June 24, 2019
Dear constituency list members of the Insolvency Law Committee, the following is a case update.
In Easley v. Collection Serv. of Nev., 910 F.3d 1286 (9th Cir. 2018), the United States Court of Appeals for the Ninth Circuit (the “Ninth Circuit”) expanded the holding in In re Schwartz-Tallard, 803 F. 3d 1095 (9th Cir. 2015) (en banc), to mean that debtors are entitled to recover appellate attorneys’ fees when successfully challenging an initial award of fees and costs awarded to them under section 362(k) for a willful violation of the automatic stay, not only when defending such award. To read the full published decision, click here.
Appellants, chapter 13 debtors (“Debtors”), scheduled a hospital as a general unsecured creditor in the amount of $3,535, but the debt had previously been assigned to appellee Collection Service of Nevada (“Appellee”). Unaware of the bankruptcy, Appellee pursued collection of the debt. Appellee eventually initiated garnishment of one of the Debtors’ wages, prompting Debtors’ counsel to demand a stop to the garnishment in light of the bankruptcy. Wages were garnished four times before Appellee caused the employer and constable to stop garnishing.
Debtors brought a contempt motion against Appellee. The bankruptcy court granted the motion and awarded $1,295 in damages and $1,277 in attorneys’ fees and costs. Debtors appealed the award to the district court on the grounds that the bankruptcy court erred in failing to account for several days of attorneys’ fees incurred in connection with remedying the stay violation. The district court affirmed the damage award, but remanded to the bankruptcy court to re-review the award of legal fees in light of the Ninth Circuit’s then-recent ruling in In re Schwartz-Tallard, 803 F.3d 1095 (9th Cir. 2015) (en banc), holding that a debtor is entitled to additional attorneys’ fees for defending an appeal of an award of damages for violation of the automatic stay. After remand from the district court, the bankruptcy court awarded additional attorneys’ fees for the prosecution of the underlying motion, but refused to grant an award for fees and costs incurred on the appeal to the district court because Debtors had already sought a similar award from district court and that request remained pending.
The district court denied the Debtors’ motion for attorneys’ fees and costs on appeal based on a failure to file adequate points and authorities as required under local rules or, alternatively, based on its reading of Schwartz-Tallard. The district court held that Schwartz-Tallard only supports payments of attorneys’ fees and costs under section 362(k) for defending a sanctions award on appeal, but not for prosecuting the appeal to challenge the judgment or order. The Ninth Circuit reversed on both grounds.
First, procedurally, the Ninth Circuit found that the district court abused its discretion when it determined that the points and authorities filed by Debtors were inadequate. It found, contrary to the district court, that Debtors provided sufficient information to support Debtors’ factual contentions.
Second, the Ninth Circuit reversed on substantive grounds. 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
11 U.S.C. § 362(k)(1).
The court explained that prior to Schwartz-Tallard, the court interpreted section 362(k)(1) as “limiting attorneys’ fees and costs awards to those incurred in stopping a stay violation.” Sternberg v. Johnston, 595 F.3d 937, 947 (9th Cir. 2010) (emphasis added). In Schwartz-Tallard, the court overruled Sternberg. Schwartz-Tallard made it clear that attorneys’ fees for “prosecuting an action for damages” under section 362(k) are recoverable. While the district court found that the holding of Schwartz-Tallard was limited to awarding fees for defense of an appeal of attorneys’ fees, in its reversal the Ninth Circuit clarified that attorneys’ fees may also be awarded for debtors’ successful prosecution of an appeal of an award of damages under section 362(k). The court reiterated its reasoning in Schwartz-Tallard that the award of attorneys’ fees for prosecuting an action for damages is consistent with the intent of Congress to provide appropriate means and incentives for debtors to pursue actions for violations of the automatic stay. Further, the court found that its ruling is consistent with its prior decisions on other fee-shifting statutes granting awards of attorneys’ fees for successfully challenging an initial judgment. The Ninth Circuit also reasoned that section 362(k) is critically important to debtors in bankruptcy who typically do not have the resources to hire private counsel and, thus, section 362(k) should be interpreted as seeking to make debtors whole (as if the violation never occurred), if possible.
The decision in Easley serves as a reminder that the financial consequences for a violation of the automatic stay may be severe. Appellee appears to have been owed less than $4,000, caused less than $1,300 in actual damages, but might be required to pay tens of thousands of dollars to the Debtors because it did not act swiftly enough to stop the stay violation and, apparently, refused to return the money that was garnished. Prudent creditors should exercise caution with debtors who have filed for bankruptcy protection, seek relief from stay when in doubt, and quickly end any stay violations and reverse any adverse consequences that resulted from their actions. Otherwise, where creditors willfully violated the automatic stay, they should be prepared to settle and pay quickly to avoid incurring additional losses. Vigilant debtors and their attorneys should also take note that, under the combined precedents of Schwartz-Tallard and Easley, the law is increasingly on their side when it comes to recovering attorneys’ fees and costs incurred in successful appeals of rulings under section 362(k), whether they are defending or challenging the decision on appeal.
These materials were written by Zev M. Shechtman, of Danning, Gill, Diamond & Kollitz, LLP, in Los Angeles (firstname.lastname@example.org), with editorial contributions from ILC members Michael W. Davis of Brutzkus Gubner Offices in Woodland Hills. (email@example.com), and Hon. Meredith A. Jury (ret.).
Insolvency Law Committee
Marcus O. Colabianchi
Duane Morris LLP
Rebecca J. Winthrop
Norton Rose Fulbright US LLP
Kyra E. Andrassy
Smiley Wang-Ekvall, LLP
Gary B. Rudolph
Sullivan Hill Rez & Engel, APLC