Bankruptcy Efforts: Ninth Circuit Finds That Fee Recovery Allowed Against Losing Creditors and In Favor Of Winning Debtors For Purposes Of Recouping “Fees On Fees” And Fees Obtaining Punitive Damages In Involuntary Bankruptcy Petition Dismissa

 

Ninth Circuit Does Determine That “Fees on Fees” Are Not Recoverable In Sanctions Proceeding By Which Creditors’ Controlling Persons Held Jointly and Severally Liable For Involuntary Petition Dismissal Expenses.

     Here is an interesting one for you bankruptcy practitioners, with co-contributors Marc and Mike knowing several of the bankruptcy attorneys involved in the appeal.

     In the Matter of Southern California Sunbelt Developers, Inc., Case Nos. 08-56570 et al. (9^th Cir. June 9, 2010) (for publication) involved a situation where debtors successfully obtained dismissal of an involuntary bankruptcy petition filed by 13 petitioning creditors, with the bankruptcy judge awarding debtors $745,000 in costs/fees (including “fees on fees” in litigating the fee requests) and $130,000 in punitive damages, all under 11 U.S.C. § 303(i), a special fee-shifting statute in this area. The bankruptcy court also sanctioned two controlling persons of certain creditors by making them jointly and severally liable for the costs and expenses relating to dismissal of the involuntary petition. Certain creditors and controlling persons appealed.

     They lost the main challenge, but controlling persons obtained a reversal on that portion of the “fees on fees” incurred in litigation of the motion for sanctions against them.

     The Ninth Circuit found that section 303(i) does allow recovery of fees incurred in litigating a section 303(i) motion because section 303(i) is a fee-shifting statute rather than a sanctions-oriented provision. This statute also allows for recovery of fees incurred in recovering punitive damages under section 303(i). (In re Landmark Distribs., Inc., 195 B.R. 837, 845 (Bankr. N.J. 1996).)

     However, the controlling persons were successful in getting the Ninth Circuit to acknowledge that “fees on fees” awarded in successful litigation of the motions for sanctions were improperly included in the overall award. The reason? They could only be assessed with the fees incurred in obtaining the dismissal of the involuntary petition, not “fees on fees” for actually litigating the motion for sanctions. (Lockary v. Kayfetz, 974 F.2d 1166, 1177 (9^th Cir. 1992).) So, controlling persons still had a bitter award exposure to swallow.

     BLOG UNDERVIEW—Co-contributor Mike worked with one of appellants’ counsel, Tom Dressler (now at The Dressler Law Group, LLP), when he was at Irell & Manella. Mike has also worked with and has been adverse to one of appellees’ attorneys, Bill Burd of Burd & Naylor. Finally, both co-contributors Marc and Mike know and have worked with Todd Ringstad of Ringstad & Sanders, LLP, another of appellees’ attorneys. Greetings to all.