Friday, January 1, 2010

Family Law Attorney Sanctioned for Willfully Violating Stay

In Sternberg v. Johnston, 582 F.3d 1114 (9th Cir. 2009), the court sanctioned an ex-wife’s family law attorney for willfully violating the automatic stay. The stay was violated by the attorney continuing to prosecute postpetition a divorce motion for contempt of court that had been filed prior to the bankruptcy case being filed. Debtor was awarded $20,000 for emotional distress and $2,883.20 in actual damages.

Prior to the bankruptcy case being filed, the divorce court had entered an order requiring debtor/husband to pay spousal support. Debtor/husband failed to make the required payments. The ex-wife, by and through her attorney, filed a motion for contempt of court for the husband’s failure to pay spousal support. Prior to the hearing on the motion, debtor/husband filed for chapter 11 bankruptcy relief.

At the divorce contempt hearing, debtor/husband informed the court that he had filed bankruptcy. The ex-wife’s attorney stated to the divorce court that the attorney did not know whether continuation of the contempt hearing would violate the stay. Nevertheless, in violation of the automatic stay, the divorce court entered an order finding debtor/husband in contempt of court and granted judgment for the ex-wife in the amount of $87,525. In addition, the divorce court’s order required debtor/husband to be jailed if the payment was not made by a date specified in the order.

Debtor/husband appealed the order to the state appellate court seeking reversal of the divorce court order. At that appellate hearing the ex-wife’s attorney argued that the divorce court order should be affirmed.

Debtor/husband also filed an emergency motion before the bankruptcy court to vacate the divorce court order. The bankruptcy court granted the motion and vacated the divorce court order holding debtor/husband in contempt.

Debtor/husband then filed an adversary proceeding against the ex-wife and the ex-wife’s attorney claiming they had violated the automatic stay. The ex-wife settled the claim against her; but the suit continued against the ex-wife’s attorney. The ex-wife’s attorney argued that the automatic stay may have been violated by the divorce court judge, but the stay was not violated by the ex-wife’s attorney. Alternatively, the ex-wife’s attorney argued that the attorney’s actions did not violate the stay because the US Bankruptcy Code provides an exception to the automatic stay for actions relating to the “establishment or modification of an order for domestic support obligations” or “the collection of a domestic support obligation from property that is not property of the estate.” Section 362(b)(2)(A)(B).

The bankruptcy court rejected the ex-wife’s attorney’s arguments and found that the attorney had willfully violated the automatic stay. The court found that the automatic stay imposed on the ex-wife’s attorney an affirmative duty of compliance with the bankruptcy laws. The court then found that the ex-wife’s attorney had violated the stay by affirmatively opposing debtor/husband’s appeal to the state appellate court seeking reversal of the divorce court’s order.

Warmest Regards,

Bob Schaller

Your Bankruptcy Advisor Blog
By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm
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