Douglas Young Builder, Inc.

UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
IN RE: DOUGLAS YOUNG :
BUILDER, INC., : No. 09-21940REF
Debtor : Chapter 7
STATEMENT IN SUPPORT OF SEPTEMBER 1. 2009
SUBSTITUTED ORDER GRANTING DEBTOR'S MOTION FOR
CONTEMPT FOR VIOLATION OF AUTOMATIC STAY
I. INTRODUCTION
In this matter, the corporate Debtor's landlord had actual knowledge that
Debtor had filed a petition seeking bankruptcy relief. The landlord did not seek relief
from this Court to permit him to exercise his rights. Nevertheless, the landlord changed
the locks on the building less than two weeks after the filing of Debtor's bankruptcy.
Upon Debtor's request, I ordered that a hearing for contempt against the landlord be
scheduled on August 26, 2009. The landlord knew full well that Debtor was in
bankruptcy; he acted to obtain possession of Debtor's premises; and he exercised control
over property of the estate. The landlord's actions therefore constitute a willful violation
of the automatic stay. I ordered at the hearing, as a sanction, that the landlord recompense
Debtor for its actual damages of attorneys' fees in the amount of $2,000. Under the facts
of this case, however, I did not find quite enough scienter to award punitive damages
1
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against the landlord. This Statement contains my findings of facts and conclusions of
law supporting both the Order entered on August 26, 2009 at the hearing and the attached
substitute Order.
II. PROCEDURAL BACKGROUND
Debtor, Douglas Young Builder, Inc., filed its petition in this case under
Chapter 7 on July 30, 2009. Debtors' principals, Douglas G, Young and Joanne R.
Young, his wife, also filed a petition for bankruptcy pursuant to Chapter 13 of the
Bankruptcy Code.1 Very little occurred in either bankruptcy for the first few weeks. The
instant matter arose upon the filing by Debtor, on August 21, 2009, of its Motion for
Contempt for Violation of the Automatic Stay and Request for Expedited Hearing. I
granted the request for an expedited hearing and held the hearing on the Motion on
August 26, 2009. At the close of the August 26, 2009 hearing, I entered a crossed out,
interlineated, and scribbled written order granting the Motion. I noted at the hearing that
I would follow up with a "clean" substitute order, which accompanies this Statement.
III. FACTUAL BACKGROUND
The factual background of this matter is straightforward and is not in
dispute. Debtor is a business company with office premises rented from Mr. Claude
Mervine in Shillington, Pennsylvania. Debtor became delinquent in its payment of rent
and failed to pay any rent after March 2009. Debtor filed its Chapter 7 petition in late
'The Chapter 13 case of Mr. and Mrs. Young is docketed at Case Number 09-21941REF.
2
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July and immediately moved many business files and a couple desks from the premises to
the home of Debtor's principal to wrap up Debtor's affairs. Debtor also removed from
the premises its employees' personal goods and property. Remaining at the premises are
electronic equipment (computers, copiers, fax machines), filing cabinets, desks, product
displays, and some bank records.
Soon after Debtor filed its bankruptcy petition, Mr. Mervine learned about
the bankruptcy filing from an employee of Debtor. Mr. Mervine spoke with his counsel
some time after learning about the bankruptcy. At some time between very early August
and August 14, 2009, Mr. Mervine changed the locks on the premises. When Debtor's
counsel contacted Mr. Mervine's counsel and asked for a key to the premises, Mr.
Mervine refused to provide it. He would allow Debtor's representatives access to the
premises only if he accompanied them. This is also his position with the Chapter 7
Trustee.
Mr. Mervine changed the locks to keep the premises secure. The premises
had never (during Debtor's tenure there) been the subject of any improper or illegal entry
or break-in. Mr. Mervine intended to keep Debtor's employees out of the premises. He
offered to be available to permit and supervise entry to the premises on a 24/7 basis. He
felt that he was responsible for the security of equipment in the premises. Even after
Debtor's counsel proved to Mr. Mervine and his counsel that Debtor had filed for
bankruptcy protection, Mr. Mervine refused to give a key to Debtor, because he was
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afraid that he would not control access to the building. He wanted to keep total control of
the key.
Debtor's principal, Douglas G. Young, acknowledged that Mr. Mervine was
a good landlord and was reliable, Mr. Young also had no reason to doubt Mr. Mervine
when he offered 24/7 availability to Debtor,
IV. DISCUSSION
Mr. Mervine defended himself from the sanction motion by claiming that he
acted innocently, in ignorance of the law. As the time-worn clause concludes, however,
that is not a legitimate excuse. The definitive decision in this District of liability and
sanctions pursuant to Section 362(k) for violating Section 362(a) is In re Mu'min. 374
B.R. 149 (Bankr. E.D. Pa. 2007), written by my colleague Bankruptcy Judge Eric L,
Frank. As did Chief Bankruptcy Judge Stephen Raslavich,2 another colleague of Judge
Frank and myself in this District, I will quote extensively from Judge Frank's Mu'min
decision:
D- The Debtor is Entitled to Damages Under 11 U.S.C.
§362(10
The Debtor contends that she is entitled to damages
under §362(k) because Penn's actions were "willful." The
only damages requested by the Debtor are reasonable
attorney's fees.
Section 362(k) provides:
2Liehtfoot v. Borkon (In re LightfootX 399 B.R. 141,149-150 (Bankr. E.D. Pa. 2008).
4
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"(1) Except as provided in paragraph (2), 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.
(2) If such violation is based on an action taken by an entity in
the good faith belief that subsection (h) applies to the debtor,
the recovery under paragraph (1) of this subsection against
such entity shall be limited to actual damages."
11 U.S.C. §362(k). Section 362(k) was formerly codified at
§362(h). As a result of the enactment of the Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005
("BAPCPA"), Pub. L. No. 109-8, Stat. 119 Stat. 23 (2005),
subsection (2) was added to §362(h) and the provision was
recodified as §362(k).
"Willful" has been defined as deliberate or intentional,
In re B. Cohen & Sons Caterers. Inc.. 108 B.R. 482, 485 (E.D.
Pa. 1989). Conduct which violates the automatic stay is
"willful" if a party acts with knowledge that a bankruptcy
petition has been filed. In re Lansdale Family Restaurants.
Inc.. 977 F.2d 826, 829 (3d Cir. 1992) (citing In re University
Medical Center. 973 F.2d at 1087-88). A "willful violation"
does not require a finding of specific intent to violate the
automatic stay. Krystal Cadillac-OldsmobileGMCTruck,Inc.
v. General Motors Corp.. 337 F.3d 314, 320 n. 8 (3d. Cir.
2003^): In re Atlantic Business & Community Development
Corp.. 901 F.2d 325, 329 (3d Cir. 1990) (citing In re Bloom.
875 F.2d 224, 227 (9th Cir. 1989)). Rather, an action is
willful if the respondent/defendant knew of the automatic stay
and the conduct that violated the automatic stay was
intentional. Krystal Cadillac-Oldsmobile GMC Truck, Inc..
337 F.3d at 320 n. 8.
In University Medical Center, the Court of Appeals
recognized a limited exception to the general standard
described above for "willfulness" under § 362(k) in its prior
incarnation as § 362(h). A violation of the automatic stay may
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not be a "willful" violation if a creditor's action is based on
persuasive legal authority indicating that his or her actions do
not violate the stay and the law on the issue is sufficiently
unsettled. 973 F.2d at 1088. FN333 This principle has been
characterized as a "good faith" exception to liability for
violations of the automatic stay. See id. at 1089 (Becker, J.5
dissenting). FN344
Exempting Penn from liability based on the "good
faith" exception to liability articulated in University Medical
Center is certainly a plausible result, even though there are
competing interests. On the one hand, the significance of the
automatic stay in the bankruptcy system is not debatable.
Strong policy reasons exist to put the burden on a creditor to
bring automatic stay issues to the bankruptcy court (rather
than permitting the creditor to act unilaterally, thereby
3Footnote 33 in Mu'min follows: "In applying University Medical Center, some courts
suggest the decision established a two-prong test for the exception to apply. See In re
Montgomery Ward. LLC. 292 B.R. 49, 57 (Bankr. D. Del. 2003) (stating that University Medical
Center good faith exception applied "where (1) the law on the issue is not settled, and (2) the
defendant has persuasive legal authority indicating that his or her actions do not violate the
stay"); cf In re Mattera. 2007 WL 594908, at *7 (Bankr. D.N.J. Feb.21, 2007) ("Courts
interpreting the exception are unclear about whether both persuasive legal authority and legal
uncertainty are required, or whether just one suffices."); In re Hawk. 314 B.R. 312, 318 (Bankr.
D.N.J. 2004) (recognizing the two-prong interpretation of Montgomery Ward, but neglecting to
resolve issue because the creditors satisfied both prongs). Other courts, however, have not
applied University Medical Center so mechanically. Rather, if the creditor had a legal
justification for their actions, despite those actions being "willful," those courts denied damages.
See In re Roche. 228 B.R. 102, 104 (Bankr. M.D. Pa. 1998) (concluding no damages were
assessable for the creditor's willful violation of the stay because there "considerable amount of
'persuasive legal authority'" and that University Medical Center found an exception "where a
creditor's actions are consistent with 'contemporaneous interpretations of Section 362'"): In re
Rusnak. 184 B.R. 459, 466-67 (Bankr. E.D. Pa. 1995) (applying the University Medical Center
exception to deny damages for a willful violation of the stay where there was an absence of case
law to the contrary of the creditor's actions and the creditor relied on the Medicare Act and other
related statutes to support its actions)."
4Footnote 34 in Mu'min follows: "Judge Becker's dissent in University Medical Center
was based on his view that the existence of a 'good faith' exception to liability under then
§362(h) had been previously rejected by the Court of Appeals in In re Atlantic Business #
Community Development Corp."
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compelling the debtor to seek judicial redress to enforce the
stay or undo collection action). Penn's conduct in this case
occurred undeniably with knowledge of both the bankruptcy
filing and the Debtor's contention that withholding the
transcript violated the automatic stay. These considerations
militate in favor of applying only reluctantly and sparingly the
"good faith exception" to liability which may exist after a
judicial determination that the automatic stay has been
violated; these considerations do not favor Penn's position. On
the other hand, the justification that Penn offered for its
conduct, that it was not a violation of the stay to withhold the
transcript, was based on respectable (i.e., persuasive) legal
authority. And, I have no difficulty concluding that the issue
involves "close and complex legal questions." University
Medical Center. 973 F.2d at 1089.
I find it unnecessary to decide whether Penn has a
defense to monetary liability under University Medical
Center. After consideration of the BAPCPA amendment to
§362(h) (now §362(k)) enacted in 2005,1 conclude that
University Medical Center was "legislatively overruled" by
the BAPCPA and that, under current law, Penn has not stated
a "good faith" defense to monetary liability in this case.
When University Medical Center was decided, there
was no express, statutory good faith exception to liability for
intentional actions taken in violation of the automatic stay
with knowledge of the bankruptcy case set forth in then
§362(h). As a result, University Medical Center can be
considered as a judicial gloss on the text of the pre-BAPCPA
Code, designed to effectuate a Congressional intent that
conduct with a certain type of scienter (i.e.. good faith) should
not be subject to the damages remedy provided in §362(h)
(now §362(k)).
In enacting BAPCPA, Congress modified the Code
provision addressed in University Medical Center and
expressly addressed the issue of good faith. In doing so,
Congress provided for only a limited, statutory good faith
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exception to the § 362(k) damage remedy. The express,
statutory good faith exception is more limited than the one
expressed in University Medical Center in two distinct ways:
(1) the limitation applies only to good faith violations of §
362(h), which relates only to action taken in the good faith
belief that the automatic stay has terminated because a debtor
fails to perform his or her obligations under §521(a)(2) in a
timely manner; FN355 and (2) it precludes only the imposition
of punitive damages and in no situation restricts the
imposition of "actual damages" for willful violations of the
automatic stay.
With Congress having addressed the issue of a good
faith exception to §362(k) liability expressly through the
BAPCPA, the plain language of §362(k)'s exception does not
encompass other types of arguably good faith conduct that
Congress could have chosen to exempt from liability. FN366
'Footnote 35 in Mu'min follows: "Section 521(a)(2) sets forth the debtor's obligation to
file a "statement of intention" with respect to secured property and to perform that stated
intention within thirty (30) days after the first date set for the meeting of creditors under §341. If
the debtor fails to perform timely the §521(a)(2) obligations, §362(h) provides that the stay under
§362(a) 'is terminated with respect to personal property of the estate or the debtor securing in
whole or in part a claim, or subject to an unexpired lease....' Thus, if a creditor acts with the
mistaken but good faith belief that the automatic stay has terminated under §362(h), §362(k)
limits a debtor's remedy to actual damages. As stated in the text, this is now the only statutory
good faith exception to liability in §362(k)."
6Footnote 36 in Mu'min follows: "See, e.g.. U.S. v. McQuilkin. 78 F.3d 105 (3d Cir,
1996), cert, denied, 519 U.S. 826, 117 S. Ct. 89,136 L. Ed. 2d 45 (1996) (doctrine ofinclusio
unius est exclusio alterius informs court to exclude from operation those items not included in
list of elements that are given effect expressly by statutory language). The inclusio unius est
exclusio alterius doctrine does not apply if an omitted item is not part of a "commonly associated
group or series." See Perlin v. Hitachi Capital America Corp.. 497 F.3d 364, 370-71 (3d Cir.
2007) (enumeration of items in one subsection of §707(a) did not exclude non-expressed items
from a different subsection of §707(a) which were enacted for different reasons). In this case, I
conclude that it is appropriate to apply the doctrine because the excluded item (a good faith
exception to liability based on intentional action taken with knowledge of the bankruptcy case in
reliance on case law) relates to the same subject matter as the included item (good faith exception
to liability based on intentional conduct with belief that §362(h) is applicable). The Court of
Appeals has also cautioned that the maxim does never override 'clear and contrary evidences of
8
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Given this carefully constructed exception drawn by
Congress, I conclude that University Medical Center is
inconsistent with §362(k), insofar as the case held that a party
is not subject to actual damages for voluntary acts taken with
knowledge of the bankruptcy case in violation of the
automatic stay when a party relies upon "persuasive legal
authority" and the law on the issue is sufficiently unsettled.
Because the standards of University Medical Center are not
applicable and §362(k) does not bar the award of actual
damages based on Penn's reliance prior reported court
decisions, I find that the Debtor is entitled to the actual
damages she has requested: reasonable attorney's fees.
In reaching these conclusions regarding the scope of
the "good faith" exception to monetary liability under §362(k)
and the absence of a meritorious "good faith" defense in this
case, I am cognizant that there is no legislative history
establishing conclusively that Congress intended to
circumscribe the good faith exception under §362(k) in the
BAPCPA or, if so, the particular reasons it chose to do so.
However, given statutory text, the absence of a "smoking
gun" in the legislative history of BAPCPA is immaterial. The
starting point in statutory construction is the plain language of
the statute and I perceive no ambiguity in §362(k). See
Hartford Underwriters Insurance Co. v. Union Planters Bank.
N. A.. 530 U.S. 1, 6, 120 S. Ct. 1942, 147 L. Ed. 2d 1 (2000);
accord. Lamie v. U.S. Trustee. 540 U.S. 526, 534, 124 S. Ct.
1023, 157 L. Ed. 2d 1024 (2004); United States v. Ron Pair
Enterprises. Inc.. 489 U.S. 235, 241,109 S. Ct. 1026, 103 L.
Ed. 2d 290 (1989); In re Price. 370 F.3d 362, 368 (3d Cir.
2004). Only if the statute is ambiguous or unclear should a
court consider legislative history for interpretive guidance.
Ross v. Hotel Employees and Restaurant Employees
International Union. 266 F.3d 236, 245 (3d Cir. 2001).
Congressional intent.' Abdullah v. American Airlines. Inc.. 181 F.3d 363, 373 (3d Cir. 1999)
rquoting Neuberger v. Commissioner. 311 U.S. 83, 88, 61 S. Ct. 97, 101, 85 L. Ed. 58 (1940)).
However, in this case, even if there were some ambiguity in the statute that would justify
consideration of legislative history, there is no legislative history expressing clear evidence of a
contrary Congressional intent."
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Further, I have no difficulty concluding that the result
emanating from the application of the plain language of the
statute is not absurd. In creating a remedy for the violation of
a fundamental legal obligation in the bankruptcy process,
Congress was free to make a policy choice as to how strictly
the Code should impose liability for violations of §362(a).
How Congress chose to navigate the continuum between
"strict liability" and a broad "good faith" exemption from
monetary liability was a legislative policy choice. The
circumscribed good faith exception to liability now found in
§362(k) simply represents its resolution of the competing
policy interests. It is not the role of the courts to modify
Congress1 policy decisions as expressed in the plain language
of a statute. Accordingly, the statute should be applied as it is
written. See Lamie. 540 U.S. at 534, 124 S. Ct. at 1030.
In re Mu'min. 374 B.R at 169-70.
Many other decisions declare the same basic rationale or otherwise cite and
rely on Mu'min. See, e.g.. In re Seymoure. Civ. Action Nos. 07-4960(JAP) and 07*
4967(JAP), 2008 WL 1809309, at *3 n.3 (D.N.J., April 22, 2008)(distinguishing Mu'min
because the Court was applying pre-BAPCPA law and Mu'min was post-BAPCPA); In re
Tezla. No. 08-12700DWS, 2009 WL 212542 at *2 - 3 (Bankr. E.D. Pa. Jan. 28, 2009);
Lightfoot v. Borkon (In re LightfootX 399 B.R. at 148-50; In re Atlantic Medical
Management Services. Inc.. 387 B.R. 654, 662-63 (Bankr. E.D. Pa. 2008)(although the
offending party might not have known about the pendency of the bankruptcy at the time
he took debtor's property, he knew about it later and failed then to return the property);
and In re Singer. 368 B.R. 435, 441 (Bankr. E.D. Pa. 2007).
In my prior unreported decision, Cortellessa y. Cortellessa (Inrg
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Cortellessa). Adv. No. 06-2082REF, Case No. 05-14258REF, slip op. at 10-12 (Bankr.
E.D. Pa., June 9, 2006), I ruled that a "willful violation" under Section 362(k) required
only that the offending party knew of the automatic stay and intended to do what it did by
acting intentionally. I relied upon Cuffeev. Atlantic Business and Community
Development Corp.. (In re Atlantic Business; andLCornmunity Corp.). 901 F.2d 325, 329
(3d Cir. 1990), and noted that the offending party's good faith is not relevant. In
Cortellessa, however, the non-debtor proceeded with the state court litigation only after
asking for and obtaining an order actually granting relief from the automatic stay of
Section 362. The Debtor interpreted the order to not permit certain portions of the
litigation, while the non-debtor interpreted the order to permit all aspects of the litigation.
Because of the reasonably differing interpretations of the Court's prior order, I awarded
no sanctions against the non-debtor offending party.
V. CONCLUSION
In this case, no such order granting Mr. Mervine relief from the automatic
stay exists. Mr. Mervine simply took it upon himself to change the locks on the premises,
thereby excluding Debtor from access to the premises. Moreover, and more critically,
even after Mr. Mervine and his counsel were informed by Debtor's counsel that the
bankruptcy in fact existed, they did not immediately surrender the new key to Debtor or to
the Chapter 7 Trustee. They chose to insist that Debtor have only limited access to the
premises. Mr. Mervine's actions would have been subject to sanctions as a "willful
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violation" even under the pre-BAPCPA language of Section 362(h). The request by
Debtor for the sanction of actual damages must be granted and I will do so.
The refusal of Mr, Mervine and his counsel to undo his changing of the
locks after they were told by Debtor's counsel about Debtor's bankruptcy skirts the edges
of constituting "appropriate circumstances" for awarding punitive damages pursuant to
Section 362(k). Mr. Mervine's continued professed intention to merely protect the
property in the premises and to permit access to the premises on a 24/7 basis, however,
carried the day for me and I will not award punitive damages.
BY THE COURT
Date: September 1, 2009 Richard E. Periling
United States Bankruptcy Judge
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