In Re: John Walker

Filing 13

MEMORANDUM and ORDER signed by Chief Judge Morrison C. England, Jr. on 3/20/2015 ORDERING that the bankruptcy court's decision in this matter is hereby AFFIRMED. CASE CLOSED. (Zignago, K.)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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In re:

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Rick Sillman,

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Debtor.
_______________________________

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No. 2:14-cv-00587-MCE

MEMORANDUM AND ORDER

JOHN WALKER,
Appellant/Defendant,
v.
RICK SILLMAN,
Appellee/Plaintiff.

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Appellant John Walker (“Walker”) was a creditor in a voluntary Chapter 13

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bankruptcy case instituted by Appellee Rick Sillman (“Sillman”). Ultimately, Sillman filed

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an adversary action against Walker and another individual who is not a party to this

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appeal. The bankruptcy court1 ruled in favor of Sillman and against Walker; that

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decision is the subject of this appeal.

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A number of bankruptcy judges presided over various aspects of the underlying case. For
simplicity, this Court refers to the bankruptcy court and its judges generically.

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BACKGROUND

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This case presents a tortured set of facts. On February 9, 2009, Sillman,

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represented by counsel, commenced his voluntary Chapter 13 case, presumably to

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forestall a foreclosure sale of his residence. Walker asserted a secured claim in the

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amount of $51,000 over real property containing that residence (“the Property”), and on

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March 9, 2009, Walker filed a pro se motion for relief from the automatic stay. Walker’s

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motion, however, was deficient in a number of ways, including the fact that he failed to

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pay the applicable filing fee. Accordingly, the bankruptcy clerk issued an order to show

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cause as to why Walker’s motion for relief from the automatic stay should not be

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dismissed.

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A hearing on the order to show cause was held on March 31, 2009.

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Unfortunately, all attempts to determine what precisely occurred at the hearing have

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been unsuccessful because there is no transcript, neither the court reporter nor her

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notes can be located, no civil minutes were prepared or filed, and the judge’s hearing

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notes provide no information as to who attended the hearing or what representations

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were made at that time. It appears, however, that neither Sillman, his Chapter 13

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counsel nor Walker appeared. At the hearing, the presiding judge mistakenly issued an

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order dismissing Sillman’s Chapter 13 bankruptcy case rather than resolving Walker’s

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motion for relief from the automatic stay. Thus, on April 3, 2009, an order dismissing

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Sillman’s Chapter 13 case was entered.

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On April 8, 2009, Walker conducted a non-judicial foreclosure sale on the

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Property and purchased it himself. Just one week later, on April 15, 2009, Sillman filed a

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motion to reconsider the dismissal and reinstate the bankruptcy case. On April 16, 2009,

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the bankruptcy court granted Sillman’s motion to vacate the dismissal and reinstated the

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Chapter 13 case. On the same day, the deed from the foreclosure sale was recorded.

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Undisputed testimony demonstrates that Sillman’s bankruptcy counsel contacted Walker

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and that the parties agreed to execute a stipulation rescinding the foreclosure sale, since
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the April 3, 2009, dismissal order was unquestionably issued in error. In the meantime,

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however, Sillman continued making plan payments and the Trustee continued to pay

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Walker $380.00 monthly. Those payments remained ongoing through approximately

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December 2009. Despite Walker’s apparent agreement to rescind the foreclosure sale

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through stipulation, no stipulation was ever filed and no deed of reconveyance correcting

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the real property records was recorded. Consequently, Sillman made payments as if he

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continued to hold title to the property for some eight months, despite the fact that the

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foreclosure deed naming Walker as the owner of the property was never rescinded.

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On June 26, 2010, the Trustee filed a motion to dismiss Sillman’s Chapter 13

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case because he was delinquent $4,668.00 in plan payments and had not filed a motion

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to confirm his Chapter 13 plan. On July 30, 2010, the Trustee’s motion was granted and

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Sillman’s Chapter 13 case was dismissed. Following approval of the Trustee’s final

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report and account, Sillman’s Chapter 13 case was closed on October 25, 2010.

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Subsequently, Walker (the putative owner of the property as a result of the

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foreclosure sale) pursued an unlawful detainer action against Sillman, who was still

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residing on the Property, in state court. In response, Sillman sued Walker, also in state

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court. Walker ultimately prevailed in his unlawful detainer action and took possession of

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the Property. He subsequently demolished the structure where Sillman had lived.

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On October 27, 2011, almost exactly a year after Sillman’s Chapter 13 case was

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closed, he filed a motion to reopen his bankruptcy case to adjudicate whether the

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foreclosure sale was void as a matter of law. Over Walker’s pro se objection, the

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bankruptcy court granted Sillman’s motion and reopened the bankruptcy case to

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determine the validity of the foreclosure sale as it relates to the automatic stay.

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Subsequently, the court held a hearing on Sillman’s motion to void the foreclosure

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sale and denied the motion without prejudice subject to Sillman filing an adversary

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action. On January 19, 2012, Sillman filed an adversary action against Walker and Lisa

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Talcott (Talcott is not a party to this appeal).

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On June 24, 2013, August 29, 2013, and November 7, 2013, the bankruptcy court

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presided over a trial on whether the foreclosure sale violated the automatic stay. In a

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Memorandum Opinion and Decision filed on January 21, 2014, that court found that the

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April 3, 2009, order dismissing Sillman’s Chapter 13 bankruptcy case was void. The

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court also determined that the foreclosure sale violated the automatic stay and Sillman

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was and remains the legal owner of the Property. It further found that Walker willfully

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violated the automatic stay, entitling Sillman to damages in the amount of $45,500.00.

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That damages award consisted of actual damages in the amount of $24,000.00 for the

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dispossession of and loss of use of the Property, $14,000.00 for emotional distress, and

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punitive damages in the amount of $7,500.00.

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Notwithstanding a number of irrelevant and/or waived arguments advanced by

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Walker on appeal, this case ultimately turns on three issues: (1) whether the bankruptcy

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court properly determined that the April 3, 2009, dismissal was void, which rendered the

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foreclosure sale a violation of the automatic stay; (2) if so, whether the bankruptcy court

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properly determined that Walker’s violation of the automatic stay was willful, thereby

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entitling Sillman to damages; and (3) if so, whether there was evidence to support the

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bankruptcy court’s award of damages. This Memorandum and Order addresses each

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issue in turn.

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STANDARD

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The applicable standard of review for adjudicating a bankruptcy appeal is identical

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to that employed by circuit courts of appeal in reviewing district court decisions. See

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Heritage Ford v. Baroff (In re Baroff), 105 F.3d 439, 441 (9th Cir. 1997). Thus, legal

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conclusions are reviewed de novo, and factual determinations are assessed pursuant to

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a clearly erroneous standard. Murray v. Bammer (In re Bammer), 131 F.3d 788, 792

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(9th Cir. 1997) (en banc).

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ANALYSIS

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A. Issue One: Whether the April 3, 2009, Dismissal Order Was Void

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Walker argues that the dismissal order was voidable, rather than void, and

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because Sillman never had the automatic stay reinstated nunc pro tunc, the foreclosure

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sale validly occurred while there was no automatic stay in effect. There is little case law

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addressing this issue.

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In finding that the dismissal was void, the bankruptcy court relied heavily on Great
Pacific Money Markets. Inc. v. Krueger (In re Krueger), 88 B.R. 238 (B.A.P. 9th

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Cir.1988), a decision reached by the Bankruptcy Appellate Panel of the Ninth Circuit.

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In Krueger, like this case, a debtor filed for Chapter 13 relief to stay a foreclosure sale.

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When the judge called the debtors’ case at a confirmation hearing, neither the debtors

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nor their counsel were in attendance; instead, only a creditor and the trustee were

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present. Id. at 239. The judge continued the hearing due to deficiencies with the plan,

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and said “[y]ou might give [debtors’ counsel] a call” to make sure he had enough time to

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provide notice. Id. at 240. However, no notice of the continued hearing was given to the

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debtors or counsel. In subsequent testimony the trustee indicated that she thought the

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court’s order was directed to the creditor; similarly, the creditor believed the judge was

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addressing someone else.

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When the debtors and their counsel failed to appear at the continued confirmation

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hearing, the court dismissed the case on the trustee’s motion. The creditor then

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conducted a foreclosure sale. After the debtors learned of the dismissal and sale, they

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moved to vacate the dismissal and to void the foreclosure sale. The bankruptcy court

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vacated the order dismissing the case and reinstated it. Another judge subsequently

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voided the sale and reverted the property to the debtors.

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On appeal, the creditor argued that because the case had been dismissed, the

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bankruptcy court lacked jurisdiction over the debtors’ property at the time the foreclosure

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sale took place and therefore the court could not exercise its equitable powers to set
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aside the sale. The panel held that the order dismissing the case was void because the

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debtors were not afforded statutory or constitutional due process. Id. at 241. The panel

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noted that, under 11 U.S.C. § 1307(c), a Chapter 13 case can only be dismissed “after

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notice and a hearing” and that “after notice and a hearing” means “such notice as is

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appropriate in the particular circumstances and such opportunity for a hearing as is

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appropriate in the particular circumstances.” Id. On a constitutional level, the court

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went on to recognize that “[t]he due process clause of the Fifth Amendment requires that

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due process be provided before property can be taken,” and that a fundamental

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requirement of due process is “notice reasonably calculated, under all of the

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circumstances, to apprise interested parties of the pendency of the action and afford

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them an opportunity to present their objections.” Id. Significantly, too, the Krueger panel

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unequivocally found that “[a]n order is void if it issued by a court in a manner inconsistent

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with [due process].” Id.

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That panel went on to hold that it was inappropriate under the circumstances for

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debtors to be uninformed of the hearing at which their bankruptcy proceedings were

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dismissed. Moreover, the panel found that because the dismissal was void, the stay was

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continuously in effect from the date the petition was filed and the foreclosure sale was

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held in violation of the stay. As the panel noted, acts taken in violation of the automatic

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stay are generally deemed void and without effect. Id.

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The facts of Krueger are on all fours with those confronted here. In this case, like

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Krueger, the bankruptcy court found that: (1) Sillman did not have appropriate notice;

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(2) his Chapter 13 case could be dismissed at an order to show cause hearing directed

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at a creditor’s faulty filing; (3) absent such notice, the dismissal order was void and the

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automatic stay remained in effect when the foreclosure sale occurred; and (4) Walker

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therefore violated the automatic stay by proceeding with the foreclosure sale and selling

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the property. The reasoning of Krueger consequently mandates that the dismissal order

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here, and the sale flowing therefrom, were void.2

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Significantly, too, the Krueger panel’s rationale is supported by other applicable

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precedent. In Turtle Rock Meadows Homeowners Ass’n v. Slyman (In re Slyman),

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234 F.3d 1081 (9th Cir. 2000), the bankruptcy court vacated an order dismissing the

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case because the debtor was not provided notice of the two hearings at issue. On

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appeal, the Ninth Circuit relied on Krueger to conclude that because the order dismissing

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the bankruptcy case was void, acts taken by the creditor with regard to a foreclosure (in

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that case a payment to forestall the foreclosure sale) violated the automatic stay and

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were void as well. Id. at 1087. Moreover, in United Student Aid Funds, Inc. v. Espinosa,

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559 U.S. 260, 270 (2010), the Supreme Court recently reaffirmed that a void order is a

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legal nullity. As a legal nullity, the erroneous dismissal order did not terminate the

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automatic stay so as to terminate either the automatic stay or the debtor’s legal rights.

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The Court consequently affirms the bankruptcy court’s ruling that the dismissal

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order was void, such that the foreclosure sale purportedly made possible by termination

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of the bankruptcy proceedings and a lifting of the automatic bankruptcy stay was also

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without legal effect.

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B. Issue Two: Willful Violation
Walker argues that even if the initial dismissal order was void and the foreclosure

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sale technically violated the automatic stay, the violation was not willful and therefore

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Sillman is not entitled to damages.

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A “willful violation” requires a finding that “the defendant knew of the automatic

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stay and that the defendant’s actions which violated the stay were intentional.” Pinkstaff

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v. United States (In re Pinkstaff), 974 F.2d 113, 115 (9th Cir. 1992). However, “[a] ‘willful

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violation’ does not require a specific intent to violate the automatic stay. Rather, the

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Walker argues that the court did not have the power to reopen the bankruptcy case under
11 U.S.C. § 350. Since it is undisputed that the dismissal order was erroneous, and since the parties
themselves agreed to execute a stipulation rescinding the foreclosure sale conducted in the aftermath of
that erroneous dismissal, Walker’s argument in this respect patently fails.

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statute provides for damages upon a finding that the defendant knew of the automatic

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stay and that the defendant’s actions which violated the stay were intentional.” “Whether

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the party believes in good faith that it had a right to the property is not relevant to

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whether the act was ‘willful’ or whether compensation must be awarded.” In re Bloom,

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875 F.2d 224 (9th Cir. 1989), citing INSLAW, Inc. v. United States (In re INSLAW, Inc.),

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83 B.R. 89, 165 (Bankr. D.D.C. 1988).

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There is no dispute that Walker knew of the automatic stay initially; indeed, his

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motion for relief from the stay led to the erroneous order of dismissal on April 3, 2009.

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Additionally, as indicated above, Walker participated in the agreement to execute a

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stipulation to rescind the non-judicial foreclosure sale. Regardless of which party failed

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to follow through in preparing that stipulation, the burden is on the creditor, here Walker,

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to determine the extent of the automatic stay and seeks such relief as is appropriate.

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Collier on Bankruptcy, Sixteenth Edition, ¶ 362.02. This is hardly surprising since, as

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one of the fundamental principles girding the Bankruptcy Code, “the automatic stay

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requires a creditor to maintain the status quo ante and to remediate acts taken in

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ignorance of the stay.” Franchise Tax Board v. Roberts (In re Roberts), 175 B.R. 339,

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343 (B.A.P. 9th Cir. 1994). The automatic stay consequently imposes an affirmative

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duty to discontinue actions in violation of the stay. Sternberg v. Johnson, 595 F.3d 937,

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944 (9th Cir. 2010). Here, as the bankruptcy court recognized, “the objective facts show

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that Walker took no action to address the violation of the automatic stay or determine

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what the effect was in conducting a non-judicial foreclosure sale after the issuance of the

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void order dismissing the Chapter 13 case.” Memorandum Opinion and Decision, In re

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Sillman, United States Bankruptcy Court, Eastern District of California, ECF

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No. 12-02023, 17: 20-24 (hereinafter “Order”).

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That court found that Walker willfully violated the automatic stay because, despite

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having full knowledge that the order dismissing the case had been vacated and error

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committed by the court, Walker (1) continued to press rights under the void deed to take

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and retain possession of the Property, and (2) continued to accept plan payments even
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after conducting the foreclosure sale. Walker did this despite being represented by two

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attorneys in his dealings with Sillman during the bankruptcy case, including with respect

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to the erroneous dismissal, and with regard to the unlawful detainer action against

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Sillman in state court along with Sillman’s own state court action. Given those

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circumstances, the bankruptcy court did not clearly err in finding that Walker willfully

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violated the automatic stay. 11 U.S.C. § 362(k). Therefore, the bankruptcy court’s

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ruling as to the second issue is also affirmed by this Court.

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C. Issue Three: Damages

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The damages statute at issue provides that “[a]n individual injured by any willful

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violation of a stay provided by this section shall recover actual damages, including costs

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and attorneys’ fees.” 11 U.S.C. § 362(k)(1). As a general matter, then, the statute

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mandates actual damages. It also, in “appropriate circumstances,” states that punitive

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damages may be recovered.

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As outlined above, following a determination that Walker’s violation of the

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automatic stay was “willful,” the bankruptcy court awarded Sillman actual damages for

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loss of use of the Property as well as emotional distress. Punitive damages were also

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assessed.

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Walker’s primary argument on appeal is that there was no evidence in trial record

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to support the damages award. While the bankruptcy was candid about the difficulties

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Sillman had, as a pro se litigant, in presenting evidence, that contention overstates the

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case. First, it appears undisputed that Sillman continued to make payments to Walker,

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under the mistaken assumption that he still owned the property, in the amount of

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$380.00 monthly in accordance with his Chapter 13 plan payments. Those payments

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continued from approximately April of 2009, when the parties agreed to rescind the

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foreclosure sale, until at least December of 2009. Those payments therefore totaled

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some $3,420.00 that Sillman presumably would not have made had he known he had no

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ownership interest in the property.

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Additionally, by pursuing an unlawful detainer action in state court premised on

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the erroneous premise that he owned the property, Walker dispossessed Sillman of the

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use of the property, ejecting him from the premises in approximately January of 2010.

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By the time the bankruptcy court’s post-trial Order was issued on January 21, 2014, four

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years had passed. Although Walker contended at trial that the house occupied by

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Sillman was largely uninhabitable, making any damages for demolishing that structure

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minimal at best, Plaintiff argued that he received some $400.00 per month for renting

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space on the property to park a mobile home. He also claimed that he could have

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rented the property out for at least $750.00 per month, without utilities, although he

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otherwise presented no evidence to support those contentions. Order, 21:7-12 In

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weighing this testimony and the evidence that was presented, and in drawing from his

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own experience, the bankruptcy court found that “damages of $500.00 per month for

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each of the 48 months that Walker has wrongfully took and held this property is clearly

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reasonable.” Id. at 27:12-14. It therefore concluded that “[t]here can be little dispute that

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even renting property in the Yankee Hill, California area [where the property was located]

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would be more expensive than $500.00 a month.” Id. at 27:14-16. The court

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consequently calculated actual damages for the violation of the stay by Walker over the

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48-month period in question as $24,000.00. Under the circumstances, this Court

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cannot conclude that the damage determination in that regard was clearly erroneous.

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Actual damages for violation of the automatic stay also include damages for

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emotional distress, as appropriate. Dawson v. Wash. Mut. Bank (In re Dawson), 390

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F.3d 1139, 1148 (9th Cir. 2004). For a debtor to establish such damages, he must:

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(1) suffer significant harm; (2) clearly establish that harm; and (3) demonstrate a causal

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connection between the significant harm and the violation of the automatic stay. Id. at

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1149. Medical evidence of the requisite distress is not required; a court may award

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emotional damages where the circumstances make it obvious that a reasonable person

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would suffer significant emotional harm. Id., citing United States v. Flynn (In re Flynn),

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185 B.R. 89, 93 (S.D. Ga. 1995). Here, the bankruptcy court made just such a
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determination. It stated that “kicking a person out of his home and then actively keeping

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them from returning to their home for a period of some 48 months causes significant

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emotional distress.” Order, 29:3-7. Again, the Court cannot find that his $14,000.00

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emotional distress award, which equates to less than $300.00 a month when spread

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over 48 months, was clearly erroneous, particularly given that court’s determination,

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based on his observations during the case, that Plaintiff was already plagued by mental

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health issues. Order, p. 29 n. 45.

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That brings us to the final component of the damages award: the $7,500.00

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awarded in punitive damages. While punitive damages are proper only in the face of

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some showing of reckless disregard for the law or with respect to the rights of others

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(Bloom, 875 F.2d at 228), a bankruptcy court nonetheless has considerable discretion in

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granting or denying punitive damages under 11 U.S.C. § 362(k)(1). In making that

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determination, the court must consider whether the circumstances of each particular

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case warrant such damages. Henry v. Assocs. Home Equity Servs. (In re Henry),

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266 B.R. 457, 481-83 (Bankr. C.D. Cal. 2001). A creditor’s good faith or lack thereof is

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relevant to this assessment. See Walls v. Wells Fargo Bank (In re Walls), 262 B.R. 519,

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529 (Bankr. E.D. Cal. 2001). Although no fixed ratio or formula applies in properly

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calculating a punitive damages award, punitive damages must be proportional to the

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underlying compensatory damages and bear a reasonable relation thereto. Hudson v.

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Moore Business Forms, Inc., 836 F.2d 1156, 1163. That determination involves

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consideration of: (1) the nature of a defendant’s acts; (2) the amount of compensatory

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damages awarded; and (3) the wealth of the defendant. Bauer v. Northeast Neb. Fed.

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Credit Union (In re Bauer), 2010 WL 6452899 at *13 (B.A.P. 9th Cir. 2010).

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The bankruptcy court here concluded that “Walker willfully, intentionally, and with

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the assistance of counsel violated the automatic stay in dispossessing [Sillman] from

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possession of [the property] and retaining possession thereof” throughout the pendency

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of the adversary proceeding. Order, 32:10-13. While it noted that the dismissal of

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Sillman’s Chapter 13 proceeding, and the subsequent foreclosure sale of the property,
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may initially have been an unintentional violation of the automatic stay, Walker’s

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subsequent conduct willfully and intentionally compounded that violation. Id. at

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32:13-16. After the void foreclosure sale, he continued to accept payments as a creditor

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in the bankruptcy case even though by that time he ostensibly held title to the property.

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Then, once Sillman ceased making those payments, he changed tack and asserted his

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purported ownership rights by pursuing an unlawful detainer action. Significantly, the

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court, in observing the parties’ conduct at trial, concluded that Walker engaged in this

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course of conduct “hoping or believing that [Sillman], due to [with respect to his] medical

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and emotional limitations, would be unable to assert [his] rights.” Id. at 32:16-21. Under

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these circumstances, the court reasoned that were the court not to award punitive

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damages, “a green light would be given to creditors to risk violating the automatic stay if

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the dollar amounts at issue are large enough and they have a debtor who is legally,

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emotionally, or physically impaired.” Id. at 32:24-33:3. In declining to permit such a

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green light, that court determined that punitive damages were necessary to deter such

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conduct in the future. Id. at 33:3-5. That decision survives appellate scrutiny at this

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juncture because this Court cannot conclude it was clearly erroneous.

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We next move to whether the $7,500.00 awarded in punitive damages is in and of

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itself clearly erroneous. As the bankruptcy court pointed out, with actual damages at

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$38,000.00, that figure is only 20 percent of such damages. That figure is hardly

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“grossly excessive” to the applicable interest in punishment and deterrence so as to

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implicate constitutional concerns. BMW of North America, Inc. v. Gore, 517 U.S. 559,

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568 (1996). With respect to whether the punitive damages are proportional to Walker’s

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financial condition, the Court notes that Walker lives in Montana and owns property in

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California. As that court observed, Walker has extensively litigated, with the assistance

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of attorneys, his contention that the void foreclosure sale transferred title in the subject

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property to him. Order, 34:19-23. Given the fact that Walker’s secured claim in the

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property, as asserted in Sillman’s bankruptcy proceedings, was $51,000.00, a $7,500.00

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punitive damage award is only 14.7 percent of that obligation. Under those
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circumstances, the Court concludes that vacating the punitive damages as awarded in

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this matter is not warranted.

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CONCLUSION

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For the reasons stated above, the bankruptcy court’s decision in this matter is
hereby AFFIRMED.
IT IS SO ORDERED.

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Dated: March 20, 2015

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