Attorney Fees for Litigating Damage Actions Based On Stay Violation

Posted by NCBRC - March 20, 2013

The Ninth Circuit decision in Sternberg v. Johnston, reared its ugly head to limit recovery of attorney fees in a stay violation action in the recent case of Check Into Cash v. Snowden (In re Snowden), No. 12-1095 (W.D. Wash. March 11, 2013). Snowden came to the district court on appeal and cross-appeal of the Bankruptcy Court’s award of damages for emotional distress and punitive damages resulting from Check Into Cash (CIC)’s violation of the automatic stay.

After affirming both the emotional distress and punitive damage awards the court rejected the debtor’s invitation to revisit its earlier decision in a previous appeal that the award of attorney fees was properly limited, under Sternberg v. Johnston, 595 F.3d 937 (9th Cir. 2010), cert. denied, 131 S. Ct. 102 (2010), to those fees pre-dating the adversary proceeding.

There is a split in the circuit courts on the issue of whether a debtor can recover attorney fees incurred in connection with an adversary complaint seeking damages for an automatic stay violation. Duby v. U.S., 451 B.R. 664 (B.A.P. 1st Cir. 2011). The Ninth Circuit in Sternberg held that attorney fees incurred in a separate action for sanctions were not “actual damages” to be added to the award based on the original stay violation. The Sternberg decision rested on a finding that the language of section 362(k) is ambiguous and that common law dictated a finding that attorney fees be paid by the party incurring them. See also In re Bertuccio, No. 04-56255 (Bankr. N.D. Cal. Oct. 15, 2009) (compelled by Sternberg to deny attorney fees incurred in action based on automatic stay violation). But see Schwartz-Tallard v. America’s Servicing Co., No. 11-1429 (B.A.P. 9th Cir. June 28, 2012) (distinguishing Sternberg to find that when a debtor is forced to defend both the ruling that the creditor violated the automatic stay and the award of sanctions for that violation, the debtor may recover her appellate attorney fees under section 362(k)). Schwartz-Tallard is currently on appeal to the Ninth Circuit (Case No. 12-60052).

In contrast to Sternberg, the Fifth Circuit in Young v. Repine (In re Repine), held that under the language of section 362(k) such fees are recoverable. 536 F.3d 512, 522 (5th Cir. 2008) (“[I]t is proper to award attorney’s fees that were incurred prosecuting a section 362(k) claim.”). See also Duby v. U.S., 451 B.R. 664 (B.A.P. 1st Cir. 2011); In re Burrell, No. 10-36989 (S.D. Tex. Aug. 27, 2012) (following Repine); In re Thompson, 426 B.R. 759 (Bankr. N.D. Ill. 2010) (debtor could have recovered attorney fees incurred in litigating stay violation had debtor’s attorney not waived the fees); In re Wood, No. 07-1864 (Bankr. N.D. Ia. May 24, 2012) (section 362(k) permits award of attorney fees in connection with litigation for sanctions).

In Grine v. Chambers (In re Grine), 439 B.R. 461 (Bankr. N.D. Ohio 2010), the court discussed and disagreed with Sternberg. The court did not find ambiguity in section 362(k) necessitating resort to common law. Rather, it found that when Congress amended section 362 in 2005 it chose not to alter the established precedent awarding fees for prosecuting then section 362(h) claims and adversary proceedings as “actual damages.” Id. at 470. As to Sternberg’s finding that “[p]ermitting a debtor to collect attorney fees incurred in prosecuting a damages action would further neither the financial nor the non-financial goals of the automatic stay,” the Grine court said this was “simply wrong.” Id.

“Without such a provision, individual debtors’ attorneys would be less likely to pursue vindication of the stay and their clients’ rights thereunder, both because their bankrupt clients lack the money to pay hourly fees and because of the oftentimes relatively small amount of probable damages, as in this case, making a contingency fee wholly impractical. The Sternberg holding that the right to fees under § 362(k) stops at the courthouse door gives creditors free shots at continuing pre-petition collection activity with little practical fear of financial accountability for their actions and hence little incentive to stop it. Under the Ninth Circuit analysis, a debtor who sustains injury from and seeks the help of counsel to stop automatic stay violations is effectively powerless to make a creditor pay the damages and fees incurred. Whether conduct constitutes a violation is also oftentimes reasonably disputed by the parties, giving debtors’ counsel little incentive to litigate the contours of § 362(a) in close cases for the benefit both of any particular debtor as well as for the bankruptcy system as a whole.”

Id. at 470-71. The Grine court went on to find that attorney fees incurred for prosecuting a damages claim under section 362(k) were recoverable just as other damages under that section: when they are incurred as the proximate cause of the stay violation and are not merely speculative. The court concluded that “if litigation is necessary to afford a complete remedy to a debtor under the particular circumstances of the case, there is nothing in the plain language of § 362(k) that precludes a judgment for the attorneys’ fees and costs incurred in prosecuting it.” Id. at 471.

Snowden opinion

Tags: , ,

Post a Comment

Your email is never shared. Required fields are marked *