On October 1, 2009, the Ninth Circuit Court of Appeals issued its decision in Sternberg v. Johnston, No. 07-16870 wherein it affirmed a stay violation under 11 USC 362, yet held that attorney fees were only recoverable related to enforcing the automatic stay and remedying the stay violation, and not in the litigation of damages. In that case, the Ninth Circuit disallowed a substantial amount of attorney fees incurred in prosecuting a bankruptcy adversary proceeding to determine damages.
This decision now seems to over rule the Ninth Circuit BAP’s earlier decision in the case of In re Walsh, Bkrtcy.N.D.Cal.1997, 208 B.R. 949, affirmed 219 B.R. 873, wherein it held that attorney fees asserted by a successful debtor in the prosecution of an appeal of a stay violation would also be entitled to recovery.
Thus, an individual debtor injured by a willful stay violation must be able to recover all damages arising from the willful stay violation, including any costs and attorney’s fees incurred on appeal.
So will this new decision from the Ninth Circuit stifle representation to debtors who prosecute these claims where no attorney fees are available for pursuing damages? Probably not.
To start, any prosecution of a stay violation over damages can usually be remedied quickly via a motion as opposed to full blown adversary proceeding. To the extent an attorney seeks compensation for any motion practice solely related to the damages portion of the case, the attorney may simply desire to substitute that portion of fees in exchange for a contingency fee basis in the final award.
Second, in most cases the bulk of attorney fees are actually incurred in attempting to force compliance with 362 on the creditor, not in determining damages. This is because such creditors often are ignorant of bankruptcy law and/or may technically believe the automatic stay does not apply to them. Thus, an initial correspondence from the debtor’s attorney is typically ignored and only after significant court intervention or final ruling will the creditor end violating the automatic stay. Thus in these circumstances, fees incurred in prosecuting the stay violation until the violation ceases at the end of the court proceeding are recoverable.
Third, 362 is not the only arrow in the debtor’s quiver of weapons to use against creditors who violate the automatic stay. Just as a discharge violation under 524 has its remedy under the Court’s contempt powers via 11 USC 105, so too do stay violations. Thus a debtor may desire instead to seek a contempt remedy under 105 instead of a private right of action under 362. Such a contempt remedy lies in the discretion of the court, and could include attorney fees in the prosecution of the contempt proceeding. Indeed, the Ninth Circuit’s case of In re Dyer specifically provides that stay violations may be remedied via sanctions under the court’s 105 powers.
Finally, any prosecutions of 362 actions which used to expose creditors to attorneys fees in the damages portion of the case, still bring to the creditor the exposure of coercive sanctions. These coercive sanctions directly arise from compliance concerns that courts usually have where the automatic stay has been violated.
There is a price to be paid in lieu of being hauled into Bankruptcy Court and risk coercive sanctions. In the event such sanctions are entered, compliance costs could be substantial. This is because not only does a creditor now face additional attorney fees it pays in defense of such proceedings, but creating new policies and procedures with respect to the automatic stay of 362 and/or providing the court with evidence of the same could cost tens of thousands of dollars.
Indeed, locally in the Jacobsen case, the Court entered coercive sanctions to force a credit union to comply with privacy laws in the context of a proofs of claims.
b. Coercive sanctions are appropriate in relation to First Future. First
Future’s response to the OSC failed to even discuss the disclosure of the social security numbers and birth dates. It appears that First Future either continues to employ improper
procedures in reviewing Proofs of Claim, since it did not identify this as a problem, or,
alternatively, has such poor document control that it was unclear within its own organization
as to what it filed in the public record. In either case, the procedures already undertaken by
First Future which dealt with disclosure of account information, an area not the focus of this
Court’s concern, are irrelevant.
5. Coercive Sanctions: Amount. In addition to compensatory sanctions, the Court
also assesses coercive sanctions against First Future in light of the evidence that it has not
taken appropriate remedial steps to date. In particular, within 30 days of the date of this
Order, First Future must provide additional training to its employees and issue additional
guidelines designed to ensure that proofs of claim including Personal Information are not filed
in the public record in the future. After providing this training and issuing such guidelines, First
Future must file an additional declaration advising the Court that First Future has taken these
remedial steps. In the event that First Future timely takes these steps and files the required
declaration, no additional coercive sanction will be appropriate. However, if First Future fails
to take these steps and fails to file its declaration, then beginning on the 31st day after entry of
this Order, First Future will be assessed coercive sanction of $100.00 a day until such time as
remedial steps are taken. In addition, the Court at that time will set this matter for an
additional hearing to determine whether additional coercive or compensatory sanctions are
appropriate.
Accordingly, that credit union had to create new policies, procedures, and maintenance protocols, to quickly and effectively eliminate its “glitches” of disclosing social security numbers and other personal information in claims it filed, and provide evidence of the same to the court. These compliance costs were substantial and it is not uncommon to see compliance costs on large institutions amount to hundreds of thousands of dollars.
Thus while Sternberg v. Johnston, No. 07-16870 has changed the playing field somewhat with respect to the prosecution of stay violations in terms of attorney fees, few cases should be impacted by its decision and creditor exposure to liability for the most part remains.
As always, seek a competent attorney in your area to determine your rights if you feel they have been violated.
Written by Michael Doan
No related posts.
Comments on this entry are closed.