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.