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Ninth Circuit Decision in Sternberg v. Johnston

May 15, 2014 by  
Filed under Blog

The Ninth Circuit’s decision in Sternberg v. Johnston has often been criticized. The panel reached its controversial conclusion by straying far from the actual briefing provided by either party. Here’s the Motion for Reconsideration that was granted only in small part.

Ronald J. Ellett
Az. Bar #012697
Ellett Law Offices, P.C.
2999 N. 44th Street, Suite 330
Phoenix, Az. 85018
602-235-9510

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

In re:

LOGAN T. JOHNSTON, III,

Debtor
MELVIN STERNBERG, et al.,
Appellant,
v.

LOGAN T. JOHNSTON, III,
Appellee.
C.A. NUMBERS 07-16870 & 08-15721

U.S.. District Court
CV-06-2115-PHX-MHM
Roslyn O. Silver

BK-01-06221-SSC
Adv. No. 01-885
Sarah J. Curley, Judge

APPELLEE’S PETITION FOR REHEARING EN BANC Mandatory Introduction
Appellee Logan Johnston respectfully petitions this Court for a rehearing en banc because, in counsel’s judgment, three independent grounds exist for a rehearing en banc:
1) the panel’s decision failed to consider and failed to follow the Supreme Court’s basic rule of statutory construction as required by Forest Grove School District v. T.A., 129 S.Ct. 2484, (2009) while the decision also substantially affects a rule of national application in which there is an overriding need for national uniformity;
2) the panel’s opinion directly conflicts with a Fifth Circuit decision and substantially affects a rule of national application in which there is an overriding need for national uniformity; and
3) consideration by the full court is necessary to maintain uniformity of the Court’s decisions.
Regarding the first ground, the panel’s decision reached a novel interpretation of 11 U.S.C. (k)(1) that was directly contrary to all prior published decisions spanning more than 20 years by numerous lower courts as well as the Third Circuit, the Ninth Circuit, the Fourth Circuit, the Fifth Circuit and the Bankruptcy Appellate Panels of the First and Ninth Circuits. The panel’s innovative analysis of 11 U.S.C. 362(k)(1) was neither anticipated, nor briefed by either party. Lacking the benefit of briefing, the panel failed to consider that the statutory section in question, 11 U.S.C. 362(h), was first enacted in 1984 and was then re-enacted in April 2005 as 11 U.S.C. 362(k)(1). From 1984 to 2005, this statutory provision was uniformly interpreted by all Courts as mandating an award of attorney fees incurred in stay violation actions to any injured individual. Therefore, upon the re-enactment of this provision in 2005, Congress is deemed to have been aware of, and adopted, the judicial interpretations of that statutory section. Forrest Grove School District at 2490. Accordingly, the panel’s novel contrary interpretation of 11 U.S.C 362(h) was foreclosed by the 2005 re-enactment of the same statutory provision now known as 11 U.S.C. 362(k)(1).
As for the need for national uniformity, the automatic bankruptcy stay is one of the most important and fundamental protections afforded under the uniform federal bankruptcy laws and automatically issues in every bankruptcy case filed in our country, currently numbering more than one million and five hundred thousand cases per year. (1,500,000 cases). Accordingly, there is an overriding need for national uniformity. However, the panel’s novel interpretation destroys the uniformity and certainty that previously existed in interpreting 11 U.S.C. 362(h), now known as 11 U.S.C. 362(k)(1). It is respectfully suggested that before this Circuit unleash the Pandora’s box of uncertainty and its attendant costs of litigation upon our nation’s bankruptcy judges and debtors, that an en banc rehearing is appropriate.
Regarding the second ground, the panel’s published opinion admits to creating a split of authority with the Fifth Circuit case of Young v. Repine, 536 F.3d 512 (5th Cir. 2008) and, as set forth in the preceding paragraph, there is an overriding need for national uniformity. If this split is not resolved, it will continue to spawn years of litigation in our nation’s bankruptcy courts. If our arguments are correct, then all of this is unnecessary because the panel’s novel analysis is fatally flawed and therefore should not be adopted by this Circuit.
Regarding the third ground, the panel’s opinion admits that it is reaching a contrary conclusion from prior 9th Circuit decisions. Indeed, the panel noted that the 9th Circuit had previously “affirmed awards under 362(k) that appear to have contained attorney fees incurred in prosecuting a 362(k) damages action.” slip opinion at 14113 citing In re Dawson, 390 F. 3d 1139, 1152-1153 (9th Cir. 2004); In re Bloom 875 F. 2d 224, 227 (9th Cir. 1989); and Havelock v. Taxel (In re Pace), 67 F. 3d 187, 192 (9th Cir. 1995). In addition to these decisions, the panel’s decision is also at odds with prior 9th Circuit decisions that held that, notwithstanding 11 U.S.C. 362(h), bankruptcy courts retain their traditional inherent civil contempt power that allows them to award the victim’s attorney fees incurred in stay violation actions. See for example, In re Dryer 322 F. 3de 1178 (9th Cir. 2003); Calif. Equipment Dev. Dep’t v. Taxel (In re Del Mission) 98 F. 3d 1147, 1152 (9th Cir. 1996). The panel’s opinion does not allow the possibility of awarding attorney fees under the court’s established civil contempt power, but fails to explain why this well-established basis for awarding attorney fees to stay violation victims has been foreclosed by its decision. It is respectfully submitted that this issue will also result in years of unnecessary litigation in this circuit.
Background
This case involves a willful stay violation by an experienced attorney, Melvin Sternberg, who previously held himself out as an expert at the confluence of divorce and bankruptcy law. (ER 67-68 ) Mr. Sternberg was the attorney for the debtor’s ex-wife. Even though the debtor filed for bankruptcy on May 14, 2001, Mr. Sternberg still managed to obtain a July 13, 2001 ruling from the State Court ordering Mr. Johnston to pay $87,525.60 by August 1, 2001 or else report for incarceration in the county jail. (ER 185)
Upon receipt of the State Court Order, Johnston requested his bankruptcy counsel’s assistance. On that day, July 16, 2009, Johnston’s counsel sent Sternberg a fax pointing out that the State Court’s Minute-Entry Order violated the stay and providing a copy of the bankruptcy petition. (ER 180-184) Receiving no response from Sternberg, counsel sent another fax on July 17, 2001 informing Sternberg of his stay violation and asking Sternberg to take remedial measures to cure the stay violation. (ER 178-9) The letter stated, in pertinent part, “My overwhelming preference is that you and [your client] bring yourselves into compliance with federal bankruptcy law voluntarily.” (ER 178-9) Sternberg took no remedial measures but instead took the opposite tack. For example, when Johnston filed a request with the Appellate Court to obtain a Stay of the State Court’s Minute-Entry Order, Sternberg filed an opposition requesting that the petition be denied. (ER 187 ).
Meanwhile, Johnston’s bankruptcy counsel brought the stay violation action and obtained an emergency hearing. At the emergency hearing, the Bankruptcy Court ruled that the State Court Minute-Entry Order violated the stay because “the Minute Entry dictated that the Debtor immediately satisfy a large Judgment or face incarceration; all without the State Court focusing on the non-estate property…or requesting the Bankruptcy Court’s prior determination of whether the automatic stay applied…” In re Johnston, 308 B.R. 469, 474 (Bankr. D.Ariz. 2003).
Sternberg, however, was not willing to accept the Bankruptcy Court’s finding of a stay violation. Instead there ensued multiple attempts to set aside the finding of a stay violation and to escape from the consequences of the stay violation. These included but were not limited to: Motions for Reconsideration; a Motion to Dismiss; Motions for Clarification; and two attempted Interlocutory Appeals. (ER 1-26) These were all denied, however, Sternberg did convince the Bankruptcy Court at trial to grant him a directed verdict and the Bankruptcy Court entered an opinion that attempted to limit the holding of the 9th Circuit’s decision in Eskanos & Adler, P.C. v. Leetien (Eskanos), 309 F. 3d 1210 (9th Cir. 2002). Johnston v. Parker, 308 B.R. at 483-84. The District Court then reversed, holding Eskanos to be controlling and remanded for further proceedings. Johnston v. Parker, 321 B.R. 262, 282 (D. Ariz. 2005)

At trial, the evidence was presented of Mr. Johnston’s damages and his attorney’s fees caused by Sternberg’s actions. The multiple attempts by Sternberg to set aside the finding of a stay violation and to escape from the consequences of the stay violation became an issue at the trial. In all there was a total of 86 filings with the Bankruptcy Court from its initial Order of July 30, 2001 through January 16, 2003. (ER 1-26) Of those eighty-six filings, only one was a motion filed by the Plaintiff (ER 9). Tellingly, despite all of the Motions filed by the defendants over this extended period of time, none were granted. (ER 1-26) At trial, Mr. Johnston’s two lawyers, Ron Ellett and his associate Jay Volquardsen, repeatedly testified that they had, in each instance, spent the minimal amount of time necessary.(ER 55). At trial the debtor’s underlying strategy was explained as follows:
Q(by Mr. Volquardsen): Given the way 362(h) operates with its fee shifting provision, why didn’t you file more than one motion?
A (by Mr. Ellett): “We were adopting an approach trying to keep the fees to a minimum because of the burden that this case in general has placed on our small firm. During this period and up to today, I’m owed, or our firm is owed $200,000.00 from this case as a total, $90,000 of which has been in the stay violation and during that time my personal gross income from the practice of law has been below $60,000 each year. Half of my salary has been postponed because of this case and I had no incentive to see any more fees go into this case than were absolutely necessary in this action because it was coming directly off of what I needed to support my family and to pay my bills.
(ER 55-56)
The Bankruptcy Court, in its role as trier of fact, considered the evidence presented to it and decided to award most, but not all of Plaintiff’s fees and further excluded the amounts it determined were not caused by Defendant Sternberg but instead by the other defendant. The amounts awarded were $69,986 for attorney fees, $20,000 for damages for emotional distress and $2,883.20 for lost wages. (ER 115-186) In reaching the attorney’s fee award the Bankruptcy Court went through a meticulous process of review of every entry and explained her reasoning in a massive memorandum decision complete with exhibits.(ER 115-186)
On appeal the District Court affirmed the Bankruptcy Court’s award in all respects. Sternberg appealed again. The 9th Circuit upheld the finding of a stay violation and the amounts for missed work and emotional distress, but held that 11 U.S.C. 362(k)(1) prohibited the bankruptcy court from awarding attorney fees for the amounts incurred in proving Johnston’s damages.
ARGUMENT
I. The panel erred by failing to apply the basic rule of statutory construction that Congress is deemed to have adopted the existing administrative or judicial interpretation of a statutory provision when it re-enacts that provision.
In Forrest Grove School District v. T.A., 129 S.Ct. 2482 (2009), the Supreme Court again utilized the basic rule of statutory construction that “Congress is presumed to be aware of an administrative or a judicial interpretation of statute and to adopt that interpretation when it re-enacts a statute without change” id. at 2450 citing Lorillard v. Pons, 434 U.S. 575,580 (1978). In Forrest Grove School District, the Supreme Court noted that there had been amendments in 1997 to the act in question, but that the particular provision of the act in question had not been changed by the amendments. The Court then applied the long-standing rule of statutory construction that Congress is deemed to be in agreement with and adopt those judicial interpretations of the reenacted statutory provision.
Applying the Supreme Court’s holding to the case at bar requires the conclusion that in 2005 Congress adopted the existing judicial interpretations of 11 U.S.C. (h) when it reenacted that provision as 11 U.S.C. (k)(1). By 2005, the Courts had repeatedly held that 11 U.S.C. 362(h) allowed an award to an individual for the attorney fees incurred during the stay violation action. see for example In re Dawson, 390 F. 3d 1139, 1152-1153 (9th Cir. 2004); In re Bloom 875 F. 2d 224, 227 (9th Cir. 1989); and Havelock v. Taxel (In re Pace), 67 F. 3d 187, 192 (9th Cir. 1995). Cuffee v. Atlantic Business and Community Corporation, 901 F.2d 325, (3rd Cir. 1990); In re Peralta, 317 B.R. 381, (9th Cir. BAP 2004); Mitchell v. BankIllinois, 316 B.R. 891, 901-04 (S.D.Tex. 2004), In re Henry, 266 B.R. 457(C.D. Cal. 2001); In re Still, 117 B.R. 251, 254-55 (Bankr. E.D. Texas 1990).
The list could go on and on but there is a strict page limit for this petition. The point is that by 2005 there was an existing consensus that 11 U.S.C. 362(h) mandated an award of an individual’s attorney fees incurred in litigating the stay violation. Congress is deemed to have been aware of this and adopted those interpretations when it re-enacted 11 U.S.C.(h) as 11 U.S.C. 362 (k)(1). It is now too late to adopt a new interpretation. Moreover for the reason discussed below we believe the panel’s interpretation to be incorrect.
II. The Panel’s decision incorrectly assumed that the American Rule is a universal rule instead of a general rule with recognized exceptions and then the panel improperly ignored the long-established exceptions of the rule.
While it is important to consider a context for a statute’s enactment it is even more important to consider the correct context. The panel incorrectly assumed that the American Rule was the correct “backdrop” and then concluded that “backdrop” was controlling absent clear language that Congress intended to deviate from it. However, preceding the 1984 enactment of 11 U.S.C. 362(h), the correct history is that the American Rule was never applied to stay violation actions. There is not a single instance of this ever happening. The real history is that stay violation actions have always been held to be subject to a court’s inherent civil contempt power which is a long-recognized and established exception of the American Rule. Indeed, the Supreme Court in Aleyska Pipline Svc. Co v. Wilderness Soc’y, 421 U.S. 240, (1975) and again in Chambers v. Nasco, 501 U.S. 32, (1991) plainly pronounced that there are three well-established exceptions to the American Rule: “the common fund exception”; a court’s discretion under its inherent civil contempt power to award fees for the “willful disobedience of a court order”; and the Court’s sanctioning authority to punish bad faith or vexatious conduct. Chambers, 501 U.S. at 47. These exceptions are as venerable and even more ancient than the American Rule itself and entitled to no less respect. As explained by Chambers, “In Alyeska we determined that ‘Congress ha[d] not repudiated the judicially fashioned exceptions’ to the American Rule, which were founded in the inherent power of the courts.” Id. at 47 quoting Alyeska, 421 U.S., at 260, 95 S. Ct., at 1623.
The Chambers Court further explained that “‘we do not lightly assume that Congress has intended to depart from established principles’ such as the scope of the court’s inherent power.” Id. at 47 quoting Weinberger v. Romero-Barcelo, 465 U.S. 305, 313,(1982); and citing Link, 370 U.S., at 631-632.
History plainly teaches us that prior to 1984, the bankruptcy stay was always and universally enforced through the court’s inherent civil contempt power. By way of one of many examples, immediately prior to the enactment of the Bankruptcy Act in 1978, the 2nd Circuit in Fidelity Mortgage Investors V. Camelia Builders (In Re Fidelity Mortgage Investors), 550 F.2d 47 (2nd Cir. 1976) upheld the District Court’s affirmation of the Bankruptcy Judge’s contempt award for a willful violation of the bankruptcy stay. There the stay violator, just like Sternberg here, continued in State Court after the filing of the bankruptcy and the 2nd Circuit upheld the award of “reasonable attorney fees for the defense of the (state) action and for the prosecution of the contempt proceeding.” Fidelity Mortgage, 550 F. 2d at 50.
The 1978 Bankruptcy Act enacted many changes but it continued, until 1984, to rely solely on the court’s inherent civil contempt power to enforce the automatic bankruptcy stay. Indeed from 1978 until 1984, all courts universally held that the bankruptcy stay was enforceable through their inherent civil contempt power and conversely, no courts ever held that the American Rule applied to stay violation actions. See for example Depoy v. Kipp (in re Depoy) 29 B.R. 471 (Bankr. Indiana 1983) In re Pierson, 33 B.R. 743 (Bankr. W.D. N.Y. 1983); In re Thacher, 24 B.R. 835, (Bankr. S.D. Ohio1982);In re Eisenberg, 7 B.R. (Bankr. E.D. N.Y.1980). While the cases up to 1984 universally recognized the Court’s civil contempt power, most Courts held this power did not include the power to award punitive damages. In re Depoy at 478-479.
This is the true context in which Congress enacted 11 U.S.C. 362(h) which provided: “An individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.” The effect of the 1984 enactment of 11 U.S.C. 362(h) was hardly earth-shaking. Indeed, the 9th Circuit long ago had already recognized that “ the contempt remedy is nearly identical to the remedy available under 11 U.S.C. 362(h), except for the permissive nature of the contempt authority.” Dyer, 322 F.3d at 1190 citing Del Mission, 98 F. 3d at 1152. In other words, the primary effect of 11 U.S.C. 362(h), when interpreted in its true historical context, was to make an award of damages and reasonable attorney’s fees mandatory instead of discretionary for an “individual injured by the willful stay violation.” An additional effect also noted by Dryer was 362(h) allowed an award “in appropriate circumstances” of punitive damages to an individual injured by a stay violation which was generally unavailable under the court’s civil contempt power. This is the true background behind the enactment of 11 U.S.C. 362(h). The panel’s assumption of that the American Rule was the real background is mistaken as is its resulting conclusion that the 11 U.S.C. 362(h) was intended by Congress to adopt the American Rule. Unfortunately, if this petition is not granted, then years of litigation will ensue throughout the Circuit and the country over a ruling that is based on an obviously mistaken assumption reached without the benefit of briefing by either party. This Circuit has previously developed a coherent and well-reasoned body of law interpreting 11 U.S.C. 362(h) and the Court’s civil contempt power. The recent Johnston decision, through its incorrect assumption, needlessly destroys the years of coherent wisdom embodied in those prior cases and renders them incoherent and contradictory.
III. The policy concerns stated in the panel’s opinion are to narrow.
The panel expressed some policy concerns about this case but overlooked the effect its ruling will have on the million of bankruptcy cases field every year. For over 25 years, 11 U.S.C. 362(h) and the Court’s inherent contempt powers have proved to be a workable and effective means of enforcing the automatic bankruptcy stay. The threat of the imposition of attorney fees is an effective deterrent to most would-be stay violators. Indeed, the great majority of stay violations are resolved by a simple letter from debtors’ counsel reminding the stay violator of the possibility for an award of attorney fees. That letter just didn’t work with this defendant.
Unfortunately, once in a blue moon a man comes along who is not like the other men. He is undaunted by the possibility of the award of attorneys’ fees and obstinately believes the stay does not apply to his conduct. Unfortunately, for Mr. Johnston such a man crossed his path in the form of the attorney hand-picked by his ex-wife to pursue him. That man was Mr. Sternberg and he vigorously and vehemently opposed Johnston every step of the way. Now, Sternberg complains it is unfair to have him pay for the fees caused by his own actions. Who then should pay for these fees? The debtor, in disregard of his fresh start? Or perhaps debtors’ counsel should instead go uncompensated although victorious in protecting his client’s stay rights and keeping him from being incarcerated?
The panel surely cannot intend either of these results. Instead, its opinion seems to imply that the debtor should have settled with Sternberg at the outset. The record reflects this was possible, at trial it was established that Sternberg through co-counsel, offered to vacate the State Court Order in exchange for a lien against the debtor’s homestead property. (Er 100) In light of the panel’s novel interpretation, there can be no doubt that Johnston would have been better off granting this concessionary lien to the stay violator rather than the face years of litigation and appeals from the more wealthy Sternberg. However, this is the very harm warned against by the Eskanos decision. Absent the protections of a fee shifting statute, the more wealthy stay violator can use their own stay violation as leverage against the debtor. Meanwhile the law-abiding creditors and the debtor will be harmed by the concessions exacted from the debtor. Simply put, adopting the American Rule de-incentivizes the defense of the stay and incentivizes its violation.
Moreover, there is little real danger of run away debtor’s attorney fees. The Bankruptcy Court indisputably was meticulous and careful in awarding only those fees for actions it deemed reasonable and necessary. The Bankruptcy Court’s lengthy and thorough review of the fees was sufficient to ensure that the fees were reasonable. The trial courts can be counted upon to properly police the reasonableness of the fees and it is not necessary for this Circuit to deprive the trial courts of the ability to compensate the victims of stay violations.
For the foregoing reasons, Appellee requests that his petition for a rehearing en banc be granted.
Respectfully submitted this 26th day of October, 2009
/s/ Ronald J. Ellett
Ronald J. Ellett
Ellett Law Offices, P.C.

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