Memorandum of Decision Re: Usury and Stay Violation

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re JIMMY and SHARON SHAW,                                                     No. 92-11121      Debtor. ___________________________/ JIMMY D. SHAW,      Plaintiff,    v.                                                                                                  A.P. No. 93-1038 TERRI and ROBERT WATSON,      Defendants. ______________________________/
Memorandum of Decision
     I. Introduction      This adversary proceeding was commenced by Chapter 11 debtor in possession Jimmy D. Shaw against his former wife, Terri Watson, and her present husband. The complaint alleges two separate and essentially unrelated claims: that Watson and her husband made a secured loan to Shaw at a usurious rate of interest, and that Watson violated the automatic stay by asserting control over the rents of properties in Shaw's control. The court addresses these claims separately.      II. Usury      The loan in question arose when Shaw asked Terri Watson, his former wife, to loan him about $43,000.00 to save one of his properties from foreclosure. Shaw specifically told Watson that he would have a real estate broker involved so that the loan, which would be secured by the property, would be exempt from California usury laws.      Watson agreed to make the loan at 18% percent interest. At the time (January, 1990), the maximum interest rate allowed for loans not arranged by a broker was 12%.      When the loan escrow was ready to close, Shaw signed escrow instructions naming a real estate broker as being involved in the loan. The Watsons would not have made the loan but for this representation, which was false. In fact, Shaw had not discussed this loan with the broker, who was a friend and business associate.      Shaw made payments on the loan to the Watsons until August, 1991. He filed his Chapter 11 petition on May 4, 1992. He now alleges that the loan was usurious so that no interest has accrued and the principal owed must be reduced by the amount of his payments.      While Shaw is correct in arguing that a loan is usurious even if the borrower actively solicited it and took the lead in naming the terms, where the loan was obtained through active misrepresentation the borrower may be estopped from alleging usury. Buck v. Dahlgren, 23 Cal.App.3d 779, 788 (1972). Under the facts as the court has found them, Shaw falsely represented that a broker was involved in the loan in order to induce the Watsons to make it. He is accordingly estopped from alleging usury.      III. Violation of the Automatic Stay      At the time he filed his bankruptcy petition, Shaw was the trustor under a trust established by the state court during the dissolution of his marriage to Watson. Under the terms of the trust, real property having a certain equity was to be held by Watson in trust for the children of the marriage. Shaw was entitled to substitute properties so long as the equity was maintained, and was entitled to all of the rents and profits of the properties while he lived. He was obligated to pay the encumbrances and taxes.      The real property which was the subject of the usury dispute discussed above was one of the properties in the trust. When Shaw borrowed the money from Watson, they entered into a stipulation whereby Watson could seek equitable relief from the state court if Shaw did not make the payments.      About two months after he filed his Chapter 11 petition, Shaw filed a motion in state court, joined by the children of his marriage to Shaw (who were now adults), to terminate the trust. In response, Watson began prosecuting a motion asking for additional powers pursuant to the stipulation. The state court denied Shaw's motion, and gave Watson the power to collect the rents on the properties. Watson then made demand on all the tenants of the properties for payment of the rents to her. Shaw's bankruptcy attorney immediately informed Watson's attorney that her actions were in violation of the automatic stay, and demanded that her claim to the rents be rescinded. However, Watson refused and collected the rents for about nine months, until this court entered an order on the stipulation of the parties.      Pursuant to Rule 6009 of the Federal Rules of Bankruptcy Procedure, Shaw was entitled to appear before the state court and seek termination of the trust. Watson argues that she only defended against this motion, but she did much more. She sought affirmative relief in order to enforce her rights under the loan agreement, and then proceeded to enforce those rights without obtaining relief from the automatic stay.      If a trustee or debtor in possession commences an action against a creditor, the creditor may not file a counterclaim or otherwise seek affirmative relief against the trustee or debtor in possession without first obtaining relief from the automatic stay, even if the counterclaim is compulsory. In re Sansone, 99 B.R. 981 (Bankr.C.D.Cal.1989). Thus, Watson's prosecution of her motion for additional powers was a clear violation of sections 362(a)(1), (3), (4), (5) and (6) of the Bankruptcy Code.      Even if the court were to buy Watson's argument that her actions in court were a "defense" to Shaw's motion to terminate the trust, her subsequent enforecement of her rights by diverting the rents was a separate and utterly unjustifiable violation of the automatic stay. The court notes that Shaw's attorney asserted the stay in writing and argued the existence of the stay in the state court proceedings. Watson had ample opportunity to take the simple steps necessary to place the issue before this court, and proceeded to ignore the bankruptcy laws instead.      It is clear that Watson willfully violated the stay, and that Shaw is entitled to damages, including punitive damages, pursuant to section 362(h) of the Code. It is no defense that Watson and her attorney were under the mistaken impression that the automatic stay did not apply; any act taken with knowledge of the stay is "willful" for purposes of section 362(h). In re Carroll, 903 F.2d 1266, 1272 (9th Cir.1990).      Despite Watson's flagrant and foolish violation of the automatic stay, it appears that Shaw's actual damages were not extensive. Watson admits that she did not actively seek to replace tenants who left, and as a result Shaw lost perhaps $2,000.00 in rental income. The court notes that while Watson had a continuing obligation to undo what she had done (In re Abrams, 127 B.R. 239 (9th Cir.BAP 1991)), Shaw let the situation go on for months when the matter could have been placed before this court in a matter of days. The court accordingly declines to find the large damages claimed by Shaw.      IV. Conclusion      Watson has prevailed on the usury claim and Shaw has prevailed on the claim regarding the automatic stay. Since both sides are entitled to attorneys' fees, they cancel each other out; each side shall bear his or her own attorneys' fees and costs.      The court finds actual damages on account of violation of the automatic stay in the amount of $2,000.00. It further assesses punitive damages against Watson in the amount of $7,500.00. These damages, totalling $9,500.00, shall be treated as a reduction of the principal owed to Watson as of February 4, 1993, the date the complaint in this adversary proceeding was filed.      Before entry of a judgment, the parties shall agree to the present amount owing to the Watsons, at the interest rate of 18%, taking into account the damages assessed above. If the parties cannot agree, they shall submit a written statement of their calculations. The court will then order the employment of an accountant to make the calculations, and assess the cost of the accountant against the party whose calculations are farthest from the amount found to be owed by the court after hearing the accountant and the parties. Once the amount is determined, counsel for Shaw shall submit a form of judgment declaring that amount to be the amount of Watson's secured claim.      This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and FRBP 7052.
Dated: January 19, 1994                                                                                                  _______________________                                                                                                                                                    Alan Jaroslovsky                                                                                                                                                    U.S. Bankruptcy