CALIFORNIA ATTORNEY'S FEES

Bankruptcy Efforts, Costs, Ethics: Ninth Circuit Reiterates That Costs Associated With Attorney Disciplinary Proceedings Are Nondischargeable In A Chapter 7 Case

$61,122.27 Was The Tab.

            In Kassas v. State Bar of California, No. 21-55900 (9^th Cir. Aug. 1, 2022) (published), the Ninth Circuit reiterated that, in line with In re Findley, 593 F.3d 1048 (9th Cir. 2010), the costs associated with a Chapter 7 debtor attorney’s disciplinary proceedings were nondischargeable under § 523(a)(7).

Bankruptcy Efforts, Sanctions: Ex-Partners In State Court Lawsuit Against Debtor With A Discharge Injunction Properly Not Sanctioned For Contempt Fees When They Had An Objective Belief The Debtor Had Returned To The Partnership State Court Dispute

Ninth Circuit Came To The Same Result, Even Under An Objective Standard Although SCOTUS Sent The Case Back Based On Denying Contempt Fees Under A Less Stringent Good Faith Belief Standard.

            On April 28, 2020, we posted on In re Taggart, a Ninth Circuit decision where two ex-partners in state court litigation against a debtor obtaining a discharge injunction were not hit with contempt fees when they took certain actions with a good faith belief that the debtor had re-entered into the state court fray—with the federal appeals court reversing a contrary lower court ruling.  SCOTUS, in Taggart v. Lorenzen, 139 S.Ct. 1795, 1799 (2019), vacated that prior Ninth Circuit decision and remanded after determining that an objective, rather than subjective, standard is more appropriate in determining whether the ex-partner creditors could be held in civil contempt for violating the bankruptcy discharge injunction.  On remand, in Taggart v. Lorenzen, No. 16-35402 (9^th Cir. Nov. 24, 2020) (published), the Ninth Circuit came to the same result based on applying the higher objective standard to the creditors’ conduct and knowledge of events. 

Bankruptcy Efforts: The Ninth Circuit Denies 28 U.S.C. § 2412(d)(1)(A) Recovery Of Attorney Fees To Debtors Who Successfully Appealed Denials Of Their Chapter 13 Bankruptcy Plans

A Bankruptcy Court Does Not Fall Within The Definition Of “United States” Under The Equal Access to Justice Act, And An Uncontested Bankruptcy Case Does Not Constitute A Civil Action Brought By Or Against The United States.

            Four separate debtors, in four separate actions, successfully appealed to the 9^th Circuit after their unopposed Chapter 13 plans were denied by the lower bankruptcy court and Bankruptcy Appellate Panel (“BAP”) due to their estimated, rather than fixed, plan durations.  Afterward, each debtor moved against the bankruptcy court and BAP under the Equal Access to Justice Act (“EAJA”), 28 U.S. Code § 2412 – seeking to recover the attorney fees they incurred.

            The EAJA, under 28 U.S.C. § 2412(d)(1)(A), provides that “[A] court shall award to a prevailing party . . . fees and other expenses . . . incurred by that party in any civil action . . . including proceedings for judicial review of agency action, brought by or against the United States . . . unless the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust.”

            Due to the similar circumstances underlying the four fee requests, the 9^th Circuit considered them together in In re: Nanette Sisk, Case Nos. 18-17445 et al. (9^th Cir. September 1, 2020) (published).  While the 9^th Circuit acknowledged that Debtors’ counsel spent considerable time and resources pursuing the successful appeals, it nonetheless denied debtors’ applications for fees.

            Because the EAJA provides separate definitions for “court” and “United States,” a bankruptcy court does not fall within the EAJA’s definition of “United States,” and uncontested bankruptcy cases do not constitute “civil action[s] brought by or against the United States” within the meaning of the EAJA.  “[B]ecause the EAJA is a limited waiver of the government’s sovereign immunity, it must be strictly construed in favor of maintaining immunity not specifically and clearly waived.”  Kreines v. United States, 33 F.3d 1105, 1109 (9th Cir. 1994).

Bankruptcy Efforts: Reasonable Costs Of Disciplinary Proceedings Imposed On California Lawyer Were Nondischargeable; However, Discovery Sanctions Payable To A Party Were Dischargeable

End Result Was $18,714 Was Nondischargeable, But $5,738 Was Dischargeable.

            In In re Albert-Sheridan (Albert-Sheridan v. California State Bar), No. 19-60023 (9^th Cir. June 10, 2020) (published), a disciplined California lawyer was ordered by the State Bar to pay $18,714 in costs for the disciplinary proceeding and to pay a client’s opponent $5,738 in discovery sanctions as conditions to lifting her suspension.  Lawyer filed a Chapter 13 bankruptcy, later converted to a Chapter 7, trying to discharge all of the costs and discovery sanctions.  The bankruptcy court said “no,” but the Ninth Circuit said “no” and “yes.”  With respect to the State Bar disciplinary costs, those were nondischargeable.  But, a different result as to the discovery sanctions:  in a first impression issue, the federal appellate court determined they were dischargeable in light of the fact they were not payable to a governmental entity. 

Bankruptcy Efforts, In The News . . . . Four Outside Bankruptcy Law Firms Seeking Approval Of $84 Million In Fees Since PG&E’s January 2019 Bankruptcy Filings

Filings Also Show Hourly Rates Being Claimed.

            As reported by NALTA in an April 2, 2019 post, four outside bankruptcy firms have requested approval of around $84 million in fees for work on Pacific Gas & Electric Company’s bankruptcy case, which was filed in January of this year. Based on its summary of public court filings, NALTA reports that Cravath attorneys are charging at rates of $415 to $1,500 per hour; Weil attorneys charge $560 to $1,600 per hour; Jenner & Block attorneys charge PG&E at hourly rates ranging from $400 to $982; and Keller & Benvenutti attorneys are charging at $400 to $800 per hour.

Bankruptcy Efforts, Substantiation Of Reasonableness Of Fees: Debtor Is Entitled To Attorney’s Fees And Costs For Challenging A Willful Automatic Stay Order On Appeal

Debtor Also Properly Allocated Fees To Work On Appeal, Such That A Procedural Basis For Denying Fees And Costs Was Infirm.

            In In re Schwartz-Tallard, 803 F.3d 1095, 1101 (9th Cir. 2015) (en banc) [discussed in our April 17, 2014 post], the Ninth Circuit earlier held that 11 U.S.C. § 362(a) authorizes the court to award reasonable attorney’s fees and costs incurred on appeal to a debtor defending a willful automatic stay violation judgment pursuant to § 362(k). This same circuit court of appeals, in Easley v. Collection Service of Nevada, No. 17-16506 (9^th Cir. Dec. 20, 2018) (published) has now extended that logic and fees/costs entitlement to encompass the situation where a debtor successfully challenges an initial award pursuant to § 362(k) on appeal. Furthermore, it rejected a district judge’s sustaining of a procedural objection that the debtor did not properly segregate work just on appeal, with the record showing it was an abuse of discretion to so conclude based on the substantiating time entries and accompanying memorandum of points and authorities.

Bankruptcy: Client’s Statement About A Single Asset To Pay Off Attorneys’ Unpaid Receivable Can Be A Statement Respecting The Client/Later Chapter 7 Debtor’s Financial Condition Which Is Dischargeable In A Bankruptcy Case According To SCOTUS

SCOTUS Put Particular Focus On The Word “Respecting.”

            In Lamar, Archer & Cofrin, LLP v. Appling, No. 16-1215 (U.S. Supreme Ct. June 4, 2018), SCOTUS faced a situation where a client told his law firm that he could cover future legal expenses, after falling behind, based on an expected tax refund, with the law firm agreeing to continue representation. However, client used the tax refund for business expenses and then told the firm that he was still waiting on the refund, which again prompted the firm to continue representation. Client never paid the final invoice, so firm sued and obtained a judgment. Shortly thereafter, client and his wife filed a Chapter 7 bankruptcy. Firm filed an adversary proceeding against client (now Chapter 7 debtor) pursuant to 11 U.S.C. §523(a)(2)(A), arguing that client’s debt was nondischargeable. Section 523(a)(2)(A) bars discharge of specified debts arising from “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s … financial condition.” Client/debtor argued that his verbal statements fell within the “other than” exception establishing nondischargeability.

            Although the bankruptcy and district court disagreed with client’s nondischargeability argument, the Eleventh Circuit and SCOTUS accepted debtor’s position. Placing special emphasis on the word “respecting,” the SCOTUS determined—in an opinion authored by Justice Sotomayor--that a statement about a single asset indeed can be a “statement respecting the debtor’s financial condition” and that firm’s interpretation would read out this important word from section 523(a)(2)(A) given that Congress attempted to balance the interests of debtors and creditors in this particular scenario.

Bankruptcy/Sanctions: Contempt Sanctions Against Creditor For Knowingly Violating Discharge Injunction Could Not Stand Based On Creditor’s Subjective Good Faith Belief, Even If Unreasonable

Ninth Circuit Clarified Some Reasoning In Zilog Decision.

            In In re Taggart, Case No. 16-35402 (9^th Cir. Apr. 23, 2018) (published), the Ninth Circuit clarified some prior reasoning in In re Zilog, 450 F.3d 996, 1009 n.14 (9^th Cir. 2006) to reinforce that contempt sanctions cannot be assessed against a creditor for knowingly violating a discharge injunction based on creditor’s good faith belief, even if unreasonable in nature.  The bankruptcy judge found the creditor’s subjective intent was irrelevant, an erroneous determination resulting in the BAP’s prior decision to reverse the bankruptcy judge ruling—with the Ninth Circuit affirming the BAP’s reversal.

Bankruptcy: NALFA Announces Billing Rates For Top Bankruptcy Attorneys During 2015-2017 In Major Legal Markets

Rates Reflect Specialty Nature Of Practice, We Would Conjecture.

            We can report that the National Association of Legal Fee Analysis (NALFA) has conducted a survey of partner hourly rates in bankruptcy cases, the results of which were reported in a recent post on its News Blog.

              NALFA examined dozens of court filings in bankruptcy cases over the past few years.  The following results of its survey reflect the average of partner hourly rate ranges in major legal markets for the sampling of bankruptcy cases at issue:

            2017: $878 - $1,005
            2016: $807 - $921
            2015: $783 - $886

            We thank NALFA for these results in the bankruptcy area as far as newsworthy purposes.

Bankruptcy/Reasonableness Of Fees: Ninth Circuit Affirms Arbitrator’s Award Of Fee Recovery To Chapter 11 Debtor’s Attorneys Under Reasonable Value Cap Of 11 U.S.C. § 502(b)(4)

Appellate Court Also Reconciled Importance of Full Faith And Credit Act With Respect To Preclusive Effect Of Arbitrator’s Decision.

            The Ninth Circuit in In re CWS Enterprises, Inc., No. 14-17045 (9^th Cir. Sept. 14, 2017) (published) had to reconcile two provisions:  11 U.S.C. § 502(b)(4), a provision limiting pre-petition attorney’s fees provided to a Chapter 11 bankruptcy debtor to the reasonable value of the attorney services, and the Full Faith and Credit Act (28 U.S.C. § 1738), which requires that courts give full faith and credit in the United States to a valid state court judgment.  As we shall see, the Ninth Circuit devised a test which largely gives full faith and credit to a detailed fees ruling which does consider the reasonableness question in full such that there is no room for later reconsideration by a bankruptcy court.

            In this one, a litigant—before filing to become a Chapter 11 bankruptcy debtor—retained a law firm to assist another a law firm on various lawsuits, agreeing that the assisting law firm should get an 8% contingency fee based on a net settlement amount.  The two law firms obtained a good result in one of the cases resulting in a $30.5 million settlement value for the client/litigant before litigant filed bankruptcy.  Client balked at paying the fee, resulting in a fully contested arbitration in which client argued quantum meruit rather than the contract recovery was the proper measure of any relief.  The arbitrator allowed both theories to proceed, but ultimately decided the contract recovery was correct and that law firm was entitled to all contingency requested fees (just under $2.5 million) in a single-spaced, 26 page decision fully discussing the contingency arrangement and fee reasonableness factors.  However, under 11 U.S.C. § 502(b)(4), the bankruptcy court took a fresh look at the reasonableness questions and determined the law firm was only entitled to $440,250, prompting an appeal by the law firm to the district court.  In turn, the district judge reversed, determining that she could basically give preclusive effect to the arbitrator’s much higher determination.  This spawned client/debtor’s appeal to the Ninth Circuit.

            The Ninth Circuit first agreed with the analysis of the Tenth Circuit in Landsing Diversified Properties v. First National Bank and Trust Co. (In re Western Real Estate Fund, Inc.), 922 F.2d 592 (10^th Cir. 1990), modified sub nom., 932 F.2d 898 (10^th Cir. 1991), which held that state law governs a pre-petition attorney’s fees dispute in this context such that section 502(b)(4) was only a federal cap on a fee already determined pursuant to state law and that the risk under contingency fee arrangements is itself an element of the reasonableness analysis.  But, in deciding that a bankruptcy court might be able to challenge a pre-petition state court judgment, the Ninth Circuit also agreed with Anthony v. Interform, 96 F.3d 692 (3d Cir. 1996), which held that the reasonableness cap could apply to state court judgments in the right circumstances so as to allow room for a reevaluation of reasonableness by a bankruptcy judge.

            Application of this new test did not appear to be hard for the Ninth Circuit in this context.  The arbitrator fully vetted the reasonableness issues as far as the contingency arrangement was concerned.  Here is what the Ninth Circuit said:  “Reasonableness, so understood, can be (and quite often is) decided in an arbitration proceeding like the one conducted here.  Arbitration is a common method of resolving fee disputes under the bar rules of many states.  Overall reasonableness is the usual criterion.  And in the typical fee arbitration, the ex ante agreement between the lawyer and client is strong evidence of reasonableness, particularly where the fee was a contingent one.”  (Slip Op., p. 29.)  The arbitrator rejected that the contingency agreement was unconscionable and entertained extensive evidence about the unreasonableness of the law firm’s fee compensation to no avail.  The particular resolution in this matter in attorneys’ favor was not one of those cases where there “might be room” for a reduction under section 502(b)(4) following the state court judgment confirming a detailed, well-reasoned arbitration award.  District judge’s full fee award ruling affirmed on appeal.

Bankruptcy Efforts, Pleading, Reasonableness Of Fees: 4/1 DCA Reverses Fee Award Based On Failure To Consider Previously Filed Papers On Prior Motion

Additionally, Remand Made To Include Bankruptcy Efforts And Provide A Better Explanation Of 50% Fee "Haircut".

            Roth v. Plikaytis, Case No. D070484 (4^th Dist., Div. 1 Sept. 13, 2017) (partially published) is a situation where defendant prevailed on a breach of contract action allowing fee entitlement (after a jury trial), but where the trial court only awarded $139,750 out of a requested $442,622.78 in contractual attorney’s fees and reduced the claimed lodestar hours by 50% after eliminating recovery for bankruptcy efforts.  During the fees proceedings, the trial judge refused to credit hourly rates contained in defense declarations filed in support of a prior motion for defense fees in the case which was denied without prejudice.

            The 4/1 DCA reversed and remanded for reconsideration of the fee award.

            In the published portion of the decision, the appellate court—in a holding instructive in all law and motion hearings—determined that the prior motion declarations should have been considered in the subsequent fee hearing.  After reconciling various California Rules of Court and principles relating to summary judgment/adjudication motions, the 4/1 DCA concluded that there was no reason to justify the trial judge in failing to consider previously filed materials in a law-and-motion fee proceeding.

            Going to the unpublished portion of the opinion, the appellate court determined there were two errors in the trial judge’s fee decision.  The first was failure to allow compensation for bankruptcy court efforts relating to the breach of contract claim brought by losing plaintiff.  (Circle Star Center Associates, L.P. v. Liberate Technologies, 147 Cal.App.4^th 1203, 1208 (2007); Chinese Yellow Pages Co. v. Chinese Overseas Marketing Service Corp., 170 Cal.App.4^th 868, 882, 884-885 (2008).)  In doing so, the appellate court disagreed with a contrary Ninth Circuit decision, finding it distinguishable and not adopting its reasoning in any event.  The second reason for a remand was the dearth of explanation for the significant 50% “haircut” in lodestar hours, carefully explaining that the explanation was not adequate under the circumstances of the case.

Bankruptcy/Special Fee Shifting Statute: Fifth Circuit Court Of Appeals Affirms Almost $16 Million Criminal Restitution Order To GECC For Legal, Expert, And Consulting Fees In Bankruptcy Fraud Proceedings

 

Basis For Order Was The Mandatory Victims Restitution Act.

 

    Although not a California case, USA v. Lagos, No. 16-20146 (5th Cir. Mar. 23, 2017 revised) (published) was interesting for purposes of illustrating that significant attorney's fees and related costs can be awarded as part of restitution entered in criminal cases. Lagos involved a nearly $16 million restitution award in a federal criminal proceeding against the defendant and in favor of General Electric Capital Corp. (GECC), the victim-lender in wire fraud counts, resulting in an eventual guilty plea by defendant to six counts in the criminal case. The restitution encompassed legal, expert, and consulting fees incurred by GECC primarily in a related bankruptcy case involving fraud proceedings. The Fifth Circuit affirmed, because such an award in its view was allowable under the Mandatory Victims Restitution Act, 18 U.S.C. §§ 2, 1343, 1344, disagreeing with a more narrow view of the statute by the D.C. Circuit Court of Appeals.

Bankruptcy: Statutory Prospective Rent Damages Cap Applies To Creditor Work In Litigating Future Rent Issues, But Does Not Apply To Work On Past Rent Or Debtor Counterclaim Ordinary Breach Of Lease Issues

 

 

Cap Only Applies To Claims Directly Resulting From Lease Termination, Not Collateral Issues.

 

    The Ninth Circuit in In re Kupfer, No. 14-16697 (9^th Cir. Dec. 29, 2016) (published) considered the extent to which attorney's fees for certain work were or were not subject to the statutory cap for prospective rent aiding a defaulting, bankrupt tenant, which cap is contained in 11 U.S.C. § 522(b)(6). The panel concluded that the cap applies to fee work for claims that result directly from lease termination, but did not apply to collateral claims. In this instance, the cap did apply to fees attributable to litigating creditors' claims for future rent, but did not apply to fees attributable to litigating claims for past rent or attributable to litigating against debtors' ordinary breach of lease counterclaims.

Bankruptcy/Indemnity: City Of Vallejo’s Chapter 9 Bankruptcy Plan Did Not Discharge Compensatory Or Attorney’s Fees Awards Against Individual Police Officers In Excessive Force Case

 

However, Vallejo Likely Owes Statutory Indemnification Duties To Officers For Both Awards.

     The Ninth Circuit in Deocampo v. Potts, No. 14-16192 (9^th Cir. Sept. 8, 2016) (published) confronted an issue under a Chapter 9 municipality bankruptcy plan, harkening to say that more of these issues may be confronted as local governments face economic problems. The specific issue was whether a compensatory verdict and a later attorney’s fees award against individual police officers, who had been defended by the City of Vallejo a trial, were discharged by City’s Chapter 9 bankruptcy plan where no provision provided for an adjustment as it related to the officers. The Ninth Circuit answered “no,” but with a caveat. California Government Code section 825 does mandate indemnification to municipal employees acting “within the scope of their employment,” with the appeals court hinting that the police officers may well have to be indemnified by City given that the verdict/award were post-petition debts under indemnity principles.

Bankruptcy: Attorney’s Fees Incurred By Plaintiff During Litigation After Confirmation Of Debtor’s Chapter 11 Bankruptcy Plan Were Discharged

 

Although Plaintiff’s Claim Arose Pre-Petition, Plaintiff’s Post-Discharge Litigation Conduct Was Within The Discharge “Fair Contemplation” Of The Parties.

     In Picerne Construction Corp. v. Castellino Villas, A.K.F., LLC, Case No. 12-57186 (9^th Cir. Sept. 6, 2016) (published), the Ninth Circuit confronted whether the bankruptcy court properly concluded that attorney’s fees incurred by plaintiff incurred during litigation after the confirmation of a Chapter 11 bankruptcy plan were discharged by that bankruptcy. Both the bankruptcy and appellate courts determined that they were under the circumstances.

     What happened was that Debtor failed to pay general contractor for work on an apartment complex project, with the parties’ contracts containing a fees clause. Contractor obtained a favorable arbitration award, with Debtor filing a Chapter 11 bankruptcy petition the day of the arbitration award. The bankruptcy court lifted the stay so that the parties could continue to litigate the mechanic’s lien claim in state court. Contractor filed an objection to confirmation of the Debtor’s Chapter 11 plan, with the parties reaching a settlement about contractor’s lien priority but not agreeing to anything about attorney’s fees and costs. The bankruptcy court approved the settlement and agreement and confirmed the Chapter 11 plan per the settlement agreement, resulting in a discharge of Debtor. However, the bankruptcy court denied contractor’s motion for fees based on the plan confirmation discharge.

     Contractor did not get any more relief on appeal. The principal thrust of the decision was that the continued post-petition litigation of a pre-petition claim did not fall outside the fair contemplation of the parties that fees might be incurred in the future and thus fall within the bankruptcy discharge. Here, Debtor did not commence new litigation or return to a new fray, but only litigated in line with what the parties agreed to under the settlement agreement.

Bankruptcy/Requests For Admission: Auto Accident Defendant/Chapter 7 Debtor Properly Discharged From Liability For Costs-Of-Proof Sanctions Based On Post-Petition Conduct Or Post-Discharge Conduct

 

Post-Petition Was Passive, Not Active, So Discharge Principles Applied.

    In Reese v. Mingramm, Case No. B262021 (2d Dist., Div. 6 May 18, 2016) (unpublished), a defendant in a later personal injury action filed a Chapter no-asset bankruptcy but failed to list the personal injury plaintiff as a creditor given that the matter was just a claim and was insured.  Debtor assumed the accident did not materially relate to his bankruptcy, with the bankruptcy court issuing a discharge.  After the discharge, personal injury plaintiff filed suit and obtained a $ 538,000 jury verdict against defendant/debtor, with debtor informing everyone about the bankruptcy after the verdict.  Debtor’s insurer tendered a full $250,000 policy limit offer, which was rejected by personal injury plaintiff.  Plaintiff then filed a motion to declare the judgment non-dischargeable and obtain attorney’s fees and costs against discharged debtor based on bad faith denial of requests for admission justifying costs-of-proof sanctions under CCP § 2033.420.

    The trial court denied the motions, a result sustained on appeal before the 2/6 DCA.

    With respect to the costs-of-proof sanctions denial, the appellate court found that these sanctions are a matter of discretion, with the lower court impliedly determining that the RFA denials were made in good faith.  But there was more.  Personal injury plaintiff argued that the debtor/defendant could be liable for post-petition conduct where that debtor returns to the fray of litigation.  However, the appellate court found this was not the case by debtor because he filed no cross-complaint, did not seek damages, or take action to press the litigation forwarded—he simply defended.  Plaintiff tenaciously argued that the RFA discovery responses were false/fraudulent conduct under a specific non-dischargeability statute (11 U.S.C. § 727(a)(4)(A)), but the appellate court determined that this only related to false statements in debtor’s schedule, with the RFA responses occurring after the bankruptcy discharge was issued.  (However, reading between the lines, plaintiff did get the benefit of insurer’s policy term tender of $250,000, so not all was lost at all.)

Bankruptcy: Two Delaware Bankruptcy Judges Nix Retention Fee Arrangements Structured To Get Around ASARCO Holding

 

Indemnification And Fee Premium Provisions Did Not Surmount ASARCO.

     In Baker Botts L.L.P. v. ASARCO, Inc., 135 S. Ct. 2158, 2169 (2015) [discussed in our June 19, 2015 post], SCOTUS held that bankruptcy estate counsel cannot obtain fee recovery for defending the propriety of their fee applications under 11 U.S.C. § 330. Although two firms recently took a stab at structuring around ASARCO, two Delaware bankruptcy judges rejected the attempts to do so.

     Counsel for the Committee of Unsecured Creditors (Committee Counsel) inserted a provision in its retention agreement with the Committee that it was entitled to indemnification from the bankruptcy estates in the event Committee Counsel incurred costs, expenses, and fees to defend its fee applications before the bankruptcy court. Although arguing that fee recovery was sought under 11 U.S.C. § 328(a) rather than § 330 and that the recovery fell within a contractual exception to the fee prohibitions, the bankruptcy judge in In re Boomerang Tube, Inc., Case No. 15-11247 (Bankr. D. Del. Jan. 29, 2016) did not buy that these distinctions surmounted ASARCO, given that § 328(a) has no express provision of fees in this context and that the contract was between Committee and Committee Counsel (with the bankruptcy estate being a nonsignatory to it).

     Baker Botts tried again, after ASARCO, to gain fee entitlement for “fees on fees” defense work by structuring a provision in its retention that allowed for a 10% Fee Premium with respect to aggregate fees, a Fee Premium which would be waived if BB did not incur material fees and expenses from defending its fee applications. The bankruptcy judge in In re New Gulf Resources LLC, Case No. 15-12566 (BLS) (Docket Nos. 228 & 334, Feb./Mar. 2016) found that this creative arrangement still ran afoul of ASARCO’s reasoning.

Bankruptcy/Section 1717/Special Fee Shifting Statute: Debtor’s Fees In Nondischargeability Bankruptcy Action Were Not Recoverable Under California Civil Code Section 1717 Or ERISA Discretionary Fee-Shifting Statute

 

Fee Activities Were Not Within the Purview Of Either Statute.

    Debtor/employer eventually “defensed” a bankruptcy nondischargeability action brought by certain employees arguing employer was an ERISA fiduciary for purposes of the “fiduciary” exception to bankruptcy discharge, a determination found to not legally be sustainable under a prior Ninth Circuit opinion (meaning employer was not an ERISA fiduciary for purposes of nondischargeability).  Employer then moved to recover fees expended in defending the nondischargeability action from bankruptcy court through appellate court levels.  The fee request was made before the Ninth Circuit, which denied it in Bos v. Board of Trustees, No. 13-15604 (9th Cir. Mar. 24, 2016) (published).

    California Civil Code section 1717 did not provide a fee entitlement basis because the nondischargeability action was not “on a contract” as required under the statute.  The nondischargeability action only involved the Bankruptcy Code, and no determination was necessary on the enforceability of any contracts between the involved parties; in fact, any contract was only collateral to the overall dispute on nondischargeability.

    ERISA’s discretionary fee-shifting provision, 29 U.S.C. § 1132(g)(1), was not implicated because the nondischargeability action was not an “action under” ERISA, but was grounded only under the Bankruptcy Code given how the cause of action was framed.

Bankruptcy: U.S. Supreme Court Denies Certiorari In Case Where Petitioning Creditors In Involuntary Bankruptcy Hit With Fees, Including Appellate Fees, For Prosecuting Case In Bad Faith

 

Certiorari Denied on January 8, 2016.

    On March 9, 2015, we posted on the Eleventh Circuit’s decision in DVI Receivables XIV, LLC v. Rosenberg, where petitioning creditors in an involuntary bankruptcy were assessed with fees, including appellate fees, for prosecuting the involuntary petition in bad faith.   U.S Bank had sought certiorari from the U.S. Supreme Court, but we can report that petition was denied on January 8, 2016.

Bankruptcy/Family Law: $15,000 Family Law Domestic Fee Support Award Affirmed On Appeal

 

Case Has Nice Discussion On Nondischargeable/Dischargeable Fee Awards in Bankruptcy.

     We have to give credit to Judge Yegan and his colleagues on the Second District, Division 6. They helped clarify an issue we have seen before as far as what type of family attorney’s fees awards in family law proceedings are nondischargeable or dischargeable in nature once a bankruptcy is at issue on behalf of the obligor.

     In Marriage of Angell, Case No. B259073 (2d Dist., Div. 6 Oct. 27, 2015) (unpublished), husband argued that a $15,000 fees award to wife was nondischargeable under a Chapter 13 bankruptcy proceeding. The appellate court disagreed, indicating that the fees award followed the principal award and was nondischargeable. If the domestic support obligation is nondischargeable, then the fee award attendant thereto is nondischargeable. However, if the property division or settlement awards are unattached to domestic support obligations, then fees relating to these activities are dischargeable in nature. (In re Duncan, 122 B.R. 434, 435-436 (Bankr. N.D. Okla. 1991).) Nice clarification.

Bankruptcy: Schwartz-Tallard Opinion Result Holds Up On En Banc Hearing.

 

Debtor Can Obtain Fee Recovery For Successfully Prosecuting Suit For Damages For Automatic Stay Violation.

    In earlier posts of April 17, 2014, August 29, 2015, and December 22, 2014, we posted on In re Schwartz-Tallard, where the Ninth Circuit determined that 11 U.S.C. § 362(k) authorized attorney’s fees recovery from debtor’s prosecution of a suit for damages redressing the violation of the bankruptcy automatic stay.  We can now report that the Ninth Circuit has adhered to this ruling in an en banc decision published on October 14, 2015, linked here. 

Bankruptcy/Section 1717: Bankruptcy Judge Erroneously Denied Debtor’s Requests For Recovery Of Fees After Defeating Car Lender’s “Hanging Paragraph” Secured Interest Claim In Chapter 13 Plan Confirmation Battle

 

“Hanging Paragraph” Claim Was “On The Contract” Under A Fees Clause.

     In In re Penrod, No. 13-16097 (9^th Cir. Oct. 1, 2015) (unpublished), debtor was successful against a car lender in a “hanging paragraph” dispute under 11 U.S.C. § 1325(a)(*) [no typo here – because this subsection was not numbered after (a)(9) by the legislation] where lender argued the whole claim should be secured while debtor argued it should only be partially secured, with debtor beating lender’s objection to confirmation of the Chapter 13 plan. Debtor then moved to recover $245,000 in attorney’s fees based on a fees clause in the auto loan documents, which was unilaterally worded in favor of lender. The bankruptcy judge denied the fee request.

     The Ninth Circuit reversed. It found that the “hanging paragraph” dispute did arise from enforcement of the auto loan contract, such that it was compensable under Civil Code section 1717 given that the unilateral fees clause is construed reciprocally under California law. There is a nice discussion of why this matter was not one solely based on bankruptcy law, but involved nonbankruptcy/contractual interpretation allowing for recovery of fees. Reversed and remanded to entertain debtor’s fee request.

Arbitration/Bankruptcy/Costs: Second District, Division 1 Strikes Costs Award Entered Against Chapter 13 Bankrupt Losing Party

 

Award of Arbitration Costs Was Affirmative Relief Violating Automatic Stay, With Striking Of Costs Award But Affirmance Of Merits Award Being The End Results.

    In Hilton v. Allcare Medical Mgt., Inc., Case No. B253984 (2d Dist., Div. 1 Sept. 25, 2015) (unpublished), former employee lost an arbitration to former employer, but then declared Chapter 13 bankruptcy.  However, the arbitrator concluded that she could entertain the fees/costs requests and then awarded arbitration costs of $15,166.37 against the bankrupt and in favor of former employee as the prevailing party, although denying the ex-employer’s motion to recoup fees.

    The appellate court disagreed, striking the costs award but affirming the merits award.  The reason was that a fees/cost proceeding constitutes an action or proceeding asserting a claim for relief such that it violated the automatic stay.  That meant the arbitrator exceeded her authority by ruling on the defense motion for fees and costs.  (Derringer v. Fitch, 2005 WL 5111008 (D.N.M. June 8, 2005).) 

In The News . . . . Class Counsel In BSH Home Appliances Moldy Washer Case Get $6.5 Million In Fees/Expenses Approved And Virginia Standing Committee On Legal Ethics Issues Opinion Helpful To Chapter 7 Bankruptcy Attorneys Getting Paid For Debtor Services

 

$55 Cash Payment Under Claims Procedure Was Consideration, With Class Counsel Obtaining $6.5 Million In Fees And Expenses.

    In Tait v. BSH Home Appliances Corp., Case No. 8:10-cv-00711 (C.D. Cal. July 27, 2015), U.S. District Judge David O. Carter approved a $6.5 million payment of fees/expenses to class counsel in a case involving allegations that washing machines were susceptible to mold.  Under the settlement which was approved, class members get a $55 cash payment under a 120-day claims process and counsel obtains a separate payment from defendant of the $6.5 million in fees/expenses under a clear sailing provision in the settlement agreement.  District Judge Carter ruled that the fees/expenses were proper under the circumstances.

Virginia Ethics Committee Issues Helpful Guidance To Chapter 7 Bankruptcy Attorneys.

    On July 23, 2015, the Virginia Standing Committee on Legal Ethics issued an opinion (LEO 1883) indicating that it was proper for Chapter 7 bankruptcy attorneys to take in the entirety of fixed fees for work in a Chapter 7 case before filing it as long as the disclosure is made in the bankruptcy papers.  Given that most of the work for a Chapter 7 debtor is done upfront (except for the 341A meeting of creditors), most of the services have already been earned.  However, as long it is structured as a fixed fee and taken in pre-petition, the Standing Committee opined this arrangement was acceptable even for future post-petition work.  Keep in mind that this opinion involved Virginia law, but it did have some nice reasoning applicable to Chapter 7 bankruptcy work in general based on interviews with bankruptcy lawyers in this area of practice.

Bankruptcy: Chapter 11 Attorneys Not Entitled To Recoup Further Fees For Fee-Defense Litigation

 

SCOTUS Decides American Rule Is In Play, With Congress Not Overriding In 11 U.S.C. § 330(a)(1).

    The United States Supreme Court, in Baker Botts L.L.P. v. Asarco LLC, No. 14-103 (June 15, 2015) (published), rejected Baker Botts’ application to obtain another $5 million in fees for successfully supporting its prior professional fee work as debtor’s company’s Chapter 11 counsel (rebuffing the challenges to fee applications by debtor itself).  The predicate statute relied by in Baker Botts, 11 U.S.C. § 330(a)(1), did not abrogate the American Rule (each party bears its own fees/costs in the absent of a contract or statute to the contrary) given that the language “services rendered” could not be read to cover fee-defense litigation work, as opposed to standard Chapter 11 estate work.  This was a 6-3 decision.

A round, white Botts’ dot.  Bidgee (2009).  Creative Commons Attribution-Share Alike 3.0 Unported license.

Bankruptcy, Costs, Judgment Enforcement: Prevailing Party Judgment Creditor’s Request For Post-Judgment Collection Fees Untimely Under Section 108 Bankruptcy Extension Section And Post-Judgment Enforcement Time Limits Are Jurisdictional In Nature

 

End Result Was Denial of Most Fee Recovery To Judgment Creditor, Although Routine Costs Were Allowed To The Creditor.

   In the companion cases of Devereaux v. Clontz, Case Nos. H037998 and H039324 (6th Dist. Apr. 30, 2015) (unpublished), judgment creditor sought attorney’s fees and costs in connection with post-judgment collection efforts against judgment debtor.   The trial court essentially denied most post-judgment fee requests (after initially awarding fees), but did grant recovery of routine costs to judgment creditor for enforcement efforts.  Both sides appealed in separate appeal causes, but the result remained the same.

    The main problem for judgment creditor with respect to the denial of the post-judgment enforcement fee requests was that judgment creditor failed to move for recovery of fees earlier than two years after the costs were incurred in derogation of Code of Civil Procedure section 685.040’s noticed motion deadline.  Judgment creditor argued, but to no avail, that judgment debtor filed for a Chapter 7 bankruptcy so that this tolled the deadline.  The appellate court, just like the trial judge, rejected this argument because the expenses were incurred after the bankruptcy was filed such that judgment creditor only got the benefit of the extension period codified in 11 U.S.C. § 108—which the judgment creditor exceeded from a filing perspective.  (Lewow v. Surfside Condominium Owners Assn., Inc., 203 Cal.App.4th 128, 132 (2012); ECC Construction, Inc. v. Oak Park Calabasas Homeowners Ass’n, 118 Cal.App.4th 1031, 1036-1037 (2004); In re Matter of M. Frenville Co., Inc., 744 F.2d 332, 334 (3d Cir. 1984).) 

    However, judgment creditor then argued that the prior decision to award fees, which was subsequently vacated under CCP § 473, was void, but the Court of Appeal found that the section 685.040 deadline was jurisdictional based upon reasoning from analogous cases under different statutory schemes.  (E.g., Manson, Iver & York v. Black, 176 Cal.App.4th 36, 42 (2009) (CCP § 473 discretionary default relief deadline); People v. Superior Court (Brent), 2 Cal.App.4th 675, 686-687 (1992) (Health and Safety Code section 11488.4 civil forfeiture deadlines).) 

    That shifted consideration in the companion case to the trial judge’s award of routine costs to judgment creditor.  Judgment debtor argued the trial judge had no jurisdiction to consider post-judgment costs while the other appeal was pending, but this argument was dispatched by the reasoning in Varian Medical Systems, Inc. v. Delfino, 35 Cal.4th 180, 189 (2005).  With respect to the merits, judgment debtor failed to meet its opposition burden of showing the costs were unnecessary or unreasonable given judgment creditor’s prima facie presentation of the costs through a costs memorandum.

Bankruptcy: Fifth Circuit Endorses Prospective, “Reasonably Likely To Benefit The Estate” Standard For Compensating Chapter 11 Debtor Counsel

 

Court of Appeals Overturns Its Prior Adoption Of Hindsight, “Material Benefit” Standard In Pro-Snax.

    In Barron & Newburger, P.C. v. Texas Skyline, Limited, No. 13-50075 (5th Cir. April 9, 2015) (published), a bankruptcy judge allowed only about $20,000 of a $130,000 fee compensation request by Chapter 11 bankruptcy counsel under 11 U.S.C. § 330, which allows compensation for “services necessary to the administration of, or beneficial at the time at which the service was rendered toward the completion of, a [Chapter 11] case.”  The bankruptcy judge followed a hindsight-based “material benefit” standard requiring a tangible, identifiable benefit set by the Fifth Circuit earlier in In re Pro-Snax Distributors, Inc., 157 F.3d 414 (5th Cir. 1998). 

    Texas Skyline overturned Pro-Snax, endorsing instead a prospectively-based “reasonably likely to benefit the estate” standard followed by other sister circuits (Second, Third, and Ninth Circuits).  It vacated and remanded the fee order for another “look see.”

    Here are the factors used under the “prospective” standard in a synopsis provided by the Texas Skyline en banc panel:

    “In assessing the likelihood that legal services would benefit the estate, courts adhering to a prospective standard ordinarily consider, among other factors, the probability of success at the time the services were rendered, the reasonable costs of pursuing the action, what services a reasonable lawyer or legal firm would have performed in the same circumstances, whether the attorney’s services could have been rendered by the Trustee and his or her staff, and any potential benefits to the estate (rather than to the individual debtor). See, e.g., In re Strand, 375 F.3d 854, 860–61 (9th Cir. 2004); In re Top Grade Sausage, Inc., 227 F.3d 123, 132 (3d Cir. 2000); In re Ames Dep’t Stores, Inc., 76 F.3d 66, 72 (2d Cir. 1996); In re Taxman Clothing Co., 49 F.3d 310, 313–15 (7th Cir. 1995).  Whether the services were ultimately successful is relevant to, but not dispositive of, attorney compensation.”

Bankruptcy: Eleventh Circuit Rules That Petitioning Creditors Face Fee Exposure For Debtor’s Fees To Obtain Dismissal Of Involuntary Bankruptcy Case, To Obtain Appellate Affirmance Of Dismissal Order, And To Prosecute Bad Faith Damage Claims Against

 

11^th Circuit Disagrees With 9^th Circuit Ruling On Appellate Fee Availability For Dismissal Order.

     Petitioning creditors in involuntary bankruptcy filings need to be aware that they can be subject to having to pay a debtor’s attorney’s fees for obtaining a dismissal of the case and also may have to pay bad faith damages (both compensatory and punitive) as well as debtor’s fees for prosecuting the bad faith damages case against petitioning creditors.

     A de facto petitioning creditor (an individual who signed on behalf of certain claimed creditors) found that out the hard way in DVI Receivables XIV, LLC v. Rosenberg, No. 13-14781 (11^th Cir. Feb. 27, 2015) (published). What happened was that a debtor in an involuntary bankruptcy successfully obtained dismissal of the case brought by certain petitioning creditors, with debtor also being able to prove that the individual signing was the real de facto petitioning creditor and the “front” entities were only “pass through vehicles.” The dismissal was appealed, but affirmed. Debtor then brought bad faith damages claims against petitioning creditors, with the fee claims sent to the bankruptcy judge and the damages claims to a jury trial. Eventually, the bankruptcy court awarded dismissal fees, appellate fees for sustaining the dismissal, “fees on fees,” and fees incurred to prosecute the bad faith claims in an amount of $1,034,295.45 (along with $39,015.37 in costs). A jury found for debtor, awarding $1.12 million in compensatory and $5 million in punitive damages, with the district judge eventually lowering the total tally to $360,000 for emotional distress.

     Petitioning creditors challenged some of the fee awards, with the Eleventh Circuit determining fee entitlement was indeed existent under 11 U.S.C. § 303(i)(1). Creditors did not challenge the dismissal fees. The federal appeals court found that the appellate fees awarded for sustaining the dismissal were recoverable under this statute, parting company from a contrary ruling in Higgins v. Vortex Fishing Sys., Inc., 379 F.3d 701, 708-709 (9^th Cir. 2004). It also determined that fees to prosecute the bad faith damages claims were recoverable, but remanded for a recalculation.

Bankruptcy, Deadlines: Plaintiff Chapter 7 Bankrupt Who Filed Fee Motion One Year After Dismissal Did So Untimely

 

Also, Chapter 7 Trustee Properly Dismissed Case Against Defendants, With Chapter 7 Trustee “Owning” the Dismissed Claims.

     Plaintiff, a Chapter 7 bankrupt, tried to get attorney’s fees a year after one of his actions was dismissed in favor of defendants by the Chapter 7 trustee under a settlement agreement. Plaintiff still went to trial, but was non-suited. A year later, plaintiff filed a motion for attorney’s fees as a prevailing party against defendants. The motion was denied.

     That result was upheld in Sui v. 2176 Pacific Homeowners Assn., Case No. G049822 (4^th Dist., Div. 3 Feb. 24, 2015) (unpublished), a 3-0 decision authored by Justice Ikola.

     The upfront problem was that the fee motion was filed a year after the lawsuit dismissal, not the required 60 days under California Rules of Court. Plaintiff argued the dismissal by the Chapter 7 trustee was invalid because no consent was given by plaintiff, but this contention failed because the causes of action in the dismissed lawsuit belonged to the Chapter 7 trustee. Finally, the settlement agreement specified that each side would bear their own respective costs and fees, another independent reason to support the decision below—although the untimeliness of the fee request was the only reason needed by the appellate court to sustain the fee denial ruling.

Bankruptcy/In The News: Bankruptcy Court Retained Ancillary Jurisdiction To Resolve Attorneys’/Financial Advisor’s Entitlement To Fee Recovery Even Though Bankruptcy Case Dismissed

 

Seventh Circuit Disagrees That Bankruptcy Judge Lacked Jurisdiction To Decide Fee Entitlement Issue.

     In Sweports, Ltd. v. Much Shelist, Case No. 12-14254 (7^th Cir. Jan. 9, 2015), bankruptcy counsel and a financial advisor to the Official Committee of Unsecured Creditors (“claimants”) in a Chapter 11 proceeding filed to recover fees of at least $780,000 after the bankruptcy case was dismissed when the U.S. Trustee moved to convert it to a Chapter 7 proceeding. The bankruptcy judge denied fees based on the notion he did not have jurisdiction because the bankruptcy case had been dismissed.

     Claimants appealed, and Circuit Judge Posner on behalf of a Seventh Circuit panel reversed the fee denial.

     The Seventh Circuit decided, under ancillary jurisdiction principles, that the bankruptcy judge had the ability to determine fee entitlement in post-dismissal proceedings so that claimants could purse state court collection remedies against the debtor (given that the bankruptcy case dismissal revested assets in the debtor rather than the debtor’s estate). Claimants’ delay in not moving for fees pre-dismissal was reasonable because the counsel involved did not want to delay other unsecured creditors’ wish that the case be dismissed so they could post haste sue debtor in state court for collection of debts owed. (Obviously, fairness was also at play here—it was unfair for other creditors to pursue their debts, but then adjudge that claimants could not get similar speedy entitlement rulings post-dismissal so they could pursue state court collection remedies.)

     Circuit Judge Posner observed that there was no final judgment resolving the controversy between the parties. “The order dismissing the bankruptcy didn’t do that. There was a loose end, left dangling—[claimants’] claim for fees.” However, the Seventh Circuit was careful to distinguish post-dismissal fee entitlement (a ruling the bankruptcy judge could make) from an order to pay fees (something which couldn’t be done because there was nothing in the bankruptcy case from which to order payment, so the route to go was state court collection efforts against debtor).

Bankruptcy: Ninth Circuit Orders En Banc Hearing for Schwartz-Tallard 11 U.S.C. § 362(k)(1) Issue

 

En Banc Order Came Down on December 19, 2014.

     In our April 17 and August 29, 2014 posts, we discussed In re Schwartz-Tallard, 765 F.3d 1096 (9^th Cir. 2014), which determined in a 2-1 opinion that a Chapter 13 bankruptcy debtor could recover attorney’s fees on appeal for successfully defending an automatic stay violation determination as “damages” under 11 U.S.C. § 362(k)(1). Because the majority and dissent varied on the application of the Court’s own prior decision in Sternberg v. Johnston, 596 F.3d 937 (9^th Cir. 2010), the Ninth Circuit ordered an en banc hearing of the matter in a December 19, 2014 Order.

Bankruptcy/Cases Under Review: Federal Government And Several States Support Baker Botts’ SCOTUS Position On Whether Efforts Defending Core Application Fees Are Compensable

 

Fifth Circuit Decision Saying No Fees For These Efforts Under Scrutiny.

     On October 2, 2014, we posted on SCOTUS granting certiorari with respect to a Fifth Circuit decision denying Baker Botts substantial fees and costs in defending their core application fee efforts. According to Law 360, “[t]he federal government on Wednesday [December 10, 2014] joined state bar associations from California, Florida, New York, Texas and others urging the U.S. Supreme Court to reverse a Fifth Circuit decision that overturned fees associated with Baker Botts LLP's $117 million fee award for defending Asarco LLC in the mining company's bankruptcy.”

Bankruptcy/Cases Under Review: SCOTUS Grants Certiorari To Decide If Bankruptcy Attorneys Can Get Compensation For Defending Fee Application Requests Relating To “Core Fees”

Bankruptcy/Cases Under Review: SCOTUS Grants Certiorari To Decide If Bankruptcy Attorneys Can Get Compensation For Defending Fee Application Requests Relating To “Core Fees”

Fifth and Ninth Circuits Are Split On The Issue.

     Today, the U.S. Supreme Court granted certiorari to resolve whether bankruptcy judges have discretion under Bankruptcy Code section 330(a) to award bankruptcy attorneys fees and costs for defending fees/expenses which are the subject of fee applications for “core” fees. (It has long been recognized that fees and costs can be awarded for preparing bankruptcy fee applications.) The Ninth Circuit, in In re Smith, 317 F.3d 918, 929 (9^th Cir. 2002) said “yes,” while the Fifth Circuit, in Baker Botts L.L.P. v. ASARCO LLC, 751 F.3d 291 (5^th Cir. 2014) said categorically “no.” The Fifth Circuit, in effect, denied about $5.5 million in fees and costs to Baker Botts in the ASARCO bankruptcy if we read the Fifth Circuit opinion correctly, leading to a grant of certiorari (No. 14-103) to resolve the split among federal circuit courts.

Bankruptcy/Equity/Sanctions: Fee Recovery Affirmed And Reversed In Part In Case Involving Federal Work and Vexatious Litigant Orders

 

Some Should Have Been Sought In Federal Court, But Vexatious Litigant Sanctions And Addition Of Attorney As Judgment Debtor, Who Assisted Vexatious Litigant, Was Proper.

     Kempton v. Clark, Case No. B248713 (2d Dist., Div. 2 Sept. 25, 2014) (unpublished) is a real imbroglio involving bankruptcy adversary and state court proceedings in which vexatious litigant orders and fee recovery orders were entered, eventually with an attorney for a vexatious litigant being added as a judgment debtor for purposes of certain vexatious litigant sanctions rulings.

     The appellate court affirmed and reversed some of these orders.

     Without getting into excruciating specifics, the reviewing court found that the superior court erroneously awarded certain fees for federal court (bankruptcy adversary) work, finding the power to do so rested with the federal court. (Charlie Y., Inc. v. Corey, 446 B.R. 384, 391-393 (9^th Cir. BAP 2011).) The appellate court did affirm orders adding an attorney as a “judgment debtor” to vexatious litigant sanctions orders after finding he was the real power behind the throne as far as liability.

Bankruptcy: Stay Violator’s Conditional Settlement Offer Did Not End Stay Violation, Entitling Bankruptcy Petitioner To Fees For Remedying Stay Violation

 

Concurring Decision Believes Sternberg Opinion Wrongfully Decided, But Still Follows It.

     In the Matter of Snowden, No. 13-35291 (9^th Cir. Sept. 12, 2014) (published) is a decision arising from 11 U.S.C. § 362(k)(1), which allows a bankruptcy petitioner to obtain attorney’s fees and damages incurred in litigating over a stay violation.

     Bankruptcy petitioner obtained a $575 payday loan and then listed the loaning bank as an unsecured creditor. However, bank engaged in “self help” and electronically debited bankrupt’s checking funds so as to cause an overdraft, which produced a lot of emotional distress because bankrupt’s finances spiraled downward and she could not buy tennis shoes or pay for a haircut for her daughter. In fairly protracted litigation over the stay violation, bankrupt eventually won $12,000 emotional distress damages, $12,000 punitive damages, and $2,538.55 in section 362(k)(1) attorney’s fees. The district court, in two appeals of bankruptcy decisions, denied bankrupt fees in the first successful appeal before the district court, reasoning that many of the fees were incurred to obtain damages rather than remedy the stay violation—in accord with the “bright line” Ninth Circuit rule enunciated in Sternberg v. Johnston, 595 F.3d 937, 940 (9^th Cir. 2010) [fees obtained to remedy the stay compensable, but fees obtained in pursuing damages not compensable]. The district court essentially ruled that a May 2009 conditional settlement offer from bank to pay $1,495 back to debtor “ended” the stay violation, although debtor did not accept it, litigated further, and obtained a December 2009 bankruptcy court order directing the bank to return the $575 earlier seized.

     The Ninth Circuit reversed and remanded the fee award. All three judges on the panel found that the stay violation was not ended in May 2009, with the bank not being able to circumvent 362(k)(1) fees by making a conditional settlement offer rejected by the debtor who had to litigate further to actually obtain an order directing return of the seized funds. Instead, the stay violation continued until the December 2009 restore funds order. The panel found that debtor had used the stay protections as a shield such that fees incurred on appeal on stay violation issues were compensable, although ordering a remand to determine which fees were for the stay violation versus damages pursuit.

     In a concurring opinion, Circuit Judge Watford disagreed with Sternberg’s reading of 362(k)(1), preferring instead the Fifth Circuit’s analysis in In re Repine, 536 F.3d 512, 522 (5^th Cir. 2008) [holding that fees were recoverable for both the stay violation and damages pursuit phases]. However, the concurring judge was bound by Sternberg and followed its demarcating rule in Snowden.

Bankruptcy: Schwartz-Tallard Opinion Withdrawn And Republished

 

Ninth Circuit Comes To Same Result, But Reissues Slightly Different Opinion.

     For those of you facing “actual damages” concerns in the automatic stay area, we discussed In re Schwartz-Tallard, Case No. 12-60062 (9^th Cir.) in our April 17, 2014 post. We can now report that the previous decision has been withdrawn and reissued on August 29, 2014 (still published), coming to the same result but with slight twists/additions in reasoning by both the majority and dissenting Circuit Judges.

Bankruptcy: Debtor’s Attorney’s Fees Incurred In Successfully Defending Against Creditor's Stay Violation On Appeal Are Recoverable As Damages Under 11 U.S.C. § 362(k)(1)

 

Contrast That With Nonrecoverability of Fees For Adversary Proceeding Work Related to Pursuit of Damages From Stay Violation.

     The Ninth Circuit in In re Schwartz-Tallard, Case No. 12-60052 (9^th Cir. Apr. 16, 2014) (published) dealt with a different issue leading to a different result than that reached in Sternberg v. Johnston, 595 F.3d 937 (9^th Cir. 2010). Sternberg determined that a debtor’s fee for work on an adversary proceeding seeking damages for a stay violation were not “actual damages” under a bankruptcy statute, namely, 11 U.S.C. § 362(k)(1) (one stating that an individual injured by willful stay violation shall recover actual damages, including costs and attorneys’ fees). However, in contrast to Sternberg, the Schwartz-Tallard panel decided debtor’s successful appellate defense of a bankruptcy court determination that a creditor violated a stay was much different and did constitute “actual damages” under section 362(k)(1). Goes to show you how distinguishing between different purposes and how different procedural contexts can drive a result in a diametrically opposite direction.

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.

Bankruptcy/Fee Clause Interpretation: Broadly Worded Fees Clause Rescues The Day For Winning Creditor

CCP § 1021, Not Civil Code § 1717, Afforded Relief.

    In re Charalambous (Hamilton v. Charalambous), BAP No. CC-13-1042-PDKi (BAP 9th Cir. Mem. Decision July 3, 2013) (unpublished) is an illustration of how one needs to carefully pick the basis for fee entitlement. Although Civil Code section 1717 is an attractive first impulse ground, it may need to yield to other statutory bases, especially where noncontractual claims are at issue.

     Here, creditor prevailed in non-discharging a debt under 11 U.S.C. § 523(a)(4), which deals with a trust fiduciary relationship. Based on a broadly worded fees clause in the agreement with debtor, creditor moved to recover attorney’s fees of $254,291.25 for prevailing in the nondischargeability action. The bankruptcy judge said “no,” reasoning that the claim was not based “on the contract” under Civil Code section 1717 and no one prevailed given that creditor did not obtain relief based on other nondischargeability grounds.

     The Ninth Circuit BAP panel reversed.

     Unlike section 1717, CCP § 1021 applies to tort actions as well as contract disputes. Because the debtor-creditor dispute was essentially a tort dispute according to the reviewing court, the broadly worded fees clause gave rise to an independent basis for a fees award. To make things clear, the BAP panel dropped a footnote indicating that the “prevailing party” discretionary process under section 1021 is much more restricted than that under Civil Code section 1717 for purposes of guiding the bankruptcy judge on remand (hint! hint!).

     BLOG OBSERVATION AND HAT TIP--The key here is whether you buy that section 523(a)(4) nondischargeability relief is akin to defalcation, a tort. We “hat tip” blog follower Andrew L. Fagan, Esq. of Santa Rosa for alerting us to this opinion.

Bankruptcy: $9,000 Fee Recovery To Debtor Defendant Prevailing On Consumer Debt Nondischargeability Claim Affirmed In Ninth Circuit BAP Decision

 

Court Discusses “Substantial Justification” Defense to an Award of Fees Under 11 U.S.C. § 523(d).

     Although the old adage “bad facts make bad law” may apply in some contexts, that is not the case here. Rather, bad facts may lead to good law, which is what happened in In re Machuca, Jr., 2012 Bankr. LEXIS 5939 (9th Cir. B.A.P. Dec. 14, 2012) (published).

     Machuca involved a lender suing to keep a debtor’s consumer debt on his house junior lien nondischargeable in nature. Lender did not do well at all, losing a summary judgment in debtor’s favor that was never timely appealed. The facts were not good in showing that lender reasonably relied on loan application statements so as to be entitled to nondischargeability: (1) there were income discrepancies between debtor’s application and unsigned loan application; (2) the debtor put down a base employment income for a five-year state corrections officer that was simply implausible (almost $250,000 per year); (3) the last minute signing of the loan application, just before loan funding and after the date debtor signed the promissory note; (4) lender’s approval and funding of the loan without income verification (a “stated income” loan); and (5) suing successor lender’s purchase of the loan without income verification. These “red flags” led to a summary judgment and the lower court’s subsequent award of attorney’s fees of $9,000 to winning debtor under 11 U.S.C. § 523(d).

Red flags.  Lela Davidson and Josie Aronor wave Alabama flags in their red dresses before going off to see the play "Annie" in Montgomery, Alabama.  2010.  Carol M. Highsmith Collection.  Library of Congress.