Debtor’s attorney failed to mitigate the attorneys’ fees incurred for the violation of Section 362(k) by rejecting the settlement offer; Proceed to trial | Smith Debnam Narron Drake Saintsing & Myers, LLP

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Section 362(k) of the United States Bankruptcy Code allows a person injured by a willful breach of the automatic stay to recover actual damages, including costs and attorneys’ fees, as well as punitive damages in appropriate circumstances. 11 USC § 362(k). A recent case from the United States Bankruptcy Court for the District of South Carolina provides a cautionary tale for debtors’ attorneys who are prone to over-litigate a garden stay violation. In Defeo vs. Winyah Surgical Specialists, PA (In re Defeo), no. 20-03738-JW, Adv. No. 21-80011-JW, 2022 Bankr. LEXIS 132 at *32–33 (Bankr. DSC Jan. 14, 2022), the bankruptcy court reduced the attorney’s fees sought by the debtor’s attorney by just over 85%, awarding the debtor $16.76 actual damages and reducing attorneys’ fees from $17,500.45 to $2,515.45.

Factual background

While the facts of the underlying violation of the suspension were relatively mundane, the litigation it prompted was relatively contentious. The Debtor filed a Chapter 13 lawsuit on October 2, 2020, but inadvertently omitted the Defendant (“Winyah”) from its bankruptcy listings. Identifier. at 2 o’clock. The debtor received an invoice from Winyah in November 2020 requesting payment of a pre-petition medical debt. On December 4, 2020, the debtor’s attorney notified Winyah of the pending bankruptcy case. On this date, a Winyah employee updated his computer system so that he does not generate or send additional invoices to the debtor. However, due to an apparent computer error, the settings were not saved and on February 9, 2021, a second invoice was mailed to the debtor requesting payment of the same debt. Identifier. to *2–3.

The trial

On February 16, 2021, the Debtor’s attorney filed a lawsuit seeking damages in excess of $50,000 from Winyah for a willful violation of the automatic stay arising from the single invoice sent to the Debtor in February 2021. Identifier. at 4 o’clock. In her response, Winyah argued that her actions were not deliberate because the invoice was sent inadvertently or by computer error. In addition, after receiving the debtor’s complaint, a Winyah employee revisited the computer system and rectified the error that had caused the previous invoice to be sent, and Winyah informed the debtor in its response that the problem had been corrected. At a Rule 26(f) conference on April 8, 2021, Winyah’s attorney made a settlement offer to Debtor’s attorney and asked Debtor’s attorney to disclose the fees that he had incurred to date in order to inform future Winyah settlement negotiations. Identifier. at 4 o’clock. The debtor’s lawyer refused and insisted that he would only release his records to Winyah through official discovery.

Later that same day, Winyah delivered an offer of judgment to the debtor’s attorney (for an undisclosed amount) and also submitted a proposed motion for penalties for alleged violations of Rule 11.[1]

Responsibility

The case went to trial, following which the court had no difficulty in concluding that the act of sending the invoice by Winyah was “deliberate” for the purposes of Section 362. (k), which only requires that “the creditor (1) knew the bankruptcy matter existed and (2) intended to do the act that violates the automatic stay. Identifier. at 10. It was undisputed that Winyah had been notified of the debtor’s bankruptcy case when the invoice was sent, and her breach was willful “because she intentionally used and relied on her computer software to send billing invoices to its customers”. Identifier. to *14. The court relied on a number of cases rejecting the “computer did it” defense to reach its conclusion. See id. to *12–13 (quoting Rijos against Biscay, 263 BR 382, ​​392 (BAP 1st Cir. 2001)). The court also dismissed Winyah’s appeal to two cases from the U.S. Bankruptcy Court for the Western District of North Carolina, which “found no willful stay violations where the violations were caused by a clerical error.” innocent judgment that caused no harm to the debtor and were promptly terminated and corrected,” noting that these decisions had been criticized by other bankruptcy courts as incorrectly requiring demonstration of a specific intent to breach the automatic stay in order to find a violation of section 362(k). Identifier. to *13 (first quote In re Peterson297 BR 467, 470 (Bankr. WDNC 2003) and Hamrick v. Def. Fin. & Acct. To serve. (In re Hamrick)175 BR 890 (WDNC 1994), then citing In re Highsmith, 542 BR 738, 750 (Bankr. MDNC 2015)). After establishing Winyah’s liability for violation of section 362(k), the court considered what damages the debtor was entitled to recover.

damage

At trial, the debtor testified that he suffered “temporary nausea, stress and loss of sleep”, which persisted for two days after receiving the invoice. Identifier. to *18–19. However, he did not seek medical treatment or present corroborating evidence of emotional distress, prompting the court to conclude that his “fleeting and insignificant assertions of emotional distress” were insufficient to warrant compensation for damages. Identifier. to *20–21. The only other damages the debtor claimed to have incurred were $16.76 in mileage to attend his attorney’s office to verify the complaint, plus $104.04 in mileage and $300.00 in lost wages to attend. At the trial. Identifier. to *21. However, the court found that the debtor had failed to mitigate his damages (as set out below) and therefore denied him reimbursement of all costs incurred in attending the trial. The court further dismissed the debtor’s claim for punitive damages, finding “no evidence of flagrant conduct on the part of [Winyah].” Identifier. to *34.

Attorney fees

After establishing that the debtor was entitled to recover $16.76 in actual damages, the court turned to the debtor’s claim for attorney’s fees in the amount of $17,500.45. Although he concluded that the billing rates charged by the two attorneys who worked on the case were reasonable, he first took issue with the time and labor charged by the debtor’s attorneys, which he determined to be “overstated” because they included costs incurred to attend a hearing regarding the attorney’s compliance with disclosures required under sections 329 and 528 and, more importantly, because the debtor’s attorney:

[F]made no genuine effort to mitigate damages in this case given [Winyah’s] immediate cessation of collection efforts upon receipt of the notice of filing of the Complaint, [Winyah’s] early efforts to negotiate a settlement, and the debtor’s attorney demanding [Winyah] participate in an expensive investigation to obtain his billing timesheets on which the damages are based so that he can determine a reasonable settlement offer.

Identifier. at *23–24. The mitigation, the court observed, “reflects sound judicial policy that profiting from automatic stay violations is inherently improper.” Identifier. at *27–28 (quoting In D Silk549 BR 297, 303 (Bankr. D. Mass. 2016)).

The court framed its analysis by noting that once the conduct violating the Automatic Stay has ceased, “debtor’s attorney has a duty to take only such reasonable and necessary steps to remedy the breach,” and those steps “will depend on the circumstances of the particular case. Case.” Identifier. to *25 (quoting In re Voll, 512 BR 132, 143 (Bankr. NDNY 2014)). The court first found that the debtor and his attorney had a “duty to reevaluate the adversarial process to determine whether further litigation was necessary” at the Rule 26(f) conference, observing that Rule 26 ( (f) obliges the parties to examine the merits of the case and the possibilities of an early settlement. Identifier. to *26. Further, the court held that the debtor and his attorney should have considered the merits of the lawsuit upon receipt of Winyah’s motion for sanctions and offer of judgment. Identifier. The court seemed particularly troubled by the debtor’s attorney’s refusal to voluntarily disclose his timesheets to Winyah’s attorney, finding that such failure to disclose was unreasonable given the lack of “evidence of distress.” significant emotional or flagrant conduct”. . . warranting an award of punitive damages. Identifier. to *27.

The court further supported its conclusion by noting that the attorneys’ fees sought were grossly disproportionate to the damages suffered by the debtor. Identifier. at *31–32. Ultimately, the court found that all attorneys’ fees incurred after April 9, 2021, the day the debtor rejected Winyah’s settlement offer, were “excessive and unnecessary” given the “de minimis prejudice to the debtor and the absence of mitigation efforts by the debtor’s lawyer. » Identifier. to *28. Accordingly, the court allowed the debtor’s claim for all attorneys’ fees and expenses incurred on or before April 9, 2021 (excluding expenses incurred to attend the disclosure compliance hearing), which amounted to $2,515.45. Identifier. to *33.

Conclusion

Defoo reinforces an important consideration governing legal efforts to remedy a breach of automatic stay: debtor’s attorneys are free to do more than necessary to remedy a breach of stay, but they may undertake such efforts at their own expense. Courts are rightly reluctant to award large attorneys’ fees under fee transfer statutes like § 362(k), particularly when there is evidence on the record that the debtor’s attorney has unreasonably increased legal costs. In fact, the Defoo The court observed that the typical award of attorney’s fees in similar cases was between $250 and $2,500, and that cases involving fees over $5,000 were rare and involved flagrant conduct on the part of creditors or highly contentious cases. Identifier. to *29 & n.12. In a garden stay breach case where the actual damages are likely to be minimal and the main component of the damages is attorneys’ fees, debtor’s attorneys should consider the risks before refusing to disclose their fees incurred. to opposing counsel in the context of the settlement.

[1] The Sanctions Motion asserted that certain allegations contained in the Debtor’s Complaint were “false and inflammatory” and were included by the Debtor’s attorney “without first conducting a reasonable investigation of the facts”, and further asserted that the complaint had been filed for improper purposes. unnecessarily increase court costs. Identifier. at 5. The motion was ultimately adjudicated in a separate order dated September 27, 2021 and is currently on appeal in district court. See Defeo v. Winyah Surgical Specialists, PA (In re Defeo)632 BR 44 (Bankr.DSC 2021).

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