In re Clarkson, 05-40062.

• Decision Date: 25 September 2007
• Docket Number: No. 05-40062.,05-40062.
• Citation: 377 B.R. 283
• Court: U.S. Bankruptcy Court — Western District of Washington
• Parties: In re Erik Michael CLARKSON, Daphne Victoria Clarkson, Debtors.

377 B.R. 283

In re Erik Michael CLARKSON, Daphne Victoria Clarkson, Debtors.

No. 05-40062.

United States Bankruptcy Court, W.D. Washington, at Tacoma.

September 25, 2007.

Donald L. Anderson, Leann K. Paluck, Stephen M. Hansen, Tacoma, WA, for debtors.

Mark Waldron, Tacoma, WA, trustee.

MEMORANDUM DECISION

PAUL B. SNYDER, Bankruptcy Judge.

This matter came on for hearing on September 6, 2007, on the Motion for Declaratory Judgment Re Enforceability of Judgment (Motion) filed by the Chapter 7 Trustee (Trustee) and Erik and Daphne Clarkson (Debtors). Based on the pleadings and arguments presented, the Court's findings of fact and conclusions of law are as follows:

FINDINGS OF FACT

In November, 2000, the Debtors filed a lawsuit (State Court Lawsuit) in Pierce County Superior Court (State Court) against Unique Construction, Inc. (Unique), seeking specific performance of a 1999 Residential Real Estate Purchase and Sale Agreement. After several delays, the State Court set a trial date in May, 2005. Subsequently, on January 5, 2005, the Debtors filed a voluntary Chapter 7 petition for relief. The trial date was stricken after the Debtors filed a Notice of Bankruptcy Filing on April 12, 2005.

The Debtors' original bankruptcy schedules did not list the State Court Lawsuit as an asset of the bankruptcy estate, nor was Unique listed as a creditor. On March 11, 2005, the Debtors filed amended Schedules B and C, listing the State Court Lawsuit as an asset with a value of $14,500, and claiming the entire amount exempt. An amended Schedule F was also filed including Unique as a possible creditor. The claim was described on Schedule F as "2000 Professional Services Possible counter-claims in specific performance lawsuit, Pierce County." Unique did not file a proof of claim and the Debtors were granted a discharge on April 5, 2005.

On February 28, 2006, Unique filed a Motion to Abandon Cause of Action as Asset of Estate or, Alternatively, to Set Deadline For Debtor to Pay Requisite Retainer to Retain Special Trial Counsel. The Trustee objected on the grounds that the Debtors' attorney in the State Court Lawsuit (Attorney), had agreed to accept the case on behalf of the estate. Daphne Clarkson (Debtor) submitted a declaration objecting to abandonment and stating that she, wanted to proceed with the State Court Lawsuit, as she had reached an agreement with Attorney for the payment of the retainer fee required to pursue her claim. The Debtor indicated that she had previously been unable to finance the lawsuit due to her financial problems. The Debtor further requested that she be given no less than 120 days from the date of the Court hearing on this motion to allow the home to be listed, sold, and for funds to be deposited in Attorney's trust account.

Attorney filed a declaration on March 15, 2006 stating:

2. I have reached an agreement with the Debtors for the payment of the retainer necessary to pursue the claim. I have also consulted with Mark Waldron, the Bankruptcy Trustee, concerning this arrangement.

3. Daphne Clarkson is currently listing her home for sale. She has agreed to pay $15,000 from the proceeds of the sale to our attorney trust account as a deposit against attorneys' fees. She will be individually liable for attorneys' fees billed on an hourly basis at $250.00 per hour and for costs and expenses incurred in the litigation.

4. Costs incurred will be considered an administrative cost of the bankruptcy. In exchange for financing the litigation from exempt property and post-petition income, the Trustee will agree to payment/reimbursement of all of Daphne Clarkson's post-petition attorneys' fees and costs in the litigation from the first dollars recovered by the Plaintiffs.

5. If the retainer is not paid within 120 days of approval of the fee arrangement by the Bankruptcy Court, we will not pursue the claim as Plaintiffs' attorneys and it is my understanding that they will consent to its abandonment as an asset of the bankruptcy estate.

Decl. of Attorney (Docket No. 29).

On May 9, 2006, Unique, the Debtors and the Trustee filed a stipulation stating that the Debtors would have until May 22, 2006, to pay a retainer to Attorney, such that he would accept employment as special counsel for the Trustee in the State Court Lawsuit, or the lawsuit would be deemed abandoned as an asset of the estate. A Stipulated Order Setting Deadline to Pay Retainer or Abandon Lawsuit as Asset of Estate (Stipulated Order) was approved by the Court on May 10, 2006. On that same date, the Debtor filed a motion requiring the Trustee to abandon her personal residence so that she could obtain financing secured by her residence to fund the State Court Lawsuit. She indicated in this motion that value may be conferred on the Debtors' estate if successful. An Order Approving Abandonment of Property was entered on June 1, 2006.

On May 18, 2007, the Trustee filed an application to employ Attorney and his law firm as attorneys for the estate. An order authorizing employment as special counsel was entered on May 18, 2007.

The State Court Lawsuit went to trial on May 31, 2007, and June 4-6, 2007. The Trustee was never substituted as a party to the State Court Lawsuit. Following the trial, the State Court dismissed the Debtors' claims against Unique and entered a judgment on July 27, 2007, against the Debtors, personally, in the amount of $44,136.27 for attorney's fees and costs incurred by Unique as the substantially prevailing party (Judgment). The State Court found that Unique incurred prepetition attorney's fees of $22,396.34, and prepetition costs of $871.43. The State Court found that Unique incurred postpetition fees of $26,415 and postpetition costs of $4,452.50. The State Court expressly declined to rule on the enforceability of the Judgment in light of the pending bankruptcy case.

On August 16, 2007, the Debtors and the Trustee filed a Motion for Declaratory Judgment Re Enforceability of Judgment, asking this Court to determine that the Debtors are not personally liable for the Judgment awarded to Unique. Unique has objected.

ISSUES

The issues in this case are as follows: (1) whether the Debtors are personally liable for that portion of the Judgment consisting of attorney's fees and costs incurred by Unique prepetition, and (2) whether the Debtors are personally liable for that portion of the Judgment consisting of attorney's fees and costs incurred by Unique postpetition.

CONCLUSIONS OF LAW

1. Prepetition Attorney's Fees and Costs

It is undisputed that prepetition claims are generally discharged in bankruptcy. Unique, however, argues that the contractual obligation to pay attorney's fees to Unique as the prevailing party was riot discharged in this case because the Debtors revived this obligation by electing to voluntarily pursue the State Court Lawsuit postpetition.

A Chapter 7 discharge "releases the debtor from personal liability for her pre-bankruptcy debts." In re Ybarra, 424 F.3d 1018, 1022 (9th Cir.2005), cert. denied, ___ U.S. ___, 126 S.Ct. 2328, 164 L.Ed.2d 840 (2006) (citing United States v. Hatton (In re Hatton), 220 F.3d 1057, 1059-60 (9th Cir.2000)) (additional citations omitted). Pursuant to 11 U.S.C. § 727(b), a discharge granted under 727(a), "discharges the debtor from all debts that arose before the date of the order for relief under this chapter." "Debt" is, defined in the Bankruptcy Code as "liability on a claim." 11 U.S.C. § 101(12). "Claim" is defined as a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." 11 U.S.C. § 101(5)(A). The definition of a claim in bankruptcy is broad and "designed to ensure that `all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case.'" California Dep't of Health Servs. v. Jensen (In re Jensen), 995 F.2d 925, 929-30 (9th Cir. 1993) (citations and quotations omitted) (emphasis in the original).

Debts for attorney's fees incurred prepetition in the Ninth Circuit are normally discharged in a Chapter 7 proceeding. "The plain language of the discharge provisions thus is clear. All of the debtor's pre-petition debts, save those listed in § 523, are discharged in a Chapter 7 proceeding. Section 523 does not except prepetition attorneys' fees from discharge." In re Biggar, 110 F.3d 685, 687 (9th Cir. 1997). Although cases admittedly exist in which courts have held that postpetition attorney fees survived discharge, this Court is not aware of a decision holding that discharged prepetition attorney fees could be revived by a debtor's postpetition actions.

It is undisputed that the underlying contract between the Debtors and Unique was entered into prepetition, the State Court Lawsuit was filed by the Debtors prepetition and the acts that gave rise to this portion of the award occurred prepetition. The Debtors were granted a Chapter 7 discharge on April 5, 2005. An exception to discharge under 11 U.S.C. § 523 has not been alleged. This claim for attorney's fees, although not reduced to judgment until postpetition, arose prepetition and is concluded by the Court to be prepetition debt discharged in the Debtors' Chapter 7 bankruptcy case.

2. Postpetition Attorney's Fees and Costs

Unique also argues that the judgment imposing personal liability on the Debtors for postpetition fees of $26,415 and costs of $4,452.50 was not discharged.

The Ninth Circuit Court of Appeals (Ninth Circuit) has concluded that a debtor can be personally liable for attorney fees incurred postpetition. In Siegel v. Federal Home Loan Mortgage Corp., 143 F.3d 525 (9th Cir.1998), the Ninth Circuit held that attorney fees arising from litigation commenced by the debtor postpetition on a prepetition matter were not discharged as a prepetition debt. In Siegel, the debtor (also the mortgagee)...