Bayview Loan Servicing LLC v. Fogarty (In re Fogarty)

39 F.4th 62

IN RE: Eileen FOGARTY, Debtor.

Bayview Loan Servicing LLC, Appellant,

v.Eileen Fogarty, Debtor-Appellee,R. Kenneth Barnard, Trustee, United States Trustee, Trustees-Appellees.

Docket No. 20-2187

August Term, 2020

United States Court of Appeals, Second Circuit.

Argued: June 24, 2021

Decided: July 6, 2022

John E. Brigandi, Knuckles, Komosinski & Manfro, LLP, Upper Saddle River, NJ, for Bayview Loan Servicing LLC.

Heath S. Berger (Brad A. Schlossberg, on the brief), Berger, Fischoff, Shumer, Wexler & Goodman, LLP, Syosset, NY, for Eileen Fogarty.

Before: Carney and Bianco, Circuit Judges, and Garaufis, District Judge.^†

Carney, Circuit Judge:

Debtor-Appellee Eileen Fogarty held a 99% interest in 72 Grandview LLC (the "LLC"), an entity that owned a property (the "Property") that Fogarty occupied as her primary residence. In 2010, the LLC stopped making payments on the Mortgage and Note secured by the Property, leading Appellant Bayview Loan Servicing LLC ("Bayview") in 2011 to initiate a state court foreclosure action (the "Foreclosure Action") as the owner and holder of the Note and Mortgage. Seeking a state court order that would permit the sale, Bayview named both the LLC and Fogarty as defendants in the Foreclosure Action.

In January 2018, Bayview obtained a judgment in the Foreclosure Action, which in effect authorized Bayview to sell the Property under the supervision of a court-appointed referee. The sale was scheduled for April 2018. Four days before the scheduled sale, Fogarty petitioned for bankruptcy in the Eastern District of New York under Chapter 7 of the Bankruptcy Code. On the eve of the sale, her counsel notified Bayview of her petition and her position that proceeding with the sale would violate the automatic stay triggered by her petition. See 11 U.S.C. § 362. Bayview promptly countered that, since the LLC alone owned the Property and the LLC had not filed for bankruptcy, no relevant stay was in effect. It then proceeded as scheduled and the Property was sold to a third party.

Fogarty then sought sanctions against Bayview in the bankruptcy court, asserting Bayview's willful violation of the automatic stay. See id. § 362(k). The bankruptcy court (Scarcella, J. ) denied Fogarty's motion, but on appeal the district court (Gershon, J. ) reversed, finding that because Fogarty was a named defendant in the Foreclosure Action, the sale violated the automatic stay. It further found the violation to be willful because Bayview knew of the petition when it proceeded. It remanded to the bankruptcy court for assessment and award of actual damages and consideration of a punitive damages award. Bayview now appeals.

As a matter of first impression, we hold that two of the Bankruptcy Code's automatic stay provisions, 11 U.S.C. § 362(a)(1) and (a)(2), are violated by the foreclosure sale of a property when the debtor is a named party in the foreclosure proceedings, even if the debtor's direct interest in the property is only possessory. Accordingly, we conclude that Bayview willfully violated the automatic stay when it completed the foreclosure sale while knowing that Fogarty, a named defendant in the Foreclosure Action, had filed a bankruptcy petition. Bayview could and should have sought relief in advance from the bankruptcy court. We AFFIRM the district court's order and we REMAND for further proceedings consistent with this Opinion.

BACKGROUND

I. Factual background¹

At all relevant times, Fogarty resided at the Property, a house and land located at 72 Grandview Drive in Shirley, New York. The LLC was the sole owner of the Property, and Fogarty held a 99% interest in the LLC.² Bayview was the assignee of the LLC's Note and the Mortgage on the Property. The Note and Mortgage were executed on behalf of the LLC by an individual other than Fogarty. Fogarty was not a guarantor of either the Note or the Mortgage, and the parties agree that she could not be held personally liable for the LLC's debts.

In January 2010, the LLC defaulted on the mortgage loan. One year later, in early 2011, Bayview sued the LLC in Suffolk County Supreme Court, in New York, citing the continuing default. In its complaint, Bayview named as defendants the LLC, the New York State Department of Taxation and Finance, and John Does numbered one through fifty, but not Fogarty. Bayview arranged to have the complaint served on Fogarty as the Property's occupant. In October 2014, Bayview requested that Fogarty, as "co-tenant in possession of a portion of the mortgaged premises," be substituted for John Doe #1 as a "party defendant" in the action. App'x at 113. In the same submission, it moved for a default judgment.

Over three years later, in early 2018, the state court issued a Judgment of Foreclosure and Sale (the "Foreclosure Judgment") in favor of Bayview, naming the LLC, Fogarty, and the New York State Department of Taxation and Finance as defendants in the case caption, and setting the general terms of the foreclosure sale.³ Bayview then scheduled a public auction of the Property for 9:45 a.m. on April 17, 2018 (the "Sale").

On April 13, four days before the scheduled Sale, Fogarty filed a voluntary petition for bankruptcy in the United States Bankruptcy Court for the Eastern District of New York.⁴ In her Chapter 7 petition, Fogarty stated that she resided at the Property.

On April 16, on the eve of the Sale, counsel for Fogarty contacted counsel for Bayview by phone, and in a confirmation email that evening conveyed his firm's opinion that "pursuant to 11 [U.S.C. §] 362, the automatic stay is in effect" and that "continuation of the [Sale] will be in violation of the stay." App'x at 135. The email further stated that Fogarty would seek "costs, fees and sanctions for such violation of the stay" if the Sale proceeded the next day as planned. Id.

Counsel for Bayview responded the next morning, minutes before the scheduled Sale, dismissing Fogarty's warning. He explained his view that, because the LLC is a legal entity distinct from Fogarty, Fogarty's bankruptcy petition "d[id] not stay acts against the LLC or assets of the LLC," such as the Property; thus, the impending Sale of the LLC's property would not violate the stay triggered by Fogarty's personal bankruptcy petition. Id. at 137. Bayview's counsel also warned that "any motion for sanctions against my client or my firm will be met with a cross-motion for sanctions against you, your firm and your client." Id.

Bayview proceeded with the Sale as scheduled. The Property was sold to a third party. The "Terms of Sale" document, dated April 17, in which the supervising referee set the particulars of the sale, was filed in the bankruptcy court not long after. The document named both the LLC and Fogarty as defendants in the caption. It set the date for delivery of the referee's deed as May 17.

II. Procedural history

A few weeks later, on May 11, Fogarty moved for sanctions against Bayview in the bankruptcy court. Invoking 11 U.S.C. § 362(k),⁵ she sought actual damages, costs, attorney's fees, and punitive damages based on Bayview's decision to proceed with the sale.⁶ Fogarty argued that conducting the sale constituted a willful violation of two of the Bankruptcy Code's automatic stay provisions: Section 362(a)(1), involving "the commencement or continuation ... of a judicial ... or other action or proceeding against the debtor," and Section 362(a)(2), involving "the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under [the Bankruptcy Code]." Bayview opposed the motion and cross-moved for sanctions against Fogarty.

On May 15, the bankruptcy court held oral argument and denied both motions.⁷ In a brief written order two weeks later, it emphasized that Fogarty could not be held personally liable for the LLC's default on the Note and Mortgage. In the bankruptcy court's view, the fact of her nonliability rendered the Foreclosure Action an action "solely in rem ." App'x at 218. Accordingly, Bayview did not violate the automatic stay when it proceeded with the Sale.⁸

Fogarty timely appealed the bankruptcy court's decision to the United States District Court for the Eastern District of New York, and the district court reversed the bankruptcy court's order. It identified two reasons for its ruling. First, because Fogarty was a named defendant in the Foreclosure Action and that action was the basis for the Sale, Bayview violated the stay by proceeding with the Sale. Second, the Sale "significantly lessened the barriers to evicting [Fogarty] from the Property" under New York law. App'x at 87. Thus, it reasoned, the Sale interfered with Fogarty's possessory interest in the Property. Because that interest was part of Fogarty's bankruptcy estate, it was protected by the automatic stay.

Finally, the district court determined that the stay violation was willful, explaining that the relevant inquiry for that analysis is only whether Bayview intended to take the action that violated the automatic stay. Bayview indisputably intended to do so here, with full knowledge of the bankruptcy filing.⁹ Accordingly, the district court held, Fogarty is entitled to actual damages as a sanction against Bayview. It remanded the case to the bankruptcy court to determine the appropriate amount of those damages and also to consider whether punitive damages should be awarded.

Bayview timely appealed.

DISCUSSION

On appeal from a district court's decision on matters arising from bankruptcy court proceedings, "we independently review the bankruptcy court's decision, accepting the bankruptcy court's factual findings unless they are clearly erroneous and reviewing its conclusions of law de novo ." In re DiBattista , 33 F.4th 698, 702 (2d Cir. 2022).¹⁰ "A bankruptcy court's decision on sanctions is reviewed for abuse of discretion," a standard that is necessarily met by a ruling that rests on "an erroneous view of the law or on a clearly erroneous assessment of the...