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Sternberg v. Johnston

February 8, 2010

MELVIN STERNBERG; STERNBERG & SINGER, LTD., APPELLANTS,
v.
LOGAN T. JOHNSTON, III, APPELLEE.



Appeal from the United States District Court for the District of Arizona Roslyn O. Silver, District Judge, Presiding D.C. No. 2:06-CV-02115-ROS

The opinion of the court was delivered by: Clifton, Circuit Judge

FOR PUBLICATION

Argued and Submitted March 6, 2009-Tucson, Arizona

Filed October 1, 2009; Amended October 22, 2009 Second Amendment February 8, 2010

Before: Michael Daly Hawkins, Marsha S. Berzon, and Richard R. Clifton, Circuit Judges.

OPINION

The filing of a bankruptcy petition immediately gives rise to an automatic stay. The stay applies to block or freeze most judicial actions against a debtor. It also permits a debtor to recoup any "actual damages," including attorney fees, that result from a willful stay violation. See 11 U.S.C. § 362. This case presents questions both as to when a willful stay violation occurs and as to what attorney fees may be recovered as "actual damages."

We affirm the holding of the district court that appellant Melvin Sternberg willfully violated the automatic stay that arose once appellee Logan Johnston filed for bankruptcy. Our cases establish that Sternberg had an affirmative duty to comply with the stay. This duty included ensuring that his actions did not prolong a violation of the stay that resulted from a state court motion seeking relief against Johnston that Sternberg filed prior to the bankruptcy. In this case, Sternberg willfully violated the automatic stay by defending an overbroad state court order in its entirety.

We also hold, however, that Johnston can recover as actual damages only those attorney fees related to enforcing the automatic stay and remedying the stay violation, not the fees incurred in prosecuting the bankruptcy adversary proceeding in which he pursued his claim for those damages. We thus vacate the amount of the award entered by the district court and remand for determination of the appropriate amount.

I. Background

Logan Johnston and Paula Parker were divorced in 1996. As part of the property settlement, Johnston was ordered to pay spousal maintenance.

In January 2001, Parker, through her attorney, Melvin Sternberg, asked the state court to hold Johnston in contempt for non-payment of spousal support. Among other things, the request asked the court to "award Judgment . . . for all sums of spousal maintenance[;] . . . enter an Order that [Johnston] be incarcerated; that his professional law license be suspended; and his drivers' license be revoked . . . until he . . . immediately pay[s] ALL sums[;]" and place a lien "upon any vehicle or other property owned."

On May 14 of that year, Johnston filed a Chapter 11 bankruptcy petition. His bankruptcy counsel did not file notice of this petition in the state court proceeding until May 17, however.

On that same day, May 17, the state court conducted what appears to have been a previously scheduled evidentiary hearing on Parker's contempt request. Johnston, who is an attorney, represented himself. Approximately 15 minutes into the hearing, he advised the court for the first time of his bankruptcy proceedings, explaining that the proceedings would result in a plan to pay his debts, including the spousal support, and that his bankruptcy counsel had informed him that the filing of the bankruptcy petition stayed anything regarding the property settlement, attorney fees, and sanctions. He apologized for "not knowing exactly what's going on" and said, "I guess, I object in the abstract to anything that would contravene the bankruptcy laws," while agreeing that the state court could establish the amount of his arrears.

Sternberg, for his part, explained that he did not know if the bankruptcy filing stayed the proceedings but stated that he did not think moving forward on the arrears, attorney fees, and contempt determination would violate the stay. The court decided to proceed on the issue of whether Johnston was in contempt. It would "take up the issue of sanctions at a later time when counsel ha[d] researched whether or not [the] court has jurisdiction to issue sanctions when a bankruptcy proceeding is pending."

On July 13, the state court filed a minute order holding Johnston in violation of the divorce decree. The court found Johnston in contempt and granted judgment for Parker in the amount of $87,525.60, including interest. In addition, it ordered Johnston to "pay the judgment by August 1, 2001," or be jailed "until the full amount . . . is paid."

The parties were surprised by the order. Specifically, the bankruptcy court found that Sternberg and Parker "had expected further proceedings before the Judge would order [Johnston] to pay a sum certain or face any consequences."

Johnston quickly sought to obtain relief from the order. He filed a motion for stay in the state court, but the hearing date on that motion was set for the day after the August 1 deadline by which he was to pay the arrears or go to jail. Additionally, he wrote a letter to Sternberg informing him that he was in violation of the automatic stay and asking Sternberg to "take appropriate remedial measures to cure [his] violation." Sternberg did not take such action.

Johnston then filed a petition in the Arizona court of appeals, requesting the appellate court to stay and vacate the order. Representing Parker, Sternberg's law firm filed a responsive brief, which was signed by another lawyer on Sternberg's behalf. The brief took the position that the state court had proceeded within two exemptions to the automatic stay. Those exemptions allow for "the establishment or modification of an order for domestic support obligations" and "the collection of a domestic support obligation from property that is not property of the estate." 11 U.S.C. ยง 362(b)(2)(A)-(B). The brief concluded by arguing that the judge "properly ...


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