On Feb. 11, 2014, the U.S. Bankruptcy Court for the Middle District of Alabama awarded a debtor actual damages, punitive damages (five times the amount of actual damages) and attorneys’ fees for a creditor’s willful violation of the automatic stay.[1] As directed, the debtor filed his application for attorneys’ fees, and the offending creditor objected to the application. The court analyzed the propriety of an attorneys’ fee award where there was a willful violation of the automatic stay.
The court concluded that an award of attorneys’ fees caused by such a willful violation of the automatic stay is proper and further, is not limited to those fees necessary to stop the violation. Instead, a creditor’s exposure continues throughout a debtor’s pursuit of recovering the damages, including attorneys’ fees that were incurred in the adversary proceeding, related appeals and any necessary collection efforts.[2]
Background
On Aug. 14, 2012, Credit Central South Inc. filed a collection action against Marion Parker. Nine days later, Parker filed a chapter 13 petition. On the same day, he called Credit Central to advise it of the bankruptcy filing. On Aug. 26, 2012, a notice of commencement of Parker’s chapter 13 case was mailed to Credit Central, which admitted to receiving the notice. Two days later, Credit Central filed the first proof of claim in the bankruptcy proceeding but it did not take any affirmative legal action to stop or dismiss the pending collection action.
On Sept. 29, 2012, Parker was served process at his place of employment. Less than a month later, on Oct. 25, 2012, an automatic default judgment was entered against him in the collection action. The next day, Parker filed a complaint initiating the subject adversary proceeding against Credit Central to collect damages and attorneys’ fees caused by the willful violation of the stay order. On Nov. 2, 2012, Credit Central filed a motion to dismiss the collection matter.
Analysis
In the adversary proceeding, Credit Central first argued that Parker was not entitled to any attorneys’ fees. Credit Central’s second position was if attorneys’ fees can be awarded, they should be limited only to those that are necessary to stop the stay violation. For a number of reasons, including a circuit court split, the court provided a detailed analysis of the § 362(k) attorneys’ fees issue.
Plain Language of § 362(k)
The Parker court first looked to the plain language of 11 U.S.C. § 362(k). “The starting point in discerning congressional intent is the existing statutory text.”[3] Section 362(k)(1) provides that
an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.
The plain language mandates the award of attorneys’ fees by the command “shall,” as distinguished from punitive damages that “may” be recovered under the statute. Therefore, § 362(k)(1) provides for a mandatory award of attorneys’ fees when a willful violation of the automatic stay is proven. Not surprisingly, the court quickly rejected Credit Central’s first argument.
Other Decisions and History of § 362(k)
To determine whether attorneys’ fees should be limited, as urged by Credit Central, the court next analyzed other bankruptcy, district and appellate court decisions in the Eleventh Circuit. These decisions provided for the recovery of attorneys’ fees that were necessary to remedy the violation of an automatic stay, to prosecute the adversary proceeding and to defend an appeal. For example, the Middle District of Alabama found that a debtor was entitled to the attorneys’ fees that were necessary to prosecute the adversary proceeding. After remand, the creditor appealed again, objecting to the bankruptcy court’s award of the debtor’s appellate attorneys’ fees. The district court found that the creditor’s argument was “without merit. It is well-established that appellate [attorneys’] fees and costs flow from the creditor’s violation of the automatic stay.”[4]
After analyzing the relevant case law, the Parker court performed a full review of the history of § 362. The statute, now codified at 11 U.S.C. § 362(k)(1), was first enacted as 11 U.S.C. §362(h) in 1984.[5] In 2005, Congress amended the provision, redesignating it as § 362(k)(1) and adding paragraph (k)(2).[6] Section 362(k)(2) provided a limitation in the case of a stay violation based on a creditor’s good-faith belief that the automatic stay had been terminated under § 362(h).[7] The court found that while the 2005 amendment does not apply to the facts of this particular case, it demonstrates that Congress has twice considered amendments of the automatic stay, yet never gave any indication of an intent to include a limitation such as Credit Central argued.
Criticism of Ninth Circuit’s Sternberg Decision
The court then turned to Credit Central’s reliance on the “heavily criticized decision” from the U.S. Court of Appeals for the Ninth Circuit.[8] Sternberg limited the awards of attorneys’ fees to cover only those that were necessary to terminate the stay violation, but not to prosecute an adversary proceeding to recover damages and attorneys’ fees.[9] The Sternberg ruling was based in large part on its determination that the actions to recover damages for automatic stay violations are ordinary-damage actions (looking to a dictionary definition of “actual damages” to discern the phrase’s plain meaning).[10]
The Parker court disagreed with Sternberg for two reasons. “First, its legal reasoning is unpersuasive, with misplaced reliance on the American Rule and irrelevant state court decisions, and it is contrary to existing Circuit precedent and the great weight of lower court authority. Second, the Ninth Circuit’s policy analysis in Sternberg is incorrect and the facts of this present case demonstrate the potential harm to a debtor if Sternberg were followed.”[11] The court quoted a bankruptcy judge in the Northern District of Ohio:
This court disagrees with the holding and unpersuasive reasoning in Sternberg. The Ninth Circuit dubiously found that the straightforward language of § 362(k) is ambiguous, then looked for guidance to a law dictionary and examples of state law malpractice and bad faith causes of action not created by any federal statute. This court does not find the language of the statute ambiguous or in need of odd parsing of simple language or resort to a dictionary or the guidance of Tennessee, California or Colorado state common law to inform the intent of Congress in § 362(k).[12]
The Parker court also reviewed a First Circuit Bankruptcy Appellate Panel (BAP) decision that declined to follow Sternberg, and cited the Northern District of Ohio case with approval.[13] In Parker, the court noted that Sternberg barely acknowledged prior Ninth Circuit precedent affirming an award of attorneys’ fees under § 362(k) for a violation of the automatic stay.[14] The formula prescribed in the earlier Ninth Circuit case, Dawson, included an allowance for fees that were necessary for the prosecution of the adversary proceeding and did not limit the fees just to those that were necessary to stop the stay violation.[15]
Sternberg also conflicts with existing Fifth Circuit precedent. In Repine, the U.S. Court of Appeals for the Fifth Circuit ruled that attorneys’ fees that are necessary to prosecute an action to collect damages can be awarded pursuant to § 362(k).[16] Moreover, after reviewing four more cases on this point, the court found that the great weight of lower court authority favors the Fifth Circuit’s holding in Repine.[17]
Policy Arguments
Finally, the Parker court agreed with the policy arguments made by a First Circuit BAP decision in Duby that declined to follow Sternberg and cited a Northern District of Ohio case, Grine, with approval. Duby stated that “[t]he automatic stay and the breathing room [that] it affords from creditor-collection activities play a vital and fundamental role in bankruptcy,”[18] and found that without the allowance of attorneys’ fees for § 362(k) litigation,
individual debtors’ attorneys’ would be less likely to pursue vindication of the stay and their clients’ rights thereunder, both because their bankrupt clients lack the money [that is needed] to pay hourly fees and because of the often … relatively small amount of probably damages, as in this case, making a contingency fee wholly impracticable.[19]
Parker held that the specific facts of the instant case provided further support for the policy arguments advanced in Grine and Duby. Credit Central litigated its case in bad faith, as few material facts were actually in dispute. For instance, Credit Central, (1) denied or alleged lack of knowledge to almost all of the factual allegations made by Parker, such as alleging that it had lacked the knowledge that it filed a claim in the bankruptcy proceedings or was sent notice of the bankruptcy proceedings, or that it had a process served on Parker or that Parker had even signed a promissory note; (2) caused prolonged and unnecessary litigation; and (3) should have been honest and disputed only what was legitimately in dispute.[20] Credit Central should have admitted what it did and litigated only damages, which would have minimized actual damages, punitive damages and attorneys’ fees.
Conclusion
Most courts have — and will continue to — decline to follow Sternberg, which has been found to be contrary to the plain language of § 362(k)(1), and is inconsistent with the legislative history and congressional intent behind the statute, as well as with many well-reasoned decisions in the First, Fifth and Eleventh circuits and by lower court decisions. Moreover, as the Parker court found, Sternberg is bad policy. Therefore, a creditor’s best bet is to presume that it will be found responsible for a debtor’s attorneys’ fees for a willful violation of the automatic stay, and the longer that the creditor fights the issue, the higher the debtor’s attorneys’ fees award will be in the end. Also, a creditor that chooses to overzealously litigate the issue may end up with a punitive damages against it as well, as was the case here.
[1] Parker v. Credit Central South Inc. (In re Parker), Adv. No. 12-1066-WRS, 2014 WL 2800754 (Bankr. M.D. Ala. Feb. 11, 2014) (court awarded $2,000 in actual damages, $10,000 in punitive damages, and attorneys’ fees).
[2] Memorandum and Decision, Parker v. Credit Central South Inc., Adv. No. 12-1066 WRS, (Bankr. M.D. Ala. May 15, 2014) [Docket No. 64] (Parker).
[3] Id. at. 5 (citing Lamie v. United States, 540 U.S. 526, 533, (2004)).
[4] Id. at 7-8. (citing Parker v. Pioneer Credit Co. of Ala., 2008 WL 4183436 (M.D. Ala. Sept. 10, 2008) (debtor was entitled to attorneys' fees that were necessary to prosecute adversary proceeding); and In re Parker, 419 B.R. 474, 476 (M.D. Ala. 2009) (debtor also entitled to attorneys' fees that were associated with appeals)).
[5] Id. at 9, n.4 (“Pub. L. 98-5353, § 304, added subsection (h) to 11 U.S.C. § 362. Enacted July 10, 1984, as the ’Bankruptcy Amendments and Federal Judgeship Act of 1984.’“).
[6] Id. at 10, n.5 (“Pub. L. 109-8, § 441, enacted April 20, 2005, as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.”).
[7] 11 U.S.C. § 362(k)(2) provides that "if such [a] violation is based on an action taken by an entity in the good-faith belief that subsection (h) applies to the debtor, the recovery under paragraph (1) of this subsection shall be limited to actual damages."
[8] Parker at 12.
[9] Sternberg v. Johnston, 595 F.3d 937 (9th Cir. 2010).
[10] Sternberg, 595 F.3d at 947.
[11] Parker at 12.
[12] Id. at 13 (citing Grine v. Chambers (In re Grine), 439 B.R. 461, 470 (Bankr. N.D. Ohio 2010)).
[13] Id. (citing Duby v. United States (In re Duby), 451 B.R. 664, 675-78 (B.A.P. 1st Cir. 2011) (citing Grine with approval and declining to follow Sternberg)).
[14] Id. at 14 (citing Sternberg at 946, n.4; in turn, citing Dawson v. Washington Mutual Bank FA (In re Dawson), 390 F.3d 1139, 1152 (9th Cir. 2004)).
[15] Id.
[16] Id. at 15 (citing Young v. Repine (In re Repine), 536 F.3d 512, 522 (5th Cir. 2008).
[17] Id. at 15-16 (citations omitted).
[18] Duby, 451 B.R. at 676.
[19] Id. at 16. (citing Grine, 439 B.R. at 470; Duby, 451 B.R at 676) (First Circuit BAP in Duby seconded initially positions raised in Grine)).
[20] Id. at 17-19.