In re Ybarra

• Decision Date: 26 June 2003
• Docket Number: Bankruptcy No. ND 91-11779-RR.,BAP No. CC-02-1356-KBaP.
• Citation: 295 B.R. 609
• Parties: In re Nancy Elaine YBARRA, Debtor. Nancy Elaine Ybarra, Appellant, v. Boeing North American, Inc., Successor for Limited Purposes to Rockwell International Corp.; United States Trustee; Alfred H. Siegel, Trustee, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

295 B.R. 609

In re Nancy Elaine YBARRA, Debtor Nancy Elaine Ybarra, Appellant, v. Boeing North American, Inc., Successor for Limited Purposes to Rockwell International Corp.; United States Trustee; Alfred H. Siegel, Trustee, Appellees.

BAP No. CC-02-1356-KBaP.

Bankruptcy No. ND 91-11779-RR.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted on November 20, 2002.

Filed June 26, 2003.

COPYRIGHT MATERIAL OMITTED

Nancy Elaine Ybarra, Santa Barbara, CA, Pro se.

Wayne R. Terry, Mitchell, Silberberg & Knupp, Los Angeles, CA, for Boeing North American, Inc.

Before KLEIN, BAUM¹ and PERRIS, Bankruptcy Judges.

OPINION

PERRIS, Bankruptcy Judge.

The issue in this case is whether the bankruptcy discharge applies to attorney fees and costs awarded against a debtor for unsuccessful postpetition state court litigation of prepetition causes of action, where the action was commenced prepetition. Based on our understanding of the Ninth Circuit decisions addressing this issue, we conclude that the fees and costs are discharged and REVERSE.

FACTS

In 1988, debtor Nancy Ybarra sued her former employer, Rockwell International Corp. ("Rockwell"), the successor of which is appellee Boeing North American, Inc., on state law theories for which attorney fees may be awarded to prevailing parties.

Ybarra filed a chapter 11² bankruptcy in 1991, which was converted to chapter 7 in 1993. She did not schedule the cause of action against Rockwell as an asset until 1993.

The Ybarra-Rockwell litigation has spawned six different appeals, including four previous federal appeals that were each dealt with by the BAP and by the Ninth Circuit.³

In 1993, Rockwell filed a proof of claim in the chapter 7 case for its legal fees, both prepetition and postpetition. The court sustained Ybarra's claim objection without prejudice to reconsideration after the litigation ended.

In November 1993, the court approved, over Ybarra's protest that the cause of action was exempt property, a "compromise" whereby the chapter 7 trustee would sell the cause of action, which Rockwell purchased for $17,500 at the ensuing auction.

Once the challenge by the case trustee and Rockwell to Ybarra's claim of exemption in the cause of action was sustained, the trustee and Rockwell dismissed the lawsuit.

We later reversed the order denying Ybarra's claim of exemption, which decision was affirmed by the Ninth Circuit.⁴

On remand, the bankruptcy court ruled that the cause of action was exempt despite the fact that it was initially omitted from the schedules and was not scheduled until the case was converted to chapter 7 in 1993. The court gave debtor a choice: either accept the $17,500 that Rockwell had paid the estate for the cause of action, or accept ownership of the dismissed lawsuit and try to revive and prosecute it. Debtor chose the latter.

Although Ybarra then persuaded the state court to set aside the dismissal that had resulted from the settlement between the trustee and Rockwell, Rockwell ultimately prevailed on the merits and obtained a judgment in 1999 that awarded Rockwell $456,884.08 in statutorily authorized attorney fees and costs. That judgment was affirmed on appeal in 2001 and is final.

Rockwell, not wishing to risk violating the bankruptcy discharge injunction, filed in bankruptcy court a "Motion For Leave To Collect Costs And Fees Award" in which it asserted that the $456,884.08 award was unaffected by debtor's discharge.

The bankruptcy court, following Siegel v. Fed. Home Loan Mortg. Corp., 143 F.3d 525 (9th Cir.1998), ruled that fees attributable to the period after the bankruptcy case was filed in 1991 were postpetition debts not covered by the discharge. For ease of calculation, Rockwell thereupon limited its request to the $159,030.78 in fees and costs incurred after the state court action was revived.

The court entered an order declaring that $159,030.78 is not encompassed by the bankruptcy discharge. Ybarra timely appealed.

ISSUES

1. Whether the bankruptcy discharge applies to an attorney fee and cost award for debtor's unsuccessful postpetition litigation of prepetition causes of action, on which litigation had commenced prepetition.

2. Whether appellee's postpetition recording of the state court judgment violated § 524.

STANDARD OF REVIEW

Interpretation of the Bankruptcy Code is a legal question that we review de novo. Yadidi v. Herzlich (In re Yadidi), 274 B.R. 843, 847 (9th Cir. BAP 2002).

DISCUSSION

1. Discharge

A chapter 7 bankruptcy discharge "discharges the debtor from all debts that arose before the date of the order for relief under this chapter ...." § 727(b). When a debtor's actions that result in the award of attorney fees and costs on a prepetition claim are undertaken postpetition, the question arises whether those fees and costs are prepetition debts encompassed in the discharge.

The Ninth Circuit has addressed this issue either directly or indirectly in three cases. Two of the pertinent cases reject administrative expense priority for attorney fees incurred by a creditor in postpetition litigation on the basis that the fee claim arose from a prepetition claim. The third case deals with whether attorney fees arising from the postpetition litigation of a prepetition claim are dischargeable. Although differing in context, the outcome in all three cases turned on one question: were the attorney fees a prepetition claim?

First, in Abercrombie v. Hayden Corp. (In re Abercrombie), 139 F.3d 755 (9th Cir.1998), the court considered whether attorney fees awarded against a debtor for unsuccessfully defending the appeal of a state court judgment in his favor should be given administrative expense priority under § 503(b)(1). When the debtor filed a chapter 11 bankruptcy case, he was defending an appeal of a state court award in his favor on a real estate contract claim. The state supreme court reversed the debtor's judgment and awarded attorney fees to the defendant pursuant to the contract's attorney fee provision. The defendant sought administrative expense priority for the fee award.

The Ninth Circuit rejected administrative expense treatment of the claim. It noted that "costs and expenses arising out of prepetition contracts are treated under the Bankruptcy Code as nonprioritized unsecured claims." Abercrombie, 139 F.3d at 757. Thus, the question was whether the fees incurred by the defendant postpetition in successfully pursuing its appeal arose out of the prepetition contract. Because the prepetition contract was the source of the fee award, the court of appeals concluded that the fees were prepetition claims not entitled to administrative expense treatment. It rejected the defendant's argument that the fees should be given priority because the defendant "was `injured' by the debtor-in-possession's postpetition decision to continue defending the trial court judgment rather than conceding its invalidity in the Oregon Supreme Court." Id. at 758. The court focused on the source of the estate's obligation, which was the prepetition contractual fee provision. Id. at 759.

The reasoning of Abercrombie is that a claim for attorney fees is a prepetition claim if the source of the fee award is a prepetition contract, regardless of whether the fee award is the result of the debtor's postpetition activity.

Six weeks after deciding Abercrombie, the Ninth Circuit decided Siegel v. Fed. Home Loan Mortg. Corp., 143 F.3d 525 (9th Cir.1998). In that case, the debtor sued a lender in state court after the bankruptcy was filed, asserting a lender liability theory that was based on prepetition conduct. The debtor had not, however, scheduled the cause of action as an asset in his bankruptcy schedules. The lender removed the action to federal district court, obtained summary judgment on the state law claims, and was awarded contractual attorney fees.

On appeal, the debtor challenged the fee award on the ground that the claim for attorney fees had been discharged. The Ninth Circuit noted that whether the claim for fees was discharged depended on when the attorney fee debt arose, because a discharge applies only to debts that arose prepetition.

Without mentioning the Abercrombie line of analysis, the Siegel panel noted that claims in bankruptcy must be "provable" and then reviewed the statutory definition of "claim," which is 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." Siegel, 143 F.3d at 532 (quoting § 101(5)(A); emphasis added by Ninth Circuit). It noted that a contingent claim is one for which the debtor will become obligated to pay "only upon the occurrence or happening of an extrinsic event[.]" Id. (quoting Fostvedt v. Dow (In re Fostvedt), 823 F.2d 305, 306 (9th Cir.1987)). However, the panel reasoned, a claim is not contingent when the debtor has control over whether the contingency occurs; the liability must be "contingent upon what others might do." Siegel, 143 F.3d at 533.

The Siegel panel also expressed a sense of "doing justice":

This is a case where the debtor, Siegel, had been freed from the untoward effects of contracts he had entered into. [The lender] could not pursue him further, nor could anyone else. He, however, chose to return to the fray and use the contract as a weapon. It is perfectly just, and within the purposes of bankruptcy, to allow the same weapon to be used against him.

Id.

The court quoted an observation from other cases that bankruptcy is not intended to insulate the debtor from the costs of post-bankruptcy acts and said that the discharge protected Siegel "from the results of his past acts, including attorney's fees associated with those acts, [but] did not give him carte blanche to go out and commence new litigation about the contract without consequences." Id. at 534; Shure v. Vermont (In re Sure-Snap Corp.), ...