Bankruptcy: Ninth Circuit BAP Affirms Denial Of Attorney’s Fees To Debtor Obtaining Discharge Of Student Loans

 

Promissory Note Clause Did Not Apply and No Independent Fee Entitlement Basis Shown; Also, Debtor Only Allowed Recovery of Limited Costs.

     HAT TIP—We give a “hat tip” to Ramiro Flores Munoz, who was kind enough to send us a copy of In re Hosseini, BAP No. CC-12-1516-DKiTa (9^th Cir. B.A.P. Dec. 19, 2013) (unpublished).

     There, debtor student obtained a discharge of his student loans through an adversary proceeding brought against lender Key Bank pursuant to 11 U.S.C. § 523(a)(8). The discharged promissory note between debtor and Key Bank, governed by Ohio law, had a fees clause allowing for fee recovery in enforcing the terms of the promissory note when student was in default of paying the student loans under the note. After the discharge, student sought to recover from bank $110,701.50 in fees and $4,960.39 in costs. The bankruptcy judge denied fees and awarded only filing fees/recovery of service of process fees under C.D. Cal. Local Bankruptcy Rule 7054-1.

     These determinations were affirmed on appeal by the Ninth Circuit BAP panel.

     Nothing in the Bankruptcy Code or section 523(a)(8) allowed for fee entitlement in this type of situation. The promissory note fees clause did not apply for two reasons: (1) the thrust of action was to discharge a debt, not enforce the promissory note; and (2) Ohio law, which is different than other states’ laws, actually establishes that a contractual provision allowing for the recovery of attorney’s fees to enforce a defaulted debt obligation is unenforceable as against public policy.

     With respect to the cost award, LBR 7054-1 did not allow debtor to recover any of the overhead expense items claimed in the costs bill.