The Bottom Line

Addressing an issue of first impression in the Eleventh Circuit, the Court in Mantiply v. Horne (In re Horne), 876 F.3d 1076 (11th Cir. 2017), recently held that section 362(k)(1) of the Bankruptcy Code authorizes payment of attorneys’ fees and costs incurred by debtors in successfully pursuing an action for damages resulting from an automatic stay violation and in defending the damages award on appeal.

What Happened?

The debtors filed for Chapter 7 bankruptcy and while the automatic stay was in place, an attorney filed a civil action on behalf of her clients against one of the debtors in state court. Despite knowing the automatic stay was in place, the attorney refused to voluntarily dismiss the civil case, which was eventually dismissed. The debtors sought damages for the attorney’s violation of the stay under section 362(k)(1) and the bankruptcy court awarded the debtors damages and attorneys’ fees. The attorney appealed and the district court affirmed, awarding the debtors additional attorneys’ fees incurred because of the appeal. The attorney then filed identical motions in the bankruptcy court and the district court seeking the bankruptcy judge’s recusal. The bankruptcy court denied the recusal motion and the attorney appealed. The district court affirmed but denied the debtors’ motion for attorneys’ fees incurred in defending the appeal. On appeal, the Eleventh Circuit affirmed the ruling on the recusal motion and remanded for the district court to either award the debtors’ attorneys’ fees under section 362(k)(1) or explain why the recusal motion did not involve litigation over the stay violation. On remand, the district court found the debtors’ requested attorneys’ fees were mandatory under section 362(k)(1). The Supreme Court denied the attorney’s petition for a writ of certiorari on the recusal motion.

After this extensive litigation involving multiple appeals, the debtors requested that the Eleventh Circuit award them their attorneys’ fees incurred in defending the appeal to the Eleventh Circuit and the petition for certiorari. The Eleventh Circuit transferred the matter to the district court, which awarded that the debtors appellate fees and costs of $92,495.86.

Under section 362(k)(1) of the Bankruptcy Code, “an individual injured by any willful violation of a stay . . . shall recover actual damages, including costs and attorneys’ fees . . . .” It was undisputed that the attorney willfully violated the automatic stay. However, the attorney argued that as a matter of law, the debtors were not entitled to appellate fees under section 362(k)(1).

First, the Eleventh Circuit concluded that since section 362(k)(1) explicitly includes “costs and attorneys’ fees” to the term “actual damages,” Congress intended to broaden the notion of actual damages beyond the immediate injury incurred in ending a willful violation of a stay. The Court similarly found that nothing in the text of section 362(k)(1) limits the scope of attorneys’ fees to ending the violation. The Court concluded that this result makes sense in the context of bankruptcy litigation where the majority of damages from stay violations are typically attorneys’ fees and most debtors are not in the financial position to pursue an action for damages.

Having concluded that section 362(k)(1) authorizes awarding attorneys’ fees for prosecuting damages actions, the Court found that defending that judgment on appeal is likewise within the statute’s fee-shifting authorization.

Why This Case is Interesting

On its face, section 362(k) applies to “individuals” which has created some uncertainty as to whether that means “natural persons” only or also corporate debtors. The cases are not uniform with some courts holding that section 362(k)’s benefits apply only to natural persons who are debtors, see In re Chateaugay Corp., 920 F.2d 183 (2d Cir. 1993), and others holding a broader scope that includes corporate debtors, see Budget Service Co. v. Better Homes of Virginia, Inc., 804 F.2d 289 (4th Cir. 1986). There is also a split over whether a bankruptcy trustee satisfies the requirement for an individual. Compare In re Pace, 67 F.3d 187 (9th Cir. 1995) (excluding trustee), with In re Garofalo’s Finer Foods, Inc., 186 B.R. 414 (E.D. Ill. 1995)(including trustee).

With this decision, the Eleventh Circuit joined the Ninth Circuit in adopting a broad reading of section 362(k)(1), holding that it entitles individuals to not only attorneys’ fees incurred in ending the stay violation but also fees incurred in prosecuting a damages action and in defending that judgment on appeal. The Court found that section 362(k)(1) explicitly contemplates a departure from the American Rule—that each side pays its own attorney’s fees—authorizing costs and attorneys’ fees incurred by the debtor in prosecuting a damages violation and defending those judgments on appeal. As noted, while the case (and Code section) applies to individuals and there is not uniformity among the courts whether that excludes other entities, like corporations, given the increased use of Chapter 11 by individual debtors (typically after triggering a bad boy guarantee relating to a failed business venture), creditors should be mindful of the extent to which damage claims can be pursued.