To Include or to Not Include: Examining When Attorneys' Fees May Be Awarded Under § 362(k)(1)

• Publication year: 2013

To Include or to Not Include: Examining When Attorneys' Fees May Be Awarded Under § 362(k)(1)

Anthony Hall

TO INCLUDE OR TO NOT INCLUDE: EXAMINING WHEN ATTORNEYS' FEES MAY BE AWARDED UNDER § 362(K)(1)

Abstract

Although courts are reluctant to shift attorneys' fees in legal matters, Congress has made special exceptions to protect individuals in unique positions or to discourage certain undesirable behavior. With § 362(k)(1), Congress made an express exception to allow debtors to recover attorneys' fees after a creditor willfully violates the automatic stay. For nearly twenty-five years, courts have interpreted § 362(k)(1) to allow debtors to recover attorneys' fees incurred by seeking damages against the automatic stay violator. However, in Sternberg v. Johnston, the Ninth Circuit created a split in authority when it refused to allow a debtor to recover the full extent of his attorneys' fees under § 362(k)(1). In a rather unusual reading of § 362(k)(1), the Ninth Circuit denied the debtor the full extent of his attorneys' fees because it held that the text of § 322(k)(1) did not clearly allow for such fee shifting.

This Comment argues against the Ninth Circuit's interpretation of § 362(k)(1). First, this Comment under takes a statutory analysis of § 362(k)(1). In doing so, it becomes clear that both a textualist and a purposivist approach support reading § 362(k)(1) as a full fee-shifting statute. second, this Comment offers policy reasons in favor of reading § 362(k)(1) as a full fee-shifting statute. Given the tenuous financial position of debtors facing bankruptcy, courts should interpret § 362(k)(1) in a manner that places debtors back into their prior financial positions before the creditor willfully violated the automatic stay. Third, this Comment offers practical solutions, including possible amendments that could add clarity to the matter.

Introduction

The automatic stay is a fundamental part of the bankruptcy process. The automatic stay requires that creditors discontinue virtually all collection actions against a debtor once a debtor files a bankruptcy petition.¹ The automatic stay

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places a hold on prepetition litigation, foreclosure actions, wage garnishments, repossession efforts by creditors, collection calls from creditors, and other similar actions.² Although there are some exceptions to the automatic stay,³ the stay is a powerful tool that Congress created to generate a "breathing spell" for a debtor entering bankruptcy.⁴

Due to the strong policy grounds for the automatic stay, Congress wanted to make sure that courts protect debtors against creditors who willfully violate the automatic stay.⁵ As such, Congress passed § 362(k)(1), which allows a debtor to recover damages, including attorneys' fees, from a creditor who willfully violates the automatic stay.⁶ In its entirety, § 362(k)(1) provides the following: "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."⁷

Currently, there is a circuit split regarding the extent of attorneys' fees that are recoverable under § 362(k)(1).⁸ In 2008, the Fifth Circuit interpreted § 362(k)(1) as a full fee-shifting statute.⁹ Then, in 2010, the Ninth Circuit disagreed with the Fifth Circuit's interpretation of § 362(k)(1).¹⁰ The Ninth Circuit, in Sternberg v. Johnston, took a surprisingly narrow reading of actual damages¹¹ and held that § 362(k)(1) only allows a debtor to recover attorneys'

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fees that were incurred to stop a creditor's violation of the automatic stay.¹² Under the Ninth Circuit's reading of § 362(k)(1), the statute does not allow a debtor to recover attorneys' fees incurred in the damages proceeding.¹³ The Ninth Circuit noted that courts must read all legislation within the backdrop of the American Rule, which requires each party to pay his or her own attorneys' fees, win or lose.¹⁴ Therefore, the Sternberg court held that because the text of § 362(k)(1) does not explicitly allow a debtor to recover attorneys' fees for the damages proceeding, a debtor can only recover attorneys' fees incurred to bring an end to the stay violation.¹⁵

To better understand the divergent interpretations, it is important to comprehend a debtor's road to recovery after a creditor willfully violates the automatic stay. A debtor normally incurs attorneys' fees in two distinct circumstances: 1) the debtor incurs attorneys' fees to "fix" the consequences that the creditor's stay violation created; and 2) the debtor incurs attorneys' fees by pursuing a subsequent proceeding to recover damages from the creditor under § 362(k)(1).¹⁶ As such, the question becomes whether § 362(k)(1) allows a debtor to recover attorneys' fees under both circumstances: fixing the stay violation, and prosecuting the stay violator for damages.

To illustrate, consider the following hypothetical. Susan files for chapter 7 on March 1, 2010, because she desperately wants a fresh start from her debt and a break from her harassing creditors. Prior to declaring bankruptcy, Susan owed $100,000 in medical bills for an emergency operation. Although Susan informed the hospital about her bankruptcy filing, the hospital decided to garnish Susan's income on March 7, 2010, which is a clear violation of the automatic stay.¹⁷ Susan's lawyer steps in and alerts the hospital that its actions are in violation of the automatic stay. Susan's lawyer provided the hospital with documentation evincing Susan's current bankruptcy and made phone calls

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to ensure their compliance with the automatic stay. Accordingly, the hospital reluctantly ordered the wage garnishment to cease. The process of stopping the hospital's violation of the automatic stay resulted in four hours of Susan's attorney's time, which amounted to $1,000 in attorneys' fees.

On March 14, 2010, after the wage garnishment ceased, Susan initiated an adversary proceeding against the hospital to recover damages due to the hospital's violation of the automatic stay under § 362(k)(1).¹⁸ The hospital's legal team refused to concede that its actions were willful. Thus, after Susan's attorney expended hours conducting research, exchanging briefs, attending hearings, and preparing for hearings, Susan had incurred $8,000¹⁹ in attorneys' fees by September 1, 2010, for the separate damages proceeding. Now, the question becomes the following: to what extent can Susan recover attorneys' fees under § 362(k)(1)? Can she only recover the amount necessary to stop the hospital's violation of the automatic stay, or can she also collect the amount incurred to recover damages in the adversary proceeding? The answer to this question is the crux of the split in authority between the Ninth and Fifth Circuits.

Prior to the Ninth Circuit's decision in Sternberg, bankruptcy courts were in overwhelming agreement that § 362(k)(1) completely circumvented the American Rule, which requires parties to pay their own litigation fees.²⁰ Thus, prior to Sternberg, most courts would have allowed Susan to recover attorneys' fees incurred to fix the stay violation and attorneys' fees incurred in the subsequent damages action. Under the Ninth Circuit's approach, however, courts would only allow Susan to recover the $1,000 in attorneys' fees incurred to stop the stay violation. Susan, who is currently in chapter 7 bankruptcy, would have to come up with $8,000 in attorneys' fees that she incurred to recover her damages from the hospital's unlawful wage garnishment.

Given the circuit split regarding the recovery of attorneys' fees under § 362(k)(1), there is a need to reevaluate the statute and examine the text, the

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purpose, and the policy goals of § 362(k)(1). As such, this Comment argues that the Ninth Circuit incorrectly interpreted § 362(k)(1). Because the attorneys' fees dispute centers around a statute, this Comment provides a statutory interpretation analysis of § 362(k)(1). A textualist and a purposivist approach both support reading § 362(k)(1) to allow a debtor to recover the full extent of his or her attorneys' fees after a creditor willfully violates the automatic stay. In addition, there are important policy reasons why courts should interpret § 362(k)(1) as a full fee-shifting statute. Given the unfavorable financial position of the debtor, courts should interpret § 362(k)(1) as a departure from the American Rule in order to place the debtor back in the same financial position he would have been in but for the creditor's willful stay violation.

This Comment provides a comprehensive analysis on the current controversy surrounding §362(k)(1). Part I details the background and history of §362(k)(1) and the automatic stay. Part II offers a statuary analysis of §362(k)(1), comparing a textualist approach with a purposivist approach. Part III provides compelling policy reasons why debtors are in an unfavorable financial situation when it comes to paying to recover damages from a creditor's willful automatic stay violation. Finally, this Comment proposes practical solutions, including possible congressional amendments to resolve any ambiguities with the statute.

I. The History and Background of the Automatic Stay and § 362(k)(1)

A. The Automatic Stay

To understand § 362(k)(1), it is important to appreciate the significance of the automatic stay. The automatic stay is a fundamental part of the bankruptcy process.²¹ Section 362 of the Code outlines the rules and regulations regarding the automatic stay.²² The automatic stay requires that creditors discontinue virtually all collection actions against the debtor after a debtor files a bankruptcy petition.²³ Additionally, the stay automatically starts with the

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debtor's bankruptcy petition, and no formal action by the debtor is required to trigger it.²⁴

The automatic stay is a powerful tool that Congress created to benefit both the debtor...