Alabama Bankruptcy Court Substantially Reduces Award of Attorney’s Fees

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In practice, it is not uncommon for bankruptcy debtors to file suit against creditors or debt collectors for stay and discharge injunction violations. Often, they will do so before making any meaningful attempt to communicate with the creditor or debt collector to request that they stop their improper collection efforts. The Bankruptcy Court for the Southern District of Alabama recently held in Glenn v. Army & Air Force Exchange Services that attorneys for debtors have a duty to mitigate their damages prior to filing such suits. Because the debtor’s counsel in Glenn failed to contact the defendant or otherwise mitigate damages, the Bankruptcy Court significantly reduced the amount of attorney’s fees awarded.

The Stay Violation, Failure to Mitigate, and Adversary Proceeding

In Glenn, the debtor filed for Chapter 13 bankruptcy relief in April 2018. Before bankruptcy, Army & Air Force Exchange Services (AAFES) had been offsetting the debtor’s retirement benefits against amounts the debtor owed AAFES. After the debtor filed his case, in recognition of the automatic stay in the debtor’s case, AAFES ceased this offsetting in May 2018. However, without requesting or obtaining relief from the automatic stay, AAFES resumed offsetting against the debtor’s retirement benefits beginning in July 2018 and continuing through January 2019.

The debtor or his spouse called AAFES’s phone number listed on their billing statements on five occasions between November 2018 and January 2019 to ask AAFES to stop the setoffs. However, the debtor did not attempt to contact AAFES at the phone number on the proof of claim AAFES filed in the bankruptcy case. More significantly, prior to filing suit, the debtor’s counsel made no attempt whatsoever to contact AAFES, the entity that had filed AAFES’s proof of claim, or the U.S. Attorney’s Office regarding AAFES’s stay violation.

In December 2018, the debtor filed an adversary proceeding against AAFES alleging stay violations. Immediately upon receiving the complaint, AAFES ceased offsetting against the debtor’s retirement benefits, and in January 2019, AAFES issued a refund check of the offset funds to the debtor.

The parties ultimately resolved the debtor’s claims except for the issue of fees and costs due to the debtor’s counsel. The debtor’s counsel sought fees totaling $8,580 for 28.6 hours of work in handling the adversary proceeding. AAFES disputed liability for the fees, asserting that hours the debtor’s counsel expended were excessive because counsel had failed to take any steps to contact AAFES or mitigate damages before filing the suit.

Reduction of Fees Due to Failure to Mitigate Prior to Filing Suit

Under section 362(k)(1), a debtor who is injured by a stay violation is entitled to recover actual damages, including costs and attorney’s fees. Notwithstanding the foregoing, bankruptcy courts enjoy discretion to determine the necessity and reasonableness of fees sought. Courts have previously applied section 330’s standard and the Johnson v. Georgia Highway Express, Inc. factors to determine the reasonableness of attorney’s fees under section 362(k)(1).

In applying the “reasonable and necessary” standard to the attorney’s fees sought by debtor’s counsel in Glenn, the Bankruptcy Court held that a downward adjustment was warranted. Noting that AAFES had initially ceased offsetting the debtor’s retirement benefits and promptly took action during the holiday season and a government shutdown to refund the offsets that had allegedly violated the stay, the Bankruptcy Court found that it was unnecessary for debtor’s counsel to have spent 28.6 hours on this matter. Additionally, the Bankruptcy Court found that the Johnson factors weighed in favor of decreasing the award of attorney’s fees.

Ultimately, the Bankruptcy Court held that, if debtor’s counsel had communicated with AAFES regarding the stay violations, debtor’s counsel would have reasonably spent only seven hours on the matter. Although section 362(k)(1) did not require debtor’s counsel to mitigate damages prior to filing the adversary proceeding, the Bankruptcy Court noted multiple instances in which it and other Eleventh Circuit bankruptcy courts had limited attorney’s fee awards for failure to mitigate. Ultimately, the Bankruptcy Court held that the “debtor’s counsel has an obligation to attempt resolution,” and the “actions of debtor’s counsel in hastily instituting litigation without first attempting resolution of the stay violation justifie[d] a reduction of attorney’s fees.” The Bankruptcy Court noted that its decision is further supported by public policy, which disfavors rewarding unnecessary litigation.

Take Away

Because attorney’s fees are statutorily provided under section 362(k)(1) in connection with stay violations, non-prevailing parties will likely be taxed with fees and costs when they are unsuccessful in defending against allegations of stay and discharge injunction violations. However, under Glenn and the authority cited therein, creditors may limit their liability for such fees if debtor’s counsel failed to take reasonable out-of-court measures to deter the creditor’s continuing stay violation and to mitigate the debtor’s damages prior to seeking judicial relief for the stay or discharge injunction violation.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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