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In re Nielsen

United States District Court, D. Colorado

January 4, 2017




         It is undisputed that Appellants Heupel Law and Kevin Heupel (collectively, “Heupel”) willfully violated the automatic stay provision of the Bankruptcy Code by taking post-petition withdrawals from Appellees Dane Nielsen's and Adia Paysinger's bank accounts. The bankruptcy court awarded Mr. Nielsen and Ms. Paysinger sanctions, including attorneys' fees and punitive damages, under 11 U.S.C. § 362(k). Heupel appeals the award of sanctions, arguing: (1) the debtors were not actually injured by the stay violation and were not entitled to any damages; (2) because the debtors entered into contingency fee agreements with their attorneys, they did not actually owe attorneys' fees and therefore could not collect them under § 362(k); (3) the fees awarded were excessive; (4) the court should not have awarded any attorneys' fees incurred after the stay violation ended; and (5) the punitive damages award was not appropriate. Heupel also asks this Court to remand the case because the bankruptcy judge who initially presided over the case, Judge Brown, sua sponte recused herself from the case while this appeal was pending.

         Because the facts and legal argument relevant to this appeal are adequately presented in the briefs and record, I decide this case without oral argument. See Fed. R. Bankr. P. 8019(b)(3). As I describe below, I discern no error in the bankruptcy court's decision. I also decline to remand the case based on Judge Brown's sua sponte recusal.

         Accordingly, I AFFIRM the bankruptcy judge's decision. I also DENY as moot the debtors' Motion to Dismiss Appeal (ECF No. 14, Nielsen, No. 16-cv-00081-LTB; ECF No. 16, Paysinger No. 16-cv-00082-LTB). I DENY the debtors' Motion to Correct the Record on Appeal (ECF No. 21, Nielsen, No. 16-cv-00081-LTB; ECF No. 23, Paysinger, No. 16-cv-00082-LTB). I REMAND the case to the bankruptcy court for the limited purpose of awarding the debtors the reasonable attorneys' fees and costs incurred in defending this appeal under § 362(k).

         I. Background

         Kevin Heupel is the sole shareholder of Heupel Law. See Paysinger Bankruptcy Record (“BR”) Vol. 3 at 286, ECF No. 10. From 2008 to 2014, Heupel Law filed more consumer bankruptcy cases than any other firm in the District of Colorado. Id. The firm's success was in large part because of the unconventional billing structure it used: the “zero down” bankruptcy filing program. Under this program, a client could hire Heupel Law without paying any up-front fees. 3 BR 286, 375. Instead, a client would sign an agreement to make payments through regular automatic bank or debit card withdrawals. Id. Heupel Law typically charged $2, 500 for a chapter 7 case-an amount the bankruptcy court characterized as “significantly higher than the going rate” in this district. 3 BR 287.

         The zero-down program required clients to sign a promissary note for the full fee and to begin making payments at or soon after the initial consultation. Id. The zero-down paperwork informed clients that nonpayment would result in a collection action. Id. Clients also signed an agreement to reaffirm the debt after the petition was filed. 2 BR 159. The reason for the reaffirmation agreement was plain: As the reaffirmation document itself explained, after filing the petition, the client's debt would otherwise be discharged. See Id. The reaffirmation agreement itself was not as plain: It informed the client that reaffirmation was “voluntary” but also explained that Heupel Law was only willing to provide post-petition services “provided that” the client reaffirmed the debt. Id. Heupel Law also informed clients it would obtain court approval of the reaffirmation agreement. Id.

         From January 2012 until June 2013, Heupel Law filed almost 600 zero-down chapter 7 cases. 3 BR 375. Initially, Heupel Law filed the reaffirmation agreements for court approval. 3 BR 287, 376. But as bankruptcy courts began to deny them with increasing frequency, Heupel Law stopped filing them. 3 BR 287. By October 2012, Heupel Law was no longer filing reaffirmation agreements in the bankruptcy court, but it was continuing to collect post-petition fees. Id. Indeed, even in cases where the court had denied the reaffirmation agreement, Heupel Law continued to collect, or at least attempt to collect, fees. 3 BR 376.

         Ms. Paysinger and Mr. Nielsen were typical “zero down” clients. They had an initial consultation with a non-attorney staff member, signed a note promising to pay $2, 500, signed up for automatic bank withdrawals, and signed the reaffirmation agreement. 4 BR 83-84, 91-93, 123-24. After Heupel Law filed their chapter 7 petitions in December 2012, it did not file the reaffirmation agreements. Nonetheless, Heupel Law continued to take automatic deductions after filing the petition, taking a total of $400 from Mr. Nielsen and $661.77 from Ms. Paysinger. 3 BR 287.

         In February 2013, Mr. Nielsen contacted Heupel Law because he needed assistance defending against a motion for relief from the stay (i.e., a creditor was attempting to collect payments post-filing). 4 BR 131-32. Heupel Law agreed to assist him, but only if he paid extra. Id. Unable to pay the additional fee, Mr. Nielsen contacted Geoffrey Atzbach, a different bankruptcy attorney. 4 BR 133. Mr. Atzbach reviewed his case and discovered that Heupel Law was taking post-petition payments, which Mr. Atzbach believed was in violation of the Bankruptcy Code. Mr. Atzbach and his brother, Erik Atzbach, substituted in as counsel to pursue the stay violation claims. Because Mr. Nielsen and Ms. Paysinger are co- workers, Mr. Nielsen advised Ms. Paysinger about the stay violation claims, and the Atzbachs also substituted in as counsel for her. 4 BR 94.

         Even though it is their normal practice to contact a creditor who is in violation of stay and ask the creditor to cease its collections, the Atzbachs opted to file Motions for Orders to Show Cause in Mr. Nielsen's and Ms. Paysinger's cases without first contacting Heupel Law. 4 BR 166-67. The Atzbachs filed the show cause motions on April 12, 2013. Despite the pending show cause motions, Heupel Law continued to attempt to collect its fees from Mr. Nielsen, threatening to send his account into collections because Mr. Nielsen had closed his account and stopped the automatic payments. 4 BR 137. Heupel Law took three more automatic debits from Ms. Paysinger's account before it voluntarily stopped taking withdrawals. 4 BR 168-67.

         In its responses to the show cause motions, Heupel Law argued its failure to file the reaffirmation agreements was inadvertent and isolated. 1 BR 35-37. Heupel also argued that, as competitors of Heupel Law, the Atzbachs were trying to gain a competitive advantage by eliminating the zero-down program. 1 BR 37-38. Through counsel, Heupel later withdrew these motions in light of compelling evidence that failure to file the reaffirmation agreements was in fact a widespread and regular practice of Heupel Law.

         In early 2013-around the same time the Atzbachs substituted in as counsel for Mr. Nielsen and Ms. Paysinger-the United States Trustee began investigating Heupel Law's billing and collection practices. The trustee ultimately filed a lawsuit in July 2013, shortly after Heupel Law voluntarily stopped its zero-down program and after the Atzbachs filed the show cause motions in Mr. Nielsen's and Ms. Paysinger's cases. See Complaint, Layng et al. v. Heupel Law, PC., No. 13-0005-EEB (Bankr. D. Colo. filed July 11, 2013). The case was designated a “Miscellaneous Proceeding.” Id. The complaint alleged that Heupel's compensation and fee collection practices violated the automatic stay, discharge injunction, and other provisions of the Bankruptcy Code. See Id. The complaint also alleged that Heupel had failed to accurately disclose the terms of the client agreements. Id. It specifically named Mr. Nielsen and Ms. Paysinger as clients who had been damaged because of Heupel's practices. Id. The trustee asked the court to disgorge client fees, enjoin Mr. Heupel from practicing bankruptcy law, and declare that his practices violated the law. Id.

         In July 2013 (the same month the trustee filed the complaint against Heupel), Heupel Law voluntarily provided checks refunding the full amounts of the post-petition payments to Mr. Nielsen and Ms. Paysinger. 4 BR 112-13, 146. However, on the advice of counsel, they did not cash the refund checks. Id.; 3 BR 288.

         The bankruptcy court consolidated Ms. Paysinger and Mr. Nielsen's cases with the trustee's case, and they remained consolidated with the trustee's case until the Atzbachs asked the court to bifurcate their cases, and the court granted their requests on January 15, 2014. 1 BR 156, 158.

         The parties in Ms. Paysinger and Mr. Nielsen's cases conducted discovery until Mr. Heupel filed his own Chapter 11 bankruptcy case in May 2014 (attempting to reorganize his substantial debts), which stayed the proceedings against him personally but not against Heupel Law. 2 BR 15. However, Mr. Heupel eventually agreed to let the cases against him personally proceed. In August 2014-roughly a year after Heupel Law tendered the refund checks that the Atzbachs counseled Ms. Paysinger and Mr. Nielsen not to cash, and roughly 20 months after the trustee began investigating Mr. Heupel and Heupel Law-Mr. Heupel and Heupel Law conceded liability for willful violations of the automatic stay provision of the bankruptcy code. 2 BR 24-26. The only remaining issue before the court was damages.

         In the meantime, discovery also continued in the trustee's case. In November 2014, the trustee and Heupel agreed to a preliminary settlement where Mr. Heupel would repay $424, 000 in fees to clients. See Mot. Approve Stipulation, Layng v. Heupel, No. 13-00005-EEB (Bankr. D. Colo. filed Nov. 3, 2014) (ECF No. 58); BR 335-47. However, the agreement was subject to the approval of the bankruptcy court that was presiding over Mr. Heupel's voluntary chapter 11 petition. Id. The bankruptcy court ultimately dismissed the chapter 11 petition and declined to convert it into a chapter 7 case. See Order Dismissing Chapter 11 Case, In re Kevin Dean Heupel, No. 14-16337-MER (Bankr. D. Colo. filed April 22, 2016) (ECF No. 220). Thus, the $424, 000 settlement was not approved and that case remains pending. Id.

         In November 2014, the Atzbachs filed their first fee affidavits. Their fees at that point already totaled over $35, 000. 2 BR 102-110. After a two-day hearing on damages, their fees exceed $72, 000. 3 BR 289.

         At the damages hearing, the Atzbachs both testified, as did Ms. Paysinger and Mr. Nielsen. Mr. Heupel also testified. After hearing the testimony and considering the evidence, the bankruptcy court first found, as Heupel had conceded, that Heupel had willfully violated the automatic stay provisions, a prerequisite to imposing sanctions under § 362(k).

         The bankruptcy court then found that other than attorneys' fees and costs, Ms. Paysinger and Mr. Nielsen suffered only “minimal” damages. Their damages were the post-petition bank withdrawals of $661.77 and $400, respectively, as well as the costs and lost wages associated with attending the two-day hearing. 3 BR 292-93. In total, the bankruptcy court concluded that the non-attorney fees related damages were $1, 080.77 for Ms. Paysinger and $747.00 for Mr. Nielsen. 3 BR 293.

         As for attorney's fees and costs, the bankruptcy court significantly reduced the Atzbach's fee request. The bankruptcy court found that “[f]rom the very beginning of this litigation, the Atazbachs [sic] have demonstrated that their motivation in pursuing this litigation was not limited solely to vindicating the rights of Ms. Paysinger and Mr. Nielsen.” 3 BR 294. The bankruptcy court found it was “apparent” that “the Atzbachs, who were rivals of the Firm in a very competitive consumer bankruptcy market, wanted to put an end to the Firm's zero-down bankruptcy program and to punish Mr. Heupel for what they viewed as unethical and illegal conduct.” Id. The bankruptcy court observed that the Atzbachs spent “significant hours” putting together evidence not relevant to Ms. Paysinger and Mr. Nielsen's cases, but instead ...

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