In re Manley Toys Ltd.

In re: MANLEY TOYS LIMITED, Debtor in a Foreign Proceeding.

Case No. 16-15374 (JNP)

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW JERSEY

June 21, 2018

Chapter 15

MEMORANDUM DECISION GRANTING, IN PART, AND DENYING, IN PART, AVIVA'S REQUEST FOR REIMBURSEMENT OF FEES

JERROLD N. POSLUSNY, JR., U.S. Bankruptcy Judge

Before the Court is the application for payment of attorney fees ("Fee Application") filed by ASI, Inc., f/k/a Aviva Sports, Inc. ("Aviva"), seeking $282,966.49 in fees and costs incurred by its attorneys Weisbrod, Matteis & Copley, PLLC. ("Aviva's Counsel"), as damages for prosecuting its motion for sanctions (the "Sanctions Motion"), Dkt. No. 144, against Toy Quest Ltd. ("Toy Quest"), for Toy Quest's willful violation of the stay imposed by order of this Court on April 1, 2016 (the "Stay Order"). Dkt. No. 18. On February 14, 2018, the Court entered an opinion determining that Toy Quest had violated the stay, and an Order granting Aviva's Sanctions Motion (the "Sanctions Order"). The Sanctions Order allowed Aviva to submit a request for the fees and costs reasonably necessary to bring the Sanctions Motion.

Because Aviva is entitled to recover only for "reasonably necessary" attorney fees and costs, the Court will grant the application in part, and deny it in part.

Jurisdiction

The Court has jurisdiction under 28 U.S.C. § 157(b)(1) and § 1334(b) and (d). Venue is proper in this Court under 28 U.S.C. § 1410. This matter is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(1), and (2)(A), (G) and (O).

Background

This issue relates to a garnishment action (the "Garnishment Action") currently pending in the United States District Court for the Middle District of Tennessee (the "Tennessee Court"). The Garnishment Action involves $97,654.31 on deposit with the Tennessee Court (the "Funds"), and there is a dispute as to whether the Funds are owed to Manley Toys Limited (the "Debtor") or to Toy Quest. The Debtor filed a Chapter 15 petition for recognition (the "Debtor's Petition") and this Court entered the Stay Order on April 1, 2016. Dkt. No. 18.

On November 15, 2016, the Tennessee Court issued an order in the Garnishment Action, which acknowledged that the action was "stayed with regard to Defendant Manley Toys Limited," but referred the case to the magistrate judge for "a determination of whether the case against the other defendants may proceed and what disposition should be made . . . of the [Funds] held by the Clerk of the Court in this matter." Dkt. No. 235-5. Following that order, the Tennessee Court entered an order granting Toy Quest's motion to intervene on December 28, 2016 (the "Tennessee Order"). The Tennessee Order stated that it was "unclear to what extent the stay impacts the rights of additional parties", and granted Aviva leave to file a response. Dkt. No. 196-5.

Instead of a response, Aviva filed a motion for a status conference and requested a continuance. Dkt. No. 196. Toy Quest filed a limited response in opposition to the request for a continuance (the "Limited Response"). The Limited Response argued that, as a matter of Tennessee law, Aviva should not be permitted to garnish the funds prior to establishing that it is entitled to them, and as such the funds belong to Toy Quest and should be released. Dkt. No. 196-7. Aviva sent notice to Toy Quest demanding that it withdraw the Limited Response, but Toy Quest declined to do so. Id. at 7.

Aviva then filed the Sanctions Motion. Dkt. No. 196. Aviva served discovery requests related to the Sanctions Motion, and the parties then engaged in protracted litigation regarding theextent to which Aviva was entitled to discovery. See Dkt. Nos. 210, 214, 215, 220, 222, 223, 226, 228, and 229. The last hearing related to discovery issues was held on July 25, 2017 (the "Discovery Hearing"), after which the parties submitted final briefs and pleadings and a hearing was held on the Sanctions Motion (the "Sanctions Hearing") on November 29, 2017. This Court issued an opinion finding that Toy Quest had violated the Stay (the "Opinion"), and issued the Sanctions Order. Dkt. No. 271. In its Opinion, the Court stated that:

While the Court does not consider this conduct to be so "outrageous" as to warrant punitive damages, the Court will award Aviva damages in the amount of reasonable and necessary attorney fees and costs. The Court cautions that only those fees reasonably necessary to establishing the elements of this Motion will be awarded.

Opinion at 15-16 (emphasis added).

Aviva then filed the Fee Application, in which it alleges that it was reasonably necessary to expend $282,966.49, in order to establish that Toy Quest violated the Stay. Dkt. No. 297. Aviva breaks down its fee request into the following general areas. First, Aviva states that it expended $10,060.50 related to the Garnishment Action itself. Aviva states it had to prepare and file a reply brief, correspond with the Tennessee Court, and participate in a teleconference regarding the matter. Id. Second, Aviva states that it expended $230,882.00 to prosecute the Sanctions Motion which is broken down as follows: (a) $153,357 for Aviva's discovery requests, discovery motions, depositions taken, and court appearances involved with that discovery; and (b) $77,525 for drafting the Sanctions Motion and arguing the matter in court. Finally, Aviva states that it expended $21,062.50 preparing the Fee Application. Aviva also seeks to recover $20,961.49 in costs involving court reporters, travel, and document copying throughout this process. Id.

Toy Quest argues that the Fee Application is exorbitant and unreasonable. Dkt. No. 311. Specifically, Toy Quest argues that the rates charged by Aviva exceed reasonable rates, given the market and the lack of complexity involved in the Sanctions Motion. Second, Toy Quest arguesthat the hours expended on the Sanctions Motion were not reasonable, and that much of the legal work involved matters that were not reasonably necessary for Aviva to establish the elements of a stay violation. Id. Toy Quest argues that the discovery conducted by Aviva was not reasonably necessary to establish its case and wound up not being relevant to the Court's decision. Id.

Aviva's reply argues that the rates charged were reasonable, and that prosecuting the Sanctions Motion required sophisticated counsel, as it is a complicated matter. Dkt. 319. Additionally, Aviva blames the excessive time spent on discovery on what Aviva argues were Toy Quest's inconsistent and uncooperative responses. Aviva also states that the Fee Application has been reduced by over $100,000 for fees written off as redundant or unnecessary. Id. Additionally, Aviva argues that "proportionality" is irrelevant to a determination of what is reasonable. Id. Toy Quest filed a sur-reply. Dkt. No. 329.

Analysis

Section 362(k)(1) requires the imposition of sanctions on a party violating the automatic stay under the following conditions: "First, the offending party must have violated the automatic stay. Second, the violation of the stay must have been willful. Finally, the willful violation must have caused Debtors some injury." In re Miller, 447 B.R. 425, 433 (Bankr. E.D. Pa. 2011) (quoting Wingard v. Altoona Reg'l Health Sys. (In re Wingard), 382 B.R. 892, 900 n. 6 (Bankr. W.D. Pa. 2008)); In re Frankel, 391 B.R. 266, 271 (Bankr. M.D. Pa. 2008). A violation of the stay is "willful" under section 362(k) "upon a finding that the defendant knew of the automatic stay and that the defendants' actions which violated the stay were intentional." In re Atl. Bus. & Cmty. Dev. Corp., 901 F.2d 325, 329 (3d Cir. 1990) (quoting In re Bloom, 875 F.2d 224, 227 (9th Cir. 1989)).

Thus, in order to prevail on the Sanction Motion, Aviva was required to show that Toy Quest was aware the Stay Order¹ was in place, and that Toy Quest's filing of the Limited Responsewas a violation of the stay. Notably, Toy Quest's motivation and intent are irrelevant to a finding that it willfully violated the automatic stay. A violation of the automatic stay is willful when the creditor knew of the stay and violated the stay by an intentional act. See Lansdale Family Rests., Inc. v. Weis Food Service (In re Lansdale Family Rests., Inc.), 977 F.2d 826, 829 (3d Cir.1992); In re Atl. Bus. & Cmty. Dev. Corp., 901 F.2d at 329.

Actual Damages

As a causational requirement of section 362(k), any compensatory damages awarded must be the result of an "actual injury." In re Russell, 441 B.R. 859, 862-63 (Bankr. N.D. Ohio 2010) (citing Archer v. Macomb Cty. Bank, 853 F.2d 497, 500 (6th Cir.1988)). "'Actual damages' are amounts 'awarded . . . to compensate for a proven injury or loss; damages that repay actual losses.'" In re Dean, 490 B.R. 662, 667-68 (Bankr. M.D. Pa. 2013) (quoting In re Copeland, 441 B.R. 352, 368 (Bankr. W. D. Wash.2010)). A "damage award must not be based on 'mere speculation, guess, or conjecture.'" Id. at 668. The party seeking recovery has the burden of proof on the issue of damages. Russell 441 B.R. at 863 (citing In re Sharon, 234 B.R. 676, 687 (6th Cir. 1999)). Of course, in order to recover attorneys' fees, "such fees must be reasonable and necessary." In re Rodriguez, 2012 WL 589553, at *5 (Bankr. D.N.J. Feb. 22, 2012) (citing Miller, 447 B.R. at 435). "It is well established that reasonable and necessary fees do not include unnecessary litigation costs." Miller, 447 B.R. at 435.

As noted, Aviva was required to show only that Toy Quest was aware of the stay, and that it took action in violation of that stay. Toy Quest had notice of the stay and had previously been before this Court defending its actions in light of the stay, therefore, Toy Quest was aware of the stay. Dkt. No. 118. As such, Aviva met its burden simply by submitting to the Court the Limited Response filed in the Tennessee Action by Toy Quest. There were no other facts necessary for Aviva to establish its case.

The Fee Application states that Aviva spent $153,357 in legal fees, and...