by The Ninth Circuit has cracked open a door that Sternberg seemed to have slammed shut by holding that a debtor is not precluded from recovering, as damages, attorneys’ fees for defending against a creditor’s appeal of a finding that the creditor violated the automatic stay. America’s Servicing Co. v. Schwartz-Tallard, No. 12-60052 (9th Cir. Apr. 16, 2014).
The creditor obtained relief from stay in the mistaken belief that the debtor had fallen behind on her mortgage payments. In a later hearing, the court orally reinstated the stay, but ASC was not present at the hearing and continued with the foreclosure sale of the debtor’s property despite the debtor’s communication with ASC as to the court order reinstating the stay. The bankruptcy court found that ASC violated the stay and awarded damages to the debtor, including attorneys’ fees and punitive damages. The court ordered that the property be put back into Schwartz-Tallard’s name within two days of the order. ASC filed an appeal to the district court and, the next day, reconveyed the property to the debtor. The district court affirmed.
The debtor then moved for attorney fees in connection with the district court appeal. These are the fees at issue in this case. The bankruptcy court denied the motion for the additional fees and the BAP reversed on the basis that the fees were actual damages under section 362(k)(1) which provides that “an individual injured by any willful violation of a stay . . . shall recover actual damages, including costs and attorneys’ fees.” In re Schwartz-Tallard, 473 B.R. 340 (B.A.P. 9th Cir. 2012).
On appeal, the Ninth Circuit framed the question as: “[W]hether the attorneys’ fees Schwartz-Tallard seeks relate to her ‘enforcing the automatic stay and remedying the stay violation,’ Sternberg, 595 F.3d at 940, or whether they are more akin to prosecuting an adversary proceeding in pursuit of a claim for damages.” The court found that, unlike in Sternberg, ASC’s appeal challenged both the fee award and the substantive stay violation ruling, therefore, the debtor’s fees were incurred in defending both the damage award and the finding of stay violation—i.e. using the stay as shield rather than a sword. This was found to be the dispositive difference between this case and Sternberg. (The court declined the debtor’s invitation to revisit and overturn its decision in Sternberg). The court concluded that, “Because we hold that Sternberg does not apply to a situation where a debtor defends herself when a creditor who had violated the automatic stay appeals that finding, Schwartz-Tallard is entitled to recover her attorneys’ fees as ‘actual damages’ under 11 U.S.C. § 362(k)(1).” The court reemphasized the distinction it made in Sternberg between the financial and non-financial purposes of the automatic stay. It found that, because ASC continued to challenge the finding of stay violation itself on appeal, the debtor’s defense of the appeals was a further attempt to enforce the stay rather than an attempt to obtain more damages and therefore fell within the meaning of ‘actual damages’ in section 362(k)(1).
Judge Wallace dissented, finding that Sternberg controlled the case and that even if it did not, the case merited reversal. Judge Wallace would have held that, under the explicit holding in Sternberg, once the property was reconveyed to the debtor the stay violation ended, the debtor was returned to status quo ante and no further recovery was merited. Sternberg does not permit a distinction between pursuit of a damage award and defense of the stay violation order. The error, the dissent argues, was compounded by the fact that ASC’s original appeal did not seek to alter the reconveyance of the property to the debtor and therefore, never jeopardized the status quo. Furthermore, the dissent would hold, even if Sternberg did not control, the American Rule of each party bearing its own costs in the absence of legislation to the contrary, would govern this case and compel reversal. The dissent acknowledged that while an attorney fee award is contemplated by section 362(k), those fees must relate directly to the violation of the stay and, once the violation is corrected by return to status quo, further accumulation of attorney fees is not covered by the statute.
The dissent ended with an admonition to the BAP relating to its improper reliance on one of its own cases, Beard v. Walsh (In re Walsh), 219 B.R. 873 (B.A.P. 9th Cir. 1998), that had been specifically overruled by Sternberg. After an extensive walk through the history of the Article I bankruptcy judicial system, the dissent noted “This discussion of the BAP’s subordinate role is not academic. The control we exercise over the BAP and its decisions is necessary to justify the very existence of that court.”