Thursday, October 9, 2014

FYI: 9th Cir Allows Atty Fees for Violation of Automatic Stay to Establish and Remedy the Violation, Affirms Emotional Distress and Punitive Damages Awards

The U.S. Court of Appeals for the Ninth Circuit recently held that a debtor seeking damages for violation of the automatic stay is entitled to attorneys’ fees under 11 U.S.C. § 362(k), but may recover fees only up to the time the stay violation ended and the fees must be related to remedying the stay violation itself. 

The Court held that “[t]he bankruptcy laws do not permit a stay violator to undermine the remedies available under § 362(k) by forcing a bankruptcy petitioner to accept a conditional offer in lieu of pursuing fair compensation and attorneys’ fees.”

The borrower (“Debtor”) obtained a $575 payday loan from a lender (“Creditor”) secured by a post-dated check.  Debtor filed chapter 7 bankruptcy without directly advising Creditor, and listed the Creditor’s unsecured claim in her petition.  After a number of supposedly harassing phone calls to Debtor’s place of employment, the Creditor allegedly used an electronic funds transfer to debit Debtor’s bank account for the amount due, overdrawing her account by $816.88, including bank charges.

Debtor filed a motion for sanctions in the bankruptcy court, alleging that Creditor willfully violated the automatic stay provision of the bankruptcy code, 11 U.S.C. § 362, and sought a return of the funds and overdraft fees, emotional distress and punitive damages, and attorney’s fees.

Prior to trial, the Creditor denied any liability and offered to repay the loan amount, bank fees, and three hours of attorneys’ fees, for a total of $1,445.  Debtor rejected the settlement offer.

The bankruptcy court found that the Creditor willfully violated the automatic stay, and awarded emotional distress damages of $12,000 as well as the $575 loan amount, $370 in bank fees, $12,000 in punitive damages, and $2,538.55 in attorneys’ fees, for a total of $27,483.55.  The bankruptcy court determined that Debtor was entitled to attorneys’ fees incurred up to the date of the Creditor’s settlement offer only, because the offer effectively terminated the stay violation.

Creditor appealed the bankruptcy court’s emotional distress, punitive damages, and fee awards.  After two rounds of appeals, the district court upheld the award for emotional distress and punitive damages, but denied Debtor’s attorneys’ fees incurred as a result of the appeal.  In so ruling, the district court held that those fees were not incurred in an effort to enforce the stay, but in pursuit of a damages award for a stay violation.

On subsequent appeal to the Ninth Circuit, the Court began by analyzing the award for emotional distress and punitive damages.

As you may recall, 11 U.S.C § 362(k) permits an award of emotional distress damages if the bankruptcy petitioner “(1) suffer[s] significant harm, (2) clearly establish[es] the significant harm, and (3) demonstrate[s] a causal connection between that significant harm and the violation of the automatic stay.”  In re Dawson, 390 F.3d 1139, 1149 (9th Cir. 2004).

In addition, Section 362(k)(1) provides for punitive damages upon “showing of reckless or callous disregard for the law or rights of others.”  In re Bloom, 875 F.2d 224, 228 (9th Cir. 1989). 

The Ninth Circuit held that the district court did not err in confirming the emotional distress award, because the record sufficiently established that the Debtor suffered emotional harm from the collection calls to her place of employment. 

Similarly, the Ninth Circuit held that the bankruptcy court applied the correct legal standard in awarding punitive damages, and supported its award with findings that Creditor failed to provide policies and procedures or employee training regarding debt collection following a bankruptcy filing.

Next, the Court turned to the issue of attorneys’ fees.  In Sternberg v. Johnston, the Ninth Circuit established a brightline rule that attorneys’ fees incurred in an attempt to collect damages are not recoverable once the stay violation ended.  Sternberg v. Johnston, 595 F.3d 937, 948 (9th Cir. 2010).  The issue before the Court is whether the Creditor’s settlement offer had terminated the stay violation. 

In a recent decision, the Ninth Circuit permitted recovery of attorneys’ fees incurred in defending an appeal from a bankruptcy court decision finding a violation of the automatic stay.  See In re Schwartz-Tallard, No. 12-60052, 2014 WL 4251571 (9th Cir. August 29, 2014).  The debtor in Schwartz-Tallard was entitled to fees because she was forced to defend the appeal to validate the bankruptcy court’s ruling that a violation of the stay had occurred, and to preserve her right to collect the pre-remedy damages awarded by the bankruptcy court.  Id. at *3. 

Similarly, here, the Ninth Circuit found that the bankruptcy court abused its discretion when it determined that the Creditor’s settlement offer marked the end of the stay violation.  Relying on In re Abrams, 127 B.R. 239 (B.A.P. 9th Cir. 1994), the Court explained that the Creditor had an affirmative obligation to return any property it had wrongfully seized from the bankruptcy estate.  Instead of returning that property with no strings attached, the Creditor denied that it violated the stay and issued a settlement offer with implied conditions.

Put in another way, the Court explained that the Debtor had to proceed with the litigation in order to establish a violation of the automatic stay.  The fees the Debtor incurred after the settlement offer were incurred to put an end to the violation of the automatic stay.  In the Court’s own words, “[p]ermitting the violator to short-circuit the remedies available under § 362(k)(1) by making a conditional offer to return the property wrongfully seized in violation of the automatic stay would undermine the remedial scheme of § 362(k).”

Relying on In re Campion, 294 B.R. 313, 315, 318 (B.A.P. 9th Cir. 2003), where the Ninth Circuit declined to find that an automatic stay violation is remedied by a Rule 68 offer of judgment, the Court determined that the district court had erred in finding the Creditor’s settlement offer was an actual “tender.”  The Creditor did not return the property it had wrongfully seized at the time of its offer.  Thus, the Ninth Circuit concluded that the stay violation actually terminated on the date when the bankruptcy court found a violation of the automatic stay, and the Debtor was entitled to her fees up to that date.

Lastly, the Ninth Circuit upheld the bankruptcy refusal to issue a sanctions award because the record supported its finding that the Creditor’s approach to the bankruptcy litigation was not in bad faith.

Accordingly, the Ninth Circuit affirmed the order on emotional distress, punitive damages, and sanctions.  The Court reversed the order affirming the award of attorneys’ fees, and remanded for a recalculation of the fees.

Eric Tsai
McGinnis Wutscher Beiramee LLP
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