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9th Cir. Dumps Precedent to Award Debtor Fees

SAN FRANCISCO (CN) - Overturning precedent, the Ninth Circuit found Wednesday that a statute of the Federal Bankruptcy Code allows for attorney's fees in a debtor's prosecution of a creditor, after the creditor violated an automatic stay.

The case arises from a lawsuit Irene Schwartz-Tallard brought against Wells Fargo subsidiary America's Servicing Company in 2009 after it sold her home at a trustee's sale, despite the fact that a stay had been entered in a Nevada bankruptcy court.

After the bankruptcy court found the company's violation willful, it granted Schwartz-Tallard $80,000 in sanctions and damages - including $20,000 in attorney's fees.

But America's Servicing argued on appeal that the bankruptcy court had improperly included the attorney's fees with the "actual damages" awarded, and a federal judge reversed that portion of the award.

Schwartz-Tallard then sought an additional $10,000 in attorney's fees for her defense of the company's appeal. The bankruptcy court declined, finding that the fees did not constitute "actual damages" because the stay violation had ended before she had to challenge the appeal.

But the Bankruptcy Appellate Panel reversed the decision and granted the fees, and after an en banc rehearing of the case the Ninth Circuit upheld the panel's judgment.

In a 20-page opinion, Circuit Judge Paul Watford wrote that a crucial precedent case here is Sternberg v. Johnston, in which the circuit held that the statute at issue allows a debtor to recover only those fees incurred to end the stay violation itself, not the fees incurred to prosecute a damages action.

But Watford said that Sternberg "misconstrued the plain meaning" of the statute, and the circuit overruled the case to the extent that it was inconsistent with its opinion.

"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 [the statute] altogether," he said.

Watford said that Congress's inclusion of the automatic stay provision in its 1978 enactment of the Bankruptcy Code "strengthened the remedies previously available to debtors injured by willful stay violations," and it "makes an award of actual damages and attorney's fees mandatory, and grants bankruptcy courts the discretion to impose punitive damages in appropriate cases."

"The question becomes: Did Congress intend to authorize recovery of attorney's fees incurred in litigation for one purpose (ending the stay violation) but not for another (recovering damages)?" he said. (Parentheses in opinion.)

"We see nothing in the statute that suggests Congress intended to cleave litigation-related fees into two categories, one recoverable by the debtor, the other not."

Although there is no legislative history that speaks directly to Congress's purpose in enacting the statute, Watford said, "it seems evident, however, 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."

"By providing robust remedies for debtors who prevail, the statute acts to deter creditors from violating the automatic stay in the first instance," he said.

Additionally, Watford said, the circuit does not believe its reading of the statute "will result in unnecessary litigation brought solely to drive up the award" - "sound exercise" of judicial discretion, he said, "will provide a sufficient check on any abuses that might otherwise arise."

Circuit Judge Carlos Bea wrote a separate concurrence with Circuit Judge Diarmuid O'Scannlain and said he was "troubled that the majority proceeds to speculate about 'Congress' plan' in enacting the automatic-stay provision."

"We should always bear in mind the 'cardinal principle of judicial restraint': 'if it is not necessary to decide more, it is necessary not to decide more,'" he said.

"Engaging in gratuitous speculation of what 'Congress' plan' must have been ignores years of Supreme Court and Ninth Circuit precedent requiring judicial inquiry to cease when a court finds a statute unambiguous."

Circuit Judge Sandra Ikuta wrote a separate 5-page dissent to say that "the ordinary tools of statutory interpretation compel me to conclude that this interpretation is not the best reading of the statutory text," and that the Circuit should have adhered to Sternberg.

She said that the majority does not apply "ordinary principles of statutory construction" because it "does not analyze the text or apply standard principles of statutory construction at all."

"Instead, the majority jumps immediately to the statute's historical context, its legislative history, and policy, but none of these sources are particularly helpful here," Ikuta said.

When the majority turns to legislative history, Ikuta said, and acknowledges that there is none "it proposes some of its own."

"In any event, even without awarding fees incurred in the damages action, the action itself deters creditors from violating the stay, and it is possible that Congress did not want to encourage costly litigation for relatively minor violations or violations that were clearly not willful," she said.

"While it is true that depriving the debtor of the attorneys' fees incurred in bringing the damages action fails to make the debtor whole, that is the ordinary result of the American Rule."

Ikuta said that she was not aware of "any canon that guides us to select an interpretation of a statute based on the ease or difficulty of administering it, and the majority does not rely on one."

"The majority states only that we try to avoid construing statutes in a way that will 'multiply litigation,' but the majority's interpretation might do just that," she said.

"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. Congress is always free to correct our interpretation."

Neither side responded to request for comment on Wednesday morning.

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