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Reconsidering, the Ninth Circuit reversed and remanded. Reading the legislative history as a whole, the court was 'convinced that Congress was concerned not only with financial loss, but also ' at least in part ' with the emotional and psychological toll that a violation of a stay can exact from an individual. Because Congress meant for the automatic stay to protect more than financial interests, it makes sense to conclude that harm done to those non-financial interests by a violation are cognizable as 'actual damages.' We conclude, then, that the 'actual damages' that may be recovered by an individual who is injured by a willful violation of the automatic stay, 11 U.S.C. ' 362(h), include damages for emotional distress. In so holding, we join an emerging consensus recognizing the availability of damages for emotional distress that results specifically from a willful violation of the automatic stay.' The court further identified a three-part test for entitlement to damages for emotional distress under ' 362(h). The court found that 'an individual must 1) suffer significant harm, 2) clearly establish the significant harm, and 3) demonstrate a causal connection between that significant harm and the violation of the automatic stay (as distinct, for instance, from the anxiety and pressures inherent in the bankruptcy process).'

Bankruptcy Court May Approve Retroactive Lease Rejection

The Ninth Circuit has ruled that a bankruptcy court may approve the retroactive rejection of an unexpired nonresidential lease, and that the retroactive date may be earlier than the date on which the landlord retakes possession of the premises. Pacific Shores Development LLC At Home Corp. (In re At Home Corp.), No. 03-15769 (Dec. 28).

A network services provider leased two buildings in need of renovation, placing $20,000,000 into escrow to fund the project. Unfortunately, the debtor filed a Chapter 11 bankruptcy petition before the renovation was complete, and it never took occupancy of the space. Prior to filing the petition, the debtor also did not furnish the lessor with a formal surrender notice, fearing the lessor would convert the remaining escrow (over $1 million) into rent. Regardless, that conversion appeared to take place on the same day that the debtor filed its bankruptcy petition. Also on that same day, the debtor filed an 'Emergency Motion for Order Pursuant ' 365(a) Authorizing Rejection of Unexpired Leases of Nonresidential Real Property.' That motion sought an order rejecting the leases nunc pro tunc to the date on which the motion was filed. The lessor did not object to debtor's decision to reject the leases, but objected to the motion 'to the extent it seeks retroactive rejection of [the] leases.' At the heart of this dispute was whether the debtor would owe over $1 million in additional rent. The bankruptcy court ruled that the debtor could retroactively reject the leases and the district court affirmed.

The Ninth Circuit affirmed. The court ruled that the bankruptcy court's ruling was within its equitable powers under ' 105(a), which allows for the issuance of orders that are 'necessary or appropriate' in carrying out the provisions of the Bankruptcy Code.

The majority rule on this issue of first impression for the Ninth Circuit is that the rejection of an unexpired nonresidential lease is effective when a court order is issued approving a motion to reject the lease. The minority view is that lease rejection becomes effective with the filing of a motion to reject the lease. The court here chose to follow the First Circuit's view of the majority rule in Thinking Machines Corp. v. Mellon Financial Services Corp. #1 (In re Thinking Machines Corp.), 67 F.3d 1021 (1995), which was a compromise ruling that allows a bankruptcy court to approve the retroactive rejection of a nonresidential lease to the motion filing date in appropriate cases. The court rejected the lessor's argument that the bankruptcy court improperly allowed the debtor to reject the leases retroactive to a time when the debtor still remained in possession of the premises. The court noted, however, that ' 365(d) does not mention the term “possession,' and that the only legally operative event is the assumption or rejection of the lease. Further, the lessor's interpretation 'would deprive a bankruptcy court of flexibility in molding its orders to reflect the circumstances and the actions of both parties to the lease.'

In determining the appropriateness of the bankruptcy court's order in this case, the appeals court looked at the four factors considered by the bankruptcy court: The immediate filing of the debtor's motion to reject the leases; the debtor's prompt action in setting that motion for hearing; the fact that Debtor never occupied the premises; and the lessors motivation in opposing retroactive rejection of the leases. Upon review, the court found no abuse of discretion in approving the rejection of the debtor's leases retroactive to the motion filing date.

Emotional Distress Damages Recoverable for Automatic Stay Violation

Upon reconsideration, the Ninth Circuit has ruled that a debtor may recover damages for emotional distress under ' 362(h) when a creditor willfully violates the automatic stay. Dawson v. Washington Mutual Bank FA (In re Dawson), No. 02-16903 (Dec. 10).

The debtors filed an adversary action against the holder of their mortgage after the bank conducted a foreclosure sale 2 days after the debtor filed for bankruptcy. The sale was rescinded 6 months later. Both the bankruptcy and district court denied the debtor's claim for emotional distress damages on the grounds that the bank's violation was not egregious and that no evidence corroborated the emotional distress claimed.

Reconsidering, the Ninth Circuit reversed and remanded. Reading the legislative history as a whole, the court was 'convinced that Congress was concerned not only with financial loss, but also ' at least in part ' with the emotional and psychological toll that a violation of a stay can exact from an individual. Because Congress meant for the automatic stay to protect more than financial interests, it makes sense to conclude that harm done to those non-financial interests by a violation are cognizable as 'actual damages.' We conclude, then, that the 'actual damages' that may be recovered by an individual who is injured by a willful violation of the automatic stay, 11 U.S.C. ' 362(h), include damages for emotional distress. In so holding, we join an emerging consensus recognizing the availability of damages for emotional distress that results specifically from a willful violation of the automatic stay.' The court further identified a three-part test for entitlement to damages for emotional distress under ' 362(h). The court found that 'an individual must 1) suffer significant harm, 2) clearly establish the significant harm, and 3) demonstrate a causal connection between that significant harm and the violation of the automatic stay (as distinct, for instance, from the anxiety and pressures inherent in the bankruptcy process).'

Bankruptcy Court May Approve Retroactive Lease Rejection

The Ninth Circuit has ruled that a bankruptcy court may approve the retroactive rejection of an unexpired nonresidential lease, and that the retroactive date may be earlier than the date on which the landlord retakes possession of the premises. Pacific Shores Development LLC At Home Corp. (In re At Home Corp.), No. 03-15769 (Dec. 28).

A network services provider leased two buildings in need of renovation, placing $20,000,000 into escrow to fund the project. Unfortunately, the debtor filed a Chapter 11 bankruptcy petition before the renovation was complete, and it never took occupancy of the space. Prior to filing the petition, the debtor also did not furnish the lessor with a formal surrender notice, fearing the lessor would convert the remaining escrow (over $1 million) into rent. Regardless, that conversion appeared to take place on the same day that the debtor filed its bankruptcy petition. Also on that same day, the debtor filed an 'Emergency Motion for Order Pursuant ' 365(a) Authorizing Rejection of Unexpired Leases of Nonresidential Real Property.' That motion sought an order rejecting the leases nunc pro tunc to the date on which the motion was filed. The lessor did not object to debtor's decision to reject the leases, but objected to the motion 'to the extent it seeks retroactive rejection of [the] leases.' At the heart of this dispute was whether the debtor would owe over $1 million in additional rent. The bankruptcy court ruled that the debtor could retroactively reject the leases and the district court affirmed.

The Ninth Circuit affirmed. The court ruled that the bankruptcy court's ruling was within its equitable powers under ' 105(a), which allows for the issuance of orders that are 'necessary or appropriate' in carrying out the provisions of the Bankruptcy Code.

The majority rule on this issue of first impression for the Ninth Circuit is that the rejection of an unexpired nonresidential lease is effective when a court order is issued approving a motion to reject the lease. The minority view is that lease rejection becomes effective with the filing of a motion to reject the lease. The court here chose to follow the First Circuit's view of the majority rule in Thinking Machines Corp. v. Mellon Financial Services Corp. #1 (In re Thinking Machines Corp.), 67 F.3d 1021 (1995), which was a compromise ruling that allows a bankruptcy court to approve the retroactive rejection of a nonresidential lease to the motion filing date in appropriate cases. The court rejected the lessor's argument that the bankruptcy court improperly allowed the debtor to reject the leases retroactive to a time when the debtor still remained in possession of the premises. The court noted, however, that ' 365(d) does not mention the term “possession,' and that the only legally operative event is the assumption or rejection of the lease. Further, the lessor's interpretation 'would deprive a bankruptcy court of flexibility in molding its orders to reflect the circumstances and the actions of both parties to the lease.'

In determining the appropriateness of the bankruptcy court's order in this case, the appeals court looked at the four factors considered by the bankruptcy court: The immediate filing of the debtor's motion to reject the leases; the debtor's prompt action in setting that motion for hearing; the fact that Debtor never occupied the premises; and the lessors motivation in opposing retroactive rejection of the leases. Upon review, the court found no abuse of discretion in approving the rejection of the debtor's leases retroactive to the motion filing date.