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Violation of the Automatic Stay:
Are you automatically entitled to your attorneys’ fees?


Although creditors routinely violate the automatic stay as embodied in 11 U.S.C.S. § 362(h), you may not be able to recover all of your damages.

While the plain language of 11 U.S.C.S. § 362(h) requires an award of actual damages, the award of actual damages is not automatic. Frequently a creditor’s violation of the stay is found to be technical, as when an act is done after the debtor’s bankruptcy filing yet before the creditor receives notice of the stay. In such cases, damages are sometimes denied, especially if a debtor’s own conduct somehow contributed to the violation.

Furthermore, damages are routinely denied where the debtor fails to adequately prove any actual damages.

Courts have denied attorneys’ fees when the debtor was not required to institute the 11 U.S.C.S. § 362(h) proceeding in order to force the creditor to desist from further violating the stay, or to prevent the creditor from again violating the stay, or to undo the effects of the creditor’s stay violation.

The equitable doctrine of ²unclean hands² may be considered by a court in evaluating requests for attorneys fees and costs under 11 U.S.C.S. § 362(h). However, equitable principles may, in some circumstances, be applicable to a claimed violation of stay. However, the existing case law indicates that there must be compelling equitable considerations which outweigh the court’s need for enforcement of an orderly administration of the bankruptcy estate. Such determination must be made on a case by case basis to insure that there is no suffocation of the stay’s intended policy. Nor must this court allow an ad hoc equitable exception to swallow a well-established legal rule. The court must find that equitable considerations weigh heavily in favor of the defendants and that the trustee bears some responsibility for creating the problems before specifically balancing the equities of the case.

On October 1, 2009, the Ninth Circuit Court of Appeals issued a decision that substantially impacts this case -- Sternberg v. Johnston. 582 F.3d 1114, 2009 U.S. App. LEXIS 21532, 2009 WL 3128056 (9th Cir. Oct. 1, 2009). In Sternberg, the Ninth Circuit held that attorneys fees and costs recoverable under the current Bankruptcy Code § 362(k)(1) 5 for violations of the automatic stay are limited to work performed prior to the remedying of the stay violation. Sternberg explains:

‘Once the violation has ended, any fees the debtor incurs after that point in pursuit of a damage award would not be to compensate for ²actual damages² under § 362(k)(1). Under the American Rule, a plaintiff cannot ordinarily recover attorney fees spent to correct a legal injury as part of his damages, even though it could be said he is not made whole as a result.’

We have never said the stay should aid the debtor in pursuing his creditors, even those creditors who violate the stay. The stay is a shield, not a sword. See, e.g., Hillis Motors, Inc. v. Hawaii Auto. Dealers’ Ass’n, 997 F.2d 581, 585 (9th Cir. 1993). . . .

(The above information does not constitute legal advice nor does the information provided create an attorney-client relationship)


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