9th Cir. Overturns Widely Criticized Attorney Fee Case

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By Stephanie Cumings

Oct. 16 — The Ninth Circuit has resolved a circuit split on attorneys' fees by overturning a much criticized decision from 2010.

The full court elected to rehear the case, known as an en banc rehearing, and chose to “jettison” Sternberg v. Johnston's “erroneous interpretation” of when it is appropriate to award attorneys' fees for violations of the automatic stay in bankruptcy.

But some of the judges were troubled by the majority's “gratuitous speculation” on Congress's intent behind the attorneys' fees statute. Judge Sandra S. Ikuta dissented, saying she prefers the approach in Sternberg but has “complete sympathy” for the difficulties the case has caused.

‘Obvious Practical Impact.'

“This case has been up and down the appellate ladder for the past five years,” Christopher Burke, an attorney for the debtor, told Bloomberg BNA Oct. 16. “Fortunately, at least for debtors and their attorneys, the Ninth Circuit came to the right conclusion. I have actually heard, from a number of attorneys and a couple of retired judges, who also believed this was the correct result.” Attorneys for the creditor did not immediately respond to requests for comment.

Kirk S. Cheney, a bankruptcy lawyer at Holland & Hart, Boise, Idaho, told Bloomberg BNA Oct. 15 that the “most obvious practical impact” of the decision is that “debtors who previously lacked the financial means or incentive to pursue damages for stay violations may now be more willing to bring those actions.”

“Under Sternberg, once a stay violation was remedied, any further legal action the debtor took relating to the stay violation was on the debtor’s own dime,” Cheney said. “If the debtor estimated its maximum recovery to be only tens of thousands of dollars, the potential recovery could easily be outweighed by the cost of suit, including appeal. That’s no longer the case.”

“Debtors in the Ninth Circuit will again be able to protect their right to a breathing spell from creditors' collection activities following the filing of a bankruptcy petition,” Tara Twomey of the National Association of Consumer Bankruptcy Attorneys (NACBA) told Bloomberg BNA Oct. 16. NACBA filed an amicus brief in this case arguing that Sternberg should be overturned because it was “at odds with the plain text of Section 362(k), undermined the statutory purpose of the automatic stay, generated unnecessary confusion in an area that demands uniformity, and was unworkable in practice,” Twomey said.

Circuit Split and Criticisms

The controversial case, Sternberg v. Johnston, 2010 BL 27115, 595 F.3d 937 (9th Cir. 2010), held that debtors can only recover attorneys' fees incurred trying to end a violation of the automatic stay, but can't recover fees incurred pursuing a damages action for that violation of the stay.

When a debtor files for bankruptcy, the automatic stay halts all judicial proceedings against the debtor. If a creditor willfully violates the automatic stay, Section 362(k) of the Bankruptcy Code says that a debtor can “recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”

When Sternberg came down, it created a split with the Fifth Circuit, which has held, albeit with minimal discussion, that “it is proper to award attorney's fees that were incurred in prosecuting a [S]ection 362(k) claim.” Sternberg has been the subject of “widespread criticism,” the court said.

In fact, the Ninth Circuit's own Judge Paul J. Watford criticized Sternberg for making the calculation of attorneys' fees “unnecessarily complicated” in a decision last year.

Wrongful Foreclosure

In this case, a debtor was awarded $60,000 in damages when her mortgage servicer wrongfully foreclosed on her house in violation of the automatic stay. The servicer appealed the damages award, but lost. The debtor then sought to recover the $10,000 in attorneys' fees she accrued fighting the appeal.

The bankruptcy court said it thought the debtor should be able to recover the fees, but it was bound by Sternberg to deny them. A divided Ninth Circuit three-judge panel held that the violation of stay had actually continued with the appeal, and so the debtor was entitled to attorneys' fees because she was still trying to end the violation of stay. After agreeing to a rehear of the case, the Ninth Circuit changed course.

Statute's Language is Clear

“We find it unnecessary to resolve the issue that divided the three-judge panel,” the court said. “Rather than decide whether Sternberg's holding extends to the facts of this case, we think the better course is to jettison Sternberg's erroneous interpretation of [Section] 362(k) altogether.”

The court said that the language of the statute unambiguously supports awarding attorneys' fees for pursuing a damages action based on the violation of stay. The court said that to read the statute as Sternberg did would require inserting “limiting language—something like, ‘including costs and attorneys' fees incurred to end the stay violation'—that is simply not present.”

Divining Congressional Intent

Turning to the legislative history of the statute, the court said it did not have “legislative history that speaks directly to Congress' purpose in enacting [Section] 362(k).”

“It seems evident, however,” the court said, “that Congress sought to encourage injured debtors to bring suit to vindicate their statutory right to the automatic stay's protection, one of the most important rights afforded to debtors by the Bankruptcy Code.” The court added that 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.”

The court also noted the “difficulties courts have encountered in administering” the Sternberg approach, which “requires the bankruptcy court to sort out how much attorney time was devoted to ending the stay violation (recoverable) as opposed to pursuing damages (not recoverable).” The court said that this can “spawn further litigation over when, exactly, a stay violation actually came to an end—a matter that can be deceptively tricky to resolve.”

‘Pure Speculation.'

Judges Carlos T. Bea and Diarmuid F. O'Scannlain agreed with the majority on the “unambiguous” meaning of the statute, but criticized it for engaging in “pure speculation as to Congress' motivations in enacting [Section] 362(k).” Bea said that this kind of speculation “ignores years of Supreme Court and Ninth Circuit precedent requiring judicial inquiry to cease when a court finds a statute unambiguous.”

“Nevertheless,” Cheney told Bloomberg BNA, “in future cases, parties seeking to apply Section 362(k) in the Ninth Circuit will likely quote the majority’s dicta as an authoritative statement on the purpose of Section 362(k).”

Impulse to Improve Legislation

Ikuta also criticized the majority's take of congressional intent, saying that “[i]t is possible that Congress had those purposes in mind, but because there is no evidence of those purposes, they do not support the majority's interpretation.”

In her dissent, Ikuta said she finds the statutory language to be ambiguous and that Sternberg's version is the “better reading” of the statute, even though she personally prefers the majority's approach for its simplicity. She argued that the majority did not apply the “ordinary principles of statutory construction” and instead made the “conclusory statement that the ‘explicit language of [Section] 362(k)' is unambiguous.”

But she agreed that the Sternberg approach is “difficult to apply, and has puzzled bankruptcy courts and district courts alike.”

“Although I understand the impulse to improve Congress's legislative efforts, our role is a modest one, and we should simply do our best to give effect to the plain language of the text,” Ikuta said. “Congress is always free to correct our interpretation.”

Christopher P. Burke of Christopher P. Burke & Associates, Las Vegas, Nev., represented the debtor.

Kelly Harrison Dove of Snell & Wilmer, LLP, Las Vegas, Nev., and Andrew Martin Jacobs of Snell & Wilmer, LLP, Tucson, Ariz., represented the creditor.

To contact the reporter on this story: Stephanie Cumings in Washington at sacree@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

Full text at: http://www.bloomberglaw.com/public/document/Americas_Servicing_Co_v_SchwartzTallard_In_re_SchwartzTallard_No_