Friday, February 12, 2010

What Damages Is a Debtor Entitled to in the Ninth Circuit for a Creditor’s Violation of the Automatic Stay, After Sternberg v. Johnston?

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

Original opinion of October 1, 2009, amended on February 8, 2010.

Also, In re Dyer, 322 F. 3d 1178 (9th Cir. 2003).

A. The Ninth Circuit Panel’s Amendment and Reference to In re Dyer

Last October a Ninth Circuit panel upset a series of the circuit’s Bankruptcy Appellate Panel precedents and what had appeared to be the Ninth Circuit’s own precedents by greatly limited the attorney fees which a debtor could receive for a creditor’s “willful violation” of the automatic stay under §362(k). Then on Monday, February 8, in response to petitions for a panel rehearing and for a hearing en banc, the panel issued an order amending its earlier opinion by adding to it one clarifying footnote. It emphasizes that the opinion focuses only on the damages permitted under §362(k), leaving open “the availability of contempt sanctions, including attorney fees, for violation of the automatic stay, where otherwise appropriate.” The footnote points to the 2003 Ninth Circuit opinion, In re Dyer, 322 F. 3d 1178 (9th Cir. 2003), for guidance on this civil contempt authority of the bankruptcy court.

What do the combination of the Sternberg v. Johnston and In re Dyer opinions tell us about the damages that a debtor is entitled to after a creditor violates the automatic stay?

B. Actual Damages: Attorney Fees & Emotional Distress under §362(k)

§362(k) states, in pertinent part, that:

an individual injured by any willful violation of [the automatic] stay . . . shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.

Attorney Fees

Sternberg v. Johnston dealt almost exclusively with the approximately $70,000 in debtor’s attorney fees that the bankruptcy court had awarded under §362(k). The Ninth Circuit panel held that a creditor is liable only for debtor’s “attorney fees related to enforcing the automatic stay and remedying the stay violation." The debtor could NOT recover his or her attorney fees "incurred in prosecuting the bankruptcy adversary proceeding in which he pursued his claim for those damages." For a summary of the panel’s rationale, as well as the factual background of the case, see my earlier Bulletin on the original Sternberg v. Johnston opinion titled Creditor's Attorney Violated Automatic Stay for Not Acting Affirmatively to Stop Unexpected Domestic Relations Order, However Debtor's Attorney Fees Greatly Limited.

Emotional Distress

The opinion also briefly addressed and affirmed, in a detailed footnote, a $20,000 award for debtor’s emotional distress. Relying heavily on the 2004 Ninth Circuit opinion, Dawson v. Washington Mutual Bank, F.A. (In re Dawson), 390 F.3d 1139 (9th Cir. 2004), the panel made clear that:

1) damages for emotional distress can be awarded without an egregious violation of the automatic stay by the creditor, and

2) corroborating evidence of emotional distress is not needed if the bankruptcy court finds that the circumstances of the violation make it “obvious that a reasonable person would suffer significant emotional harm.”

The cited 2004 Ninth Ciruit Dawson opinion (written by former Oregon Supreme Court Associate Justice Susan Graber) is necessary reading for anyone considering pursuing an emotional distress claim. This opinion determined that emotional distress damages fit within the “actual damages” referred to in § 362(k) (the former § 362(h)), joining an “emerging consensus” on this contentious issue. Judge Graber then discussed in detail the delicate balancing act between allowing such claims to make a debtor whole after a creditor’s violation of the stay and avoiding frivolous claims of emotional distress. The court held “that a claim for emotional distress damages is available if the individual provides clear evidence to establish that significant harm occurred as a result of the violation.”

Other Actual Damages, Punitive Damages

Other than actual damages in the form of attorney fees, which was the focus of Sternberg v. Johnston, the opinion mentions that the bankruptcy court had awarded nearly $3,000 in actual damages in that “the stay violation had hindered [debtor’s] ability to work.” This was not an issue on appeal. Nor were punitive damages.

C. Permitted Attorney Fees for Automatic Stay Violations Under Dyer

Short Background

In Dyer the court addressed a willful violation of the automatic stay consisting of a creditor recording a deed of trust weeks after the filing of a Chapter 7 case. The bankruptcy trustee sought to avoid the lien on the real estate and to sanction the creditor for violating the stay. The case on appeal focused on the bankruptcy court’s civil contempt authority of 11 U.S.C. § 105(a) and the court's inherent sanction authority, because the more direct damages provision for automatic stay violations of § 362(k) is not available to trustees.

The bankruptcy court awarded the trustee a total of $201,439 for the stay violation, $50,000 of which it called “punitive damages” and the remaining amount was the trustee's documented attorneys' fees and costs.

Issues in Dyer: Civil Contempt Sanctions under § 105(a), and Inherent Sanction Authority

The primary issue in Dyer was whether the bankruptcy court’s civil contempt authority granted by § 105(a) permitted punitive damages. But the opinion also reviewed the appropriateness of compensatory sanctions under § 105(a), as well as both punitive and compensatory sanctions under the bankruptcy court’s separate inherent sanction authority. “The inherent authority derives not from statute but rather from the very creation of the court (unless Congress intentionally restricts those powers).”

Sanctions under the Civil Contempt Authority of § 105(a)

Unlike § 362(k), which specifically authorizes the recovery of “actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, . . . punitive damages,” § 105(a) does not expressly authorize any specific kind of damages. It states:

The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.

The Ninth Circuit cited its own precedents as follows:

1. Sanctions under § 105(a) require the violation of “a specific and definite order of the court.”

2. The “automatic stay qualifies as a specific and definite court order.”

3. “The threshold standard for imposing a civil contempt sanction in the context of an automatic stay violation . . . dovetails with the threshold standard for awarding damages under § 362(h)”: both turn not on the creditor’s subjective intent to violate the stay but rather his knowledge of the automatic stay and intent to take the action which violated the stay.

4. Although in the § 362(h) context the creditor’s mere knowledge of the bankruptcy proceeding is enough to infer knowledge of the automatic stay, in the contempt context the creditor must have knowledge of the automatic stay itself. (This was stated in dicta.)

5. Creditor has an affirmative duty to remedy his violation of the automatic stay, at least by filing a motion for relief from stay, and his failure to do so constitutes a violation of the automatic stay injunction, permitting civil contempt sanctions.

Punitive Damages under the Civil Contempt Authority of § 105(a)

The court reasoned:

1. Since “the contempt authority conferred on bankruptcy courts under § 105(a) is a civil contempt authority,” “it authorizes only civil sanctions as available remedies.”

2. Civil remedies “must either be compensatory or designed to coerce compliance.” Here the $151,000 or so in attorney fees “was neither intended to coerce compliance nor intended to compensate the Trustee for actual damages,” so it was a criminal sanction.

3. Because § 105(a) “contains no explicit grant of authority to award punitive damages,” and “due process requires that an individual accused of criminal contempt receive several procedural protections, including a jury trial, before ‘serious criminal penalties’ can be imposed,” which “the bankruptcy court is ill-equipped to provide,” “§ 105(a) does not authorize punitive sanctions for automatic say violations.”

“Compensatory” Attorney Fees

After confirming “that attorneys' fees are an appropriate component of a civil contempt award,” the court asserted that in the contempt context the bankruptcy court must make a “determination of the Trustee's actual damages flowing from the automatic stay violation alone.” The Ninth Circuit remanded to the bankruptcy court for that purpose.

The Non-Statutory Inherent Sanction Authority of the Bankruptcy Court

The court concluded with this final type of authority, following this rationale:

1. “Civil contempt authority allows a court to remedy a violation of a specific order (including "automatic" orders, such as the automatic . . . )” while the “inherent sanction authority allows a bankruptcy court to deter and provide compensation for a broad range of improper litigation tactics.”

2. But “[b]efore imposing sanctions under its inherent sanctioning authority, a court must make an explicit finding of bad faith or willful misconduct,” which carries a different meaning than the meaning . . . under § 362(h)[now (k)] or . . . under § 105(a) for an automatic stay violation. “[S]pecific intent to violate the automatic stay" . . . or other conduct in ‘bad faith or conduct tantamount to bad faith,’ . . . is necessary to impose sanctions under the bankruptcy court's inherent power.”

3. In a case of first impression for the circuit, the court determined that, for “the same reasons underlying our holding that the bankruptcy court lacks the authority to impose serious punitive sanctions under its contempt authority [under § 105(a)], . . . ‘when a court uses its inherent powers to impose sanctions that are criminal in nature, it must provide the same due process protections that would be available in a criminal contempt proceeding’.“

4. Finally, also analogous to the § 105(a) context, the court remanded “to the bankruptcy court to determine the appropriate scope of the compensatory sanction award.”

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.

© 2010 Bankruptcy Litigation Support for Attorneys

Thursday, February 11, 2010

9th Circuit Panel Clarifies Its Holding Restricting Debtors’ Attorney Fees for Creditor Violation of Automatic Stay, En Banc Review Avoided Again

Sternberg v. Johnston (In re Johnston)

9th Circuit Court of Appeals Case Nos. 07-16870 & 08-15721

Original opinion of October 1, 2009, Amended on February 8, 2010.

The Ninth Circuit Panel’s Clarification

On Monday, February 8, the Ninth Circuit amended its momentous opinion of last October in which it had greatly limited the attorney fees which a debtor could receive for a creditor’s “willful violation” of the automatic stay under §362(k). See my prior Bulletin on that opinion. Under that earlier opinion a creditor is liable only for debtor’s “attorney fees related to enforcing the automatic stay and remedying the stay violation." The debtor could NOT recover his or her attorney fees "incurred in prosecuting the bankruptcy adversary proceeding in which he pursued his claim for those damages." This holding is contrary to long-standing Ninth Circuit Bankruptcy Appellate Panel precedent, and contrary to the only other Circuit opinion to have ruled on the issue.

Now the Ninth Circuit panel which wrote last October’s opinion has issued an order amending its opinion, apparently in response to a petition for a panel rehearing. The amendment did not change a single word of the body of its opinion, but merely added this clarifying footnote:

3The attorneys fee award against [creditor] Sternberg was based on the authority of this statute [§362(k)(1)]. The bankruptcy court did not find Sternberg or anyone else to be in civil contempt for violating the automatic stay, nor did it impose any sanctions under its inherent civil contempt authority. See In re Dyer, 322 F. 2d 1178, 1189 (9th Cir. 2003) [actual citation is to F. 3d]. As this opinion does not consider the civil contempt authority of the court, it does not limit the availability of contempt sanctions, including attorney fees, for violation of the automatic stay, where otherwise appropriate.

So in this amendment the Ninth Circuit panel does NOT change its holding severely limiting the debtor’s attorney fees that a creditor would be required to pay for its “willful violation” of the automatic stay. The panel merely makes explicit that its opinion addresses only §362(k), and does not address a potential alternate basis for a creditor to be sanctioned for violating the automatic stay, the bankruptcy court’s inherent civil contempt authority. The footnote points to its own 2003 opinion, In re Dyer, for guidance on this alternative basis. Thus the combination of these two cases lays out the current law on this issue in the Ninth Circuit. See my next Bulletin (tomorrow) for this summary.

En Banc Review Denied

It is commonplace for a court of appeals to deny a petition for rehearing en banc (by the entire membership of the court). Under Federal Rule of Appellate Procedure 35(a):

An en banc hearing or rehearing is not favored and ordinarily will not be ordered unless:

(1) en banc consideration is necessary to secure or maintain uniformity of the court’s decisions; or

(2) the proceeding involves a question of exceptional importance.

But the context here is worthy of note. As the Johnston opinion acknowledges, the Ninth Circuit has “affirmed awards under § 362(k)(1) that appear to have contained attorney fees incurred in prosecuting a § 362(k)(1) damages action.” It cited three Ninth Circuit opinions spanning from 1989 to 2004. The three-judge panel explicitly determined that these opinions were not binding on it because

[i]n these cases our court was not confronted with an argument that § 362(k)(1) does not permit such fees. . . . . Accordingly, we are free to decide the issue without referring it to the court en banc.

Subsection (f) of the appellate rule cited above states that a vote by the full membership on a petition for hearing en banc need be taken only if a judge asks for a vote. The new amended order states that none of the judges asked for a vote. And so the petition was denied.

$20,000 Award for Debtor’s Emotional Distress Upheld Again

Lastly, the Ninth Circuit upheld the bankruptcy court’s award of $20,000 to debtor for his emotional distress resulting from the stay violation. The facts of the case are somewhat unusual and so deserve a closer look, especially because at least in some respects the stay violator’s actions seemed less than egregious.

Johnston was the respondent in a motion in state court filed by his ex-wife’s attorney, Sternberg, to hold him in contempt for his failure to pay spousal support. Sternberg proceeded with a hearing on the contempt motion after Johnston, who was representing himself in that matter, told him for the first time, 15 minutes into the hearing, that he had filed a Chapter 11 case three days earlier. Sternberg told the judge that he did not think the automatic stay affected the proceedings because it fell within exceptions of the stay. The state court judge proceeded with the contempt hearing, telling the parties that the issue of appropriate sanctions would be addressed after the parties briefed the issue of whether she still had jurisdiction in light of the bankruptcy filing. Notwithstanding this, the judge subsequently ruled, before the automatic stay issue was briefed, granting judgment against Johnston for nearly $88,000, and gave him only 19 days to pay this or be jailed until he did. Johnston asked Sternberg to remedy this matter since it was in violation of the stay, but Sternberg did not take any action to do so. Johnston filed an appeal of the contempt judgment, which Sternberg’s law firm, in representing the ex-wife, resisted, arguing that the state court acted within exceptions of the automatic stay. Johnston sought emergency relief in the bankruptcy court, which, at a hearing on the day before the contempt order was due to be paid, vacated the state court contempt judgment. It subsequently awarded Johnston the $20,000 award for emotional distress against Sternberg in an adversary proceeding by Johnston against Sternberg for his violations of the stay.

The Ninth Circuit addressed the emotional distress award, which had been upheld on appeal to the district court, merely in a footnote, the heart of which states:

Each of Sternberg’s arguments is foreclosed by Dawson v. Washington Mutual Bank, F.A. (In re Dawson), 390 F.3d 1139 (9th Cir. 2004). First, as In re Dawson clearly states, “even if the violation of the automatic stay was not egregious,” Johnston could recover emotional distress damages that arose from a stay violation. Id. at 1149-50. Second, Johnston could establish emotional distress damages without corroborating evidence if the circumstances make it obvious “that a reasonable person would [have] suffer[ed] significant emotional harm,” which the bankruptcy court found was the case here.

The cited Dawson opinion held that:

to be entitled to damages for emotional distress under § 362(h), an individual must (1) suffer significant harm, (2) clearly establish the significant harm, and (3) demonstrate a causal connection between that significant harm and the violation of the automatic stay (as distinct, for instance, from the anxiety and pressures inherent in the bankruptcy process).

The opinion then provided many concrete examples and citations to other opinions showing the kinds of evidence required to meet each of these elements. Taken together these confirm that getting an award for a debtor’s emotional distress is difficult and requires appropriate facts substantiated by solid evidence. But at least Dawson provides a relatively clear road map in the Ninth Circuit for attempting to do so.