Opinion
Case No. 13–30959–FJB
10-03-2017
IN RE: Steven R. MCCARTHY, Debra E. McCarthy, Debtors
L. Jed Berliner, Berliner Law, Springfield, MA, for Debtors.
L. Jed Berliner, Berliner Law, Springfield, MA, for Debtors.
MEMORANDUM OF DECISION
Frank J. Bailey, United States Bankruptcy Judge
Before the Court for a determination of damages only is the "Debtors' Motion for Contempt Sanctions (Discharge Violation): Massachusetts Department of Revenue" (the "Contempt Motion") filed by Steven and Debra McCarthy, the debtors in this Chapter 7 bankruptcy case. The Massachusetts Department of Revenue (the "MDOR") has previously been found liable for having violated the injunction against collection of discharged debts codified in § 524 of the United States Bankruptcy Code (the "discharge injunction"), see In re McCarthy, 553 B.R. 459 (Bankr. D. Mass. 2016), leaving only the question of appropriate damages on account of that violation before this Court for determination.
See 11 U.S.C. § 101 et seq. (the "Bankruptcy Code" or the "Code"). All references to statutory sections are to the Bankruptcy Code unless otherwise specified.
I. FACTS AND TRAVEL OF THE CASE
On August 30, 2013, the Debtors filed a voluntary petition under Chapter 13 of the Bankruptcy Code, largely in an effort to stop the MDOR from attaching their wages on account of outstanding tax debts. The case was subsequently converted to one under Chapter 7 of the Code at the Debtors' request. Ultimately, the Chapter 7 trustee determined that there were no assets to administer, the Debtors received a discharge, and the case closed on May 1, 2014.
The tax debts owed to the MDOR on account of late-filed tax returns for the years 2001 through 2006, however, were not subject to the Debtors' discharge, and the MDOR recommenced its efforts to collect those taxes. The MDOR sent its first post-discharge bill to the Debtors on April 1, 2014, a month prior to the case closing. It sent a second, revised, tax bill on June 12, 2015, containing a recalculation and reduction in the amount of penalties sought in connection with the unpaid taxes.
In response to the MDOR's collection activities, the Debtors moved to reopen their bankruptcy case and filed the Contempt Motion, alleging that the MDOR was violating the discharge injunction through its collection efforts. Although the First Circuit had recently issued a decision holding that taxes owed on account of late-filed state tax returns (such as the Debtors' 2001 through 2006 tax debts) were not discharged in bankruptcy, see Fahey v. Mass. Dep't of Revenue (In re Fahey), 779 F.3d 1 (1st Cir. 2015), the Debtors believed that the ruling applied only to principal and interest, and not to penalties. Accordingly, the Debtors argued that the MDOR's continued efforts to collect the penalties related to the nondischarged tax debt violated the discharge injunction. In connection with the alleged discharge injunction violation, the Debtors also sought an award of attorney fees, emotional distress damages, and punitive damages against the MDOR.
In response, the MDOR first noted that, in the July 12, 2015 tax bill, it had revised and reduced the amount of penalties claimed to be owed. And as to the remaining penalties demanded, the MDOR believed they were not discharged based on the Fahey decision because they were assessed with regard to the nondischarged 2001–2006 taxes. The MDOR further argued that, under extant case law, neither emotional nor punitive damages could be assessed against it as a governmental unit, as its sovereign immunity was not waived with regard to those particular types of recovery. See, e.g. United States v. Torres (In re Torres), 432 F.3d 20 (1st Cir. 2005) ; Duby v. United States (In re Duby), 451 B.R. 664, 671 (1st Cir. BAP 2011).
Although the question of whether the assessed penalties were or were not subject to the Debtors' discharge was purely a legal issue, at the initial hearing on the Contempt Motion, held July 22, 2015, Debtors' counsel, L. Jed. Berliner ("Attorney Berliner"), requested discovery with regard to whether there was "sufficient numerosity to establish a class action," 7/22/15 Hr'g Transcript, at 3:2–3, ECF No. 68, and to whether emotional distress and/or punitive damages were warranted. The presiding bankruptcy judge, Judge Henry J. Boroff, set a discovery deadline of November 20, 2015 and continued the matter for a nonevidentiary hearing in December 2015.
Shortly thereafter, in August 2015, the Debtors moved to amend the Contempt Motion to add Mark E. Nunnelly, Commissioner of the MDOR, as an additional respondent. In the face of stringent opposition from the MDOR, the Debtors ultimately withdrew that motion.
The day before the continued hearing on the Contempt Motion, and nearly a month after the expiration of the discovery deadline, Attorney Berliner filed a "Motion to Suspend Discovery and Set Deadlines for Summary Judgment Motions" (the "Discovery Motion"). In the Discovery Motion, the Debtors again raised the prospect of seeking class relief, but abandoned their contention that emotional distress damages or punitive damages were recoverable against the MDOR. See Discovery Motion, at 2 ¶ 3, Dec. 15, 2015, ECF No. 79. But the Debtors also admitted that they had, so far, failed to promulgate any discovery on the MDOR and had not responded to MDOR's discovery. The Discovery Motion urged the Court to suspend discovery pending a ruling on the pure legal issue related to liability (i.e., the dischargeability of the penalties) and requested that the Court set a deadline for filing summary judgment motions on that issue.
At the conclusion of the hearing on the Discovery Motion, Judge Boroff set a deadline for filing summary judgment motions on the issue of liability and further ruled:
THE REQUEST TO SUSPEND DISCOVERY IS DENIED INSOFAR AS THE DEBTORS ARE ORDERED TO RESPOND TO, AND COMPLY WITH, DISCOVERY REQUESTS PREVIOUSLY MADE BY THE COMMONWEALTH OF MASSACHUSETTS, ON OR BEFORE JANUARY 15, 2016.
Dec. 16, 2015, ECF No. 84. The parties subsequently filed cross-motions for summary judgment. On July 11, 2016, Judge Boroff issued a decision on liability, granting summary judgment in favor of the Debtors, ruling that the penalties were dischargeable, even if the underlying taxes were not. See In re McCarthy, 553 B.R. 459.
A further status conference in the case was set for September 2016. Judge Boroff having retired in the interim, the case was reassigned to this Court. At the status conference, Attorney Berliner changed course from his earlier statement that punitive damages were not available and requested a new discovery deadline to allow him to explore whether the MDOR had a pattern and practice of demanding discharged penalties in other cases, which, according to Attorney Berliner, could establish that punitive damages were warranted. Attorney Berliner read Judge Boroff's ruling on the Discovery Motion as requiring him to respond immediately to the MDOR's pending discovery requests, but suspending further discovery on damages pending a determination of liability. He bolstered his argument by noting that, in the summary judgment ruling, Judge Boroff had specifically stated that "the determination of punitive damages ... has been reserved pending the outcome of the question of liability." McCarthy, 553 B.R. at 467 fn. 9.
After examining the record in the case, including Judge Boroff's ruling on the Discovery Motion and the statement in the summary judgment ruling, this Court agreed that Judge Boroff had left the door open for the Debtors to pursue additional discovery related to damages following the liability ruling. Accordingly, this Court set a new discovery deadline, allowing discovery to proceed, but only with regard to the issue of punitive damages, including discovery related to the MDOR's alleged pattern and practice of attempting to collect discharged penalties related to nondischargeable debts.
The MDOR responded by immediately filing a motion requesting a determination that punitive damages are not available under 11 U.S.C. § 106(a)(3), and asking for the reopened discovery to be suspended pending the Court's ruling. Attorney Berliner responded to that motion by recharacterizing his reference to punitive damages, claiming instead that he wanted discovery to explore the necessity of "coercive civil contempt damages." And he again referenced a need for discovery to determine whether it was appropriate to seek class certification.
At the hearing on that motion, the Court stated that class certification was inappropriate given the stage of litigation, and noted that the short discovery extension was limited only to discovery related to punitive damages. However, as Attorney Berliner conceded that punitive damages were not available, the Court ruled that discovery was concluded and set an evidentiary hearing on the issue of actual damages, including attorney's fees.
At the evidentiary hearing on damages held on January 26, 2017, the Debtors failed to appear and testify as to any actual damages sustained by them, leaving only the issue of the amount of attorney's fees compensable on account of the MDOR's violation of the discharge injunction. Attorney Berliner submitted an affidavit, along with an itemization of his fees, indicating that he and his staff had spent over 71 hours on this matter, for a total fee request of $24,627.00. He further requested compensation for costs totaling $123.50. In the course of the evidentiary hearing, the Court excluded three of the time entries, representing $547.00 in requested fees, but indicated that the Court would consider Attorney Berliner's allowance of fees with respect to the estimates of 4.5 hours spent in preparation for, and attendance at, the evidentiary hearing. As to the remaining fees, the MDOR was granted an opportunity to cross-examine Attorney Berliner, and Attorney Berliner provided additional testimony on re-direct. At the conclusion of the hearing, the parties were invited to submit post-trial briefs, which they did. Thereafter, the Court took the matter under advisement.
In addition to the arguments addressed below, during the course of the evidentiary hearing, the MDOR questioned whether Attorney Berliner's time spent defending his fee application was compensable in light of Baker Botts, LLP v. ASARCO LLC, ––– U.S. ––––, 135 S.Ct. 2158, 192 L.Ed.2d 208 (2015). The Court invited the MDOR to address this legal argument in its post-trial brief, which it failed to do. Accordingly, the Court deems the argument waived and will credit Attorney Berliner for his estimated 4.5 hours of work spent in preparation for and attendance at the evidentiary hearing. See 1/26/17 Hr'g Transcript, at 69:21–70:9, ECF No. 153.
II. DISCUSSION
1. The Analytical Framework
Violations of the discharge injunction, like violations of the automatic stay imposed by § 362 of the Bankruptcy Code, entitle debtors to actual damages incurred as a result of the violation. See Duby v. United States (In re Duby), 451 B.R. 664, 674 (1st Cir. BAP 2011) ; see also Bessette v. Avco Fin. Servs. Inc., 230 F.3d 439, 445 (1st Cir. 2000). Included among those actual damages are attorneys' fees, "provided that they are reasonable." In re Barry, 330 B.R. 28, 38 (Bankr. D. Mass. 2005). In absence of a statutorily mandated method for calculating fees, "fee-shifting" awards are generally subject to a lodestar analysis for determining what constitutes a reasonable fee. See, e.g., Lopez v. Consejo de Titulares del Condominio Carolina Court Apartments (In re Lopez), 405 B.R. 24, 30 (1st Cir. BAP 2009). The First Circuit Court of Appeals has recognized that the lodestar analysis generally mirrors the factors used to determine a reasonable fee pursuant to § 330 of the Bankruptcy Code, and has explained that:
Accordingly, cases involving awards of damages for violations of the automatic stay are relevant to an analysis of appropriate damages for a violation of the discharge injunction.
[u]nder the lodestar method, a court determines a fee award by multiplying the number of hours productively spent by a reasonable hourly rate to calculate a base figure. When computing the number of hours productively spent, the court should discount time spent on unnecessary, duplicative, or overworked tasks.
Berliner v. Pappalardo (In re Sullivan), 674 F.3d 65, 69 (1st Cir. 2012) (citations omitted).
The MDOR has raised several objections to the fees requested by Attorney Berliner. Based on its objections, the MDOR posits that Attorney Berliner should be entitled to compensation for 19.8 hours of work in this case at a rate of $125 per hour, for a total fee compensation of $2,475.00. The Court will address each of the MDOR's arguments in turn.
2. Hourly Rate
The MDOR first argues that Attorney Berliner's hourly rate of $350 must be reduced in accordance with § 106(a)(3) of the Bankruptcy Code. Section 106(a)(3) provides that an award of damages against a government unit "shall be consistent with the provisions and limitations of [ 28 U.S.C. § 2412(d)(2)(A) ]." 11 U.S.C. § 106(a)(3). Section 2412(d)(2)(A), in turn, limits the hourly rate for attorney fees to "$125 per hour unless the court determines that an increase in the cost of living or a special factor, such as the limited availability of qualified attorneys for the proceedings involved, justifies a higher fee." 28 U.S.C. § 2412(d)(2)(A).
The MDOR did not raise this argument during the course of these proceedings until the filing of its post-trial brief. It neither discussed the applicability of § 2412(d)(2)(A) during oral argument nor cross-examined Attorney Berliner relative to whether the cost of living or other special factors justified his higher hourly rate. The MDOR's failure to indicate its intention to rely on the § 2412 fee limitation in this case deprived Attorney Berliner of an opportunity to address the argument through presentation of relevant evidence during the evidentiary hearing. Because Attorney Berliner was not apprised of the MDOR's § 2412 argument prior to the evidentiary hearing, he had no opportunity to mount a defense, and the Court therefore deems this argument to have been waived. Cf. Rodriquez v. Doral Mortgage Corp., 57 F.3d 1168 (1st Cir. 1995) (where certain claims were not raised in a complaint, through other pleadings, or at oral argument, and no evidence at trial relevant to those claims was adduced, the plaintiff was not entitled to relief on those claims post-trial).
The Court notes, however, as indicated by the MDOR during cross-examination of Attorney Berliner, that the fee agreement between the Debtors and Attorney Berliner in this case recites an hourly fee of $315, not the $350 hourly fee used to calculate the instant fee request. See Discl. Of Compensation of Atty. for Debtor(s)—Amended, Sept. 25, 2013, ECF. No. 23. In light of the fact that no subsequent agreement between the Debtors and Attorney Berliner has been submitted to establish their acquiescence to an increase in the hourly rate to be charged, the Court finds that the appropriate hourly rate for Attorney Berliner's time in this matter is $315 per hour.
3. Abandoned and Unsuccessful Theories
The MDOR's most substantive objections relate to time spent by Attorney Berliner pursuing various legal theories and arguments that were ultimately abandoned—namely, time spent on emotional distress damages, punitive damages, certification of a class action, allegations premised on a prior case, In re Venne, 06–41395–HJB (Bankr. D. Mass. 2006), and the effort to add Commissioner Nunnelly as a respondent. The MDOR argues that the time spent on those endeavors was fruitless, and thus cannot be considered reasonable or necessary under the lodestar analysis.
Whether or not Attorney Berliner could or would have been successful in pursuing those various claims, the Court finds that the time spent on those unsuccessful endeavors cannot be compensated here. In analyzing allowable compensation for attorneys' fees under fee-shifting principles, the First Circuit has held that litigants "generally may not recover attorneys' fees on unsuccessful claims." Trainor v. HEI Hospitality, LLC, 699 F.3d 19, 35 (1st Cir. 2012). Here, not only were the referenced claims unsuccessful, but they were ultimately wholly abandoned by the Debtors. While much time researching the availability of the claims is reflected in the itemization of fees, the Debtors never seriously pursued those theories and, in fact, never promulgated any discovery to determine their plausibility.
Had the unsuccessful or abandoned claims been "interrelated with successful claims," i.e., had the unsuccessful claims "include[d] 'a common core of facts' or [were] premised on a 'related legal theor[y] linking [them] to the successful claim,' " then the Court could award compensation for the time spent pursuing the unsuccessful or abandoned claims. Trainor, 699 F.3d at 35 (quoting Garrity v. Sununu, 752 F.2d 727, 734 (1st Cir. 1984) ). But the factual and legal bases for entitlement to class action relief, emotional distress damages, and punitive damages, as well as time spent reviewing the Venne case and exploring the Debtors' actual damages (which the MDOR did not reference, but was clearly reflected in Attorney Berliner's time entries)—were entirely separate from the factual and legal issues related to liability. This is clear not only from the fact that the time entries on the itemization of fees clearly delineate between the issues, but also from Judge Boroff's decision that it would be more efficient to bifurcate the matter between liability and damages.
See also Bogan v. City of Boston, 489 F.3d 417, 428 (1st Cir. 2007) (explaining that hours spent on unsuccessful claims can been compensated when interrelated with successful claims "because '[m]uch of counsel's time will be devoted generally to the litigation as a whole, making it difficult to divide the hours expended on a claim-by-claim basis.' ") (quoting Figueroa–Torres v. Toledo–Davila, 232 F.3d 270, 278 (1st Cir. 2000) ).
The Court determines, upon review of Attorney Berliner's time entries on the itemization of fees, that a total of approximately 16.3 hours were spent on work relating to the abandoned and unsuccessful claims. Accordingly, the Court will reduce the total compensable hours by 16.3 for time spent on unsuccessful and abandoned claims.
Because two of the time entries—those on June 24, 2015 and July 22, 2015—lumped several tasks, some of which the Court believes are compensable, the Court estimated that .5 and .7 hours, respectively, were spent on noncompensable matters.
4. Clerical Work
The MDOR next criticizes Attorney Berliner's fee request for failing to separately itemize and reduce the hourly rate for tasks the MDOR claims are purely clerical in nature. While the Court does not dispute the MDOR's general proposition that clerical work should not necessarily be compensated at an attorney's normal hourly rate, the MDOR failed to adequately establish that the time entries it marked as "clerical" should be excluded or the hourly rate with regard to those matters reduced. During the evidentiary hearing, in response to the MDOR's suggestion that it would forego detailed cross-examination of Attorney Berliner related to work the MDOR argued was purely clerical, the Court acquiesced to the MDOR's suggestion that specific time entries be identified through post-trial briefing. But the Court specifically admonished the MDOR that the Court would need to be sufficiently persuaded that certain time entries should be compensated at a lower rate due to the clerical nature of the tasks. The Court suggested that if the MDOR needed to establish an evidentiary basis to support its argument, that it should do so during the evidentiary hearing, noting that "[i]f [the Court] can't figure out that [the] entry is [an] administrative task, then [the Court] won't be able to exclude it." 1/26/17 Hr'g Transcript, at 41:2–4. In its post-trial brief, while the MDOR provided a mark-up indicating that certain time entries should be delineated clerical tasks, it provided no further explanation for that assertion, asking only that "the Court, guided by equitable principles, take this billing practice into account in fashioning an award of reasonable attorney fees." MDOR Post–Trial Brief, at 12, Feb. 16, 2017, ECF No. 158.The MDOR having failed to specifically establish that the entries in the itemization of fees it claims were clerical in nature were in fact of the type for which a reduced hourly rate should apply, the Court declines to reduce the fee award on that basis.
5. Excessive, Vague, and Duplicative Time Entries
The MDOR also maintains that compensation should be reduced on account of Attorney Berliner's failure to sufficiently detail the activities performed in connection with certain time entries—arguing that the entries are too vague to allow the Court to assess the reasonableness or necessity of the work performed. In addition, the MDOR marked certain time entries as "excessive" or "duplicative" without further discussion. With regard to the allegedly excessive time entries, the Court has reviewed the time entries denoted as such, but is not persuaded that Attorney Berliner spent excessive time on the tasks described.
As to the allegedly vague time entries, the Court disagrees with MDOR regarding the majority of entries so marked, but does concur that the time entry for August 6, 2015, described as "detailed emt Natl Cons Bankr Rights Ctr" is too vague to establish a legitimate relation to the current litigation and will accordingly reduce Attorney Berliner's compensable time by .4 hours. The Court also agrees with the MDOR's identification of two time entries on June 10, 2015, marked "mot/sanctions," as duplicative, and will further reduce Attorney Berliner's compensable time by 2.20 hours on account of the duplicate entry. In sum, the compensable hours will be reduced by a total of 2.6 hours for vague and duplicative time entries.
6. Mitigation of Damages
In addition to substantive attacks on Attorney Berliner's time spent on various tasks in this case, the MDOR says that the fees requested should be further reduced on account of Attorney Berliner's failure to mitigate damages. First, the MDOR complains of Attorney Berliner's 14–month delay in filing the Contempt Motion following the receipt of the first tax bill in April 2014. Had Attorney Berliner acted promptly, the MDOR says, the motion would have been filed before the closing of the case an Attorney Berliner would have avoided spending time drafting the motion to reopen the case. Furthermore, the MDOR argues that, had Attorney Berliner reached out to the MDOR prior to filing the Contempt Motion, the contested issues may have been resolved more efficiently and promptly.
The MDOR is correct that, in many cases, a debtor's failure to mitigate damages, including a failure to attempt a resolution with the offending party prior to filing a contempt or sanctions motion on account of violations of the automatic stay or discharge injunction, is an important factor that may warrant the reduction of compensable attorneys' fees. See, e.g., In re Silk, 549 B.R. 297, 302 (Bankr. D. Mass. 2016) (collecting cases). Here, however, the Court cannot discern any alternative course of action that would have substantially reduced the amount of time Attorney Berliner spent on this case.
With regard to Attorney Berliner's delay in bringing the Contempt Motion, the Court finds that the delay was reasonable because, at the time the first tax bill was issued, the Fahey case, which had an important legal relationship to the issues raised here, remained pending before the First Circuit Court of Appeals. The Court finds Attorney Berliner's advice to the Debtors to await a decision in the Fahey case before proceeding with the Contempt Motion to be a reasoned, and perhaps preferable, course of action. Although Attorney Berliner did expend some time in drafting a Motion to Reopen the case, the Court notes that he has not included the fee for reopening the case in his request for cost reimbursement. And had he wanted to avoid the reopening fee, his alternative course of action would be to request the Court to delay closing of the case pending a resolution in Fahey —which request would also include the drafting of a motion.
As to Attorney Berliner's failure to contact the MDOR prior to filing the Contempt Motion, the Court finds, in this narrow circumstance, that this failure to communicate did not increase his fees substantially, if at all. The MDOR concedes that, although it ultimately removed certain penalties in its amended tax bill issued in July 2015, it remained steadfast in its contention that the remaining penalties were not discharged. The litigation that ensued was inevitable in light of that position, and no amount of pre-filing communication would have obviated Attorney Berliner's need to communicate with his clients, formulate a strategy, and fully research and brief the relevant legal issues necessary to resolve the case. Accordingly, the Court finds that, in the context of these particular proceedings, the Debtors could have done nothing more to mitigate their damages, and the Court declines to further reduce Attorney Berliner's requested fee.
7. Fee Request in Relation to the Amount of Damages
Finally, the MDOR urges the Court to consider Attorney Berliner's requested fee because, apart from obtaining a ruling that approximately $7,000 in tax penalties were, indeed, discharged, the Debtors did not establish any additional damages. According to the MDOR, the fees sought are unreasonable in relationship to the benefit of the litigation to the Debtors.
While a "Court may consider a lack of actual damages when determining the reasonableness of attorneys' fees and costs," Silk, 549 B.R. at 303 (quoting Duby v. United States (In re Duby), No. 08-1160, 2010 WL 2867447, at *2 (Bankr. D.N.H. July 21, 2010), aff'd in part and rev'd in part on other grounds, 451 B.R. 664, 674 (1st Cir. BAP 2011) ), this consideration is but "one element in the constellation of factors that the court considers when determining the quality of the results obtained," Lopez, 405 B.R. at 31 (quoting Coutin v. Young & Rubicam Puerto Rico, Inc., 124 F.3d 331, 338 (1st Cir. 1997) ). Here, in light of the reduction of fees discussed above, the Court finds that no further reduction is warranted simply because the Debtors have declined to seek compensatory damages other than attorney's fees. The legal issues raised in this case were, despite the MDOR's assertion to the contrary, more complex than those often encountered in day-to-day bankruptcy practice. In addition, in light of the changing legal landscape created by the Fahey decision and the uncertainty regarding ancillary legal issues such as those in the Contempt Motion, the Court finds that absence of damages other than attorney fees incurred in resolving this case does not mandate a reduction in the amount of compensable fees. The ruling obtained by the Debtors in this case laid to rest an unsettled issue of law likely to impact the scope of the fresh start not only for the Debtors here, but for Debtors across Massachusetts. The individual impact of the ruling in this particular case—the discharge of approximately $7,000 in penalties assessed by the MDOR—combined with impact of the decision on other Debtors, more than justifies the award of attorney's fees for the work performed in this case.
III. CONCLUSION
For all the foregoing reasons, the Court finds and rules that Attorney Berliner is entitled to compensation for 55.2 of hours of work performed in this matter at a rate of $315 per hour, resulting in a total fee award of $17,388.00. In addition, the Court will award reimbursement of costs in the amount of $95.00 An order in conformity with this Memorandum will issue forthwith.
The itemization of fees and costs requests reimbursement of $123.50 for costs incurred in connection with this matter, but there appears to be an error in the cost calculation. The itemized costs include a $65.00 charge on July 28, 2015 for a transcript and a $30.00 charge on August 11, 2015 for a recording of the hearing, totaling $95.00. An entry dated August 10, 2015 in the amount of $28.50 was added to the request for cost reimbursement, but that charge is described as a refund for an overpayment related to the transcript. Accordingly, the Court has deducted $28.50 from the costs awarded.
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