Weatherford v. Timmark, Carey Holdings Inc. (In Re Weatherford)

Citations: 413 B.R. 273; 2009 Bankr. LEXIS 1574; 2009 WL 2900265Docket: 19-01069

Court: United States Bankruptcy Court, D. South Carolina; April 6, 2009; Us Bankruptcy; United States Bankruptcy Court

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Judith A. Weatherford filed a complaint against Timmark, Carey Holdings Inc., Nationwide Developments, Timothy Schwartz, and Mark Carey, alleging violations of the automatic stay under 11 U.S.C. § 362 and § 105 during her bankruptcy proceedings. The U.S. Bankruptcy Court for the District of South Carolina, under Judge John E. Waites, found that the defendants willfully violated the automatic stay by obtaining and executing a judgment against Weatherford while she was in bankruptcy. The court declared the state court judgment void but recognized the underlying claim as a nondischargeable debt. Defendants were ordered to cancel the void judgment within ten days and halt all collection efforts, with noncompliance resulting in a continuing violation of the automatic stay.

Weatherford was awarded $14,758.56 in actual damages, which included previously collected amounts plus interest, $1,000 for emotional distress, $12,500 in attorney's fees, and $4,000 in punitive damages. The court confirmed its jurisdiction under 28 U.S.C. §§ 1334 and 157, determining the case was a 'core' proceeding. The findings of fact included details about a prior lawsuit initiated by Weatherford against the defendants and the subsequent legal actions leading to the violations.

On September 12, 2003, Judith Ann Tedford (also known as Judith Weatherford) and her ex-husband David Wayne Tedford filed for Chapter 7 bankruptcy (C/A No. 03-11413), failing to disclose the Timmark Suit or its parties as creditors in their financial filings. Their bankruptcy case was dismissed on November 24, 2003, due to their absence at the creditors' meeting. Weatherford subsequently filed for Chapter 13 bankruptcy (C/A No. 03-15184) on December 5, 2003, again omitting the Timmark Suit from her disclosures. Her Chapter 13 Plan was confirmed on March 30, 2004, with a claims filing deadline set for April 26, 2004.

On June 29, 2005, Timmark received an Entry of Default on their Counterclaim, but the state court complaint was dismissed on August 31, 2005, for lack of prosecution. In September 2005, Weatherford claimed to have contacted Weidner's office regarding her bankruptcy and to have provided notice, which the defendants denied receiving. 

On December 15, 2005, a judgment was entered in favor of Timmark for $34,875, accruing pre-judgment and post-judgment interest. Weidner then sought to execute the judgment on January 6, 2006. The Sheriff informed Weidner on March 2, 2006, via a nulla bona letter, that Weatherford had filed for bankruptcy, providing her case number. Following this, Weidner confirmed the bankruptcy dismissal on March 20, 2006. 

Pam Brown from the Beaufort County Sheriff’s Office testified that Schwartz requested the execution to be reworked after the dismissal. Consequently, on March 21, 2006, a Notice of Levy was posted against Weatherford’s house, demanding payment by March 28, 2006, to avoid the sale. Weatherford attempted to reach her attorney for assistance but, finding him unavailable, made two payments to the Sheriff’s Office to prevent the levy.

Beaufort County records show that Weatherford made two payments of $7,379.28 on March 31 and May 2, 2006, which were transferred to Weidner by the Sheriff's Office. On March 23, 2006, Fairbanks filed a Motion to Reconsider the dismissal of Weatherford's Bankruptcy Case. The Court granted this motion on May 11, 2006, vacating the previous dismissal from March 10 and reinstating the case. On June 26, 2006, the Sheriff's Office sent Weidner a second nulla bona letter stating Weatherford was in bankruptcy and provided the case number, although Weidner mistakenly thought it was a duplicate of the first letter and did not verify the bankruptcy status.

On August 7, 2006, Fairbanks informed Weidner that Timmark's continuation of state court actions after December 2003 violated the bankruptcy stay, making Timmark liable for damages to Weatherford. He urged Timmark to vacate its judgment and reimburse Weatherford for expenses incurred from the violation. Weidner responded on August 16, 2007, claiming he had no notice of Fairbanks representing Weatherford and requested documentation of any notification. Fairbanks replied on August 17, 2006, stating he was unaware of Weidner's representation of Timmark and noted that creditors must rectify stay violations regardless of intent. He proposed a resolution involving the return of collected sums and vacation of the judgment against Weatherford.

On December 5, 2007, the Bankruptcy Court discharged Weatherford after she completed her Chapter 13 plan, and by January 23, 2008, the case was officially closed. Shortly after her discharge, Weatherford received a call from the Sheriff's Department regarding remaining debts from the Timmark Suit, prompting her to seek Fairbanks's help, which led to the filing of this action on June 2, 2008. On September 30, 2008, Weatherford moved for Summary Judgment regarding violations of the automatic stay, but the court denied her motion due to procedural issues. As of the trial date, Weatherford had not received a return of either payment made to the Sheriff's Office. On November 17, 2008, Timmark filed a Motion for Relief from Judgment in the Court of Common Pleas to relieve Weatherford from her final judgment in the Timmark Suit. The Court must evaluate three interrelated issues to determine the validity of the Complaint.

Debtor's omission of the Timmark Suit and its Defendants from her Chapter 13 bankruptcy schedules impacts the dischargeability of the debt. Generally, a debtor completing payments under a Chapter 13 plan is entitled to discharge all debts addressed by the plan, as per 11 U.S.C. § 1328(a). A debt is considered "provided for" by a plan if it is acknowledged, even without proposed payments. However, creditors who are not scheduled and do not receive timely notice of the bankruptcy proceedings do not have their debts discharged. Since Weatherford failed to list the Timmark Suit and Defendants in her bankruptcy filings and did not acknowledge the debt in her Chapter 13 plan, the claim related to the Timmark Suit appears to be a nondischargeable debt. Defendants likely did not receive notice of Weatherford's bankruptcy until after the deadline for claims had passed, reinforcing the nondischargeability.

Additionally, the postpetition judgment obtained in the Timmark Suit raises questions about violations of the automatic stay under 11 U.S.C. § 362. The automatic stay is effective immediately upon filing for bankruptcy, prohibiting any judicial actions against the debtor for claims that arose pre-filing. This stay protects all estate property regardless of notice. Therefore, any actions taken in violation of this stay could affect the validity of the judgment obtained against Weatherford.

The automatic stay serves to protect debtors from creditor harassment and prevent a competitive rush among creditors. It becomes effective upon the filing of a bankruptcy petition, regardless of whether creditors are aware of it. In this case, Timmark's judgment against Weatherford was obtained while Weatherford's Bankruptcy Case was pending, making the judgment void ab initio due to the automatic stay, despite the Defendants' lack of notice. There is a circuit split on whether actions taken in violation of the stay are void or voidable, but local courts have consistently ruled such actions as void ab initio. The South Carolina Supreme Court has affirmed that the automatic stay limits state court jurisdiction regarding any inconsistent actions. 

Additionally, under Section 362(h), a debtor may recover damages for willful violations of the automatic stay, requiring proof of five elements: the filing of a bankruptcy petition, that the debtors are individuals, that creditors received notice of the petition, that creditors acted willfully in violation of the stay, and that the debtor suffered damages. The burden of proof for violations under 362(h) is clear and convincing evidence, and the first two elements are not contested by the parties.

The evidence indicates that the third and fourth elements of the relevant legal standard are met. Although the Defendants did not receive formal notice from the Bankruptcy Court regarding Weatherford's Bankruptcy Case, the March 2, 2006 nulla bona letter provided adequate actual notice, including the bankruptcy case number. Upon receiving this notice, the Defendants had a duty to inquire further, which would have revealed both the bankruptcy filing and the invalidity of the state court judgment against Weatherford. 

Knowledge of the bankruptcy is equated to knowledge of the automatic stay, implying that any creditor actions taken with awareness of the bankruptcy may be considered willful violations. A violation does not require specific intent; rather, it suffices that the defendant knew of the stay and intentionally acted in violation of it, as established by various case law. The Fourth Circuit notes that willful violations occur when creditors knowingly continue collection efforts despite the bankruptcy petition. 

While the Defendants' initial collection attempt on January 6, 2006, by signing a writ of execution was deemed a violation of the automatic stay, the Court determined it was not willful due to a lack of clear evidence showing that the Defendants were aware of the bankruptcy at that time. However, after receiving the nulla bona letter, the Defendants were required to ascertain the implications of the bankruptcy, including recognizing the void nature of the earlier judgment. Following the dismissal of Weatherford's Bankruptcy Case in March 2006, Defendants instructed the Sheriff's Office to proceed with the execution, which further emphasizes their obligation to act in compliance with the bankruptcy proceedings.

The Sheriff's Office issued a notice of levy on Weatherford's property, prompting her to make two payments totaling $14,758.56 to prevent its sale. Weidner accepted these payments on behalf of the Defendants, but they were made under duress due to the Sheriff's threat of levy based on a writ of execution that should have been invalidated. Although there was no automatic stay between March 10, 2006, and May 11, 2006, the payments were linked to the Defendants' attempts to enforce a void judgment. The case dismissal did not legitimize the previously void judgment, nor did it validate actions taken during the automatic stay. The second nulla bona letter dated June 26, 2006, informed the Defendants of Weatherford's reinstated Bankruptcy Case, which they failed to properly investigate. Following this reinstatement, the Defendants were obligated to return Weatherford's payments, as creditors must restore the status quo upon notice of a bankruptcy. Retaining these payments, acquired through actions violating the automatic stay, constitutes a continuing violation of the stay and may lead to contempt. Weatherford's payments are considered property of the bankruptcy estate since they were made involuntarily due to the void execution.

Defendants delayed filing a motion to vacate the judgment until November 17, 2008, and have not returned payments made by Weatherford, despite receiving notices in August 2006 advising them to do so. The Court determined that Defendants violated the automatic stay under 11 U.S.C. § 362(h) by continuing collection efforts and retaining Weatherford's property after being informed of her bankruptcy case. Consequently, the state court judgment is deemed void, and Weatherford is entitled to its cancellation, the return of $14,758.56 in payments, pre-judgment interest, damages for emotional distress, and reasonable attorney's fees. 

The Court assessed that Weatherford's payments should have been returned by June 26, 2006, and their wrongful retention deprived her estate of the ability to earn interest. Pre-judgment interest is awarded at a rate of 5.24% from June 26, 2006, until the order's entry. Emotional distress damages of $1,000.00 were granted based on credible testimony regarding anxiety and depression caused by the Defendants' actions. Weatherford also seeks attorney's fees and costs incurred during the adversary proceeding.

Fairbanks submitted an affidavit detailing attorney's fees, which the Court reviewed and deemed Fairbanks' rates of $150 per hour for himself and $50 per hour for his paralegal reasonable. The total fee request of $17,725 was found excessive under the lodestar method, leading to a reasonable award of $12,500 for attorney's fees. Weatherford also sought punitive damages under 11 U.S.C. 362(h), which the Court granted, stating that defendants disregarded the automatic stay by continuing collection efforts despite being aware of Weatherford's bankruptcy case. The Court determined an award of $4,000 in punitive damages was appropriate, acknowledging complications arising from Weatherford's failure to list defendants as creditors and the dismissal and reinstatement of her bankruptcy case. 

The Court ordered the following: 1) The state court judgment is void, and defendants must cancel it within ten days; 2) The claim underlying the state court judgment is nondischargeable; 3) All collection efforts based on the void judgment must cease; and 4) Defendants are jointly and severally liable to Weatherford for $14,758.56 in actual damages, plus interest, $1,000 in emotional distress damages, $12,500 in attorney's fees, and $4,000 in punitive damages. The order also notes amendments for clarity on nondischargeability and adopts factual findings as legal conclusions where applicable. Additionally, witness testimony regarding Weatherford's actions was referenced but lacked specific details.

Citations to the Bankruptcy Code are to the version in effect at the time of the petition, prior to the 2005 amendments by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which do not affect the outcome of this Order. Section 362(h) is now codified as 11 U.S.C. 362(k). Defendants should have sought court clarification on the automatic stay's scope; failing to do so exposes them to sanctions under section 362. Creditors who are uncertain about the stay's applicability risk contempt if they do not seek judicial guidance. The purpose of awarding damages for stay violations is to encourage creditors to obtain declaratory judgments before taking actions that could violate the stay and incur unnecessary legal costs for debtors. The South Carolina Rule of Civil Procedure 69 states that enforcement of a money judgment requires a writ of execution. Schwartz was informed in March 2006 of the dismissal of Weatherford's Bankruptcy Case, which was verified through PACER; however, he only confirmed the dismissal without reviewing relevant details regarding the automatic stay, leading to a void judgment in the Timmark Suit. The reinstatement of Weatherford's Bankruptcy Case on May 11, 2006, did not retroactively restore the automatic stay during the period of dismissal. Section 349 indicates the implications of a bankruptcy case dismissal but does not validate judgments obtained in violation of the automatic stay, suggesting Congress did not intend such an outcome.

Defendants did not attempt to retroactively annul the automatic stay to validate their judgment, and the Court has no knowledge of any post-trial developments regarding this matter. Under 11 U.S.C. § 105(a), the Court possesses broad equitable powers, enabling it to act sua sponte to prevent process abuse that could compromise the integrity of the bankruptcy system. This includes closing loopholes that could be exploited to abuse bankruptcy procedures. Actual and punitive damages can be awarded to a debtor for creditor misconduct under this section. Defendants' actions in executing a judgment voided by the Bankruptcy Code constitute an abuse of process that justifies awarding Weatherford damages, assuming relief under 11 U.S.C. § 362(h) is not available. Regarding post-judgment interest, 28 U.S.C. § 1961 mandates that it be calculated from the judgment date at a specified rate, which is 5.24% for the week preceding the second nulla bona letter. The Court determines that the state court judgment is void, leaving Defendants with only a colorable claim against Weatherford, subject to defenses and potential counterclaims. The Court opts not to address sanctions for contempt of court at this time.