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    Ninth Circuit Attempts to Eliminate Attorney Fees in Stay Violations.

    Recently, the Ninth Circuit Court of Appeals issued its decision in Sternberg v. Johnston, No. 07-16870 which effectively eliminates attorney fees in the prosecution of determining damages in stay violations.  Nevertheless, its ruling should have little impact on attorney fees in persuing such violations and debtors should be able to continue to seek quality representation in such actions.  

    On October 1, 2009, the Ninth Circuit Court of Appeals issued its decision in Sternberg v. Johnston, No. 07-16870 affirming that a stay violation occured under 11 USC 362.  While the Court also held that attorney fees were recoverable to the extent fees were incured in enforcing the automatic stay and remedying the stay violation, the Court went on to say that such fees were not recoverable for the litigation of damages. Thus the Ninth Circuit disallowed a substantial amount of attorney fees incurred in prosecuting a bankruptcy adversary proceeding to determine damages.

    This decision now conflicts with its earlier decision 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 have any impact on the quality of attorney representation to pursue such causes of action?  Probably not.

    To start, in most cases, the bulk of attorney fees are incurred in ending the unlawful conduct rather than pursuing any award.  This is because most creditors often are ignorant of bankruptcy law and/or may technically believe they are not governed by 11 USC 362.  Thus, correspondence from the debtor’s attorney is typically ignored and only after significant court intervention or a final ruling does the conduct stop. Accordingly, in these circumstances, fees incurred in prosecuting the stay violation until the violation ceases at the end of the court proceeding, are all fully recoverable.

    Nevertheless, where the conduct ends, and additional attorney fees are incurred after,there are 2 approaches to recovery, depending on the amount of attorney fees incurred.  The first approach would be to simply have a fee agreement wherein a contingency fee basis exists in any final award, less attorney fees awarded.  Thus to the extent the bulk of attorney fees are prior to unlawful conduct ending, the contingency attorney fee should compensate for any non-awarded fees.

    The second approach, and preferred approach when there are substantial fees incurred after the conduct stops, is to simply employ the same process for requesting fees as that used in Discharge Violations.  Discharge Violations under 524 are pursued under the Court’s contempt powers via 11 USC 105.  Stay violations can also be pursued in the same way.  Accordingly, a debtor could always forgoe a private right of action under 362 and seek a contempt remedy under 105 instead.

    Contempt remedies lie within the discretion of the court, and could include attorney fees in the prosecution of the contempt proceeding.  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, 362 actions still expose creditors to 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 new compliance procedures could cost tens of thousands of dollars.

    In our 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 a 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.

    In the above case, the 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 within 30 DAYS OF THE ORDER. 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, attorneys should still be be compensated for all their work by the offending creditors.

    Written by Michael G. Doan– Owner of the Carlsbad Bankruptcy Office, Michael also manages his business and is a highly skilled San Diego Bankruptcy Attorney with over 17 years of experience.  Michael is currently concentrating his practice solely in Bankruptcy Law and is a Board Certified Specialist in Consumer Bankruptcy Law by the American Board of Certification, one of only fourteen such attorneys in all of California.

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