An October 22, 2009 by the 9th Circuit Court of Appeals upsets the understanding that a debtor in bankruptcy who pursues an adverary proceedings claim against a creditor who violated the automatic stay may be awarded costs and attorneys’ fees. The case is
Sternberg v. Johnston.
In 1997, the Bankruptcy Appellate Panel of the 9th Circuit had approved a claim for attorneys’ fees asserted by a successful debtor in the prosecution of an appeal of a stay violation. In re Walsh, 208 B.R. 949, affirmed 219 B.R. 873 (Bkrtcy.N.D. Cal.1997). This led most bankruptcy practitioners to conclude that attorney fees for prosecution of a violation of the stay were allowed under 11 USC section362(k)(1) which states in part:
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.
In Sternberg, the 9th Circuit interpreted this language as meaning that the debtor could only recover attorneys’ fees incurred in defending against an act resulting from a violation of the automatic stay, not in prosecuting a claim against the violating creditor. The 9th Circuit acknowledged that its interpretation was at odds with the 5th Circuit, but decided that if Congress intended to abrogate the “American Rule” (the common law rule that each party bears its own costs and attorneys’ fees absent agreement or statute), it would have done so more explicitly. It seemed to reason that the phrase “actual damages and attorneys’ fees” means only “actual damages, including attorneys’ fees spent defending a wrongful action.”
This is an odd interpretation of what one would expect from plain statutory language. But the 9th Circuit invoked the US Supreme Court case Fogerrty v. Fantaxy, Inc., 510 US 517 (1994) in support. (As an aside, this was John Fogerty of Creedance Clearwater fame.) Fogerty involved a defendant’s claim for attorneys’ fees against a plaintiff after he successfully defended against a copyright lawsuit. The statute in question gave the District Court discretion to award attorneys’ fees, but did not require it. The Supreme Court held that, because the copyright statute stated that the court “may” award attorneys’ fees, it was not required to.
The obvious problem jumps out. Section362(k)(1) states that attorneys’ fees “shall” be awarded. The 9th Circuit did not discuss this distinction.
Nevertheless, right now in the 9th Circuit it looks like there is no authority for asking for attorneys’ fees in a prosecution for violation of relief from stay.
The other issue in Sternberg was whether a lawyer representing a divorced wife pursuing delinquent support willfully violated the automatic stay by defending her claim in state court proceedings after the bankruptcy petition had been filed. The 9th Circuit said yes, restating the affirmative duty of creditors to essentially undo state proceedings to the extent that such proceedings impair a bankrupt debtor’s estate.