowing from the automatic stay violation alone. 88
89 Finally, we address the bankruptcy court's attempt to justify the sanction award under its inherent sanction authority. Chambers v. NASCO, Inc., 501 U.S. 32, 42-47, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991), held that Article III courts have an inherent authority to sanction bad faith or willful misconduct, even in the absence of express statutory authority to do so. In Caldwell v. United Capital Corp. (In re Rainbow Magazine, Inc.), 77 F.3d 278, 284 (9th Cir.1996), we held that bankruptcy courts, like district courts, also possess that inherent power. 90 In so concluding, we noted that § 105(a) impliedly recognized this inherent power. Id. The inherent authority derives not from statutory grants but rather from the very creation of the court (unless Congress intentionally restricts those powers). Id. at 283. We looked to § 105(a) to confirm our conclusion that Congress had not intended to restrict the bankruptcy court's inherent power to sanction bad faith litigation. Id. at 284. Because Rainbow Magazine referenced § 105(a), it is tempting to conclude that a bankruptcy court's inherent sanction power and the civil contempt powers of § 105(a) are interchangeable. Our cases have been less than clear concerning whether they are. Compare Bennett, 298 F.3d at 1069 (discussing the concepts without differentiation) with Rainbow Magazine, 77 F.3d at 278, 284 (differentiating between the two concepts). See also United States v. Arkison (In re Cascade Roads, Inc.), 34 F.3d 756, 767 (9th Cir.1994) (noting the conflicting descriptions). 91 We do discern a difference. Civil contempt authority allows a court to remedy a violation of a specific order (including automatic orders, such as the automatic stay or discharge injunction). The inherent sanction authority allows a bankruptcy court to deter and provide compensation for a broad range of improper litigation tactics. Fink v. Gomez, 239 F.3d 989, 992-93 (9th Cir.2001). 92 The inherent sanction authority differs from the civil contempt authority in an additional respect as well. Before imposing sanctions under its inherent sanctioning authority, a court must make an explicit finding of bad faith or willful misconduct. Id. In this context, willful misconduct carries a different meaning than the meaning employed in the context of determining whether an individual is entitled to damages under § 362(h) or a contempt judgment under § 105(a) for an automatic stay violation. With regard to the inherent sanction authority, bad faith or willful misconduct consists of something more egregious than mere negligence or recklessness. Id. at 993-94. Although specific intent to violate the automatic stay may not be required in the contempt context, Pace, 67 F.3d at 191, such specific intent or other conduct in bad faith or conduct tantamount to bad faith, Fink, 239 F.3d at 994, is necessary to impose sanctions under the bankruptcy court's inherent power. 93 Here, the bankruptcy court concluded that Mr. Lindblade's automatic stay violation was done in bad faith. We hesitate, however, to endorse that conclusion without a more explicit finding of fact. As we have stated, there is no indication in the record as it stands that Mr. Lindblade or his attorney was aware, when sending the May 1 letter, that by recording the deed they would violate the automatic stay. Indeed, it is hard to believe that they would have announced in the letter, in advance, their intent to record the deed had they realized that doing so would violate a court order. Mere ignorance or inadvertence is not enough to support a sanction award under the inherent authority. Fink, 239 F.3d at 992-93. 94 After the post-petition recordation Mr. Lindblade did assert, for a time, that the recordation was not automatically void. But he subsequently abandoned that position, and took no further steps to enforce his deed of trust, such as foreclosing on the property. Though Mr. Lindblade vigorously asserted the validity of his unrecorded deed of trust, he was entitled to do so, as his position in that regard was far from frivolous. Indeed, the bankruptcy court held that it was correct. 95 We need not resolve whether the district court was correct in finding that Mr. Lindblade violated the automatic stay in bad faith, however. The bankruptcy court's inherent sanction authority, we conclude, like its civil contempt authority, does not authorize significant punitive damages, so the punitive sanctions cannot stand, whatever Mr. Lindblade's degree of culpability. 20 96 Just as we have never authorized a punitive damage award under the bankruptcy court's civil contempt authority, so too have we refrained from authorizing a punitive damage award under the bankruptcy court's inherent sanction authority. Although Rainbow Magazine did not expressly limit the inherent sanctioning power to compensatory sanctions, 21 the case has been interpreted as so limited. See, e.g., In re Les Deville, 280 B.R. 483, 494-98 (9th Cir. BAP 2002) (relying, in part, on Rainbow Magazine for proposition that a bankruptcy court can rely on inherent authority to impose sanctions, but concluding that sanctions which are punitive in nature cannot be sustained under that authority). We agree with that interpretation of Rainbow Magazine. No question of punitive sanctions was before the court, nor did the opinion purport to address the issue. 97 Addressing the issue of punitive inherent authority sanctions as one of first impression, we conclude that the same reasons underlying our holding that the bankruptcy court lacks the authority to impose serious punitive sanctions under its contempt authority indicate the answer to the parallel question concerning the inherent sanction authority. Indeed, Hanshaw is even more directly on point as to the inherent sanction issue than it was with regard to civil contempt: In Hanshaw, we made clear that when a court uses its inherent powers to impose sanctions that are criminal in nature, it must provide the same due process protections that would be available in a criminal contempt proceeding, including the right to a jury trial. Hanshaw, 244 F.3d at 1139-40. [D]ue process guarantees need to be observed when a court resorts to its inherent power to punish misconduct simply because those powers are enormous; the procedural guarantees are the restraint that protects against intended or unintended abuse of that power. Id. at 1139. 98 Therefore, even if the bankruptcy court properly resorted to its inherent authority to sanction Mr. Lindblade, the punitive portion of the award could not be sustained under that authority. Only the compensatory sanctions are appropriate. We therefore remand the sanction award to the bankruptcy court to determine the appropriate scope of the compensatory sanction award.