There is no longer a split among the circuits on the ability of a debtor to recover attorneys’ fees in pursuit of damages for willful violation of the automatic stay.
In a 2010 decision called Sternberg, the Ninth Circuit held that counsel fees could be recovered under Section 362(k) only to remedy a violation of the automatic stay and not for attorneys’ fees incurred pursuing damages against the offending creditor.
Sitting en banc, the circuit overruled Sternberg with a split decision on Oct. 14 in a case called America’s Servicing Co. v. Schwartz-Tallard (In re Schwartz-Tallard).
In Sternberg, the stay violation had been remedied before the bankrupt sued to recover damages.The appeals court concluded in its 2010 opinion that the fees could not be recovered for seeking damages, only for halting the stay violation itself.
In Schwartz-Tallard, a lender foreclosed on a home, knowing the homeowner was in bankruptcy. Immediately after the bankruptcy court directed that it be done, the lender reconveyed the home.The bankruptcy court awarded damages for a stay violation and ordered reconveyance of the
home.
The lender unsuccessfully appealed both the grant of fees and the underlying finding of a stay violation. The bankruptcy court denied recovery of fees for the bankrupt’s appeal, interpreting Sternberg. The bankruptcy appellate panel ruled on appeal that fees should be paid.
The first time Schwartz-Tallard went to the circuit court, a majority upheld the appellate panel, distinguishing Sternberg because the lender in the new case still contended on appeal that there was no stay violation and no need to reconvey the home. The panel opinion held last year that the “plain language” of the statute required an award of fees because the creditor had not acceded to the existence of a stay violation.
Following en banc rehearing, Circuit Judge Paul J. Watford wrote for the majority and noted that Sternberg had been subjected to “widespread criticism.” Rather than examine the narrow holding of the three-judge panel, Judge Watford said that the “better course is to jettison Sternberg’s erroneous interpretation of Section 362(k) altogether.”
Judge Watford overruled Sternberg because he said it “misconstrued the plain meaning of Section 362(k).” He found nothing in the statute to suggest that Congress intended to create two categories such that fees for ending the stay are recoverable while those in pursuit of damages are not.
Although Judge Watford said the subsection is not ambiguous, it was still “easy” to overrule Sternberg, he said, even in the absence of legislative history regarding Section 362(k). Embedded within the subsection, he found that Congress intended “to encourage injured debtors to bring suit to vindicate their statutory right to automatic stay protection, one of the most important rights afforded to debtors.”
Circuit Judges Carlos T. Bea and Diarmuid F. O’Scannlain concurred in the judgment because the majority found the statute unambiguous. They declined to “engage in pure speculation” about the intent of Congress.
Circuit Judge Sandra S. Ikuta dissented. She could not find intent by Congress to “abrogate the American Rule,” where each party bears its own costs. She relied in part on this year’s Supreme Court decision in Baker Botts LLP v. Asarco LLC, in which a majority required a high level of statutory clarity before finding a modification of the American Rule.