Reversing the lower courts, the Second Circuit held that a debtor is entitled to recover attorneys’ fees for successfully prosecuting appeals from the bankruptcy court’s order holding a creditor in contempt of the discharge injunction.
The May 17 opinion by Circuit Judge Richard J. Sullivan may discourage creditors from appealing contempt citations, because a debtor’s appellate attorneys’ fees could exceed the damages assessed for violation of the discharge injunction or the automatic stay. In other words, attempting to set aside a hurtful precedent could entail costs greater than the creditor’s own attorneys’ fees.
The ‘Egregious’ Discharge Violation
The debtor obtained a discharge in chapter 7. Later, the mortgage lender made erroneous reports to credit agencies and more than 30 phone calls attempting to collect delinquent mortgage payments that had been discharged.
The bankruptcy judge ruled that the lender’s actions were “absolutely egregious.” She found the lender in contempt of the discharge injunction and assessed some $9,000 for the debtor’s legal fees and $17,500 for attempting to collect the discharged debt.
On the first appeal, the district court upheld the $9,000 award for violation of the discharge injunction but remanded for the bankruptcy judge to say whether the $17,500 was for actual or punitive damages.
On remand, the bankruptcy court reinstated the $17,500 award as compensatory damages. On remand, the debtor had sought another $28,000 for the attorney’s fees for the first appeal. The bankruptcy judge denied the appellate attorneys’ fees, believing that the appeal did not violate the discharge injunction and saying that the debtor should have requested appellate attorneys’ fees in district court.
The district court affirmed on a second appeal, saying that the bankruptcy court lacked the power to award attorneys’ fees for an appeal in district court.
The debtor’s counsel appealed to the circuit and won on both grounds.
‘Old Soil’ Helps Debtors this Time
Reviewing the bankruptcy court’s decision for abuse of discretion, Judge Sullivan found the contempt power in the Section 524 discharge provisions and in Section 105, which empowers the court to enter “any order . . . necessary . . . to carry out the provisions of” the Bankruptcy Code.
Quoting Taggart v. Lorenzen, 139 S. Ct. 1795, 1801 (2019), Judge Sullivan said that those “‘provisions authorize a court to impose civil contempt sanctions’” and “‘bring with them the old soil that has long governed how courts enforce injunctions.’” He went on to say it was “well settled” that “a bankruptcy court may compensate a debtor for a creditor’s violation of its discharge order.”
For guidance from Second Circuit precedent, Judge Sullivan cited Weitzman v. Stein, 98 F.3d 717 (2d Cir. 1996), where the appeals court ruled that a lower court must give persuasive grounds for denying appellate legal costs arising from a contemnor’s misconduct. The Weitzman court noted that none of the litigation would have been necessary had the contemnor obeyed the district court’s order.
Judge Sullivan said that Weitzman “foreclosed” the lender’s argument that the appeal had not violated the discharge injunction, because the appeal would not have been necessary had the lender respected the discharge. “Put simply,” he said, the debtor’s appellate fees were caused by the lender’s contempt.
On policy grounds, Judge Sullivan noted that the $28,000 in fees for defending the first appeal were higher than the $17,500 damage award. He said that “the failure to compensate the victim of contempt with appellate fees could leave the victim worse off for seeking to enforce a discharge order and would, at the very least, discount any compensatory damages award.”
The lender’s argument that only the district court could award appellate attorneys’ fees was “equally unpersuasive,” Judge Sullivan said.
Bankruptcy courts have power to sanction for violation of the discharge injunction, and, Judge Sullivan said, “it is immaterial that this case involves a bankruptcy court’s, rather than a district court’s, contempt order.”
Again, Judge Sullivan said that the “old soil” permits a court to enforce its injunction to compensate for someone’s losses arising from noncompliance with an injunction.
The lender made other arguments that were unpersuasive. The bankruptcy and appellate rules allowing sanctions for frivolous appeal, Judge Sullivan said, do not “preclude[] a bankruptcy court from exercising the ‘old-soil’ power to award fees for non-frivolous appeals of its contempt order in appropriate circumstances.”
Judge Sullivan reversed and remanded with directions for the district court to remand the matter for the bankruptcy court to calculate the appropriate amount of appellate attorneys’ fees, or to articulate “persuasive grounds” for denying fees.
At the end of his opinion, Judge Sullivan added a zinger. He directed the bankruptcy court to decide on granting fees for the second appeal.
Tension with Gravel?
Last year, the Second Circuit held in PHH Mortgage Corp. v. Sensenich (In re Gravel), 6 F.4th 503 (2d Cir. Aug. 2, 2021), that bankruptcy courts may not impose contempt sanctions for violating Bankruptcy Rule 3002.1. Rather, the majority ruled over a vigorous dissent that a debtor may only recover compensatory damages, which often will be nominal. To read ABI’s report on Gravel, click here.
To this writer, there is tension between the new case, finding common law grounds for imposing appellate attorneys’ fees, and the insistence in Gravel that contempt sanctions are not permitted under a rule without authorization in the statute or the rule.
True, the two cases can be distinguished on their facts. Perhaps the differing results can be explained, because the two cases had different panels of judges.
Until the Second Circuit smooths out the rough edges, debtors will cite the new case while creditors will rely on Gravel.
Reversing the lower courts, the Second Circuit held that a debtor is entitled to recover attorneys’ fees for successfully prosecuting appeals from the bankruptcy court’s order holding a creditor in contempt of the discharge injunction.
The May 17 opinion by Circuit Judge Richard J. Sullivan may discourage creditors from appealing contempt citations, because a debtor’s appellate attorneys’ fees could exceed the damages assessed for violation of the discharge injunction or the automatic stay. In other words, attempting to set aside a hurtful precedent could entail costs greater than the creditor’s own attorneys’ fees.