Written by attorney Angela M Wilson-Goodman

Violating the Automatic Stay in Bankruptcy - Part Two

This is part two of a series on violating the automatic stay in bankruptcy. We've already discussed the definition of a "willful" violation and will now turn to a discussion of "actual damages."

“Once a court determines that a willful violation of the automatic stay has occurred, an award of actual damages is mandatory. However, the amount of actual damages must be proven. Debtor bears the burden of such proof." In re Urwin, 2010 Bankr. LEXIS 348 (Bankr. D. Idaho) (internal citations and quotations omitted).

So what kinds of actual damages can there be? First, and perhaps most obvious, are attorneys' fees. However, an award of attorneys' fees cannot include the fees incurred to bring an adversary proceeding against the creditor violating the automatic stay. This may be a surprising (and unfortunate) result, especially if the debtor didn't incur fees in defending directly against the violation.

We again turn to the Sternberg case for an explanation:

“We also hold, however, that Johnston can recover as actual damages only those attorney fees related to enforcing the automatic stay and remedying the stay violation, not the fees incurred in prosecuting the bankruptcy adversary proceeding in which he pursued his claim for those damages."Sternberg v. Johnston, 582 F.3d 1114 (9th Cir. 2009).

“The stay is a shield, not a sword. . . . We conclude, therefore, that a damages action for a stay violation is akin to an ordinary damages action, for which attorney fees are not available under the American Rule."Sternberg v. Johnston, 582 F.3d 1114 (9th Cir. 2009).

Other cases have also explained that, not only are attorneys' fees awards limited to those fees incurred in directly defending against the violation (not in later bringing an adversary proceeding), they must also be reasonable:

“While attorneys" fees and costs are recoverable under § 362(k), the fees and costs must be reasonable and necessary. The policy of section 362[k], to discourage willful violations of the automatic stay, is tempered by a reasonableness standard born of courts’ reluctance to foster a cottage industry built around satellite litigation. It is well established that [r]easonable and necessary fees do not include unnecessary litigation costs." In re Prusan, 2010 Bankr. LEXIS 699 at 8-9 (Bankr. E.D.N.Y. Mar. 2, 2010) (internal citations and quotations omitted).

“Attorneys are not at liberty to incur large legal fees simply because those fees will be shifted to their adversaries pursuant to Section 362[k]." In re Parks, 2008 Bankr. LEXIS 1436, at *22 (Bankr. N.D. Ohio May 6, 2008) (citing Archer v. Macomb County Bank, 853 F.2d 497, 499 (6th Cir. 1988)) (An award of actual damages must be reasonable and must be supported by the evidence).

See, e.g., In re Mosher, 2010 Bankr. LEXIS 1820, at *9 (Bankr. D. N.H. June 8, 2010) (the amount of pre-petition claims sought to be collected or, stated differently, the proportionality of the fee award to the damages sought, is one factor the court may consider when determining reasonableness of attorneys’ fees).

But what if a debtor, simply because of the facts of his particular case, didn't incur attorneys' fees but was nevertheless humilated or harassed by a creditor in violation of the automatic stay? Is there any remedy available to him that would even make it worth it to incur the time and expense of bringing an adversary proceeding against the creditor? Perhaps, if he can prove the other type of available damages: emotional distress damages. We will discuss this subject in the next part of the series.

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