More Reason to Respect the Automatic Stay—Violations Just Got More Expensive

A debtor’s bankruptcy filing imposes an automatic stay preventing essentially any conceivable action a person might take against a debtor or her property—e.g., prosecuting or attempting to collect on any claim, or enforcing any judgment or lien against the debtor or her property.  11 U.S.C. § 362(a).  Willful violations of the automatic stay give rise to a claim against the violating party for actual damages, punitive damages “in appropriate circumstances,” and attorney fees and costs.  11 U.S.C. § 362(k).  This week the 9th Circuit Court of Appeal issued an important ruling on the scope of attorney fees and costs recoverable under section 362(k).  In America’s Servicing Co. v. Schwartz-Tallard, Case No. 12-60052 (9th Cir. Oct. 14, 2015) (en banc), the Court ruled that a debtor is entitled to recover (1) attorney fees incurred to end a stay violation and (2) attorney fees incurred to prosecute an action for damages for a stay violation.

Previously, under Sternberg v. Johnston, 595 F.3d 937 (9th Cir. 2010) it was the law in the 9th Circuit—and only the 9th Circuit—that a debtor could recover fees in the first category (to end stay violation) but not in the second (to prosecute an action for damages).  To use examples discussed in the Schwartz-Tallard opinion, under Sternberg,  a debtor could recover fees incurred in hiring counsel to call or write to a creditor demanding that it stop violating the automatic stay, and could recover fees suing for an injunction to stop a stay violation, but not for recovering damages caused by the stay violation.  If the debtor sued both for an injunction and damages, the court would have to engage in a fact-intensive analysis to separate fees related to seeking the injunction from fees related to the damages claim, and only award the former.  Also of concern to the Court in Schwartz-Tallard was that “in many cases the actual  damages suffered by the injured debtor will be too small to justify the expense of the litigation, even if the debtor can afford to hire counsel.”

The 9th Circuit accordingly decided “to jettison Sternberg’s erroneous interpretation of § 362(k) altogether.”

The basic facts in Schwartz-Tallard are as follows:  a mortgage servicing company wrongfully foreclosed on the debtor’s home, believing she was behind on her payments when she wasn’t.  In re Schwartz-Tallard, 765 F.3d 1096, 1098 (9th Cir. 2014) (before divided three-judge panel).  The debtor sought an order requiring the servicer to reconvey title to the home, as well as actual damages, punitive damages, and attorney fees, which she was awarded.  The servicer appealed the damages award to the district court, which upheld the award.  The debtor then sought $10,000 in fees incurred fighting off the servicer’s appeal of the damages award, which the bankruptcy court declined to award her under Sternberg, on the rationale that the stay violation ended when the servicer reconveyed title, so any fees the debtor incurred after that were not recoverable.

The inability to collect fees for prosecuting a stay violation damages claim undoubtedly inhibited many debtors from filing meritorious stay violation claims, given that actual damages for a stay violation may be much less than the cost of prosecuting such a claim.  And absent a significant risk of suit and or of being ordered to pay the debtor’s fees, creditors aren’t always deterred from conduct that violates the stay.  Schwartz-Tallard adds a powerful tool to the debtors’ toolbox for stopping stay violations and recovering from creditors who refuse to heed the mandates of section 362.  Creditors would be wise to proceed even more cautiously—and consult their legal counsel—before proceeding with any course of action that could be construed as violating the automatic stay.

Author:  Hilary Mohr