Overruling Prior Precedent, the U.S. Court of Appeals for the Ninth Circuit Confirms Award of Attorney’s Fees for Prosecution of Suit Seeking Damages for Violation of the Automatic Stay

SUMMARY

In America’s Servicing Co. v. Schwartz-Tallard (In re Schwartz-Tallard), ___ F.3d ___, 2015 WL 5946342 (9th Cir. Oct. 14, 2015), the U.S. Court of Appeals for the Ninth Circuit (the “Ninth Circuit”), en banc, held that section 362(k) of the Bankruptcy Code authorizes an award of attorneys’ fees reasonably incurred in a debtor’s prosecution of a suit for damages to provide redress for a violation of the automatic stay.  In so holding, the Ninth Circuit overruled its prior decision in Sternberg v. Johnston, 595 F.3d 937 (9th Cir. 2010), which limited the costs recoverable under section 362(k) to those incurred to end the stay violation itself.  To read the court’s opinion, click here:  http://1.usa.gov/1PV8DXc

FACTS

The debtor, Irene Schwartz-Tallard (the “Debtor”), took out a mortgage on her home in Henderson, Nevada.  After filing a Chapter 13 bankruptcy petition, she continued to make monthly mortgage payments to America’s Servicing Company (“ASC”), the loan servicer.

Post-petition, ASC wrongfully foreclosed on the Debtor’s home.  ASC purchased the home at the foreclosure sale and promptly served the Debtor with an eviction notice.

In response, the Debtor filed a motion in the U.S. Bankruptcy Court for the District of Nevada (the “Bankruptcy Court”) seeking relief under section 362(k) of the Bankruptcy Code—namely, an order requiring ASC to reconvey title to the home and awarding actual and punitive damages and attorney’s fees and costs.  Finding that ASC willfully violated the automatic stay, the Bankruptcy Court ordered ASC to reconvey title to the Debtor and pay the Debtor $40,000 in economic and emotional distress damages, $20,000 in punitive damages, and $20,000 in attorneys’ fees.

ASC reconveyed title to the property and appealed the order to the U.S. District Court for the District of Nevada (the “District Court”).  On appeal, ASC did not challenge the reconveyance; rather, ASC challenged the award of damages.  Ultimately, the District Court affirmed the Bankruptcy Court’s order.  ASC did not challenge the damages award further.

After succeeding on appeal, the Debtor filed a second motion seeking relief under section 362(k) of the Bankruptcy Code.  More precisely, the Debtor sought an order awarding additional attorneys’ fees and costs associated with the appeal.  The Bankruptcy Court denied the motion—holding that since the stay violation ended upon reconveyance of title, which occurred shortly after entry of the initial stay violation order, the fees and costs incurred thereafter in the course of the appeal could not be awarded under Sternberg.

The Debtor appealed the decision to the U.S. Bankruptcy Appellate Panel of the Ninth Circuit (the “BAP”), which reversed the Bankruptcy Court.  Schwartz-Tallard v. America’s Servicing Co. (In re Schwartz-Tallard), 473 B.R. 340 (B.A.P. 9th Cir. 2012).  The BAP distinguished Sternberg because, on appeal to the District Court, ASC continued to challenge the Bankruptcy Court’s determination that the automatic stay had been violated in the first place.  Therefore, the BAP concluded, Sternberg did not preclude the Bankruptcy Court from awarding the Debtor attorneys’ fees incurred when defending the Bankruptcy Court’s enforcement of the stay and her stay-enforcement damage award; such fees constituted actual damages recoverable under section 362(k)(1).  ASC appealed the reversal to the Ninth Circuit. 

A divided three-judge panel of the Ninth Circuit affirmed, distinguishing the case from Sternberg.  Judge Wallace dissented because, in his view, the stay violation ended once the property was reconveyed and therefore, under Sternberg, attorneys’ fees incurred after that point could not be awarded.  The Ninth Circuit then vacated the three-judge panel’s decision and agreed to rehear the appeal en banc.

REASONING

A majority of the Ninth Circuit’s en banc panel declined to directly evaluate the BAP’s conclusion that Sternberg did not preclude the Bankruptcy Court’s award; rather, the majority decided to take a more drastic step—namely, to “jettison Sternberg’s erroneous interpretation of § 362(k) altogether.”  Schwartz-Tallard at p. 6.

The majority observed that Sternberg draws a line in the sand—holding that only those fees and costs incurred before the stay violation ceased or was cured constituted “actual damages” resulting from the stay violation.  Although the majority acknowledged that section 362(k) uses atypical language in deviating from the American rule, the majority criticized the Sternberg interpretation on the grounds that it created two classes of litigation expenses.  As the majority opined:

We see nothing in the statute that suggests Congress intended to cleave litigation-related fees into two categories, one recoverable by the debtor, the other not.  The statute says “including costs and attorneys’ fees,” with no limitation on the remedy for which the fees were incurred.  To uphold Sternberg’s interpretation of § 362(k), we would have to read into the statute limiting language—something like, “including costs and attorneys’ fees incurred to end the stay violation”—that is simply not present.

Schwartz-Tallard, supra, at p. 8 (emphasis in original).  The majority bolstered its interpretation by opining that allowing a debtor to recoup all related fees and costs carried out the purpose and underlying Congressional intent of the statute, and concluding that the new Schwartz-Tallard interpretation of section 362(k) will avoid litigation relating to the bifurcation of costs under the Sternberginterpretation.  Id. at pp. 9-12.

Judge Bea and O’Scannlain concurred with the majority’s judgment but criticized the majority for looking beyond the plain language of the statute, under which, in their opinion, the Debtor was entitled to recover her attorneys’ fees.  Judge Ikuta, on the other hand, dissented and criticized the majority’s interpretation of section 362(k), which, in Judge Ikuta’s opinion, expanded the fee-shifting aspects of section 362(k) without clear Congressional intent.  Judge Ikuta also criticized the majority’s reasoning—opining that the increased availability of attorneys’ fees and costs may increase litigation by serving as an extra incentive to bring an action under section 362(k).

AUTHOR’S COMMENTARY

Schwartz-Tallard’s interpretation of section 362(k) represents a significant shift in Ninth Circuit jurisprudence—one that brings the Ninth Circuit in line with many of its sister circuits.  If applied judiciously, the new interpretation of section 362(k) may limit litigation and provide additional protection for debtors by disincentivizing actions that may violate the automatic stay.  The interpretation, however, may just as easily be exploited by unscrupulous debtors seeking leverage over, or nuisance settlements from, creditors that innocently violated the automatic stay—a result that would arguably pervert the purpose of bankruptcy and create an imbalance in the debtor/creditor relationship.  Ultimately, only time will tell whether the majority or Judge Ikuta will be proven right.

These materials were prepared by Michael T. Delaney (mdelaney@bakerlaw.com), an associate in the Los Angeles office of Baker & Hostetler LLP and member of the Insolvency Law Committee, with editorial contributions from John N. Tedford, IV, of Danning, Gill, Diamond & Kollitz, LLP, in Los Angeles.  The opinions expressed herein are those of the author alone and do not reflect the opinions or positions of Baker & Hostetler LLP or its attorneys.

Thank you for your continued support of the Committee.

Best regards,
Insolvency Law Committee

Co-Chair
Leib Lerner 
Alston & Bird LLP
Leib.Lerner@alston.com

Co-Chair
Corey Weber 
Ezra Brutzkus Gubner LLP
cweber@ebg-law.com

Co-Vice Chair
Asa S. Hami 
SulmeyerKupetz, A Professional Corporation
ahami@sulmeyerlaw.com

Co-Vice Chair
Reno Fernandez 
Macdonald Fernandez LLP
Reno@MacFern.com