Bruce v. Fazilat (In re Bruce), —- B.R. —-,   8:15-ap-01028 (Bkrtcy, C. D. Cal. July, 2018, J. Wallace)

Issue:   Did the creditor here violate the automatic stay and/or the discharge injunction and if so, what are the appropriate damages?

Holding:   Yes as to both violation of the automatic stay and violation of the discharge injunction.  Actual damages of $15,000 for violation of the stay but no damages as to violation of the discharge injunction.

Judge Mark Wallace

The creditor here was the debtor’s landlord and was trying to evict him from the rental property where he lived.  The creditor, with knowledge of the bankruptcy petition, “turned off the electricity and then placed a new padlock on the electrical box,” and later sent someone to the property who “began banging on the door in an attempt to breach the door and enter the Property’s interior.”  That person told the debtor he owed them money.  The creditor contacted the debtor’s employer for the purpose of getting him fired – which worked.  Before the discharge was entered, the creditor filed a motion for relief seeking permission to proceed with the unlawful detainer.  That motion was granted but the “portion of the Lift Stay Motion requesting that the state court be permitted to award ‘[a]ll postpetition rents, attorney’s fees, and costs'” to creditor was specifically denied.  Nevertheless, the creditor sought and obtained a judgment for money against the debtor, after the discharge was entered.  At trial, the creditor’s attorney argued that the lease had terminated prepetition and that he had the right to holdover damages.

Judge Wallace ruled that the creditor violated the stay (obviously).  The state court judgment is void.  As to damages, the debtor’s “evidence of damages is somewhat thin.”  Judge Wallace ruled:

The Court concludes that Plaintiff is entitled to actual damages of $12,500.00 plus punitive damages of $2,500.00 (for a total of $15,000.00) in respect of the stay violations described above. Additionally, attorney’s fees and costs are awarded to Plaintiff.

With respect to monetary sanctions for a discharge injunction violation, the Court notes that the United States Court of Appeals for the Ninth Circuit has recently held that in the context of a discharge injunction violation, monetary sanctions can be imposed only if the movant shows that the creditor “knew the discharge injunction was applicable.” Lorenzen v. Taggart (In re Taggert), 888 F.3d 438, 443 (9th Cir. 2018). Additionally, “the creditor’s good faith belief that the discharge injunction does not apply to the creditor’s claim precludes a finding of contempt, even if the creditor’s belief is unreasonable.”

Here, there is no doubt that Mr. Sproul (Defendant’s attorney) had a good faith belief that he was properly bringing an action in state court for holdover damages and attorney’s fees.  The Court therefore declines to impose monetary sanctions for the discharge injunction violation that occurred. 11 U.S.C. § 524(a)(2).  However, this in no way disturbs the Court’s determination that the 2017 Judgment is void and of no effect pursuant to the plain language and meaning of 11 U.S.C. § 524(a)(1).

In my Amicus Brief supporting the Debtor’s request for a rehearing en banc in In re Taggart, 888 F.3d 438, 443 (9th Cir. 2018), I said:

In its opinion, the [Taggart] panel held,

“the creditor’s good faith belief that the discharge injunction does not apply to the creditor’s claim precludes a finding of contempt, even if the creditor’s belief is unreasonable.” [emphasis added] 888 F.3d at 444

The statement is an incremental extension of a footnote in the Ninth Circuit case of ZiLog, Inc. v. Corning (In re ZiLog, Inc.), 450 F.3d 996 (9th Cir. 2006), a case easily distinguishable from Taggart on the facts. The statement disrupts the long-standing rule that a creditor who receives notice of the debtor’s discharge and still pursues the debtor for discharged debts may not plead ignorance of the discharge as a defense. The statement, if allowed to stand, will forever be treated by creditors as a blackletter rule which will quickly come to be known as the Taggart Rule. Creditors, using the above statement will respond to discharge violations by saying, “Taggart says we win!” “We weren’t sure about the discharge injunction and therefore we win because the Ninth Circuit said so!” There will be little reason to even have an evidentiary hearing regarding the creditor’s good faith belief because the Ninth Circuit said that even if the subjective good faith belief is unreasonable, there can be no consequences to violating the discharge.

My prediction is coming true.  The 9th Circuit BAP has even extended this to the automatic stay, reversing a ruling by Judge Sheri Bluebond who had awarded some $400,000 in fees for violating the automatic stay.  The BAP said in Ress Financial Corp v. Beaumont 1600, LLC (In re The Preserve, LLC), Adv. No. 2:13-ap-01406-BB, unpublished (9th BAP Sept 7, 2018), Read more…