The parties call upon this Court to determine whether to grant plaintiff's motion for substitution and parties' cross motions for partial summary judgment. After hearing counsels' arguments, the Court took these matters under advisement. For the following reasons, we conclude plaintiff's claims survive his death and defendant violated the automatic stay on two counts. Accordingly, we grant plaintiff's motion for substitution and motion for partial summary judgement on Counts II and III of his complaint for actual damages, including costs and attorneys' fees pursuant to 11 U.S.C. § 362(h).
The Court possesses jurisdiction over the parties and subject matter of this core proceeding pursuant to 28 U.S.C. §§ 157(a), (b)(1), (b)(2)(A), (b)(2)(E), (b)(2)(F), (b)(2)(H), (b)(2)(O) and 1334(b). Venue is proper by 28 U.S.C. § 1409(a).
Debtor Joseph Eugene Wills ("plaintiff") filed a Chapter 11 bankruptcy petition on July 10, 1989.
On December 5, 1989, defendant obtained a lift-stay order permitting it to sell plaintiff's Independent Federal shares. Defendant held these shares for 15 months before selling them on March 19, 1991. Defendant properly reduced its claim by the $108,812.50 received from the sale. Also, during the time between January through November 1990, defendant continued to send invoices seeking interest payment on the promissory note, and received plaintiff's payments totaling $73,381.85. Defendant did not subtract this amount from the principal due by plaintiff under the note.
The Court appointed Raymond Yancey as Chapter 11 trustee on January 10, 1992. Several months later on November 3, 1992, the Court confirmed plaintiff's reorganization plan. Defendant, as a class 11 unsecured creditor under the plan for $341,187.50, was to receive a pro-rata interest in plaintiff's limited partnership and cash distribution of 84% of its claims. In accordance with the plan, trustee transferred the property interest and paid defendant $274,788.00 of the $286,597.50 owed.
On February 9, 1993, after the confirmation, but before the plan's effective date of March 31, 1993, defendant sold plaintiff's Systems Impact shares for $35,000. Defendant did not seek relief from the stay for this sale, nor did it reduce its claim by this amount. On August 7, 1995, four months after plaintiff filed his adversary proceeding, this Court entered a final decree in the underlying bankruptcy proceeding. Plaintiff died on January 25, 1996.
Plaintiff, and trustee through his endorsement, filed a four-count complaint initiating this adversary proceeding on March 13, 1995. Count I asserts that defendant waived the lift-stay order by waiting to sell the Independent Federal shares, neglected to give plaintiff notice of the sale required by state law and failed to sell the shares at a commercially reasonable rate. Count II accuses defendant of selling the Systems Impact shares in violation of the automatic stay, without notice and for less than a commercially reasonable price. Count III states that in violating the stay by sending post-petition invoices for interest due on the promissory note, plaintiff's payment resulted in an overpayment to defendant under the plan. Alternatively, Count IV seeks to recover all plan payments under a theory of mistake.
The issues to be determined are plaintiff's motion for substitution of B.B. Wills as party plaintiff, plaintiff's motion for partial summary judgment on Counts II through IV and defendant's cross-motion for partial summary judgment on Counts III and IV.
Plaintiff filed a motion to substitute plaintiff's son and executor, B.B. Wills, as party plaintiff due to plaintiff-debtor's death. Bankruptcy Rule 7025(a)(1) incorporates by reference Federal Rule of Civil Procedure Rule 25 dealing with the substitution of parties upon death, which states:
Rule 7025 therefore permits substitution of the successor or representative of a deceased debtor, so long as the claim survives debtor's death. Hawkins v. Eads (In re Eads), 135 B.R. 380, 384 (Bankr.E.D.Cal. 1991).
As a question of substance, courts must look at each cause of action to determine whether a claim abates. Id. at 384. As a rule, federal law governs federal law claims, and state law governs state law claims. Eads, 135 B.R. at 385; 7C C. WRIGHT, ET AL., FEDERAL PRACTICE & PROCEDURE §§ 1952 & 1954 (1991). Thus, first we should look to the statute creating the cause of action in search of the legislature's intent. If the statute fails to settle the matter, then we must turn to common law for guidance. Eads, 135 B.R. at 385.
The analysis of an action's survival arising under the Bankruptcy Code begins with the rule that debtor's death may abate cases under Chapters 11, 12 and 13, unless further administration remains possible and in the parties' best interests. FED. R.BANKR.P. 1016.
Under the federal Bankruptcy Code, the Court can resolve the effect of a debtor's death on recoupment of pre- and post-petition payments from the Code's terms. See Eads, 135 B.R. at 386. A corollary to the power to continue the posthumous administration of any bankruptcy case is the power to exercise all of the avoiding powers authorized by the Code. Id. These powers remain integral to case administration. Id. This would include claims dealing with violations of the automatic stay. The ability to pursue such claims in an adversary proceeding is necessary to effectively administer the case. Id.
Plaintiff also claims punitive damages under 11 U.S.C. § 362(h) in conjunction with defendant's alleged violation of the automatic stay. 11 U.S.C. § 362(h). Federal common law states that causes of action based on "penal" statutes abate, while those based on "remedial" statutes survive. Schreiber v.
Relevant factors in this determination include whether the statute's purpose redresses individual wrongs or more general wrongs to the public, whether recovery under the statute runs to the harmed person and whether the statute authorizes a recovery proportionate to the injury. Huntington v. Attrill, 146 U.S. 657, 666-67, 13 S.Ct. 224, 36 L.Ed. 1123 (1892); Murphy v. Household Finance Corp., 560 F.2d 206, 209 (6th Cir. 1977); First Nat'l Bank & Trust Co. v. Flatau (In re Wood), 643 F.2d 188, 191 (5th Cir.); Smith v. Dep't of Human Servs., 876 F.2d 832, 835 (10th Cir.1989). Subsection 362(h) specifically and proportionately redresses personal injuries resulting from violations of the automatic stay. 11 U.S.C. § 362(h); See 3 COLLIER ON BANKRUPTCY ¶ 362.11 (Lawrence P. King et al., eds., 15th ed. rev.1997); Pettitt v. Baker, 876 F.2d 456, 457-58 (5th Cir.1989).
The Eads court reviewed a claim for punitive damages under § 362(h). The court stated that though punitive damages provisions sound "penal", they differ from damages available in common law actions. Such damages under the Code are not unlike antitrust and patent treble damages, civil tax fraud penalties, securities fraud statutory damages and Truth in Lending Act statutory damages, all of which survive a plaintiff's death. Eads, 135 B.R. at 386; Rau v. Comm'r of Internal Revenue (In re Rau), 301 F.2d 51 (9th Cir.1962); Porter v. Household Fin. Corp., 46 Ohio Misc. 53, 385 F.Supp. 336 (S.D.Ohio 1974); Flatau, 643 F.2d at 191. These statutory provisions both serve to compensate the injured party and deter similar actions by others. Eads, 135 B.R. at 387.
Likewise, we find plaintiff's § 362(h) punitive damages claim does not abate under the "penal"-"remedial" dichotomy. As in § 362(h), this statutory provision compensates those other losses rationally related to violating the stay, which remain difficult to quantify. Id. In appropriate circumstances, Congress has permitted a punitive damages award to encompass such losses, in addition to sums for deterrence purposes. Id.
Under Congress's express intention regarding the effect of debtor's death on bankruptcy proceedings, we find that the claims before the Court survive plaintiff's death. Accordingly, we grant plaintiff's motion to substitute B.B. Wills as party plaintiff. As successor to his father's interests, Mr. Wills will step into his predecessor's shoes as if no change has occurred. Hage v. Joseph (In re Joseph), 121 B.R. 679, 683 (Bankr.N.D.N.Y.1990).
Plaintiff claims defendant willfully violated the § 362 stay by selling the Systems Impact shares prior to the Chapter 11 plan's effective date, which entitles him to summary judgment on Count II of his complaint.
A party may knowingly violate the stay, either in the erroneous belief that its action is permitted or in direct disregard of the stay. 3 COLLIER ON BANKRUPTCY ¶ 362.11 (Lawrence P. King, et al., eds., 15th ed. rev.1997); United States v. Bulson (In re Bulson), 117 B.R. 537, 539 (9th Cir. BAP 1990), aff'd, 974 F.2d 1341 (1992) (mistaken belief that Chapter 13 case had been closed); In re Mullarkey, 81 B.R. 280, 284 (Bankr. D.N.J.1987) (mistaken belief that property no longer constituted property of the estate); In re Baker, 183 B.R. 30, 32-33 (Bankr.D.R.I. 1995) (mistaken belief that court had granted discharge).
Defendant's arguments, which attempt to negate its willfulness, are to no avail. Under the law, to constitute a willful act, the creditor must have acted intentionally and with knowledge of the automatic stay. Citizens Bank of Md. v. Strumpf (In re Strumpf), 37 F.3d 155, 159 (4th Cir.1994), rev'd on other grounds, 516 U.S. 16, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995); see Budget Serv. Co. v. Better Homes of Va., 804 F.2d 289, 292-93 (4th Cir.1986). Defendant knew of the automatic stay, previously asking this Court for relief from the stay to sell the Independent Federal shares. Defendant also clearly intended to act. Defendant states it believed at the time of the sale it received a good price for the Systems Impact shares, especially given the soft market for the shares. Defendant's mistaken belief that its actions did not require court approval cannot be a factor in the Court's analysis. See, e.g., Goichman v. Bloom (In re Bloom), 875 F.2d 224, 227 (9th Cir.1989); Pettitt, 876 F.2d at 456.
Though defendant's claimed innocent state of mind does not affect the award of compensatory damages, it could with the determination of whether to award punitive damages. See, e.g., In re Hiers, 76 B.R. 640, 642-43 (Bankr.E.D.Tenn.1987). The Code under § 362(h) permits the court to award punitive damages in "appropriate circumstances". The circumstances in this case are not appropriate for such a determination in a motion for summary judgment, as punitive damage awards require egregious factual circumstances. In re Newell, 117 B.R. 323, 325 (Bankr.S.D.Ohio 1990); Mullarkey, 81 B.R. at 284-85; Promower, Inc. v. Scuderi (In re Promower, Inc.), 74 B.R. 49 (D.Md.1987); Aponte v. Aungst (In re Aponte), 82 B.R. 738, 745 (Bankr.E.D.Pa.1988). We cannot, as a matter of law, say they exist in this case.
Plaintiff's Count III deals with the $73,381.85 paid to defendant for interest on the promissory note.
Section 549 covers post-petition transfers not prohibited, but not authorized by the Bankruptcy Code, where in most circumstances debtor willingly participates. Schwartz v. United States (In re Schwartz), 954 F.2d 569, 573-74 (9th Cir.1992); Knopfler v. Glidden Co. (In re Germansen Decorating, Inc.), 149 B.R. 517, 520 (Bankr. N.D.Ill.1992); Garcia, 109 B.R. at 339. Subsection 362(a) enumerates specific acts the Code prohibits while the stay remains in effect, regardless of debtor's participation.
Plaintiff's Exhibit E sets forth defendant's loan payment schedule, including the checks tendered in interest payments. Of the $31,950.00 paid in the first check on January 18, 1990, approximately $6,000 covered pre-petition interest. The remainder of the $73,381.85 paid between January through November 1990, represents interest that accrued during the bankruptcy proceeding.
To the extent defendant collected payments of pre-petition interest on the $450,000 promissory note, defendant violated § 362(a)(6). This subsection stays "any act
Section 362(a)(3) prohibits "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." 11 U.S.C. § 362(a)(3); Strumpf, 516 U.S. at 21, 116 S.Ct. 286. Defendant violated § 362(a)(3) by mailing invoices to debtor's conservator requesting such payments. It sought to receive payments in violation of the stay and at the potential expense to other creditors prior to confirmation of plaintiff's plan.
Nothing in either § 362(a)(3) or (6) suggests that plaintiff's bankruptcy only stays coercive non-voluntary acts to take property of the estate or collect a pre-petition debt. See, e.g., § 362(a)(1), (2) and (8); Calder v. Job (In re Calder), 907 F.2d 953, 956 (10th Cir.1990); Smith v. First America Bank (In re Smith), 876 F.2d 524, 526 (6th Cir.1989); Germansen, 149 B.R. at 521; In re BNT Terminals, 125 B.R. 963, 973 (Bankr.N.D.Ill. 1990). Whether plaintiff agreed to make these payments or disclosed the fact that his conservators had made the payments is of no consequence. Germansen, 149 B.R. at 521-22 ("[i]t makes no difference whether creditor gets [an] advantage as a result of a voluntary or involuntary transfer").
Though the Germansen court found violations of the stay void, the reasoning remains the same for this Court in refusing to condone defendant's actions:
At the time defendant received these interest payments, the Court had yet to confirm a Chapter 11 plan.
We find that plaintiff's claims did not abate upon his death, and that defendant willfully violated the automatic stay by selling plaintiff's Systems Impact shares without seeking relief of the stay and by collecting post-petition interest payments. For the foregoing reasons, the Court grants plaintiff's motion for substitution and motion for partial summary judgment on Counts II and III of his complaint for actual damages, including costs and attorneys' fees.
Defendant cites the Advisory Committee Notes to this rule to support the proposition that in Chapter 11 reorganization and Chapter 13 individual debt adjustment cases, a likelihood exists that the court will dismiss the case. See In re Erickson, 183 B.R. 189, 195 (Bankr.D.Minn. 1995). Since under § 1121(c) any party in interest may file a reorganization plan, it is conceivable that the trustee could continue to administer the estate notwithstanding debtor's death or insanity. 9 COLLIER ON BANKRUPTCY ¶ 1016.03 (Lawrence P. King, et al., eds., 15th ed. rev.1997); see 11 U.S.C. § 1121(c). Rule 1016 gives courts discretion in determining whether to do so under the circumstances of a particular case. In re Gridley, 131 B.R. 447, 451 (Bankr.D.S.D.1991) (stating that unlike Chapter 7 cases, the Code gives courts discretion in deciding whether to continue a bankruptcy case after a Chapter 11 or Chapter 13 debtor has died).
(d) An action or proceeding under this section may not be commenced after the earlier of—
11 U.S.C. § 549(a) and (d).