Monday, October 5, 2009

Creditor's Attorney Violated Automatic Stay for Not Acting Affirmatively to Stop Unexpected Dom Rel Order, However Debtor's Atty Fees Greatly Limited

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

Sternberg v. Johnston (In re Johnston)
9th Circuit Court of Appeals Case Nos. 07-16870 & 08-15721
October 1, 2009

The Issues:
1) What constitutes a creditor attorney's "willful violation" of the automatic stay while collecting on a "domestic support obligation," permitting the debtor to recover against the attorney debtor's "actual damages, including costs and attorney fees," under § 362(k)? Specifically, after filing a state court motion pre-petition to collect for support arrears, what must a creditor's attorney do post-petition to comply with the stay?

2) What attorney fees may the debtor recover as "actual damages" in this context? Specifically, can debtor recover "only those attorney fees related to enforcing the automatic stay and remedying the stay violation," or also "the fees incurred in prosecuting the bankruptcy adversary proceeding in which he pursued his claim for those damages"

Its Rulings
1) Upon the issuance of the domestic relations judge's order in violation of the automatic stay, the creditor's attorney had an affirmative duty "[w]ithin a reasonable time after that" "to take corrective action." Since he "did not act to try to fix that problem," "he willfully violated the automatic stay."
2) Debtor may only recover attorney fees "related to enforcing the automatic stay and remedying the stay violation."

The Court affirmed the judgment that creditor's attorney violated the automatic stay and is liable for debtor's actual damages of almost $3,000, plus for emotional distress of an additional $20,000. It remanded to the bankruptcy court to determine the amount of "attorney fees incurred [by debtor] in seeking to enforce the automatic stay and to fix the problem caused by the overbroad state court order," but NOT "in prosecuting the adversary proceeding to determine damages."

Essential Facts
Johnston, an attorney, fell behind on his spousal support payments. Sternberg, attorney for Johnston's ex-wife, filed a motion in state court to hold Johnston in contempt for this non-payment. The motion also asked for a judgment in the amount of the support arrears, and an order that Johnston be jailed, his drivers' license revoked, a lien put on his vehicle and other assets, and his law license suspended. Johnston filed a Chapter 11 case through his bankruptcy attorney three days before the hearing on Sternberg's motion. Johnston represented himself at that hearing, and informed Sternberg and the court of his Chapter 11 filing. The court decided it would address the contempt issue at that hearing, but that it would take up the issue of the appropriate sanctions after the attorneys had researched whether the court had authority to order sanctions in light of the bankruptcy filing. Two months later, to the surprise of both attorneys, the state court judge issued an order not only finding Johnston in contempt and granting judgment in the amount of about $87,500, but ordered him to pay that amount in full in less than three weeks or else be jailed "until the full amount . . . is paid."

Johnston wrote a letter to Sternberg stating that he was in violation of the automatic stay, and asked him to remedy the situation. Johnston also both filed a motion in state court for relief from the order and an appeal with the state court of appeals to stay the order. Sternberg's law firm filed a brief with that court of appeals arguing for the appropriateness of the state court judge's sanction notwithstanding the automatic stay.

Johnston also filed a motion in bankruptcy court to set aside the state court order. That court concluded that the automatic stay had been violated and set aside the order. However, after Johnston filed an adversary proceeding asserting Sternberg's willful violation of the automatic stay, the bankruptcy court ruled after trial that the affirmative duty to stop actions which violate the stay did not extend to collection on support arrears. Johnston appealed to the district court, which reversed, extending Sternberg's affirmative duty to stopping collections on support arrears. On remand, the bankruptcy court awarded Johnston nearly $3,000 for loss of employment income, $20,000 for emotional distress, and nearly $70,000 for Johnston's attorney fees and costs, a total of nearly $93,000. Sternberg appealed to the district court, which affirmed; he then appealed to the Ninth Circuit.

The Rationales
1) Creditor Attorney's Duty
The Court cited a number of Ninth Circuit opinions on the affirmative duty of a creditor and its counsel to comply with the automatic stay, but focused mostly on the applicability of its 2002 opinion Eskanos & Alder, P.C. v. Leetien (Eskanos), 309 F.3d 1210. There a law firm representing a debtor's unsecured creditor was held to have willfully violated the stay when it waited 23 days after learning of a bankruptcy filing to dismiss its client's lawsuit against a debtor.

The Court here reasoned that even though Sternberg was not responsible for the state court's order,
[w]ithin a reasonable time after [learning of the order], however, the law required Sternberg to take corrective action. He did not, and he affirmatively opposed Johnston's effort to obtain relief from the state appellate court.
. . .
. . . Sternberg offered a complete defense of the order. . . . . He did not try to parse the valid from the invalid, but instead defended the order in its entirety, including the command that Johnston pay the arrears or go to jail, and without limiting the source of payment to non-estate property.
. . .
To comply with the "affirmative duty" under the automatic stay, Sternberg needed to do what he could to relieve the violation. He could not simply rely on the normal adversarial process.
As to Sternberg's willfulness, it is enough that he was aware of the automatic stay and that his actions in violation were intentional. It does not help if he had a good faith belief that he was acting legally, or that debtor did not make a specific request to amend the state court order to comply with the stay.

2) Permitted Attorney Fees
Unless established otherwise by statute, the "American Rule" says that litigants pay their own attorney fees. § 362(k)(1) of the Bankruptcy Code says that
an individual injured by any willful violation of a stay . . .shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.
At issue, the Court reasoned, is the interpretation of the ambiguous and statutorily undefined phrase, "actual damages." Using Black's Law Dictionary's definition as it's sole cited source, the Court determined that the permitted attorney fees are those "resulting from the stay violation itself. Once the violation has ended, any fees the debtor incurs after that point in pursuit of a damage award would not be for 'actual damages' under § 362(k)(1)."

Court argued that the "context and goals of the automatic stay support this narrower understanding." The financial goal of the stay is to give the debtor time to put his finances in order, reorganize to maximize satisfying creditors, and prevent creditors from racing to the debtor's assets.
We have never said that the stay should aid the debtor in pursuing his creditors, even those creditors who violate the stay. The stay is a shield, not a sword.
The non-financial goal is to "create a breathing spell" for the debtor.
More litigation is hardly consistent with the concept of a “breathing spell” for the debtor.
. . . .
[Encouraging] litigation attenuated from the actual bankruptcy, [is] something we do not think Congress intended to promote by allowing him to collect “actual damages” for a violation of the automatic stay.
In so holding the Court went against two longstanding Ninth Circuit BAP opinions, one of which explicitly said that "it is well established that the attorneys’ fees and costs incurred in prosecuting an adversary proceeding seeking damages arising from a violation of the automatic stay is recoverable . . . . " The Court even acknowledged in a footnote that the Ninth Circuit Court of Appeals itself had affirmed such attorney fees, no less than three times. But since in none of these appeals was this specific issue "presented for review," the Court here was "free to decide the issue without referring it to the court en banc."

Finally, the Court also went against apparently the only other Circuit Court to squarely address the issue, Young v. Repine (In re Repine), 536 F.3d 512, 522 (5th Cir. 2008). In his short paragraph on this, the Ninth Circuit judge said that "we are hard-pressed to find this decision persuasive" because it merely relied on the "lower courts of [that] Circuit . . and adopt[ed] the same reading of section 362(k) . . . ." The judge did not bother to address the reasoning of the lower courts' published opinions listed in and endorsed by the Fifth Circuit opinion.

Note on Emotional Distress
The $20,000 award for emotional distress was resolved in this opinion by a one-paragraph footnote stating that 1) the automatic stay violation need not necessarily be "egregious" to warrant an emotional distress award, and 2) the circumstances need only to "make it obvious 'that a reasonable person would [have] suffer[ed] significant emotional harm.' "

New Bulletins on this website will provide summaries of other opinions within the Ninth Circuit shortly after they are published. PLEASE EMAIL ME at IF YOU WOULD LIKE TO BE EMAILED A LINK TO SUCH FUTURE REPORTS.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys