UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION
March 28, 2011
EMPLOYMENT DEVELOPMENT DEPARTMENT, ET AL., APPELLANTS,
CALIFORNIA CONTRACTORS STATE LICENSE BOARD, ET AL., APPELLANTS,
FRANK BERTUCCIO, APPELLEE.
CALIFORNIA CONTRACTORS STATE LICENSE BOARD, ET AL., APPELLEES.
The opinion of the court was delivered by: Lucy H. Koh United States District Judge
United States District Court For the Northern District of California
ORDER DISMISSING RELATED
Presently before the Court are appeals in three related bankruptcy proceedings. All three appeals stem from Frank Bertuccio's 2004 Chapter 13 bankruptcy petition. Prior to filing for 3 bankruptcy, Bertuccio's contractor's license was suspended due to an unpaid employment tax 4 liability. After extensive litigation, trial, and post-trial briefing, the Bankruptcy Court ruled that the Employment Development Department (EDD) and the California Contractors State License Board (CSLB) violated the automatic stay provision of the Bankruptcy Code by refusing to reinstate Bertuccio's contractor's license for twenty-four days despite notice of Bertuccio's filing for 9 bankruptcy. The Bankruptcy Court, however, also ruled that Bertuccio failed to show any damages 10 in connection with the relatively brief refusal to reinstate his contractor's license. Finally, the Bankruptcy Court denied attorney's fees under recent Ninth Circuit precedent and the equitable doctrine of unclean hands.
In these appeals, the EDD and the CSLB (collectively "Defendants") appeal the ruling in connection with the finding of a violation of the automatic stay provision, while Bertuccio appeals 16 the ruling in connection with damages and attorney's fees. The Court affirms the Bankruptcy 17
Court's decision on all three issues.
license, as the sole owner of business named "European Hardwood Floors Design & Interiors," to
The underlying facts are not in dispute. In 1995, the CSLB issued Bertuccio a contractor's install flooring.*fn1 On June 25, 2003, the EDD informed the CSLB that Bertuccio was in violation of 24 California state law for failing to pay $34,517.46 in employment taxes. On June 26, 2003, the CSLB sent Bertuccio a letter advising him of the unpaid employment taxes and the potential suspension of his contractor's license if the tax default was not corrected by August 26, 2003. On August 26, 2003, after Bertuccio failed to respond to the notice of tax default, the CSLB suspended Bertuccio's contractor's license solely for failing to resolve the outstanding tax liability owed to the EDD in accordance with California Business & Professions Code §7145.5 ("Failure to resolve 5 6 outstanding liabilities as grounds for refusal to renew license").
Bertuccio initially insisted that he only continued selling flooring materials, which does not require 9 a license, as opposed to installing flooring materials, which does require a license. However, the
While his license was suspended, Bertuccio continued to operate his business. At trial, Bankruptcy Court found, based on evidence submitted by Bertuccio, that Bertuccio entered into contract for floor installation in October 2004.*fn2 Bertuccio eventually acknowledged that he entered into these contracts on the belief that his contractor's license would be reinstated in light of his 13 14
On October 7, 2004, some thirteen months after his license suspension, Bertuccio filed for Chapter 13 bankruptcy. Counsel for Bertuccio sent notice of the bankruptcy petition to the CSLB 17 on October 8, 2004, and requested that the CSLB reinstate Bertuccio's license. Six days later, on 18
October 14, 2004, the CSLB relayed Bertuccio's request to the EDD. The EDD, however, declined 19 the request to reinstate Bertuccio's license. On October 18, 2004, counsel for Bertuccio called the 20
EDD directly, and again requested a reinstatement of Bertuccio's license. In response, the EDD 21 22 asked whether Bertuccio's Chapter 13 bankruptcy plan required use of the contractor's license, as it was not clear to the EDD that Bertuccio needed the license to fund the plan. On November 1, 24 Chapter 13 bankruptcy filing.
2004, counsel for Bertuccio called to advise the CSLB that she would be filing a motion for an 25 injunction requiring reinstatement of Bertuccio's license. After receiving this information from counsel, an EDD representative sent CSLB an e-mail authorizing the release of the license to Bertuccio. The CSLB reinstated Bertuccio's contractor's license on November 1, 2004.
Also on November 1, 2004, Bertuccio commenced an adversary proceeding in Bankruptcy Court, asserting damages under the automatic stay provision of the Bankruptcy Code on the ground 5 6 that his license was not restored immediately after notification of his bankruptcy petition. While his bankruptcy action was pending, Bertuccio filed an application for a corporate license under the name "European Floor Coverings, Inc." At trial, Bertuccio testified that this application was 9 denied because his contractor's license had been suspended.
The Bankruptcy Court held a trial on February 13 and 15, 2008. During the course of the 2008 trial, the CSLB learned that Bertuccio had lied on his original application for a contractor's license, as well as on his subsequent applications for corporate contractor's licenses. Specifically, April 11, 2008, the CSLB held a hearing regarding revocation of Bertuccio's contractor's license in 16 light of Bertuccio's failure to disclose his extensive criminal record. On June 2, 2008, the CSLB 17 issued a final decision revoking Bertuccio's license, with a one-year ban on reapplying for a 18 reissuance or reinstatement.
refusing to reinstate Bertuccio's contractor's license, violated the automatic stay provision. See In 21 22 re Bertuccio, 414 B.R. 604 (Bankr. N.D. Cal. 2008) ("Bertuccio I"). In that same decision, however, the Bankruptcy Court also ruled that Bertuccio had failed to establish any damages. On Bertuccio failed to disclose several criminal convictions extending between 1984 and 1999. On
On December 31, 2008, the Bankruptcy Court issued a decision ruling that Defendants, by October 20, 2009, after the parties were given an opportunity to fully brief the remaining issues of 25 attorney's fees and costs, the Bankruptcy Court denied Bertuccio's request for attorney's fees and 26 costs. See In re Bertuccio, 2009 Bankr. LEXIS 3302 (Bankr. N.D. Cal. Oct. 15, 2009) ("Bertuccio II"). The Bankruptcy Court entered final judgment on October 28, 2009. See October 28, 2009 Judgment, Case No. 04-56255, Adversary No. 04-5524. 3
stipulation, opening briefs would be due by September 28, 2010, responsive briefs would be due by
B.Procedural History in District Court
For each of these related cases, the notice of appeal from Bankruptcy Court was filed in November 2009. On June 11, 2010, the Honorable James Ware granted the parties' stipulation to consolidate briefing and extend deadlines for the briefing schedule. Pursuant to the parties' own October 29, 2010, and reply briefs would be due by December 3, 2010. Without an Order 10 approving the parties' stipulation, opening briefs would have been due in mid-July, respondent briefs would have been due 21 days later, and reply briefs would have been due 14 days after service of respondent briefs. See Local Bankruptcy Rule 8010-1. same day as the deadline for filing opening briefs, the parties filed yet another stipulation agreeing 16 to further extension of briefing deadlines. In violation of Civil Local Rule 6-2, however, the 17 parties did not set forth with particularity the reasons for the requested extension of time. In fact, 18 the parties provided no reason at all. Accordingly, the Court denied the parties' request at that 19 time. See September 29, 2010 Order Denying Request [dkt. #16]. After the parties provided 20 additional reasons for seeking an extension, the Court granted an extension, in which briefing 21 22 would be complete by December 2010. See October 1, 2010 Order Granting Extension as Modified [dkt. #18]. The parties complied with that latter schedule, and briefing is now complete.*fn3
These cases were reassigned to this Court on August 2, 2010. On September 28, 2010, the conclusions de novo. See In re Tucson Estates, 912 F.2d 1162, 1166 (9th Cir. 1990). Thus, the matter is deemed submitted for decision upon completion of the briefing. See B.L.R. 8010-1(b).
II. STANDARDS OF REVIEW
The Court reviews the Bankruptcy Court's factual findings for clear error and its legal Court reviews the Bankruptcy Court's legal decisions regarding the automatic stay de novo. Berg v. Good Samaritan Hosp., 198 B.R. 557, 560 (9th Cir. BAP 1996), aff'd sub. nom In re Berg, 230 F.3d 1165 (9th Cir. 2000).
The Bankruptcy Court's assessment of damages under § 362(h) is
reviewed for an abuse of
6 discretion. See In re Miller, 262 B.R. 499, 503 (9th Cir. BAP
2001). The Bankruptcy Court's
decision with respect to attorney's fees and costs is also reviewed
for abuse of discretion or
erroneous application of the law. See In re Dawson, 390 F.3d 1139,
1145 (9th Cir. 2004). 9
There are three issues on appeal. First, whether Defendants violated the automatic stay provision by refusing to reinstate Bertuccio's contractor's licen se despite notice of the Chapter bankruptcy petition? Second, whether Bertuccio was entitled to damages as a result of the 13 14 violation of the automatic stay? Third, whether Bertuccio's counsel was entitled to attorneys' fees and costs as a result of the violation of the automatic stay? 16
As explained below, the Court affirms the well-reasoned opinion of the Bankruptcy Court with respect to all three issues. 18
A.Violation of the Automatic Stay Provision of the Bankruptcy Code*fn4
At the time Bertuccio initiated his adversary proceeding, the automatic stay provision of the Bankruptcy Code provided:
Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of-- (1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
11 U.S.C. §362(a)(1). *fn5 An individual injured by a "willful violation" of the stay may seek 4 damages, including costs and attorneys' fees. 11 U.S.C. §362(h). As summarized by the Bankruptcy Court, "[a] party seeking damages for violation of the automatic stay must prove by a 6 preponderance of the evidence that (1) a bankruptcy petition was filed; (2) the debtor is an 7 individual; (3) the creditor received notice of the petition; (4) the creditor's actions were in willful 8 violation of the stay; and (5) the debtor suffered damages." See In re Bertuccio, 414 B.R. 604, 611 (Bankr. N.D. Cal. 2008) (citing In re Henry, 328 B.R. 664, 667 (Bankr. E.D.N.Y. 2005). The 10 parties hotly dispute whether the EDD's and CSLB's actions were "willful," and whether Bertuccio suffered any damages.*fn6
The Bankruptcy Court ruled that, under the automatic stay provision, Defendants had an "affirmative duty" to reinstate Bertuccio's license upon notice of his bankruptcy filing. Defendants 14 challenge the Bankruptcy Court's ruling on three grounds, arguing that: (1) there was no "post-15 petition affirmative act" in violation of the automatic stay; (2) the "police power" exception to the 16 automatic stay applies in these circumstances; and (3) Bertuccio was not entitled to the stay 17 because he never had a right to the contractor's license since he lied about his criminal history on 18 his license application. As explained below, none of the three arguments is ultimately persuasive. 19
"An award of actual damages under Section 362(h) requires a showing by
the debtor that
she sustained an injury from a 'willful' violation of the stay. A
'willful violation' does not require
1.Post-petition Affirmative Act
specific intent to violate the automatic stay. A violation of the automatic stay is 'willful' if 1) the 2 creditor knew of the stay and 2) the creditor's actions, which violated the automatic stay, were 3 intentional." See In re Roman, 283 B.R. 1, 7-8 (9th Cir. BAP 2002) (internal citations omitted).
"Once a creditor knows that the automatic stay exists, the creditor bears the risk of all intentional 5 acts that violate the automatic stay regardless of whether the creditor means to violate the 6 automatic stay." See In re Campion, 294 B.R. 313, 318 (9th Cir. BAP 2003).
notice of Bertuccio's filing for Chapter 13 bankruptcy. The August
26, 2003 pre-petition 9 suspension of Bertuccio's contractor's license
was not a violation of the stay. Instead, the issue is 10 whether
Defendants' refusal to reinstate the suspended license, after notice
of Bertuccio's Chapter
petition, is a continuation of an action against a debtor to
recover a claim that arose before the
bankruptcy filing. See 11 U.S.C. §362(a)(1). In these circumstances,
the answer is a clear yes.
continuation, including the issuance or employment of process, of a judicial, administrative, or 15 other action or proceeding against the debtor that was or could have been commenced before the 16 commencement of the case under this title, or to recover a claim against the debtor that arose 17 before the commencement of the case under this title" falls under the automatic stay. 11 U.S.C. §362(a)(1) (emphasis added). It is undisputed that the pre-petition suspension of Bertuccio's 19 contractor's license was based on Bertuccio's failure to pay employment taxes.*fn7 The Bankruptcy Court found, and it is also uncontested, that Bertuccio's license would have been promptly 21 reinstated had he paid the taxes owed to the EDD. By denying Bertuccio's request for 22 reinstatement of his license, Defendants affirmatively acted in continuation of an action to recover 23 on a claim, and thus violated the automatic stay provision. See Eskanos & Adler, P.C. v. Leetien, 24 309 F.3d 1210, 1215 (9th Cir. 2002) (holding that "§ 362(a)(1) imposes an affirmative duty to 25 discontinue post-petition collection actions.").
suspending Bertuccio's contractor's license." See EDD Appellant's Opening Brief at 12. This statement, however, is in the context of arguing for the "police powers" exception to the automatic 28 stay provision, an argument more fully addressed below.
Defendants argue that they did not actively seek collection of the tax liability after receiving
The automatic stay provision, § 362(a)(1), plainly states that "the commencement or
2."Police Powers" Exception to Automatic Stay
include governmental actions to enforce a money judgment. "This exception is intended to allow 13 governmental units to sue a debtor 'to prevent or stop violation of fraud, environmental protection, 14 consumer protection, safety, or similar police or regulatory laws, or attempting to fix damages for 15 violation of such a law . . . .' House and Senate Reports (Reform Act of 1978) (H.Rep. No. 595, 95th Cong., 1st Sess. 343 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 52 (1978)). See In re
To assess whether a state's administrative actions are within the
scope of the police powers
exception, the Ninth Circuit has identified two tests: the
pecuniary purpose and the public policy 20 tests. See In re Dunbar,
235 B.R. at 465. The Ninth Circuit Bankruptcy Appellate Panel
describes 21 the two tests as follows: 22
The "police powers" exception to the automatic stay provides:
The filing of a petition under section 301, 302, or 303 of this title, or of an application under section 5(a)(3) of the Securities Investor Protection Act of 1970, does not operate as a stay--
(4) under paragraph (1), (2), (3), or (6) of subsection (a) of this section, of the commencement or continuation of an action or proceeding by a governmental unit or any organization exercising authority under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on
Their Destruction, opened for signature on January 13, 1993, to
enforce such governmental unit's or organization's police and
regulatory power, including the
enforcement of a judgment other than a money judgment, obtained in an
action or proceeding by the governmental unit to enforce such
governmental unit's or
organization's police or regulatory power;
U.S.C. §362(b)(4) (emphasis added). By its own terms, the "police
powers" exception does not
Dunbar, 235 B.R. 465, 471 (9th Cir. BAP 1999), aff'd, 245 F.3d 1058
(9th Cir. 2001).
Under the "pecuniary purpose" test, the court must determine whether the government action relates "primarily to the protection of the government's pecuniary interest in the debtors' property or to matters of public safety and welfare." See In re Universal Life Church. Inc., 128 F.3d 1294, 1297 (9th Cir. 1997), cert. denied, 524 U.S. 952, 118 S. Ct. 2367, 141 L. Ed. 2d 736 (1998) (citing N.L.R.B. v. Continental Hagen Corp., 932 F.2d 828, 833 (9th Cir. 1991)). "Indeed, most government actions which fall under [§ 362(b)(4)] have some pecuniary component, particularly those associated with fraud detection. This does not abrogate their police power function. Only if the action is pursued 'solely to advance a pecuniary interest of the governmental unit' will the automatic stay bar it." Universal Life Church, 128 F.3d at 1299 (9th Cir. 1997) (quoting Thomassen, 15 B.R. at 909).
The "public policy" test distinguishes between those proceedings that effectuate public policy and those that adjudicate private rights. Universal Life, 128 F.3d at 1297; In re Charter First Mortg., Inc., 42 B.R. 380, 383 (Bankr. D. Or. 1984). Under the latter test, the court considers whether the administrative agency is exercising legislative, executive, or judicial functions. In re Poule, 91 B.R. 83, 86 (9th Cir. BAP 1988). "Where the agency's action affects only the parties immediately involved in the proceedings, it is exercising a judicial function and the debtor is entitled to the same protection from the automatic stay as if the proceeding were being conducted in a judicial form." Id.
In re Dunbar, 235 B.R. at 471.
because the employment taxes assessed on Bertuccio would eventually go toward instruments like 8 the State Unemployment Insurance fund, the State Unemployment Disability Insurance fund, and 9
Defendants argue that both the pecuniary purpose and public policy tests are satisfied Employment Training Taxes, all of which benefit the public. The Court rejects Defendants' 10 arguments, and agrees with the Bankruptcy Court that neither "police powers" exception to the automatic stay is satisfied. See, e.g., In re PMI-DVW Real Estate Holdings, L.L.P., 240 B.R. 24, 31 (Bankr. D. Ariz. 1999) ( noting that the "police powers" exception "allows a governmental unit to 13 pursue actions to protect public health and safety, however Congress intended this exception to be 14 given a narrow construction").
based on the evidence before it, that the suspension of Bertuccio's license was solely pecuniary.
Bertuccio's license was not suspended based on any determination of fraud, public safety, or 18 welfare, but was instead suspended solely for failure to pay taxes. Indeed, Bertuccio's license 19 would have been promptly reinstated had he paid the taxes owed to the EDD. See Bertuccio I at 20 616-17 (citing Notice of Suspension to Bertuccio, which stated: "This suspension will be lifted 21 when you submit proof from the [EDD] that the liability has been satisfied. Thus, the Debtor 22 needed to do nothing more than pay the debt owing to the EDD."). Moreover, the EDD admitted 23 that it required review of the debtor's plan before making its decision on releasing the suspension 24 because it wanted to ensure its claims would be paid under the plan. See id. Finally, as soon as the EDD authorized the CSLB to remove the suspension, the CSLB did so without question and 26 without inquiry into Bertuccio's qualifications. As the Bankruptcy Court aptly summarized: "It 27 was simply a matter of owing back taxes. It is clear, therefore, that the continued suspension of
With respect to the pecuniary purpose test, the Bankruptcy Court properly determined, [Bertuccio's] license was done solely to advance the pecuniary interests of the EDD." Id. at 617; 2 compare In Re Poule, 91, B.R. 83 (9th Cir. BAP 1988) (finding legitimate police power exception 3 where reason for suspension of debtor's license involved undisputed findings of "willful 4 misconduct and fraudulent activities" against customers).
public policy test. As stated by the Ninth Circuit Bankruptcy Appellate Panel: "The purpose of 7 [the California Contractor's License Law] is 'to guard the public against the consequences of 8 incompetent workmanship, imposition, and deception.'" See In Re Poule, 91 B.R. at 87 (citing 9
The Bankruptcy Court also properly determined that Defendants' actions did not satisfy the Asdourian v. Araj, 38 Cal. 3d 276, 282, 211 Cal. Rptr. 703, 696 P.2d 95 (1985)); see also Chao v. Hosp. Staffing Servs. Inc., 270 F.3d 374, 389 (6th Cir. 2001) ("the public policy test calls upon ular lawsuit is undertaken by a courts to analyze whether a partic governmental entity in order to 12 effectuate public policy or, instead, to adjudicate private rights."). Defendants' suspension of 13
Bertuccio's license in August 2003 did not implicate the public
interests of preventing incompetent 14 workmanship or fraud. Instead,
the suspension was simply a means of collecting a tax, and was 15
completely unrelated to the debtor's qualifications or
competence.*fn8 In these circumstances, where 16 the
reason underlying the suspension had nothing to do with the public
policy interests of the
California Contractor's License Law (e.g., protection of the public
against incompetent, deceptive, 18 or fraudulent conduct), the public
policy exception to the automatic stay provision is not satisfied. 19
contractor's license application nullifies the basis for a
violation of the automatic stay. Both state 22 entities assert that
Bertuccio likely would not have received his contractor's license if
the prior 23 convictions had been revealed. Thus, Defendants contend
that Bertuccio lacks standing, as his 24 contractor's license was void
ab initio. Moreover, Defendants repeatedly suggest that "the 25 26
become aware of Bertuccio's criminal history and misrepresentations
on his license application. See Bertuccio I at 617 n.44. In August
2003, the sole reason for Bertuccio's suspension was the 28 tax debt
owed to the EDD.
3.Bertuccio's Entitlement to Reinstatement of License
Defendants argue that Bertuccio's failure to disclose his prior criminal convictions on his equities" in this case do not support the Bankruptcy Court's determination that Bertuccio "was 2 entitled to relief." See, e.g., EDD Appellant's Opening Brief in Case No. 09-cv-5209-LHK at 19. 3
4 suspension, negate the fact that the EDD and CSLB willfully violated
the automatic stay.*fn9 The
Ninth Circuit's decision in Southwest Adm'rs, Inc. v. Rozay's
Transfer, 791 F.2d 769 (9th Cir.
Defendants are incorrect that Bertuccio's bad acts, discovered four
years after the license
1986) is instructive. The Southwest court distinguished between two
types of misrepresentations: 7 fraud in the inducement and fraud in
the execution. Id. at 774. Fraud in the inducement occurs 8 when a
misrepresentation is used to induce a party to assent to something she
otherwise would not 9 have, while fraud in the execution arises when
an agreement is executed without knowledge, or a 10 reasonable
opportunity to obtain knowledge, of its character or its essential
terms. Id. The Ninth
Circuit held that "fraud in the execution results in the agreement
being void ab initio
fraud in the inducement makes the transaction merely voidable." Id.
Here, the application was 13 evaluated by the CSLB, who had ample
opportunity to investigate. There is no indication by any 14 of the
parties that Bertuccio's criminal record was difficult to locate, or
did not appear in the 15 standard databases utilized for such
information. Furthermore, while it is true that the CSLB may 16 have
denied Bertuccio's application if his criminal convictions were
disclosed, the evidence 17 presented to the Bankruptcy Court did not
establish with certainty that his application would have 18 been
denied. For this Court to find that a denial would have been certain
calls for speculation 19 inappropriate on an appeal.*fn10
Thus, the debtor's fraud lies within the category of fraud in
the 20 inducement, making the license voidable. As the license is not
clearly void ab initio, there is no merit to Defendants' claim that there is no actual case or controversy
because Bertuccio lacks 2 standing.
cases. In the first case, In re Feature Homes, Inc., 116 B.R. 731 (Bankr. E.D. Cal. 1990), the 5 debtor was a corporation whose corporate status was suspended for failure to pay taxes. The 6
Defendants protest that the Bankruptcy Court did not fully consider two arguably similar Feature Homes Bankruptcy Court refused to construe the State's refusal to issue a certificate of 7 revivor as an affirmative action violating the automatic stay. Feature Homes, however,is 8 distinguishable in significant respects. Most importantly, the Feature Homes court conducted no 9 analysis regarding whether the State's conduct was an affirmative act violating the automatic stay 10 provision because it had absolutely no tangible impact upon the debtor's business. See Feature Homes, 116 B.R. at 733. Moreover, the Feature Homes court reserved the possibility to compel a revivor if the suspension ever became necessary for the debtor's continued business operations. Id. 13
Here, it is undisputed that Bertuccio sought reinstatement of his contractor's license in order to 14 continue his business operations. Consequently, Defendants' argument that Feature Homes is 15 somehow dispositive of the present case is unpersuasive.
17 dealt with a debtor whose driver's license was suspended due to unpaid fines for traffic violations.
The Kimsey Bankruptcy Court held that the State was not in violation of the automatic stay when it 19 refused to lift the suspension of the driver's license. However, as the Bankruptcy Court reasoned 20 below, the suspension in Kimsey involved express issues of public safety and punishment, thus 21 distinguishing it from Bertuccio's suspension based solely on a tax debt. See also In re Thomas, 22 2007 Bankr. LEXIS 1320, *9 (Bankr. N.D. Cal. Apr. 5, 2007) (distinguishing Kimsey as a case 23 involving refusal to reinstate license in order to enforce traffic laws as a matter of public safety, 24 rather than for any financial reasons).
26 violated the automatic stay provision of the Bankruptcy Code by refusing to reinstate Bertuccio's
The second case cited by Defendants, In re Kimsey, 263 B.R. 244 (Bankr. E.D. Ark. 2001),
In sum, on de novo review, the Court affirms the Bankruptcy Court's ruling that Defendants contractor's license for twenty-four days despite actual notice of Bertuccio's bankruptcy petition. 2
The Court now turns to the issues of damages and attorney's fees, respectively.
5 an award of actual damages, costs, and attorney fees to the extent she was injured by the 'willful 6 violation.'" See In re Taylor, 884 F.2d 478, 483 (9th Cir. 1989). "Section 362(h) provides little 7 guidance regarding the applicable standards for awarding actual damages. Nonetheless, most courts 8 apply a reasonableness analysis. Section 362(h) 'requires that the injured party be awarded the 9 entire amount of actual damages reasonably incurred as a result of a violation of the automatic 10 stay.'" See In re Roman, 283 B.R. at 11. On appeal, Bertuccio challenges the Bankruptcy Court's
ruling that he did not establish any actual damages as a result of the violation of the automatic stay
provision for the twenty-four day period between October 7, 2004 and November 1, 2004. 13
14 damages ruling. Bertuccio offered three forms of evidence to prove lost profits. See Bertuccio I at 621-25. First, Bertuccio submitted two flooring installation contracts from October 4 and 7, 2004, 16 alleging lost profits of about $14,000. However, as the Bankruptcy Court determined at trial, both 17 contracts were entered into and cancelled before Bertuccio's bankruptcy petition was even filed.
Id. No evidence was presented to show why the two contracts were
cancelled. Thus, the 19 cancellation of these two contracts could not
have been due to the automatic stay violation because 20 the contracts
were cancelled before Bertuccio even filed for bankruptcy. 21
installation component of his business before his license was
suspended in August 2003. However,
Bertuccio's credibility was severely impeached at trial, and he
offered absolutely no documentary 24 evidence or business records,
such as accounting records identifying income and expenses, of any 25
kind in support of his testimony of income. Moreover, Bertuccio's
testimony related to alleged 26 earnings prior to the suspension of
his license in August 2003. At the time of the October 2004 27
bankruptcy filing, Bertuccio had not installed flooring in over a
year. Although courts have
Upon a finding of a willful violation of the automatic stay provision, a debtor is "entitled to
The Court's review of the record reveals no abuse of discretion in the Bankruptcy Court's Second, Bertuccio testified that he averaged a net profit of $40,000 per month for the recognized that lost profits are "necessarily an estimate" and need not be shown with "mathematical precision," Bertuccio failed to provide any support to his testimony of lost income.
See, e.g., Humetrix, Inc. v. Gemplus S.C.A., 268 F.3d 910, 919 (9th Cir. 2001) (although lost profits 4 are "necessarily an estimate," an appellate court may uphold an award of damages that is supported 5 by substantial evidence).
that, at the trial of this matter, [Bertuccio] testified truthfully, including truthful testimony about his 8 prior lies on his application for the license." See Bertuccio Reply Brief in Case No. 09-cv-05454-9
On appeal, Bertuccio downplays his lack of credibility by stating that: "the record shows
LHK at 5 (emphasis added). This odd argument has no merit, and misrepresents Bertuccio's 10 actions at trial. Even at the 2008 trial, Bertuccio first lied about having a criminal record, and then only admitted his extensive criminal history after cross-examination by Defendants' counsel in open court. In any event, the Bankruptcy Court did not abuse its discretion in deciding not to rely 13 solely on Bertuccio's testimony, unsupported by any documentary or accounting records, with 14 respect to lost income. 15
Finally, Bertuccio also submitted a telephone log of potential customer calls between October 8, 2004 and October 31, 2004. The phone log, however, did not differentiate between 17 calls for potential installation projects and other projects. Furthermore, the Bankruptcy Court 18 found that "many of the calls" related to materials sales and inquiries regarding warranties for past 19 installations. See Bertuccio I at 624-25. The Bankruptcy Court did not exceed its discretion by 20 determining that such speculative evidence does not establish actual damages with respect to 21
Bertuccio's potential installation projects.
fees under Section 362(h). In determining the appropriate amount of attorneys' fees, "the court 27 looks to two factors: '(1) what expenses or costs resulted from the violation and (2) what portion of
Thus, the Court can no discern no abuse of discretion in the Bankruptcy Court's ruling that Bertuccio failed to establish actual damages.
C.Attorneys' Fees and Costs
In addition to seeking damages, a debtor is expressly allowed to seek costs and attorneys' those costs was reasonable, as opposed to the costs that could have been mitigated.'" See In re Roman, 283 B.R. at 12. Under recent Ninth Circuit authority, however, attorneys' fees and costs 3 recoverable for violations of the automatic stay are limited to work performed prior to the 4 remedying of the stay violation. See Sternberg v. Johnston, 595 F.3d 937, 949 (9th Cir. 2009)
(actual damages include attorney's fees incurred seeking to enforce the automatic stay, but do not 6 include attorney's fees incurred in prosecuting the adversary proceeding to obtain damages). 7
Finally, a court may consider the equitable doctrine of "unclean hands" in evaluating requests for 8 attorneys' fees and costs in relation to a bankruptcy proceeding. See In re Gustafson, 111 B.R. 282 (9th Cir. BAP 1990), overruled on other grounds by In re Gustafson, 934 F.2d 216 (9th Cir. 1991).
In light of Sternberg, the Bankruptcy Court took a two-prong approach to deciding attorneys' fees for this case. First, the Bankruptcy Court denied the bulk of attorneys' fees and costs because, on counsel for Bertuccio's own account, only $4,084.75 of the fees sought were 13 incurred prior to reinstatement of Bertuccio's license on November 1, 2004. See Bertuccio II at *21. The Bankruptcy Court denied the fees incurred after reinstatement of the license, fees which 15 amounted to $28,177, as unrecoverable under Sternberg. See id. at *22. Second, the Bankruptcy Court denied the remainder of attorneys' fees (the $4,084.75) on the basis of Bertuccio's bad faith 17 actions ("unclean hands"). 18
This Court finds that the Bankruptcy Court did not abuse its discretion in either respect.
The Ninth Circuit, in Sternberg, directly addressed the question of attorney's fees incurred to 20 obtain damages (as opposed to those incurred seeking to enforce the automatic stay), and answered 21 that those fees are not recoverable. Although noting that Sternberg "weakens substantially the 22 effectiveness of the automatic stay," the Bankruptcy Court found itself bound, as this Court is also 23 bound, to follow direct Ninth Circuit authority. Thus, the Bankruptcy Court properly found that 24 the fees incurred after reinstatement of Bertuccio's license are not recoverable.*fn11
26 authority of a bankruptcy court, and was not limiting the availability of contempt sanctions, including attorney's fees, as an option where otherwise appropriate. See 595 F.3d at 946 n.3. 27
Counsel for Bertuccio suggests that the Court remand to the Bankruptcy Court the issue of whether attorney's fees are appropriate as a "civil contempt sanction." See Bertuccio Reply in Case No. 09-28 cv-5454-LHK at 3. The Court declines to remand on that basis. The Bankruptcy Court could have
The Bankruptcy Court was also within its discretion to deny the
remainder of the fees based
on the unclean hands doctrine. Although hesitant to undercut the
policy arguments in favor of 3 remedying violations of the automatic
stay provision, the Bankruptcy Court found that, in these 4
"unusual circumstances," the equitable considerations outweighed any
such policy concerns. See 5 id. at *27. Here, Bertuccio knew he
procured his contractor's license by lying on the application, 6 yet
still sought recovery of such a fraudulently procured license. As the
Bankruptcy Court noted, 7
Bertuccio's unclean hands "strike at the very heart of the basis for this adversary proceeding." See 8 id. at *24. Bertuccio did not just misrepresent his criminal history on his license application, but he 9 also misrepresented that criminal history all the way through four years of bankruptcy litigation, 10 and was only exposed at trial in February 2008. In light of these egregious facts, the Bankruptcy Court's decision denying the remainder of fees was not an abuse of discretion or erroneous application of law.
For the reasons specified above, the Court affirms the Bankruptcy
Court's decisions with
respect to the rulings on violation of the automatic stay, damages,
and attorneys' fees and costs. 16
The appeals in these three related cases are hereby dismissed. The
Clerk shall close the file.
IT IS SO ORDERED.
issued attorney's fees as a civil contempt sanction for violation of the automatic stay even before Sternberg. See In re Dyer, 322 F.3d 1178, 1189 (9th Cir. 2003). Sternberg does not hold that a bankruptcy court must consider attorney's fees as a civil contempt sanction, but merely clarifies 26 that the court may still do so where appropriate. In light of the permissive nature of civil contempt sanctions and the Bankruptcy Court's view that Bertuccio's unclean hands outweighed otherwise 27 strong policy interests in providing a remedy for violation of the automatic stay provision, the Court does not find remand necessary or appropriate in this instance.