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En Banc Rehearing of Debtor’s Award of Fees

(CN) - The 9th Circuit called for an en banc rehearing Friday of the attorneys' fees that a bankruptcy court awarded against a creditor that appealed after it was found to have violated an automatic stay

Judicial power is the real issue on the table, America's Servicing Company told the federal appeals court in its petition for en banc review, saying that the Bankruptcy Appellate Panel usurped the authority of higher federal courts.

The dispute stems from a lawsuit Irene Schwartz-Tallard brought against the Wells Fargo subsidiary 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.

Federal Bankruptcy Code allows for awards of "actual damages" to those injured by a "willful violation" of such an automatic stay. Because the bankruptcy court found the company's violation willful, it granted Schwartz-Tallard $80,000 in sanctions and damages, including $20,000 in attorneys' fees.

America's Servicing argued on appeal that the bankruptcy court had improperly lumped the attorneys' fees in with the "actual damages" awarded in the case. A federal judge in Las Vegas agreed and reversed that portion of the award.

Schwartz-Tallard then sought another $10,000 in attorneys' fees for her defense of the company's appeal. This time the bankruptcy court turned her down after ruling that the fees could not be considered "actual damages" because the stay violation had ended before she was forced to fight the appeal, and thus could not have been willfully violated.

The Bankruptcy Appellate Panel (BAP) of the 9th Circuit later reversed that finding, however, and granted the fees

A three-judge appellate panel affirmed 2-1 in April but replaced the opinion in August, and America's Servicing Co. petitioned for en banc review the next month.

"The panel's decision implicates issues of exceptional importance, including an Article I tribunal assessing attorneys' fees against a party for taking an appeal that was successful in part to an Article III court," its petition states.

Judge J. Clifford Wallace had made a similar point in his dissent to the original 9th Circuit's ruling.

That opinion called it "troubling" that the bankruptcy panel had rejected the 9th Circuit's 2010 resolution of Sternberg v. Johnston, in which it set down what constituted "actual damages" under the bankruptcy code.

"The BAP's decision to ignore our binding precedent raises serious threats to the separation of powers," Wallace wrote. "The implications of such cavalier disregard by the BAP for its subordinate status within the federal judiciary are far-ranging, and merit much greater attention than the majority bestows on them."

In its en banc petition, the company similarly argued that "Sternberg drew a clear temporal line, beyond which attorneys' fees are not available."

"The panel's decision, however, held that fees incurred after a stay violation has ended can be 'actual damages'," the petition states. "This is inconsistent with Sternberg ... en banc review is warranted to avoid abrogating Sternberg and introducing uncertainty in the important question of what attorneys' fees qualify as 'actual damages' under the Bankruptcy Code."

In typical fashion, the 9th Circuit offered no comment late Friday in ordering the case be reconsidered before an en banc panel. The three-judge panel ruling may no longer be cited as precedent.

Oral argument will take place in San Francisco during the week of March 16, 2015.

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