MEMORANDUM OPINION AND ORDER
On Appeal from the United States Bankruptcy Court for the Northern District of Illinois No. 13 B 38995
ROBERT W. GETTLEMAN, District Judge.
Appellants Romanucci & Blandin, LLC ("R&B") and Anthony Collaro ("Collaro") appeal from an order of the United States Bankruptcy Court for the Northern District of Illinois entered on September 28, 2016, awarding sanctions to debtor Spiro Lempesis ("Lempesis") for appellants' violation of Lempesis' discharge injunction. Appellants also appeal the denial of appellants' Motions in Limine, entered on September 28, 2016. For the reasons below, the decision of the bankruptcy court is affirmed in part and reversed in part.
On May 14, 2013, Collaro, through his attorneys, R&B, filed a lawsuit against Lempesis and Concordia University Chicago in the Circuit Court of Cook County (the "First Lawsuit"). The First Lawsuit alleged claims of fraud and breach of contract against Lempesis, stemming from Lempesis' alleged sexual exploitation of Collaro while Lempesis was his baseball coach at Concordia. On October 3, 2013, Lempesis filed for relief under chapter 7 of the Bankruptcy Code and listed Collaro on Schedule F as a creditor with an unliquidated and disputed claim, in the form of the First Lawsuit.
On October 6, 2013, the Bankruptcy Notification Center mailed notice of Lempesis' bankruptcy to creditors, including Collaro in care of R&B, at the firm's LaSalle Street address in Chicago, as listed on the complaint in the First Lawsuit. On October 30, 2013, the notice sent to the R&B's LaSalle Street address was returned to sender because R&B had moved its office since the complaint was filed in the First Lawsuit. On November 4, 2013, upon discovering that R&B no longer occupied the LaSalle Street address, Lempesis' attorney mailed a copy of the bankruptcy notice to R&B's new address and sent the notice via facsimile to R&B with attention to attorney Rebekah Williams ("Williams"), the lead associate assigned to Collaro's state court case. R&B admits it received the faxed notice, but claims that Williams left R&B without informing anyone of the notice. Both the mailed and faxed bankruptcy notice contained a warning about the automatic stay and provided that the deadline to object to Lempesis' discharge or to challenge the discharge of certain debts was January 17, 2014.
On January 21, 2014, Lempesis' discharge order was entered and notice was sent to all creditors on the same date. Prior to discharge, R&B did not attempt to lift the automatic stay in Lempesis' bankruptcy or challenge the dischargeability of Collaro's claim. The certificate of service for the discharge order indicates that the notice was sent to R&B's old address on LaSalle Street. The bankruptcy case was closed on February 25, 2014.
Also on January 21, 2014, Lempesis filed his pro se answer in the First Lawsuit. In his answer, Lempesis referred to his bankruptcy case, including the case number. Lempesis also referred to the discharge, but incorrectly stated that the "discharge date is Nov. 18." Lempesis mailed a copy of his answer to R&B via certified mail, but did not pay to receive a return receipt.
On April 3, 2014, Collaro, through R&B, voluntarily dismissed the First Lawsuit. On December 30, 2014, Collaro, through R&B, filed another lawsuit against Lempesis and Concordia University in the Circuit Court of Cook County (the "Second Lawsuit"). The Second Lawsuit contained the same allegations as the First Lawsuit, as well as new allegations that Lempesis had sexually abused Collaro when Collaro was a minor.
On February 20, 2015, Lempesis moved to reopen his bankruptcy case and brought a motion for an order of civil contempt against R&B and Collaro. Lempesis argued that R&B and Collaro had violated the discharge injunction by failing to dismiss the First Lawsuit timely and by filing the Second Lawsuit. Lempesis requested sanctions in the form of damages for emotional distress, punitive damages, out-of-pocket expenses, as well as attorney's fees and court costs. The bankruptcy court granted Lempesis' motion to reopen the case and the motion for sanctions was set for trial on November 2, 2015.
On February 25, 2015, upon receiving the notice of Lempesis' motion for sanctions, R&B stayed the Second Lawsuit. After the Second Lawsuit was stayed, R&B amended the complaint, alleging five counts against Lempesis personally. On April 10, 2015, Collaro and R&B's managing partner, Anthony Romanucci ("Romanucci"), appeared in a broadcast televised interview regarding allegations made against Lempesis in the Second Lawsuit.
On October 26, 2015, R&B filed a motion in limine in the sanctions proceeding seeking to bar evidence relating to punitive damages and damages for emotional distress and humiliation. R&B argued that punitive damages are not available in an action for civil contempt, and permissible remedies for violation of the discharge injunction do not include damages for emotional distress and humiliation. The bankruptcy court reserved ruling on the motion.
On November 2, 2015, the bankruptcy court held the trial, at which it heard testimony from Lempesis on behalf of himself and Romanucci on behalf of R&B. Lempesis testified about notice of the bankruptcy filing and the discharge order and his claimed damages. Romanucci testified about the structure of R&B, the firm's receipt of notice for Lempesis' bankruptcy, and R&B's actions in the First Lawsuit and Second Lawsuit.
On September 28, 2016, the bankruptcy court issued its Memorandum Opinion, holding that Collaro and R&B had willfully violated the automatic stay and the discharge order. The court initially awarded damages for out-of-pocket expenses in the amount of $174, attorneys' fees in the amount of $10,958.75, emotional distress in the amount of $12,000, and punitive damages against R&B only in the amount of $50,000. The court also denied R&B and Collaro's Motions in Limine seeking to bar evidence of emotional distress and punitive damages. After Lempesis' filed a Supplemental Statement of Attorneys' Fees, the court awarded additional attorneys' fees in the amount of $16,362.50 and $379 in costs.
On October 27, 2016, the bankruptcy court entered its final "Order of Judgment Granting Motion for Sanctions and Awarding Actual and Punitive Damages," which awarded damages for out-of-pocket expenses in the amount of $174, attorneys' fees in the amount of $28,670.26, emotional distress in the amount of $12,000, and punitive damages against R&B only in the amount of $50,000. This appeal followed.
STANDARD OF REVIEW
This court has jurisdiction over the bankruptcy appeal pursuant to 28 U.S.C. § 158(a)(1). On appeal, this court reviews factual findings for clear error and conclusions of law de novo.
Appellants argue that the bankruptcy court erred by: (1) finding that Appellants received proper notice of Lempesis' bankruptcy and discharge; (2) finding that R&B was aware that the discharge injunction applied to Collaro's claims; (3) awarding substantial attorneys' fees; (4) denying appellants' Motion in Limine seeking to bar evidence of emotional distress and awarding damages for emotional distress; and (5) denying appellants' Motion in Limine seeking to bar evidence of punitive damages and awarding punitive damages. This court addresses each issue in turn.
I. Whether the Bankruptcy Court Erred by Finding that Appellants Received Proper Notice of the Bankruptcy and Discharge
Appellants argue that the bankruptcy court erred in finding that they received proper notice of Lempesis' bankruptcy and discharge. Appellants contend that the bankruptcy court incorrectly "presumed" or "imputed" notice of the bankruptcy or, in the alternative, that appellants received notice only of Lempesis' bankruptcy, but not the discharge. Appellants cite
Appellants are correct that a bankruptcy court may hold a creditor in contempt only for a "willful" violation of the automatic stay or discharge injunction, and "[w]illfulness entails actual knowledge that a bankruptcy is under way or has ended in a discharge."
In the instant case, the bankruptcy court held a trial at which the court heard testimony from both Lempesis and Romanucci regarding the issue of whether appellants received proper notice and therefore had knowledge of the bankruptcy and discharge. Romanucci admitted that R&B received a faxed notice of Lempesis' bankruptcy in November 2013, which referenced the approximate date of discharge, but claimed that the fax was received by associate attorney Williams, who left the firm without telling anyone at R&B about the notice. Lempesis testified that he mailed his answer to the First Lawsuit to R&B on January 21, 2014, indicating that Lempesis was in bankruptcy and referencing the "discharge date," albeit providing the wrong date. Romanucci testified that as the partner in charge of the case against Lempesis, he was responsible for reviewing answers that were filed to their complaints.
The bankruptcy court did not "presume" or "impute" R&B with knowledge of the bankruptcy or discharge. Rather, Romanucci admitted that R&B received notice of the bankruptcy, and the court was capable of finding that R&B had actual knowledge of the discharge, based upon the testimony and evidence presented at the trial.
The issue of whether Collaro received proper notice must be considered separately. The bankruptcy court held that notice was imputed to Collaro because R&B was representing Collaro in the state court litigation. This court disagrees. In finding that notice was imputed to Collaro, the bankruptcy court relied on
In the instant case, the bankruptcy court did not find as a matter of fact that Collaro had actual knowledge of Lempesis' bankruptcy or discharge, but rather imputed notice to Collaro through R&B. Consequently, the bankruptcy court could not have found that Collaro willfully violated the automatic stay or discharge injunction without also finding that Collaro had actual knowledge of the bankruptcy and discharge.
II. Whether the Bankruptcy Court Erred by Finding that R&B was Aware That the Discharge Injunction Applied to Collaro's Claims
Appellants argue that the bankruptcy court erred in finding that appellants violated the discharge injunction, because appellants did not know that the discharge injunction applied to Collaro's claims against Lempesis. According to appellants, in addition to having notice of the discharge, an alleged contemnor must also be aware that the injunction applies to his claims, and that a creditor's subjective belief that the injunction does not apply to creditor's claim bars an action for sanctions.
To prove that a discharge injunction has been violated, "the debtor must show that the creditor acted intentionally, with knowledge that his act was in violation of the automatic stay [or injunction]."
III. Whether the Bankruptcy Court Erred by Awarding Substantial Attorneys' Fees
Appellants argue that the bankruptcy court erred in awarding substantial attorneys' fees because Lempesis failed to mitigate his damages. Citing
Appellants' argument disregards that they continued to pursue Lempesis in the Second Lawsuit even after Lempesis filed his motion for sanctions. Appellants stayed the Second Lawsuit in state court after the motion for sanctions was filed instead of dismissing Lempesis. Thereafter, appellants amended the complaint, keeping Lempesis as a named party. Appellants appeared in a broadcast televised interview regarding the Second Lawsuit after the motion for sanctions was filed, which the bankruptcy court found was a further attempt to collect Lempesis' discharged debt. Appellants also filed a response to the sanctions motion, in which they argued that Collaro's claims were non-dischargeable. Based on these facts, the bankruptcy court found that it was unclear "how a phone call would have short circuited the litigation." This court agrees. The record does not support appellants' assertion that they would have stayed or dismissed the Second Lawsuit, thus avoiding Lempesis' motion for sanctions, based on a phone call or letter from Lempesis providing notice that the Second Lawsuit violated the discharge injunction. Therefore, this court concludes that the bankruptcy court did not abuse its discretion in awarding Lempesis the attorneys' fees that he requested.
Appellants also argue that it is unclear how the bankruptcy court awarded a total of $28,670.26 in attorneys' fees and costs. The bankruptcy court's initial order awarded $10,958.75 of attorneys' fees, and Lempesis requested an additional $16,362.50 in attorneys' fees and $379 in costs by way of a Supplemental Petition, totaling $27,700.25. This court concludes that the bankruptcy court's award of attorneys' fees and costs should be reduced to reflect the amount requested by Lempesis, totaling $27,700.25.
IV. Whether the Bankruptcy Court Erred by Denying Appellants' Motion In Limine and Awarding Damages for Emotional Distress
Appellants first argue that the bankruptcy court erred as a matter of law in denying their Motion in Limine seeking to bar evidence of emotional distress and awarding emotional distress damages. Appellants cite
In the instant case, the bankruptcy court relied on
Appellants attempt to distinguish
Appellants next argue that even if emotional distress damages are recoverable for violations of the discharge injunction, Lempesis failed to provide evidence which entitled him to an award of such damages. The Seventh Circuit has held that "[w]hen the injured party provides the only evidence of emotional distress, he must reasonably and sufficiently explain the circumstances of the injury rather than relying on mere conclusory statements."
In the instant case, the bankruptcy court heard testimony in which Lempesis described a relentless pursuit and threats in the media after the Second Lawsuit was filed, resulting in Lempesis' loss of work hours and embarrassment at Lempesis' place of employment. Thus, Lempesis showed "demonstrable emotional distress," rather than "relying on mere conclusory statements."
Appellants also argue that Lempesis failed to prove the required "causal connection between the emotional distress and the creditor's violation of the discharge injunction."
Appellants' argument fails because it ignores Lempesis' testimony that the Second Lawsuit revived interest in Collaro's claims against Lempesis, more than eight months after the first lawsuit was dismissed. Further, the Second Lawsuit was not filed against Concordia University alone, but named Lempesis personally as a defendant, in violation of the discharge injunction. Even if appellants are correct that the revived media attention would have resulted regardless of Lempesis being named as a defendant in the Second Lawsuit, this does not break the chain of causation between appellants' violation of the discharge injunction and Lempesis' emotional distress. Thus, this court concludes that the bankruptcy court did not abuse its discretion in awarding emotional distress damages to Lempesis.
V. Whether the Bankruptcy Court Erred by Denying Appellants' Motion In Limine and Awarding Punitive Damages
R&B argues that the bankruptcy court erred as a matter of law in denying its Motion in Limine and awarding Lempesis punitive damages because bankruptcy courts do not have the authority to award punitive damages for violations of a discharge injunction. R&B cites numerous cases in support of its argument:
In the instant case, the bankruptcy court primarily relied on
The Seventh Circuit has stated that "[t]he victim of a violation of the statutory [discharge] injunction might... be able to obtain punitive damages, though presumably only if he could prove criminal contempt, since punishment is the purpose of criminal but not of civil contempt."
R&B next argues that even if the bankruptcy had the authority to award punitive damages, the court erred in awarding $50,000 in punitive damages because R&B did not act with malicious intent. Bankruptcy courts may award punitive damages "in response to particularly egregious conduct" that violates the discharge injunction.
In the instant case, the bankruptcy court held that R&B's conduct was egregious because R&B "was not an ordinary creditor acting through ignorance," but rather "[t]hese were lawyers disregarding the Bankruptcy Code." R&B asserts that its violation of the discharge injunction was at worst "a mistake," but the bankruptcy court found that R&B received proper notice of both the bankruptcy and discharge injunction, and violated the discharge injunction on three different occasions, even after receiving Lempesis' motion for sanctions. The bankruptcy court further found that Romanucci's testimony established that R&B would be able to pay the punitive damages requested, R&B's motive in violating the discharge injunction was to collect money from Lempesis, and Lempesis did nothing to provoke R&B's conduct. The bankruptcy court's findings were consistent with the factors necessary for awarding punitive damages.
The bankruptcy court did not err by: finding that R&B received proper notice of the bankruptcy and discharge injunction; finding that R&B was aware that the discharge applied to Collaro's claims against Lempesis; awarding Lempesis attorneys' fees, although the total amount of attorneys' fees and costs is reduced to $27,700.25; denying appellants' Motions in Limine seeking to bar evidence of punitive damages and emotional distress damages; awarding emotional distress damages; and awarding punitive damages. The bankruptcy court erred in finding that Collaro had proper notice of the bankruptcy and discharge, and therefore the bankruptcy court's finding of civil contempt against Collaro is reversed. This case is remanded to the bankruptcy court for proceedings consistent with this opinion.