Houck v. Substitute Tr. Servs., Inc. (In re Houck)

In re: DIANA HOUCK, Debtor.

DIANA HOUCK, Plaintiff, v. SUBSTITUTE TRUSTEE SERVICES, INC., Defendant.

Case No. 11-51513

Adversary Proceeding No. 15-5028

UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF NORTH CAROLINA STATESVILLE DIVISION

October 6, 2020

Chapter 13

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER GRANTING JUDGMENT TO THE PLAINTIFF

THIS MATTER is before the court after trial on the complaint of the Plaintiff, Diana Houck. This lengthy litigation grew out of a short-lived bankruptcy case—although the Plaintiff's case only lasted five days, the Defendant, Substitute Trustee Services, Inc., conducted a foreclosure sale during those five days and did not subsequently undo the foreclosure or make any attempt to validate it. After the court's February 15, 2019 Order Granting Plaintiff's Motion for Summary Judgment, Denying Defendant's Motion for Summary Judgment, and Denying Plaintiff's Motion for Sanctions determined that the Defendant violated the automatic stay of 11 U.S.C. § 362, the only issue left for the court to determine at trial was the amount of damages to be awarded to the Plaintiff. The trial presented a situation where a defendant committed a willful stay violation that continued for several years on the one hand, and a plaintiff who did not convincingly show a significant portion of her alleged injuries at trial on the other. Despite the Defendant's egregious stay violation, the court can only award damages proven by the Plaintiff. After considering the evidence and argument presented by the parties and as explained below, the court awards damages totaling $260,175.27 to the Plaintiff. The total damages consist of $20,857.11 in actual damages other than attorney's fees, $109,318.16 in attorney's fees, and $130,000 in punitive damages.

PROCEDURAL HISTORY

1. This lawsuit began over seven years ago when the Plaintiff filed her complaint in the United States District Court for the Western District of North Carolina ("District Court") on April 26, 2013. The complaint, as subsequently amended, alleges that Lifestore Bank, F.S.A ("Lifestore"), Grid Financial Services, Inc. ("Grid"), and the Defendant engaged in a conspiracy inviolation of a number of state laws that caused the Plaintiff to default on her mortgage and culminated in a foreclosure in violation of the automatic stay imposed by 11 U.S.C. § 362 during the Plaintiff's (second) bankruptcy case. The District Court referred the lawsuit to United States Magistrate Judge David S. Cayer, and Judge Cayer entered three dismissal orders between October 1, 2013 and February 20, 2014 that collectively dismissed the entirety of the Plaintiff's complaint. The Plaintiff only appealed the first dismissal order (without leave), the United States Court of Appeals for the Fourth Circuit ("Fourth Circuit") had not considered the appeal when Judge Cayer dismissed the remainder of the complaint, and, on July 1, 2015, the Fourth Circuit applied the doctrine of cumulative finality, vacated the District Court's judgment, reversed the October 1, 2013 dismissal order, and remanded the case to the District Court. Judge Cayer subsequently sent the lawsuit to this court with his September 22, 2015 Order of Referral to the Bankruptcy Court.

2. Upon receiving the lawsuit and hearing from the parties, this court entered its Order Determining the Status of This Adversary Proceeding, Examining This Court's Subject Matter Jurisdiction, Recommending Withdrawal of the Reference, and Setting Status Hearing ("Status Order") on February 5, 2018.¹After describing the lengthy procedural history of the lawsuit, the Status Order determines the status of the lawsuit after the Fourth Circuit's July 1, 2015 opinion. Houck v. Lifestore Bank (In re Houck), Nos. 11-51513, 15-5028, 2018 WL 722462, at *5-7 (Bankr. W.D.N.C. Feb. 5, 2018) [hereinafter Status Order]. The Status Order concludes that the Fourth Circuit's opinion did not disturb the two dismissal orders that the Plaintiff did not appeal, all of the claims against Lifestore and Grid had been dismissed, and the lawsuit then consisted of only the Plaintiff's stay violation claim and state law claims (except for her emotional distress claims) against the Defendant. Id. at *7. Next, the court considered whether it had subject matter jurisdiction to consider the remaining claims in the complaint. Id. at *7-12. The Status Order concludes that the court did have "arising under" jurisdiction to hear the stay violation claim, and, while it would have had "related to" jurisdiction to hear the state law claims during the pendency of the Plaintiff's base bankruptcy case, the court could not hear the state law claims after the Plaintiff's base case had been dismissed and closed. Id. Since this court could not hear the entirety of the lawsuit, the Status Order recommends that the District Court withdraw the reference so the Plaintiff could pursue it there. Id. at *12.

3. The District Court confirmed the court's analysis of the subject matter jurisdiction question but decided to proceed in adifferent manner and bifurcated the lawsuit. On February 7, 2018, the Honorable Max O. Cogburn Jr. signed an order that withdraws the reference of the state law claims, declines to exercise supplemental jurisdiction over the state law claims, and dismisses the state law claims without prejudice to the Plaintiff refiling them in state court.² Houck v. Lifestore Bank, 582 B.R. 138, 140-142 (W.D.N.C. 2018). Judge Cogburn declined to withdraw the reference of the stay violation claim. Id.

4. Accordingly, this court proceeded with the stay violation claim against the Defendant.³ After completing discovery, both parties moved for summary judgment. The court held a hearing on November 7, 2018 and entered its Order Granting Plaintiff's Motion for Summary Judgment, Denying Defendant's Motion for Summary Judgment, and Denying Plaintiff's Motion for Sanctions ("Summary Judgment Order") on February 15, 2019. First, the Summary Judgment Order rejects the Defendant's contention that the Plaintiff was not eligible to be a debtor pursuant to 11 U.S.C. § 109(g) in her second bankruptcy case. Houck v. Substitute Tr. Servs., Inc. (In re Houck), 597 B.R. 820, 828-31 (Bankr. W.D.N.C. 2019) [hereinafter Summary Judgment Order]. Next, the courtconcludes that the Defendant committed a willful violation of the automatic stay when it foreclosed on the Plaintiff's residence during her second bankruptcy case and did nothing to remedy the violation after receiving notice of the bankruptcy case later the same day. Id. at 831-35.

5. The parties disagree about when the Defendant received notice of the Plaintiff's second bankruptcy case, but the court did not have to resolve any factual disagreements about the timing of the notice because the Defendant admitted to facts sufficient to show a willful violation of the stay. After the Plaintiff commenced her second bankruptcy case on December 16, 2011 and before the court dismissed it on December 21, 2011, the Defendant conducted a foreclosure sale on December 20 at 12:57 p.m. Id. at 832. While the Plaintiff contends that her husband, Ricky Penley ("Penley"), contacted the Defendant's law firm by telephone on December 16 to bring the second bankruptcy case to its attention, Second Amended Complaint with Demand for Trial by Jury at 9, Houck v. Lifestore Bank, F.S.A., No. 5:13-CV-66 (W.D.N.C. Aug. 28, 2013), and the Defendant claims that its law firm has no record of a call from Penley between December 16 and 20, Memorandum in Support of Substitute Trustee Services, Inc.'s Motion for Summary Judgment at 6, Houck v. Substitute Tr. Servs., Inc. (In re Houck), Nos. 11-51513, 15-5028 (Bankr. W.D.N.C. Oct. 31, 2018), the Defendant admits that its law firm received notice of the second bankruptcycase from Nationstar Mortgage, LLC ("Nationstar") at 3:52 p.m. on December 20—about three hours after the foreclosure sale, Summary Judgment Order at 832. Even if Penley did not call the law firm on December 16, the Defendant conducted the foreclosure sale in technical violation of the automatic stay, and the technical violation became willful when Nationstar brought the bankruptcy case to the Defendant's attention. Id. The court expressed its displeasure with the Defendant's behavior in connection with the foreclosure and its arguments in this litigation:

Importantly, [the Defendant] does not deny that its "practice" after learning of a foreclosure sale in technical violation of the stay is to wait and see if the case is dismissed before taking steps to undo the sale. The court wholeheartedly agrees with the Plaintiff's contention that this practice is abhorrent. The court is dumbfounded by the cavalier position that [the Defendant] has taken regarding its seemingly obvious stay violation. The essence of [the Defendant's] "wait-and-see" approach is flawed and in direct conflict with a litany of case law. If [the Defendant] learns of a technical violation, it is obligated to determine the effect of the stay and remedy its violation-not wait to see if the case will be dismissed and the "barrier" of the automatic stay removed.

Id. at 834 (citations omitted). While acknowledging that it would subsequently have to determine the exact extent of the Plaintiff's damages, the court had no trouble concluding that she was injured and awarding summary judgment to the Plaintiff. Id. at 835.

6. Before the court could proceed to the issue of damages, however, it had to rule on the Defendant's objection to language it considered too harsh in the Summary Judgment Order. See Defendant's Motion Pursuant to Fed. R. Civ. P. 52 and 59 at 1-2, Houck v. Substitute Tr. Servs., Inc. (In re Houck), Nos. 11-51513, 15-5028 (Bankr. W.D.N.C. Mar. 1, 2019). After claiming for six years in this lawsuit that it had not violated the automatic stay, the Defendant admitted the stay violation but argued that it was accidental, not abhorrent, Memorandum of Law Supporting Defendant's Motion...