Debtors in bankruptcy got back the right to collect all of their damages for violations of the automatic stay when the 9th Circuit Court of Appeals en banc overturned the Sternberg case.
We conclude that Sternberg misconstrued the plain meaning of §362(k). To the extent it is inconsistent with this opinion, Sternberg is overruled.
Debtors are no longer chained to a bad legal decision that effectively limited their ability to enforce a right granted by the Bankruptcy Code.
The Sternberg Problem
Sternberg had given a radically different interpretation to a 30 year old provision of bankruptcy law dealing with violation of the automatic stay.
Section 362 of the Bankruptcy Code included the debtor’s attorneys fees incurred by reason of a violation of the stay as part of the actual damages.
an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees…
Sternberg managed to interpret the attorneys fees out of the equation. Debtors could recover their attorneys fees from misbehaving creditors, said the 9th Circuit panel, only to the point that the violation of the stay ceased. No attorneys fees were available to collect damages caused by the stay violation.
In a twinkling, the cost to creditors of ignoring the law was lowered enormously by Sternberg. Bankruptcy judges found themselves with few levers against creditors behaving badly.
Debtors, by definition, don’t have a lot of money to pay lawyers. So the ability of debtors to get the benefits of the automatic stay promised by the Code was limited by their inability to pay a lawyer to enforce their rights. Under Sternberg, it didn’t cost creditors much to ignore the law.
We’ve lived for 6 years in a legal world in the 9th Circuit where creditors paid a small price to violate the law. Because Sternberg was a decision of the circuit court, it required an en banc panel of the Circuit Court to undo the damage.
I was prosecuting a stay violation action against the State of California for ignoring the automatic stay when Sternberg came down. Despite the undisputed finding that the State had suspended my client’s contracting license in order to coerce him to pay overdue taxes, the judge found himself unable to award meaningful attorneys fees for the harm caused.
So, we’ve now returned to a legal world in which the maxims of jurisprudence govern: no right exists without a remedy.
Until Schwartz-Tallard, debtors had a right to the peace and protection of the stay, without a meaningful remedy.
Once again, the right to the benefits of the stay comes with a remedy for its violation.