Monday, January 21, 2019

FYI: 9th Cir Holds Debtor Who Successfully Challenges Automatic Stay Fee Award Also Entitled to Appellate Fees

In a case of first impression, the U.S. Court of Appeals for the Ninth Circuit recently held that a debtor who successfully challenges -- as opposed to a debtor who defends -- an award of attorney's fees and costs for violations of the automatic stay under § 362(k) of the Bankruptcy Code is entitled to an award of appellate fees and costs.


In so ruling, the Court reversed the trial court's order denying the debtor's motion for appellate attorney's fees and costs, and remanded the matter to the trial court with instructions to remand to the bankruptcy court to calculate reasonable attorney's fees and costs on appeal. 


A copy of the opinion is available at:  Link to Opinion


Husband and wife debtors filed a petition under Chapter 13 of the Bankruptcy Code in October of 2012, which triggered the automatic stay under section 362 of the Code. The debtors listed a $3,535 unsecured, nonpriority debt in their schedules owed to a medical services company. The debt, however, had previously been assigned to a collection agency in July of 2012.


The collection agency, which did not receive notice of the bankruptcy, filed a collection action against the wife in July 2013. The parties entered into a payment plan, but the debtor defaulted.


The collection agency served a writ of garnishment on the debtors in April of 2014. The debtor's counsel demanded that the garnishment be dissolved, but the wife's wages were garnished for several more weeks before stopping.


In June of 2014, debtors filed a motion for contempt in the bankruptcy court against the collection agency for violating the automatic stay. The motion was unopposed and the bankruptcy court granted it in August of 2014, awarding $1,295 in damages and $1,277 for attorney's fees and costs. The debtors appealed both awards, arguing that "the bankruptcy court erred in failing to account for several days of attorneys' work needed to end the stay violation."


While the appeal was pending, the Ninth Circuit held in In re Schwartz-Tallard that section 362(K)(1) of the Bankruptcy Code authorized an award of reasonable attorney's fees and costs incurred on appeal in defending a judgment under section 362(k).


The trial court affirmed the damages award, "but remanded to the bankruptcy court the attorneys' fees calculation in light of Schwartz-Tallard. The bankruptcy court then awarded attorneys' fees and costs of $16,324.40, in addition to the $1,277 initially awarded[, but] refused to award attorneys' fees and costs incurred on appeal, claiming it lacked jurisdiction due to a pending application for these fees before the trial court."


In June of 2017, the trial court denied the debtors' motion for appellate attorney's fees and costs because debtors failed to file a memorandum of "points and authority" required by the court's local rules. In the alternative the trial court held that section 362(k) "does not allow for recovery of appellate work when a party is prosecuting, and not defending, the judgment on appeal." The debtors appealed to the Ninth Circuit.


The Ninth Circuit first addressed the trial court's applicable local rule, which provides relevant part that "[t]he failure of a moving party to file points and authorities in support of the motion constitutes a consent to the denial of the motion…."


The Ninth Circuit reasoned that, although "[o]nly in rare cases will we question the exercise of jurisdiction in connection with the application of local rules[,]" the case before it was "one of those rare cases." It then concluded that the trial court abused its discretion because the debtor's motion "clearly indicated that the attorney's fees and costs requested pertained solely to the appeal, and did not need to be further segregated."


Turning to the issue of appellate attorney's fee and costs, the Court began by explaining that section 362(k)(1) of the Bankruptcy Code provides in relevant part that "an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages."


The Ninth Circuit then disagreed with the trial court's reading of its Schwartz-Tallard ruling, explaining that "[p]reviously, [in Sternberg v. Johnston] we interpreted § 362(k)(1) as limiting attorneys' fees and costs awards to those incurred in stopping a stay violation. 'Once the violation has ended, any fees debtor incurs after that point in pursuit of a damage award would not be to compensate for 'actual damages under § 362(k)(1),' and thus fees incurred pursuing damages for a stay violation were not recoverable under the statute. … However, Schwartz-Tallard overruled Sternberg in 2015."


The Court reasoned that, as it explained in Schwartz-Tallard, "'Congress undoubtedly knew that unless debtors could recover the attorney's fees they incurred in prosecuting an action for damages, many would lack the means or financial incentive (or both) to pursue such actions.' … Allowing for attorneys' fees and costs while prosecuting an action for damages is likely the only way debtors in bankruptcy can afford to pursue damages. As is the case here, damages themselves may be too limited to justify an action if attorneys' fees and costs in pursuit of those damages are not recoverable."


The Court noted that "[u]nlike most fee-shifting statutes, the language does not explicitly refer to a 'prevailing party.' … Still, § 362(k)'s 'phrasing signals an intent to permit, not preclude, an award of fees incurred in pursuing a damages recovery.' … The statute clearly provides for damages and attorney's fees and costs for an injured debtor when a creditor violates the automatic stay. … Section 362(k)(1) also serves a deterrent function much like many fee-shifting statutes."


In addition, the Ninth Circuit continued, "fee shifting statutes allow for recovery of attorneys' fees incurred in establishing a party's claim for fees. … This principle ensures that the fee award is not diluted by the time and effort spent on the claim itself, … and includes appellate attorney's fees when a party successfully challenges the trial court's award or when a party successfully defends a favorable judgment on appeal."


"Most fee-shifting statute cases that award appellate attorneys' fees do so for successfully defending a judgment on appeal. … Significantly, Schwartz-Tallard also reached this outcome after carefully considering the purpose of § 362(k). If a creditor unsuccessfully appeals a bankruptcy court's judgment in favor of a debtor, it stands to reason that the party who violated the stay should continue to pay for its harmful behavior by compensating the debtor for its appellate attorneys' fees and costs."


The Ninth Circuit then noted that "courts also grant appellate attorneys' fees in fee-shifting statute cases when, as here, parties successfully challenge initial judgments on appeal. … Indeed, we are not aware of any authority suggesting that, although fees may be awarded under a fee-shifting statute for defending a judgment on appeal, they are not available for successfully challenging the judgment as inadequate. As note, the firmly established principle is that 'attorneys fees may be awarded for time devoted in successfully defending appeals of or challenges to the trial court's award of attorney's fees.'"


The Court concluded that although it was "unaware of any previous case that has analyzed § 362(k)'s application of this principle, the purpose of § 362(k) strongly favors the outcome we now reach." Because the Ninth Circuit found that § 362(k) is meant to protect debtors when a creditor violates the automatic stay and "thus seeks to make debtors whole, as if the violation never happened, to the degree possible[,] [t]his reasonably includes awarding attorney's fees and costs on appeal to a successful debtor, even when the debtor must bring the appeal."


Accordingly, the trial court's order refusing to award the debtors their attorneys' fees and costs incurred on appeal was reversed, and the case remanded to the trial court, with instructions to remand to the bankruptcy court to determine the amount of reasonable appellate attorney's fees and costs.




Ralph T. Wutscher
Maurice Wutscher LLP
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