If a creditor violates the automatic stay by seizing property of the estate and fails to cure that violation before the debtor files an action under sec. 362(k), may the debtor recover his attorney’s fees for prosecuting the stay violation under sec. 362(k)? The Ninth Circuit Court of Appeals recently ruled that, in these circumstances, attorney’s fees incurred in prosecuting a stay violation are recoverable by a debtor against the creditor committing the violation.
In Snowden v. Check into Cash of Washington, Inc. (In the Matter of: Rupanjali Snowden), 769 F.3d 651 (9th Cir. 2014), the debtor obtained a payday loan from Check into Cash of Washington (“CIC”), giving CIC a post-dated check to repay the loan. Before the loan came due, the debtor stopped payment on the check and advised CIC that she would be filing bankruptcy. Following this information, and after the debtor filed bankruptcy, CIC engaged in harassing conduct—calling her at work numerous times each day even after she told them to stop, and requiring the debtor to call CIC’s offices every day or it would call her “references” and give them embarrassing information about her. After the debtor filed bankruptcy, CIC successfully used an electronic funds transfer to debit the debtor’s account for the amount of the loan, causing the debtor’s account to be overdrawn and for the debtor to incur bank charges.
The debtor filed a motion for sanctions against CIC, seeking a return of the funds which CIC had taken from her bank account post-petition, and damages for overdraft fees, emotional distress, punitive damages and attorney’s fees. The debtor offered to settle the sanctions motion for $25,000. CIC rejected and sent the debtor a counter offer of $1,445. However, CIC never returned the monies it took from the debtor account after the debtor filed bankruptcy. After hearing the evidence at trial, the bankruptcy court awarded the debtor damages for the funds taken, bank fees, and emotional distress as well as punitive damages and attorney’s fees. At issue in the appeal was the bankruptcy court’s ruling that the debtor could recover attorney’s fees only up to the date of CiC’s counter offer, and could not recover attorney’s fees incurred in the prosecution of the motion for sanctions or in CIC’s appeal from the order. The bankruptcy court reasoned that CIC’s offer was a tender that would have remedied the stay violation had the debtor accepted it. In so ruling, the bankruptcy court relied on the Ninth Circuit’s decision in Sternberg v. Johnston, 595 F.3d 938 (9th Cir. 2010).
One of the issues before the Ninth Circuit was whether CIC’s tender of $1,445—without an actual return of the monies it took in violation of the automatic stay—“remedied” the stay violation such that any attorney’s fees incurred by the debtor were not in remedying the stay violation but purely in pursuing her claim for damages. The bankruptcy court had relied on the Ninth Circuit’s decision in Sternberg, which held that attorney’s fees incurred in enforcing the automatic stay and in remedying violations of the stay can be recovered, but fees incurred in prosecuting a claim for damages for violation of the automatic stay, are not. Id. at 940. The court stated that in Sternberg it had interpreted sec. 362(k) against the “American Rule” under which parties are presumed to bear their own litigation costs, and concluded that actual damages under sec. 362(k) refers to “actual losses.” The Ninth Circuit stated its Sternberg opinion stands for the proposition that, once the stay violation ends, any fees a debtor incurs after that point in pursuit of a damage award are not “actual damages” within the meaning of sec. 362(k). The court stated that Sternberg establishes a bright-line rule that attorney’s fees incurred in an attempt to collect damages once the stay violation has ended are not recoverable in a proceeding under sec. 362(k).
However, the court then concluded that CIC’s “tender” did not end the stay violation. First, in making its counter offer, CIC insisted that it had never violated the automatic stay. Consequently, the court stated the debtor had to go to court in order to establish the stay violation and, in so doing, end it. The court pointed to its decision in In re Schwartz-Tallard, No. 12-60052, 2014 WL 4251571 (9th Cir. 2014) as support. InSchwartz-Tallard the court permitted an award of attorney’s fees incurred in defending an appeal from the decision of the bankruptcy court finding a stay violation, holding the debtor was entitled to fees because she “was forced to defend [the] appeal to validate the bankruptcy court’s ruling that [the creditor] had violated the stay, and to preserve her right to collect the pre-remedy damages awarded by the bankruptcy court.” Consequently, the court viewed the debtor’s conduct as similar to the conduct in Schwartz-Tallard: the debtor was not using the stay as a sword but instead as a shield from CIC’s assertions that it had not violated the stay. The court stated: “CIC unsuccessfully maintained [that it did not violate the stay] through the litigation in the bankruptcy court. Snowden had to proceed with the litigation to establish a violation of the automatic stay; put differently, she had to go to court to end the stay violation.” As a result, the court held that the fees the debtor incurred in remedying the stay violation after receiving CIC’s counter-offer fell squarely within the meaning of “actual damages” under sec. 362(k). This conclusion was further supported by the fact that CIC’s settlement offer did not include an actual physical return of the monies it wrongfully took from her account following her bankruptcy filing.
In the end, the court concluded that attorney’s fees incurred by the debtor in seeking a finding that CIC had violated the stay could be included in her damages under sec. 362(k). However, the court went on to hold that, under the American Rule, the debtor could not recover attorney’s fees she incurred in proving her monetary damages.
This decision should be heeded by creditors in the Ninth Circuit. CIC, a payday lender, clearly violated the automatic stay when it effected an electronic funds transfer from the debtor’s bank account to pay its pre-petition debt. Yet, it never returned those funds to the debtor and, from the language of the opinion, may have had actual knowledge of the case at the time it effected the transfer. Had it done so, its liability for the debtor’s attorney’s fees could have been limited to those incurred prior to its settlement offer.