In Schwartz-Tallard v. America's Servincing Co. 2012 DJDAR 9091 (2012), the Bankruptcy Appellate Panel for the Ninth Circuit Court of Appeals decided a fee case under the so-called Sternberg bankruptcy doctrine. The doctrine was established under the Ninth Circuit’s decision in Sternberg v. Johnston, 595 F.3d 937 (9th Cir. 2010). Under this doctrine, attorney fees incurred in pursuit of damages for the violation of the automatic bankruptcy stay are recoverable as an exception to the American Rule. That rule states that the parties to litigation are required to pay their own attorney fees.
The debtor filed a Chapter 13 bankruptcy petition. Despite filing for bankruptcy, the debtor continued to make monthly mortgage payments on her home. Despite that fact, a creditor “determined” that the mortgage payments had stopped and obtained an order to foreclose on the mortgage. The monthly mortgage payments had in fact been made. To foreclose, the creditor had to seek a lifting of the automatic stay. The creditor moved for an order to lift the stay and the bankruptcy court granted the relief.
The debtor subsequently proved that the creditor’s position was not meritorious. The bankruptcy court ordered the reinstatement of the automatic stay. Prior to the court’s entry of the order, the creditor sold the home at a foreclosure sale. The debtor moved for sanctions on the grounds that the creditor had violated the court’s stay order.
The bankruptcy court granted the sanctions motion. In addition, the court awarded the debtor damages and attorney fees. When the creditor appealed, the district court concluded that there had been a violation of the automatic stay. The debtor then moved for additional attorney fees incurred during the defense of the appeal. The creditor contended such fees were prohibited under the decision in Sternberg v. Johnson, cited above. The district court denied the request for the recovery of fees incurred on the appeal. The case was then appealed to the Ninth Circuit’s Bankruptcy Appellate Panel.
The Ninth Circuit reversed the denial of the fee award. The Ninth Circuit noted that under the Sternberg doctrine, a debtor’s attorney fees incurred in “pursuit of damages” for a stay violation cannot be awarded as compensation for actual damages. However, a debtor’s appellate attorney fees may be awarded as actual damages for a stay violation. The Ninth Circuit reasoned that the debtor was defending a damages award for the creditor’s stay violation, and fees were appropriate under those circumstances.