Swords, Shields, and Bright Lines: Settlement Offers and Fee Cut-offs under § 362(k)
Written by:
Steven Schneider
Clerk for Hon. Daniel P. Collins, United States Bankruptcy Court – District of Arizona
Phoenix, AZ
The opinions expressed herein are solely those of the author.
Section 362(k) of the Bankruptcy Code requires that debtors recover their actual
damages, including attorneys’ fees and costs, caused by a creditor’s willful stay violation, unless
the violation resulted from the creditor’s good-faith reliance on the exception in § 362(h).1 In
Sternberg v. Johnston,2 the Ninth Circuit adopted a bright-line test setting a cut-off point at
which debtors can no longer recover attorneys’ fees relating to willful-stay-violation litigation.
Under Sternberg, “[o]nce the violation has ended, any fees the debtor incurs after that point in
pursuit of a damage award would not be to compensate for ‘actual damages’ under § 362(k)(1),”
and are thus not recoverable.3
In re Snowden
The Ninth Circuit recently re-examined when a willful stay violation ends for purposes of
recovery under § 362(k).4 In Snowden, the debtor took out a pre-petition, $575 payday loan from
Check Into Cash of Washington (CIC). Before the loan matured, Snowden stopped payment on
the check and told CIC she was considering filing for bankruptcy. CIC agreed not to cash the
check securing Snowden’s loan.
Snowden later told CIC she could not repay the loan, and filed a chapter 7 case in the
Western District of Washington, scheduling CIC as an unsecured creditor owed $575. Postpetition, CIC called Snowden several times in attempt to collect the debt. After a month of these
collection attempts, CIC cashed the check, overdrawing Snowden’s account by $816.88.
Snowden moved for stay-violation sanctions against CIC, seeking actual, emotional-distress, and
punitive damages.
Before the sanctions trial, Snowden offered to settle with CIC for $25,000, presumably to
settle all claims.5 CIC countered by e-mail, offering to pay Snowden $1,445. This amount
The court can also award debtors punitive damages “in appropriate circumstances.” 11 U.S.C. § 362(k)(1).
Sternberg v. Johnston, 595 F.3d 937 (9th Cir. 2009).
3
Id. at 947.
4
In re Snowden, 769 F.3d 651 (9th Cir. 2014).
5
The Ninth Circuit noted that Snowden’s attorney delivered the offer by voicemail, that the voicemail was lost, and
inferred that it was “an offer to settle all of Snowden’s claims.” Id. at 659.
1
2
represented the loan principal, bank fees, and three hours of attorney time.6 Significantly, CIC’s
counteroffer explicitly denied any stay violation. Snowden rejected the counteroffer.
Trial Outcome
At trial, the bankruptcy court found for Snowden and awarded her $12,000 for emotional
distress, $575 for the loan amount, $370 in bank fees, $12,000 in punitive damages, and
$2,538.55 in attorneys’ fees, a grand total of $27,483.55. The bankruptcy court’s fee award only
included Snowden’s attorneys’ fees incurred through May 20, 2009, the date of CIC’s e-mail
counteroffer. CIC appealed the punitive and emotional damages awards to the district court, and
Snowden cross-appealed on her attorneys’ fee award.7 On her cross-appeal to the district court,
Snowden argued that CIC’s counteroffer did not remedy the stay violation, and that her
subsequent attorneys’ fees were thus recoverable.
First Appellate Outcome
The district court reversed and remanded on the punitive and emotional-distress awards,
but affirmed the bankruptcy court on Snowden’s attorneys’ fees. In affirming the bankruptcy
court, the district court applied Sternberg,8 finding that “[h]ad Ms. Snowden accepted CIC’s
tender, Ms. Snowden’s losses would have been righted and the violation would have come to an
end.”9 In so finding, the district court held that the fees Snowden incurred after the time of
CIC’s counteroffer “were not relevant to remedying the stay violation,” but were instead incurred
“to collect damages for the stay violation,” and therefore excluded under 362(k).10
Remand and Second Appellate Outcome
On remand, the bankruptcy court again awarded punitive and emotional damages, and
denied Snowden’s fees from after the e-mail. CIC again appealed to the district court, and
Snowden again cross-appealed on fees. Snowden argued that her attorneys’ fees relating to the
appeals were recoverable damages under 362(k). The district court affirmed the bankruptcy
court on all three issues.11 The district court rejected Snowden’s argument, citing the
Bankruptcy Appellate Panel’s (BAP) decision from In re Schwartz-Tallard12 to support its
finding that “both cross[-]appeals have revolved around Ms. Snowden’s pursuit to recover
damages resulting from the stay violation after the stay violation was remedied.”13 The parties
appealed all three issues to the Ninth Circuit.
6
Id. at 655.
In re Snowden, 2012 WL 600697 (W.D. Wash., Feb. 21, 2012).
8
Sternberg, 595 F.3d at 947.
9
Snowden, 2012 WL 600697 at *4.
10
Id.
11
In re Snowden, 2013 WL 943023 (W.D. Wash., Mar. 11, 2013).
12
In re Schwartz-Tallard, 473 B.R. 340, 347–350 (9th Cir. 2012) (the Sternberg exception to the American Rule
only applies to “the attorneys’ fees incurred by a debtor to enforce the automatic stay.”) (emphasis added).
13
Snowden, 2013 WL 943023 at *4.
7
Ninth Circuit Ruling
On appeal, the Ninth Circuit affirmed the district court on emotional and punitive
damages, but reversed and remanded on attorneys’ fees.14 Expanding on its “sword and shield”
metaphor and bright-line test from Sternberg, the Ninth Circuit explained that “the limitation on
recovery of attorneys’ fees was aimed at reducing incentives for further litigation while
providing a bankruptcy petitioner a remedy for the stay violation.”15 The Ninth Circuit held that
the district court abused its discretion in finding that “Snowden’s ‘losses would have been
righted and the violation would have come to an end’ had she accepted the $1,445 tender”; this
abuse of discretion stemmed from the bankruptcy court’s initial use of the wrong legal
standard.16
The district and bankruptcy courts’ focus on the timing of CIC’s offer was misplaced
because “CIC had an affirmative obligation to return” the money to the estate after violating the
stay.17 The Ninth Circuit took issue with the facts that “CIC never admitted a stay violation,”
and that “[i]nstead of returning [the money] with no strings attached, CIC responded to
Snowden’s offer to settle with an e-mail containing implied conditions.”18
By denying it had violated the stay, CIC forced Snowden to continue to prosecute the
stay violation, which, because she rejected CIC’s no-fault settlement offer, was neither remedied
nor established at the time of the e-mail.19 Snowden’s post-email attorneys’ fees were therefore
recoverable under Sternberg and 362(k)(1).20 The Ninth Circuit set December 10, 2009 (the date
the bankruptcy court determined CIC violated the stay) as the correct cut-off date for Snowden’s
fees, in contrast to the May 20, 2009 e-mail date that the bankruptcy court and district court
used.21
Implications
For creditors accused of willful stay violations, Snowden seems to have one clear
implication: better to admit and remedy the violation via settlement (including payment of
debtor’s related fees and a release of liability) sooner rather than later, but in any case before the
debtor pursues additional damages. Creditors in CIC’s shoes could try to bifurcate, e.g. via
14
In re Snowden, 769 F.3d 651 (9th Cir. 2014).
Id. at 658-659 (citing Sternberg v. Johnston, 595 F.3d 937, 948 (9th. Cir. 2010)).
16
Id. at 659 (citing United States v. Hinkson, 585 F.3d 1247, 1251 (9th Cir. 2009) (describing the two-part test for
abuse-of-discretion review)).
17
Id. (citing In re Abrams, 127 B.R. 239, 242–243 (9th Cir. B.A.P. 1994) (“[T]he duty to insure the post-petition
return of property of the estate lies with the entity in possession of such property, and not the debtor.”)).
18
Id.
19
Id. (quoting In re Schwartz-Tallard, 765 F.3d 1096, 1102 (9th. Cir. 2014) (“[T]he additional litigation resulted
from [the violator’s] continued attempts to justify its stay-violating behavior—not from the debtor’s conduct.”)
(alterations shown as in Snowden, 769. F.3d at 659)). On December 19, 2014, the Ninth Circuit granted an en banc
rehearing of Schwartz-Tallard. In re Schwartz-Tallard, 774 F.3d 959 (9th Cir. 2014).
20
Snowden, 769 F.3d at 659.
21
Id. at 660.
15
settlement, any punitive/emotional-distress-damages litigation from debtor’s action to establish a
violation, so as to avoid possibly paying the debtor’s fees for both. As Judge Watford noted in
his Snowden dissent: “under our reading of § 362(k)(1), if the stay violation ends before the
plaintiff ever files an action to recover her actual damages, none of the fees incurred in
prosecuting the suit may be awarded.”22 This coincides with the majority’s questioning of
whether Snowden would have been able to recover emotional-distress damages if she had first
accepted CIC’s $1,445, no-fault settlement offer.23 Citing the BAP’s ruling from In re
Campion,24 the majority reasoned that since the Campion creditor’s no-fault Rule 68 offer of
settlement didn’t remedy the violation, CIC’s no-fault settlement e-mail failed to cut off fees.
Creditors accused of willful stay violations should consider the following: (1) a mere nofault settlement offer does not prevent a creditor’s liability for debtor’s future attorneys’ fees;25
(2) a settlement offer admitting a violation, unconditionally returning the property to the estate,
and providing for reasonable attorneys’ fees might shield a creditor from liability for future fees,
regardless of whether debtor accepts; and (3) a valid, no-fault settlement agreement with an
enforceable release clause might preclude a debtor’s future litigation for damages related to the
alleged violation.26
Creditors seeking to settle without admitting fault should heed the BAP’s advice from
Campion and include reasonable attorneys’ fees and “offer[] a sum . . . sufficient to make the
debtor think very hard about whether continued litigation is worthwhile.”27 Such settlement
offers would seem to fit the Ninth Circuit’s interpretation of § 362(k) while advancing the goals
of reducing litigation and remedying (alleged) wrongs against the debtor.28 On the other hand, if
a creditor does not plan to contest the stay violation but does plan to contest damages, admitting
fault and making the debtor/estate whole before litigating the extra damages is probably the
safest bet.
22
Id. at 661 (Watford, J., dissenting) (internal quotations omitted).
Id. at 660 (“Had Snowden accepted the $1,445 and sought damages for emotional distress in a separate action, her
recovery may have been precluded because CIC never admitted a violation of the stay—not to mention the reality
that any settlement would have included a standard release of liability.”).
24
In re Campion, 294 B.R. 313 (9th Cir. B.A.P. 2003).
25
Snowden, 769 F.3d at 660.
26
Id.
27
Campion, 294 B.R. at 318 (internal quotations omitted) (quoting Marek v. Chesny, 473 U.S. 1, 11, 105 S. Ct. 3012
(1985)).
28
Snowden, 769 F.3d at 658-659 (citing Sternberg v. Johnston, 595 F.3d 937, 948 (9th. Cir. 2010)).
23