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IN RE SARATOGA SPRINGS PLASTIC SURGERY

United States District Court, N.D. New York


February 11, 2005.

In re SARATOGA SPRINGS PLASTIC SURGERY, PC, Debtor. ROBIN YARINSKY, Appellant,
v.
SARATOGA SPRINGS PLASTIC SURGERY, PC, Appellee.

The opinion of the court was delivered by: DAVID HURD, District Judge

MEMORANDUM-DECISION and ORDER

I. INTRODUCTION

  Robin Yarinsky ("Mrs. Yarinsky"), her attorney Wayne P. Smith, Esq. ("Attorney Smith"), and her former attorney Nancy Bunting, Esq. ("Attorney Bunting") appeal from orders of the United States Bankruptcy Court for the Northern District of New York finding that they willfully violated the automatic stay, awarding debtor Saratoga Springs Plastic Surgery, P.C. ("SSPS" or "debtor") compensatory damages, and setting forth the amount of compensatory damages. The consolidated appeals were taken on submission without oral argument.

  SSPS moved to strike appellants' brief and record on appeal. The motion to strike is wholly without merit and is denied.

  II. BACKGROUND

  The background and procedural history of this matter is set forth in a Memorandum-Decision and Order reversing the denial of permission to file a late appeal, familiarity with which is assumed. See Yarinsky v. Saratoga Springs Plastic Surgery, PC, 310 B.R. 493 (N.D.N.Y. 2004). The facts recited below are only those necessary for determination of this appeal.

  Honorable Jerry J. Scarano, New York State Supreme Court Justice ("Justice Scarano"), granted judgments against Steven Yarinsky, M.D. ("Dr. Yarinsky"), Mrs. Yarinsky's estranged husband and the sole principal of debtor, and SSPS in October 2000 and in December 2000. The judgments were for the amounts Dr. Yarinsky was in arrears for previously court-ordered child support, spousal maintenance, and counsel fees. Another Page 3 order entered in December 2000, further provided that all money judgments entered in the matrimonial action were to be filed against Dr. Yarinsky personally and against SSPS.

  SSPS filed for Chapter 11 bankruptcy protection on January 28, 2002.

  On December 17, 2002, Justice Scarano ordered a judgment in the amount of $20,000 for counsel fees against Dr. Yarinsky and SSPS. Justice Scarano further granted a judgment in favor of Mrs. Yarinsky for child support and maintenance arrearages against Dr. Yarinsky and SSPS in the amount of $151,691.58.*fn1

  Attorney Smith duly recorded the $151,691.58 judgment, caused restraining orders to be issued against the bank accounts of Dr. Yarinsky and SSPS, and filed a claim against debtor's bankruptcy estate based upon the judgment. Attorney Smith immediately moved the bankruptcy court for nunc pro tunc relief from the § 362 automatic stay, despite his belief that child support, spousal maintenance, and counsel fees were exempt. He refrained from any further actions to enforce the judgment against the debtor, pending a ruling on the motion for relief from the stay. It is also noteworthy that during the short time the SSPS account was restrained, it contained only 27 cents.

  On February 27, 2003, the Honorable Robert E. Littlefield, Jr., United States Bankruptcy Court Judge, orally denied the motion for relief from the stay and directed debtor to submit an order. Debtor submitted a written order to that effect on March 12, 2003. The order was entered on March 19, 2003.

  On the same day that it submitted the written order denying relief from the stay, March 12, 2003, SSPS moved for a finding that the automatic stay was violated and for Page 4 resultant compensatory damages. On April 23, 2003, debtor made an additional motion to extinguish the income execution, for compensatory damages, and for sanctions.

  On May 1, 2003, Bankruptcy Judge Littlefield issued a bench decision on debtor's motions, finding that the motion to extinguish the income execution was moot. However, he found that Attorney Smith, Attorney Bunting, and Mrs. Yarinsky willfully violated the stay. He determined that the state court judge had no authority to "do what he did" and there was no basis for enforcement of this state court order against property of the bankruptcy estate. Accordingly, he ordered Attorney Smith to cause the judgment to be extinguished, upon which the request for punitive damages would be denied. He further ordered that debtor was entitled to compensatory damages (attorneys fees and expenses); that debtor submit an affirmation of services within one week; and that Attorney Smith, Attorney Bunting, and Mrs. Yarinsky, who were jointly and severally liable for such damages, respond within two weeks. Pursuant to this briefing schedule the matter would be ready for decision on May 22., 2003 Thus, the motion was set down for oral decision on May 29, 2003. This oral decision was exemplified by written order filed on May 7, 2003. However, the written order provided that the affirmation of services was due within one week of that date, to wit: May 14, 2003. On May 16, 2003, the debtor filed and served the affirmation of services.

  As ordered by the bankruptcy court, Attorney Smith withdrew the income execution. He amended the income execution so it was directed only to Dr. Yarinsky, then re-issued it for execution on May 19, 2003. Due to mistake, the second income execution, although directed only to Dr. Yarinsky, referenced SSPS in the body of the text. Upon notification of the error, Attorney Smith immediately withdrew the second income execution (from the sheriff, before any account was restrained) and corrected it throughout. On May 28, 2003, at Page 5 debtor's request, the bankruptcy court issued an order to show cause why Attorney Smith should not again be sanctioned for willful violation of the stay.

  The bankruptcy court held a hearing on June 4, 2003, at which debtor's request for punitive damages was denied. Also on June 4, 2003, the bankruptcy court denied Mrs. Yarinsky's motion to file a late notice of appeal, and a written order to that effect was entered on June 10, 2003. A timely appeal of that June 10, 2003, order was filed (No. 03-CV-896), and that decision was reversed. See Yarinksy, 310 B.R. at 409. Thereafter, the appeal of the order finding a willful violation of the stay and awarding compensatory damages was perfected.

  Also on June 10, 2003, the bankruptcy court entered an order denying the portion of debtor's order to show cause related to the income execution as moot. The bankruptcy court further ordered that debtor was entitled to compensatory damages for a second willful violation of the stay to be paid by Attorney Smith "as a result of his behavior." Determination of the amount of compensatory damages was adjourned. A timely appeal of this June 10, 2003, order was filed (No. 03-CV-897).

  On July 15, 2003, Judge Littlefield further determined the amount of compensatory damages awarded to debtor to be the sum of $5,792.50, comprised of $5,758.75 in counsel fees and $38.75 in expenses. The bankruptcy court ordered that Attorney Smith, Attorney Bunting, and Mrs. Yarinsky were jointly and severally liable for $5,042.50, and Attorney Smith was solely liable for $750.00. A written order to this effect was entered on July 16, 2003. A timely appeal of this order was filed (No. 03-CV-996).

  These three appeals were consolidated and are now ready for determination. Page 6

  III. DISCUSSION

  A. Standard of Review

  In reviewing a bankruptcy court's decision, a district court applies the clearly erroneous standard to conclusions of fact and de novo review to conclusions of law. In re Manville Forest Prods. Corp., 209 F.3d 125, 128 (2d Cir. 2000); In re Petition of Bd. of Directors of Hopewell Int'l Ins. Ltd., 275 B.R. 699, 703 (Bankr. S.D.N.Y. 2002); Fed.R.Bankr.P. 8013. A bankruptcy court's decision regarding an award of fees and sanctions is subject to review for an abuse of discretion. Feldman v. United Merchants & Mfrs., Inc., No. 97 CIV. 5437(DC), 1999 WL 4929, at *1 (S.D.N.Y. Jan. 5, 1999).

  B. Willful Violation of Stay and Award of Damages

  The Bankruptcy Code provides for an automatic stay to protect the property of the bankruptcy estate from the time a bankruptcy petition is filed. 11 U.S.C. § 362(a). Property of the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." Id. § 541. Property interests are determined by state law. Butner v. United States, 440 U.S. 48, 55, 99 S. Ct. 914, 918 (1979). Relief from the automatic stay may be granted by the bankruptcy court in appropriate circumstances. 11 U.S.C. § 362(d).

  The protection of the automatic stay generally applies to actions and proceedings against the debtor and the debtor's property to recover claims that arose prior to filing of the petition. See generally 11 U.S.C. § 362(a)(1)-(8). More specifically, for example, the stay applies to "the commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced" prior to the filing of a petition, "or to recover a claim against the debtor that arose before the" filing of the Page 7 petition. Id. § 362(a)(1). However, the statute provides that filing a bankruptcy petition does not operate as a stay of certain actions, such as a criminal proceeding against a debtor or actions or proceedings whose purpose is to collect "alimony, maintenance, or support from property that is not property of the state." Id. § 362(b)(1), (b)(2)(B).

  Individuals are entitled to exempt from property of the bankruptcy estate certain property. Id. § 522. New York State has opted out of the federal bankruptcy exemption scheme. See N.Y. Debt. & Cred. L. § 282-84 (McKinney 2001).; In re Maidman, 141 B.R. 571, 572 (Bankr. S.D.N.Y. 1992); In re Kleist, 114 B.R. 366, 367 (Bankr. N.D.N.Y. 1990). Therefore, New York State debtors may only exclude property permitted by New York State law. See N.Y. Debt. & Cred. L. § 282-84; In re Maidman, 141 B.R. at 572; In re Kleist, 114 B.R. at 367. In sum, debtor's property is protected by the automatic stay unless relief from the stay is granted by the court, 11 U.S.C. § 362(d), the specific action against the property is statutorily carved out, id. § 362(b), or the property is exempt (i.e., not property of the estate), id. § 522.

  Where the automatic stay is willfully violated, the individual injured by such violation shall recover actual damages and may recover punitive damages in the appropriate circumstances. Id. § 362(h). "[A]ny deliberate act taken in violation of a stay, which the violator knows to be in existence, justifies an award of actual damages." Crysen/Montenay Energy Co. v. Esselen Assocs., Inc. (In re Crysen/Montenay Energy Co.), 902 F.2d 1098, 1105 (2d Cir. 1990). Punitive damages may be justified where there is a showing of maliciousness or bad faith. Id.

  The primary issue on these appeals is whether there was a willful violation of the stay by the first filing of the income execution against debtor's operating account and/or by Page 8 the second execution directed to Dr. Yarinsky individually but including debtor in the body of the text. If there was a willful violation, it then must be determined if an award of damages pursuant to 11 U.S.C. § 362(h) was appropriate. The parties do not dispute the facts underlying these determinations. Accordingly, the question of law receives de novo review.

  SSPS filed the bankruptcy petition seeking protection under Chapter 11 on January 28, 2002. The automatic stay went into effect at that time. Judge Scarano issued an order and judgment against debtor representing over $150,000 in arrearages in alimony, support, and counsel fees.*fn2 This was a judicial proceeding against the debtor that was commenced before the filing of the petition to recover a claim that arose prior to the bankruptcy filing, stayed pursuant to the operation of section 362(a). Accordingly, the judgement was entered in violation of the automatic stay, as noted by Judge Littlefield. Additionally, the income execution against debtor's operating account was in violation of the automatic stay. See 11 U.S.C. § 362 (2)-(6).

  Attorney Smith acted purposefully in causing the judgment to be executed against debtor's operating account in the first instance, with knowledge that the stay was in effect. Accordingly, there was a willful violation of the automatic stay with regard to the first income execution.

  Attorney Smith argues that he acted in good faith with regard to the first income execution. First, he contends that it was arguable under § 362(b)(2)(B) that the stay was not in effect because the state court action was to enforce "the collection of alimony, maintenance, or support." See § 362(b)(2)(B). However, to fall within that subsection, the Page 9 collection must be "from property that is not property of the estate." See id. The operating account of SSPS, a corporation, clearly was property of the estate. Attorney Smith's next argument, that often checking accounts are exempt from the estate pursuant to N.Y. Debt. & Cred. L. § 283 is also to no avail. All the bankruptcy exemptions for which New York law provides apply only to individual (not corporate) debtors. See N.Y. Debt. & Cred. L. § 282-83. Indeed, the exemptions for which the federal statute provides also apply only to individuals. See 11 U.S.C. § 522. Thus, as an experienced bankruptcy attorney, Attorney Smith could not have "in good faith" believed the account was exempt and therefore the stay did not apply to the collection of the alimony, maintenance, and child support judgment. Moreover, the "good faith" standard for determining whether there is a willful violation of the stay does not apply under § 362(h). Crysen/Montenay Energy Co., 902 F.2d at 1104 (noting that the good faith standard applied when sanctions were imposed as contempt for violating the automatic stay, before the passage of § 362(h)).

  With regard to the second instance, again, Attorney Smith was aware of the stay and issued the income execution (albeit through mistake).*fn3 Thus, there was a willful violation of the stay. The next determination must be whether debtor was entitled to an award of attorneys fees and expenses.

  Attorney Smith filed the first income execution but took no further action to enforce the judgment pending resolution of the motion for relief from the stay. Further, the account contained only 27 cents. As soon as ordered to do so, Attorney Smith withdrew the income execution. SSPS has not pointed out any manner in which it was harmed, and did not do so Page 10 before the Bankruptcy Court. With regard to the second income execution, an error was made leaving debtor's name in the text. Again, as soon he became aware of the error Attorney Smith withdrew the income execution (before it restrained SSPS's account).

  Debtor was not injured by the violation of the stay in either instance. It suffered no actual damages in either instance.*fn4 Accordingly, it is not entitled to an award of damages. See Salem v. Paroli, 260 B.R. 246, 257 (S.D.N.Y. 2001) (where no actual damages were suffered, no award for the violation would be made), affirmed, 79 Fed. Appx. 455 (2d Cir. 2003) (Table, text at 2003 WL 22440245); Rashid v. United States (In re Rashid), 210 F.3d 201, 209 (3d Cir. 2000) (holding that where no injury could be alleged from the violation, denial of damages was proper). Because an award of damages was improper, the remaining issue of the amount of the award and the joint, several, and/or individual liability of Attorney Smith, Attorney Bunting, and Mrs. Yarinsky are moot. Page 11

  IV. CONCLUSION

  Attorney Smith was aware of the stay and took deliberate action in causing the income execution to attach to SSPS's operating account (in both the first and second instances). Thus there was a willful violation of the automatic stay. However, debtor suffered no actual damages related to either incident and is not entitled to an award of attorneys fees under 11 U.S.C. § 362(h).

  Accordingly, it is

  ORDERED that

  1. The finding of two willful violations of the automatic stay is AFFIRMED;

  2. The award of attorneys fees and expenses in favor of debtor and against Attorney Smith, Attorney Bunting, and Mrs. Yarinsky is VACATED; and

  3. This matter is REMANDED to the bankruptcy court to enter appropriate orders in accordance with the foregoing opinion.

  IT IS SO ORDERED.


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