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Debtors awarded attorney fees for challenging stay violation judgment

Debtors were entitled to attorney fees for successfully challenging on appeal a bankruptcy court’s initial award of damages against a creditor who violated the automatic stay in their Chapter 13 case, the U.S. Court of Appeals for the Ninth Circuit has determined. Expanding the scope of existing circuit precedent, the court held that a debtor may recover attorney fees for challenging on appeal the adequacy of a bankruptcy court’s initial award of damages under Bankruptcy Code Sec. 362(k) for willful violation of the automatic stay (Easley v. Collection Service of Nevada, 910 F.3d 1286 (9th Cir. 2018).

The creditor in Easley was unaware of the debtors’ bankruptcy case when it filed a collection action against one of the debtors. The creditor agreed to accept payments from the debtor but started to garnish the debtor’s wages after the payments stopped. When the garnishment continued even after the debtor’s attorney notified the creditor of the debtors’ bankruptcy case, the debtors filed a motion for contempt against the creditor and were awarded damages and attorney fees by the bankruptcy court. However, the debtors challenged the sufficiency of the bankruptcy court’s initial award. The district upheld the damage award but remanded the case for a recalculation of attorney fees. The bankruptcy court recalculated the fee award but refused to award attorney fees and costs incurred by the debtors on appeal. The district court affirmed, holding that Sec. 362(k) and the Ninth Circuit’s decision in In re Schwartz-Tallard, 803 F.3d 1095 (9th Cir. 2015) allow for the recovery of attorney fees for appellate work only when a debtor is defending a damage award in an appeal by a creditor, not when the debtor is challenging the sufficiency of damages awarded.

Fee shifting in bankruptcy. Although the “American Rule” requires parties to bear their own attorney fees, Sec. 362(k) provides that an injured debtor may sue for “actual damages, including costs and attorneys’ fees” to remedy willful violations of the automatic stay. Prior to Schwartz-Tallard, the Ninth Circuit said that attorney fee awards under Sec. 362(k) were limited to those incurred in stopping the stay violation. However, in Schwartz-Tallard, the court reasoned that the deterrent function of Sec. 362(k) was not best served by such a narrow interpretation and held that the statute authorized “an award of attorney’s fees incurred in prosecuting an action for damages under the statute,” including “fees incurred in successfully defending the judgment on appeal.” The court extended that holding in Easley and found the purpose of Sec. 362(k)—to prevent violations of the automatic stay and to make debtors whole again when a creditor violates the stay—strongly favored awarding attorney fees and costs to a successful debtor even if the debtor initiates the appeal.