Ramirez v. Fuselier (In Re Ramirez)

OPINION

JONES, Bankruptcy Judge:

SUMMARY

Appellant, Henry M. Ramirez, Esq. (“Ramirez”), is an attorney practicing law in San Diego, California. To collect on a judgment against Ramirez, the appellee, Leonard Goldberg (“Goldberg”), a chiropractor whose practice is also located in San Diego, obtained a writ of execution from the San Diego County Municipal Court on July 13, 1998. The writ placed a levy upon money and equipment in Ramirez’s law office. On July 15, 1993, Ramirez filed a Chapter 13² petition and served the levying officer with a bankruptcy stay order. To prevent the levying officer from violating the automatic stay, Ramirez filed a motion requesting that the San Diego County Municipal Court release the levy placed on his property. The Municipal Court denied the motion. The following day, after he had received notice of the automatic stay, the Marshal removed all property from Ramirez’s law office, including his client files. As a result of the receiver’s failure to turn over the client files, the removal of the client files from the premises, and the delays in the eventual return of the client files, Ramirez sought sanctions against the receiver. Ramirez filed a motion for order of contempt in violation of the automatic stay, which the bankruptcy court denied. Ramirez appeals.

BACKGROUND

Ramirez signed a medical lien while representing Goldberg’s patients in a personal injury action. Upon settlement of the action, the hen secured payment to Goldberg for services rendered to his patients. The parties to the action settled the lawsuit, however Ramirez never paid Goldberg. Goldberg consequently filed a complaint against Ramirez. Judicial arbitration resulted in an award for Goldberg. Ramirez then requested a trial, which resulted in a judgment for Goldberg. The trial court judgment was affirmed on appeal.

To collect on the judgment, Goldberg obtained a writ of execution from the San Diego County Municipal Court on July 13, 1993. The writ placed a levy upon all money, inventory and equipment related to Ramirez’s law firm. Realizing that an inventory of the premises would take several days, the Marshal installed Appellee, E.M. Arthur (“Arthur”), as keeper on Ramirez’s property on July 14, 1993.

On July 15, 1993, Ramirez filed a petition for relief under Chapter 13 and served Arthur with a bankruptcy stay order. In an effort to prevent Arthur from removing property, Ramirez filed a motion asking the San Diego County Municipal Court to release the levy placed on his property. On July 19, 1993, the Municipal Court denied Ramirez’s motion, holding that the Marshal obtained constructive possession when Arthur became keeper of Ramirez’s property. The Marshal refused to turn over the client files and, the following day, he removed all property from Ramirez’s office, including the client files. After some delay, the client files were eventually returned to Ramirez.

Ramirez filed a motion for order of contempt in violation of the automatic stay against Goldberg, Arthur and Goldberg’s attorney, Lowell R. Fuselier (“Fuselier”), in the Bankruptcy Court for the Southern District of California. In denying the motion, the bankruptcy court concluded that the defendants did not violate the automatic stay. Ramirez appeals, contending that the bankruptcy court abused its discretion in not finding Goldberg, Fuselier and Arthur in contempt of court. We REVERSE and REMAND.

STANDARD OF REVIEW

We review a bankruptcy court’s decision to deny a motion for contempt sanctions for an abuse of discretion. See In re Cascade Roads, Inc., 34 F.3d 756, 766-67 (9th Cir.1994) (remanding for bankruptcy court to exercise its discretion regarding the imposition of sanctions for contempt) (citing In re Chugach Forest Prods., Inc., 23 F.3d 241, 244 n. 4 (9th Cir.1994)); In re Goodman, 991 F.2d 613, 620 (9th Cir.1993) (stating that, on remand, the bankruptcy court should exercise its discretion in deciding whether to deny civil contempt sanctions; noting, however, that under Section 362(h) the award of damages is mandatory).

The bankruptcy court’s findings of fact are reviewed for clear error, and the conclusions of law are reviewed de novo. In re Eastport Assoc., 935 F.2d 1071, 1079 (9th Cir.1991). Mixed questions of law and fact are reviewed de novo. In re Wade, 115 B.R. 222, 225 (9th Cir. BAP 1990), aff'd, 948 F.2d 1122 (9th Cir.1991). Statutory interpretation is reviewed de novo. Trustees of the Amalgamated Ins. Fund v. Geltman Indus., Inc., 784 F.2d 926, 929 (9th Cir.1986), cert. denied, 479 U.S. 822, 107 S.Ct. 90, 93 L.Ed.2d 42 (1986).

ISSUES

1. Whether the bankruptcy court erred in finding that the removal of the files and equipment to another location, from which they were eventually retrieved only with great difficulty and delay, did not violate the automatic stay.

2. Whether the seized property was part of Ramirez’s estate for purposes of the automatic stay after the Marshal completed its levy.

3. Whether the violation of the automatic stay warrants compensatory damages pursuant to Section 362(h).

4. Whether the violation of the automatic stay warrants punitive damages.

5. Whether Arthur, as levying officer, is immune from liability.

DISCUSSION

I. The Seizure of Client Files Violated the Automatic Stay

The automatic stay of Section 362 protects property of the estate in which the debtor has a legal, equitable or possessory interest. Interstate Commerce Comm’n v. Holmes Transp., Inc., 931 F.2d 984, 987 (1st Cir.1991). Legislative history indicates that property of the estate “includes charges on property, such as liens held by the debtor on property of a third party, or beneficial rights and interest that the debtor may have in property of another.” 124 Cong.Rec. 096 (Sept. 28,1978) (statement of Rep. Edwards), S. 17,413 (Oct. 6, 1978) (statement of Sen. DeConcini).

As recognized by the Ninth Circuit, the Section 362 automatic stay is a critical protection of bankruptcy law and quite broad in its scope:

It is designed to effect an immediate freeze of the status quo by precluding and nullifying post-petition actions, judicial or nonjudieial, in nonbankruptcy fora against the debtor or affecting the property of the estate. The automatic stay plays a vital and fundamental role in bankruptcy. The stay ensures that all claims against the debtor will be brought in a single forum, the bankruptcy court. The stay protects the debtor by allowing it breathing space and also protects creditors as a class from the possibility that one creditor will obtain payment on its claims to the detriment of all others.

Hillis Motors, Inc. v. Hawaii Automobile Dealers’ Ass’n, 997 F.2d 581, 585 (9th Cir.1993) (citations omitted).

Under California Rules of Professional Conduct, attorneys are considered fiduciary custodians of client files and are required to keep and maintain such files for five years after the conclusion of a case.³ It is well settled under California law that an attorney has a duty to promptly surrender any communicated work product contained in an attorney’s litigation file upon request of the client. Rose v. State Bar, 49 Cal.3d 646, 655, 262 Cal.Rptr. 702, 779 P.2d 761 (1989). The California Supreme Court has also noted that it is unacceptable for an attorney to require clients to repossess their own files from an attaching creditor. Ridge v. State Bar, 47 Cal.3d 952, 963, 254 Cal.Rptr. 803, 766 P.2d 569 (1989). The Supreme Court in Ridge noted that: “It is outrageous [to suggest] that a client must personally search the public record to try to learn of the status of his cases or approach an attorney’s landlord in an attempt to retrieve his case files.” Id. The Ridge court also noted that an attorney’s failure to provide a proper accounting for entrusted funds under such circumstances would be grounds for discipline whether or not financial loss has ultimately occurred. Id. at 961, 254 Cal.Rptr. 803, 766 P.2d 569.

In the instant case, the removal of the client files and equipment to another location, from which they were eventually recovered only with great difficulty and delay, affected Ramirez’s law practice. Ramirez’s inability to practice law, in turn, affected his ability to maintain a repayment plan. The serious consequences of the removal and delayed turn over of Ramirez’s client files, after notice of the automatic stay, is the type of activity that Congress intended the automatic stay to prevent. In light of the expansive parameters of the automatic stay, and the fact that Ramirez had an interest in his client files that the stay is intended to protect, we conclude that the automatic stay applied to the client files.

II. The Automatic Stay Applied to the Levied Property

Appellees argue that the automatic stay did not apply to Ramirez’s property because the completion of the levy through the installation of Arthur as keeper meant that the equipment and client files were not property of Ramirez’s estate. We disagree.

According to Cal.Civ.Proe.Code Section 687.030 (West 1987), a levying officer completes a levy by taking property into custody. Section 687.030 provides that a levying officer may take property into custody either by 1) removing the property to a safe place, 2) installing a keeper or 3) otherwise obtaining possession or control of the property. Since the Marshal installed Arthur as keeper on July 14,1993, the Marshal had custody of the property and the levy was complete from this day forward.⁴

While the bankruptcy court correctly held that the Marshal completed its levy on Ramirez’s property upon the installation of Arthur as keeper, we conclude that the bankruptcy court committed clear error in holding that the automatic stay did not apply to the levied property.

Section 362(e)(1) states:

(1) the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate....

11 U.S.C. § 362(c)(1) (emphasis added).

Appellees argue that since the Marshal completed its levy on Ramirez’s property prior to Ramirez filing his bankruptcy petition, the property was not part of the estate for purposes of the automatic stay. However, Section 542 grants to the estate a posses-sory interest in certain property that the debtor did not hold at the commencement of the bankruptcy proceeding.

Section 542(a) requires an entity holding property of the debtor to turn such property over to the trustee if the trustee can use, sell, or lease it under Section 363. In United States v. Whiting Pools, Inc., 462 U.S. 198, 203, 103 S.Ct. 2309, 2312-13, 76 L.Ed.2d 515 (1983), the Supreme Court concluded that Section 542(a) includes debtor’s property previously repossessed by a creditor. Id. at 203, 103 S.Ct. at 2312-13; see, e.g., In re Anaheim Elec. Motor, Inc., 137 B.R. 791, 794-96 (Bankr.C.D.Cal.1992) (finding that, despite the existence of a perfected and enforceable hen, where a debtor retains turnover or redemption rights under a lien or levy statute, the debtor’s interest in the property at issue does not terminate; thus, since ownership is not transferred pre-petition, the property is part of the bankruptcy estate). The Whiting Pools court recognized, however, that if the levy transfers complete ownership of the property seized to the creditor, then the debtor’s estate will not include property that a creditor seized prior to the filing of the bankruptcy petition. Id. at 209, 103 S.Ct. at 2315-16; see, e.g., In re Caldwell, 111 B.R. 836, 838 (Bankr.C.D.Cal. 1990) (holding that since terms of tax lien statute specified that “[a] levy transfers ownership in property,” the debtors’ right, title and interest in funds were transferred to the State pre-petition, and the funds never became property of the bankruptcy estate).

In the instant case, the California statute did not specify that a completed levy transfers ownership in property. Furthermore, Goldberg did not seek complete ownership of Ramirez’s property. Goldberg sought reimbursement of money resulting from judgment for chiropractic services he had performed on Ramirez’s clients. If the Marshal were to sell Ramirez’s personal property, Goldberg would get the amount provided by the judgment and Ramirez would get the remainder. Because Goldberg did not seek complete ownership of the levied property, the property was a part of the estate after Ramirez filed his bankruptcy petition. Therefore, the automatic stay applied to the levied property.

III. Imposition of Damages

The parties below filed a motion for contempt. Since the power of bankruptcy courts to issue sanctions in response to a motion for contempt is not clear in the Ninth Circuit,⁵ and since the plaintiff below was an individual, Section 362(h) provides a less troubling means for awarding sanctions in the instant case.

Section 362(h) provides, in pertinent part, that:

(h) An individual injured by any willful violation of a stay ... shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.

11 U.S.C. § 362(h) (emphasis added).

The words “shall recover” indicate that Congress intended that the award of actual damages, costs and attorney’s fees be mandatory upon a finding of a willful violation of the stay. In re Taylor, 884 F.2d 478, 483 (9th Cir.1989); In re Sansone, 99 B.R. 981, 987 (Bankr.C.D.Cal.1989).

The test for determining whether a violation of an automatic stay is willful is: 1) whether the appellees knew of the stay and 2) whether appellee’s actions, which violated the automatic stay, were intentional. In re Bloom, 875 F.2d 224, 227 (9th Cir.1989). “Knowledge of the bankruptcy filing is the legal equivalent of knowledge of the automatic stay provided under § 362.” In re Pace, 159 B.R. 890, 901 (9th Cir. BAP 1993) (citing In re Zartun, 30 B.R. 543, 546 (9th Cir. BAP 1983)). Furthermore, in determining whether the violation was willful, it is irrelevant whether the party believed in good faith that it had a right to the property at issue. Bloom, 875 F.2d at 227; Pace, 159 B.R. at 901. “Not even a ‘good faith’ mistake of law or a ‘legitimate dispute’ as to legal rights relieve a willful violator of the consequences of his act.” Sansone, 99 B.R. at 987 (quoting In re AM Int’l Inc., 46 B.R. 566, 567 (Bankr.M.D.Tenn.1985)).

Because Ramirez served appellees with a bankruptcy stay order on July 15, 1993, the appellees knew of the automatic stay on the day of the violation, July 20,1993. Furthermore, for purposes of determining whether their violation was willful, it is irrelevant that appellees might have believed that they had a right to Ramirez’s property after the state court denied Ramirez’s motion to release the levy. Appellees intended to take Ramirez’s property. Clearly, under the Bloom standard, appellees’ act of confiscating Ramirez’s property was a willful violation of the automatic stay mandating the award of compensatory damages under Section 362(h).

The status quo at the petition date consisted of a keeper in place at the debtor’s place of business, with all records intact at that location. The violation of the stay was the removal of the files and equipment to another location from which they were eventually retrieved only with great difficulty and delay. In determining the amount of actual damages to be awarded on remand, the bankruptcy court should evaluate the amount of damages caused by appellant’s failure to turn over the client files, his removal of the files from the premises after notice of the automatic stay, and the delays associated with his eventual return of the files.

IV. Punitive Damages

Ramirez further contends that punitive damages are appropriate against Goldberg and Fuselier, Goldberg’s attorney, because Fuselier approved of the removal of Ramirez’s property after notification of the bankruptcy stay order. Punitive damages will be awarded only if a defendant’s conduct was malicious, wanton or oppressive. Sansone v. Wadsworth, 99 B.R. 981, 987 (Bankr.C.D.Cal.1989) (citing Shuman v. Standard Oil Co., 453 F.Supp. 1150, 1154 (N.D.Cal.1978)).

In Sansone, the debtor filed a bankruptcy petition and then proceeded against the creditor in another case. The creditor’s attorney filed two cross-complaints against the debtor for money damages. Id. at 990. The San-sone court held that the filing of cross-complaints violated the automatic stay and warranted punitive damages because the filings were an “intentional abuse of legal power and a deliberate and arrogant defiance of federal bankruptcy law.” Id.

Although Fuselier approved of the removal of property from Ramirez’s office after notification of the bankruptcy stay order, the removal only proceeded after the Municipal Court denied Ramirez’s motion to release the levy. Because Fuselier may have believed that the Municipal Court’s validation of the levy meant he could approve of the removal, this may not constitute an “intentional abuse of legal power and a deliberate and arrogant defiance of federal bankruptcy law.” We further note the allegations of contumacious behavior and assault by Ramirez against the keeper, Arthur. The automatic stay does not justify or protect such conduct. Consequently, we remand for a determination of whether punitive damages are appropriate.

V. Arthur’s Liability

Cal.Civ.Proc.Code Section 687.040 provides in relevant part:

(a) The levying officer ... is not Hable for ... actions taken in conformance with the provisions of this title in reHance on information contained in the written instructions of the judgement creditor ... except to the extent the levying officer ... has actual knowledge that the information is incorrect....

Cal.Civ.Proc.Code § 687.040 (West 1994) (emphasis added).

AppeUants propose that Arthur is Hable for violating the automatic stay because, as keeper, he knew the stay was in effect as soon as Ramirez filed his bankruptcy petition. Although this is true, nothing in the record suggests that Arthur knew that the stay still appHed after the vaHdation of the levy by the Municipal Court. Consequently, we remand for a determination of whether Arthur actually knew that the automatic stay was in effect when he removed Ramirez’s cHent files and equipment on July 20, 1993.

CONCLUSION

Although the bankruptcy court correctly found that the levy on Ramirez’s property was complete upon the instaHation of Arthur as keeper, the bankruptcy court committed clear error in finding that Goldberg and FuseHer did not violate the automatic stay by removing the client files from Ramirez’s law office. Accordingly, we REVERSE the bankruptcy court’s denial of Ramirez’s motion for order of contempt and REMAND for a determination: 1) whether Arthur, as levying officer, knew that the automatic stay was in effect when he removed Ramirez’s property on July 20, 1993; 2) the amount of actual damages associated with the removal and delayed return of the files; and 3) whether punitive damages are appropriate.

2 . Unless otherwise indicated, all references to Chapters, Sections or Rules are to the Bankruptcy Code, 11 U.S.C. §§ 101, et seq. and to the Federal Rules of Bankruptcy Procedure, Rules 1001, et seq.

3 . California Rules of Professional Conduct, Rule 4-100 (West Supp.1995) provides in pertinent part:

(B) A member shall:

(3) Maintain complete records of all funds, securities, and other properties of a client coming into the possession of the law firm and render appropriate accounts to the client regarding them; preserve such records for a period of no less than five years after final appropriate distribution of such funds or properties; and comply with any order for an audit of such records issued pursuant to the Rules of Procedure of the State Bar.

(4) Promptly pay or deliver, as requested by the client, any funds, securities, or other properties in the possession of the member which the client is entitled to receive.

4 . Although Ramirez argues that in order to complete its levy, the Marshal needed to obtain "exclusive custody” of the property pursuant to Cal. Civ.Proc.Code § 700.070, this section only applies when a creditor chooses a levy which allows a debtor to continue running its business after a levying officer installs a keeper. Cal.Civ. Proc.Code § 700.070 (West 1987). The Marshal only allowed Ramirez to continue to run his firm after realizing that inventorying the property would take several days. Ramirez's continued practice in the levied property was not authorized by Goldberg’s instructions for the levy, and § 700.070 does not apply to the case at bar.

5 . See Goodman, 991 F.2d at 620 (stating that for debtors who are not "individuals” for purposes of Section 362(h), the proper means of compensation and punishment for willful violations of the automatic stay are bankruptcy court contempt proceedings) (citing with approval and adopting the reasoning of, inter alia, In re First RepublicBank Corp., 113 B.R. 277, 279 (Bankr.N.D.Tex.1989) (recognizing power of bankruptcy court under Section 105 and Rule 9020 to impose contempt sanctions for violation of the automatic stay)). But see In re Sequoia Auto Brokers, Ltd., Inc., 827 F.2d 1281, 1283-91 (9th Cir.1987) (finding that bankruptcy courts lack independent authority to issue contempt sanctions and stating that Section 105 is not a persuasive source of the contempt power); see also Cascade Roads, 34 F.3d at 767 (citing In re Pace, 159 B.R. 890, 904 (9th Cir. BAP 1993) (proposing that the Ninth Circuit in Goodman clearly meant 'sanctionable conduct’ when it used the term 'contempt' for violation of the automatic stay)).