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.

Eric Tsai

Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654

Fax: (866) 581-9302

Mobile: (714) 600-6000

Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon

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FYI: 9th Cir Holds "Unlawful Information Collection and Sharing" Class Action Improperly Removed Under CAFA

In a 2-1 decision, the U.S. Court of Appeals for the Ninth Circuit held that a putative class action against state entities and a private contractor for allegedly collecting and sharing personal data without authorization was essentially a local controversy and was therefore correctly remanded to state court under an exception in the federal Class Action Fairness Act ("CAFA").

Accordingly, the Ninth Circuit affirmed the ruling of the trial court remanding the matter to state court. 

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

The plaintiffs ("Plaintiffs") sought to maintain an action in state court on behalf of a class of users of a bridge against two entities of the State of California ("State Entities") and a private company ("Company") that contracted with the State Entities to operate the bridge's toll system.

Plaintiffs' principle claims alleged the defendants violated the California privacy statutes prohibiting collection of personal data when they collected personally identifiable information from people driving over toll bridges and then shared the information with various unauthorized third parties.

The Company removed the action to federal court under CAFA.  Plaintiffs then moved to remand arguing, among other things, that removal was precluded under 28 U.S.C. § 1332(d)(5)(A) because the Company was acting on behalf of the state even though it is a private company.

The trial court concluded that the Company qualified as a state entity because it was exercising the authority of the state with respect to the alleged violation of the Plaintiffs' privacy rights.

The trial court held that the Company had the burden of satisfying section 1332(d)(5)(A) and because the burden was not met, removal was improper.  The trial court therefore remanded the matter to state court. 

The Company then appealed.

As you will recall, under CAFA, a trial court shall have jurisdiction over a class action when: (1) the amount in controversy exceeds five million, and (2) any class member is a citizen of a state different from any defendant. 28 U.S.C. 1332(d)(2). 

However, CAFA creates an exception from federal court jurisdiction for cases targeting state, local and other government entities that may claim immunities.  See 28 U.S.C. § 1332(d)(5)(A). 

On appeal, the Company argued that the trial court erred because it relied on 42 U.S.C. § 1983 case law to determine that it was a state actor, and that the trial court failed to address the language of CAFA's statutory exception relating to "other governmental entities against whom the trial Court may be foreclosed from ordering relief."

The Company's position was that it was a private entity outside the scope of 28 U.S.C. § 1332(d)(5)(A).  It further "accurately point[ed] out that Section 1983 cases are not controlling because the § 1983 state actor analysis looks to an actor's role and conduct while the CAFA inquiry goes to the nature of the entity itself." 

Thus, the Company argued, the "trial court's exclusive reliance on § 1983 was not appropriate," rather the "issue is whether [the Company] may be considered an instrumentality of the state." 

The Ninth Circuit disagreed, noting that "[th]he trial court's analysis, however, also focused to some extent on the relationship between [the Company] and the state entities ultimately responsible under California law for collecting bridge tolls.  [The Company] is an entity acting on behalf of the state to perform toll related functions required by the statute."

As you may recall, the Eleventh Amendment of the United States Constitution provides that "[t]he Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State," which means private individuals may not sue non-consenting state entities in federal court. 

Moreover, the Ninth Circuit noted, the state need not be named as a defendant, rather "[t]he Supreme Court has held that 'the reference to actions 'against one of the United States' encompasses not only actions in which a State is actually named as a defendant, but also certain actions against state agents and state instrumentalities.'"

"To determine whether an entity is able to invoke such immunity our Court has said we generally look to a number of factors: (1) whether a money judgment would be satisfied out of state funds, (2) whether the entity performs central government functions, (3) whether the entity may sue or be sued, (4) whether the entity has the power to take  property in its own name or only the name of the state, and (5) the corporate status of the entity."

In reviewing those factors, the Ninth Circuit ruled that the Company "satisfies the second factor of performing a central government function and it has not asserted that it lacks any of the other characteristics," but the "record does not reflect whether it may satisfy the other factors." 

Moreover, "the Mitchell factors are not particularly useful when applied to a private entity because a private entity cannot be an arm of the state when the relationship to the sovereign is by contract only," and "[o]ur case law provides not clear answer as to whether [the Company] qualifies as a governmental entity within the meaning of CAFA."

Nevertheless, the Ninth Circuit continued, "[w]e need not decide whether the trial court erred in remanding on the 'other governmental entit[y]' ground pursuant to § 1332(d)(5)(A) because there is a further justification for remand.  The plaintiffs correctly content that the result is required by provisions of CAFA calling for local actions to be heard in state court.  The local controversy exception is one of several exceptions to CAFA removal jurisdiction."

Under this exception, "a trial court is required to decline jurisdiction over a class action when: (1) more than two-thirds of the proposed plaintiff class(es) are citizens of the state in which the action was originally filed, (2) there is at least one in-state defendant against whom 'significant relief' is sought and 'whose alleged conduct forms a significant basis for the claims asserted' by the proposed class, (3) the 'principal injuries' resulting from the alleged conduct of each defendant were incurred in the state of filing, and (4) no other class action 'asserting the same or similar factual allegations against any of the defendants' has been filed within three years prior to the present action."

In analyzing these factors, the Ninth Circuit determined that "[m]ost of these requirements are met."

In so ruling, the Court held that "[t]his is essentially a dispute between those who use the bridge to travel between Marin County, California and San Francisco, California, and defendants who are charged with operating the bridge on behalf of the State of California.  The trial court properly ruled that the case against [the Company], a toll collector, belongs in state court with the California entities that manage the bridge's maintenance and operation." 

Accordingly, the ruling of the trial court was affirmed. 

Eric Tsai

Maurice Wutscher LLP 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654

Fax: (866) 581-9302

Mobile: (714) 600-6000

Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon

ALABAMA   |   CALIFORNIA   |   FLORIDA   |   ILLINOIS   |   MARYLAND   |   MASSACHUSETTS   |   NEW JERSEY   |   NEW YORK   |   OHIO   |   PENNSYLVANIA   |   TEXAS   |   WASHINGTON, D.C.