A recent Bloomberg BNA story, “Ch. 13 Debtor’s Attorneys Can’t Get Costs, Fees Paid” reports that a debtor’s attorney isn’t entitled to costs and fees in the absence of any proven injury to the debtor when the City of Philadelphia, through another entity, violated the Bankruptcy Code’s automatic stay by attempting to collect overdue real estate taxes after the debtor filed for bankruptcy, a district court in Pennsylvania ruled.
Reversing the judgment of the bankruptcy court, Judge Gerald J. Pappert of the U.S. District Court for the Eastern District of Pennsylvania concluded that the bankruptcy court failed to apply the proper legal standard when it awarded the debtor’s attorneys’ fees and costs.
Under the Bankruptcy Code Section 362(k)(1), an “individual injured by an 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 statute is straightforward, the court said, and requires the debtor to prove “(1) the offending party violated the automatic stay; (2) the violation was willful; and (3) that the willful violation caused the debtor an injury.”
The City of Philadelphia doesn’t contest that it willfully violated the stay, but argued that debtor Norman L. Walker failed to prove that the willful violation of the stay caused him any injury, the court said. According to the court, it is the debtor’s burden to prove injury.
Even if the debtor had proven some form of injury, the U.S. Supreme Court in Baker Botts LLP v. ASARCO LLC, 135 S. Ct. 2158 (2015) (27 BBLR 861, 6/18/15) has prohibited bankruptcy courts from awarding attorneys' fees to counsel for work performed in defending a fee application. The court noted that Baker Botts was decided three months after the bankruptcy court's decision in this case.
The Supreme Court concluded that “[i]n our legal system, no attorneys, regardless of whether they practice in bankruptcy, are entitled to receive fees for fee-defense litigation absent express statutory authorization,” the court said. Baker Botts expressly disallows any award of costs of attorneys' fees to Robin A. Feeney, who represented Walker's counsel, Ronald McNeil, in the hearing on attorneys' fees, the court said.
The debtor filed for Chapter 13 protection, which allows individuals receiving regular income to obtain debt relief while retaining their property. At the time of filing his Chapter 13 petition, the debtor hadn't paid his 2012 real estate taxes on the property.
The City of Philadelphia referred the matter to Goehring Rutter & Boehm (GRB), who made two telephone calls and mailed two notices to the debtor regarding the unpaid taxes.
The debtor filed a complaint against the City and GRB in the bankruptcy court seeking damages for an alleged violation of the automatic stay under Section 362(a).
The bankruptcy court found that the City willfully violated the automatic stay, but dismissed the debtor's claims for emotional distress and punitive damages.
The debtor filed an application for attorneys' fees, and the City objected.
Ultimately, the bankruptcy court awarded debtor's counsel (McNeil) $8,674 in attorneys' fees and $652 in costs for a total of $9,326, and counsel for debtor's counsel (Feeney) attorneys' fees of $2,750.
According to the bankruptcy court, the debtor should recover fees even though he did not recover other damages. The bankruptcy court also found that Feeney's fees were “reasonable and necessary under the circumstances.”