Ybarra v. Boeing North American, Inc. (In Re Ybarra) , 295 B.R. 609 ( 2003 )

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.), 983 F.2d 1015, 1018 (11th Cir.1993); In re Hadden, 57 B.R. 187, 190 (Bankr.W.D.Wis.1986).

The reasoning of Siegel is that, where liability on a prepetition claim is entirely contingent on actions initiated by the debt- or postpetition, rather than actions taken by another party, the liability is not a “claim” as defined in the Bankruptcy Code and is not subject to discharge.

Finally, in 2000, the Ninth Circuit decided Kadjevich v. Kadjevich (In re Kadjevich), 220 F.3d 1016 (9th Cir.2000). In that case, the debtor was the defendant in a prepetition state court fraud action. After he filed chapter 11 bankruptcy and before the case was converted to chapter 7, the bankruptcy court granted relief from the automatic stay so the state court action could continue. The debtor settled the fraud action during the pendency of the bankruptcy case. However, he then breached that settlement agreement, and the fraud case went to trial. The debtor lost, and the court awarded attorney fees against him under the state’s general sanctions statute. The question was whether the fee award was an administrative expense that should be given priority of payment in the debtor’s bankruptcy case.

The Kadjevich court held that the claim for fees incurred postpetition was not an administrative expense because it was a prepetition claim. Relying on Abercrombie, the court reasoned that “the ‘source’ of the award of attorney fees is the prepetition state-court fraud action that brought [the debtor] under the jurisdiction of the California courts and subjected him to the fee-shifting rule contained in California Code of Civil Procedure § 128.5.” Kadjevich, 220 F.3d at 1020. The state court judgment was “unitary; all of it must be considered prepetition under the reasoning of Abercrombie.” Id.

The court saw no difference between a prepetition contract action and a prepetition fraud action; nor did it matter that the debtor’s conduct that resulted in the award of fees (breach of a settlement agreement) did not occur until after the bankruptcy petition was filed: “[T]he fact that [the debtor] did not engage in the particular misconduct that caused the fees to be awarded until after he filed his bankruptcy petition does not change the fundamentally pre-petition nature of the fraud action and of the total resulting judgment.” Id. The court concluded that, “[b]ecause [the plaintiffs] claim for attorney fees arises from the same pre-petition obligation as the damages, back rent, costs, and all other components of the state court’s judgment, it should be afforded the same priority in federal bankruptcy proceedings as those other items.” Id.

The Kadjevich holding was intended to be narrow:

We do not deal here with a case in which a representative of the estate commenced litigation on behalf of the estate after a bankruptcy petition was filed, or one in which the representative obtained relief from the automatic stay to continue pre-petition litigation[J

Id. at 1021 (citations omitted). There was no mention of Siegel.

Our task is to try to reconcile these cases.⁵ Ybarra argues that the attorney fee award in the state court action in this case is like the award in Abercrombie and Kadjevich, because the award is based on a prepetition claim that debtor continued to pursue postpetition. Appellee argues, and the bankruptcy court agreed, that the result in this case is governed by Siegel, because Ybarra revived the dismissed lawsuit postpetition, which action, it is argued, equates with Siegel’s filing of a postpetition lawsuit on a prepetition claim.

Reading these cases together, it is apparent that the rule set out in Abercrombie, that the key to determining whether a claim is a prepetition claim is to look to the source of the claim, is not universal. In Siegel, the lender liability cause of action arose prepetition, yet the court concluded that the fees awarded for the litigation commenced postpetition were not a prepetition debt.

Our search for possible distinctions by which to reconcile Abercrombie and Siegel led us to a number of dead ends.

We explored the possibility of distinguishing the cases based on the identity of the contingent actor. In Abercrombie, the attorney’s fee claim was contingent on what the state supreme court would decide postpetition, rather than any action by the debtor, while the Siegel contingency was purely under Siegel’s control. Until Siegel filed his postpetition lawsuit, he controlled whether he would subject himself to the possibility of liability for fees by commencing the action.

Kadjevich, however, belies this distinction. There, the debtor controlled the decision whether he would risk an award of attorney fees; he had settled the fraud claim. The fees were awarded only when the action proceeded due to his breach of the settlement agreement. The court nonetheless concluded that the attorney fees were prepetition claims because they were based on the prepetition fraud. Thus, a distinction based on the identity of the contingent actor is not viable.

Nor can the difference between the cases be explained by whether the source of the fee award is contractual or statutory. In Abercrombie the award was based on contract, while in Kadjevich it was based on statute, yet the cases reached the same result. In Siegel the fee award was based on contract, yet the result was different from Abercrombie.

Nor can the cases be distinguished based solely on the timing of the debtor’s conduct that gave rise to the fees. In both Siegel and Kadjevich, the debtor’s conduct that gave rise to the awards of attorney fees occurred postpetition, yet the cases came to opposite results.

It could also be argued that the cases can be distinguished on the basis of whether the claim is pursued by a trustee or debtor in possession for the benefit of the estate, or by a debtor to whom the claim has been abandoned. In both Abercrombie and Kadjevich, the postpetition action was undertaken by debtors in possession. Assuming that Siegel was a chapter 7 case (the decision is not clear on this point) and that the debtor was pursuing the claim for his own benefit, the court did not rely on that distinction in reaching its decision.

The distinction that does appear to withstand scrutiny is that, in Abercrombie and Kadjevich, the actions on the prepetition claims had been commenced prepetition and continued to be litigated postpetition, with the debtor defending the appeal in Abercrombie and the debtor defending the state court action in Kadjevich. In Siegel, in contrast, the action that gave rise to the attorney fee award was commenced post-petition. That the court of appeals appears to consider this a valid distinction is supported by the language in Kadjevich in which it says that it was not dealing “with a case in which a representative of the estate commenced litigation on behalf of the estate after a bankruptcy petition was filed ....” Kadjevich, 220 F.3d at 1021. If the only question were whether the fees were based on a prepetition source, it would be immaterial whether an estate representative commenced litigation post-petition on a prepetition claim or merely kept prosecuting an action commenced prepetition.

We confess to puzzlement about why the timing of the commencement of an action on a prepetition claim should matter. The question of whether a debt is within the bankruptcy discharge should be whether the claim is one that arose prepetition or postpetition, not when the action on the prepetition claim was commenced. That same analysis should apply to whether a claim arose prepetition or postpetition for purposes of determining whether the claim has administrative priority. However, our task is to apply the cases as they are given to us, doing our best to understand the distinctions the court made.

In this case, Ybarra commenced her action against Rockwell before she filed bankruptcy, not after. If the bankruptcy trustee had not caused the state court action to be dismissed on the basis that it was not Ybarra’s exempt property, which ruling was later reversed on appeal, Ybarra would never have needed to revive it. In light of the fact that Ybarra had no control over the trustee’s dismissal, and in light of the fact that she later won the relevant appeal, her revival of the action constitutes a restoration of the status quo and cannot legitimately be seen as the commencement of a new action. Thus, this case is like Abercrombie and Kadjevich and not like Siegel, and the fees were discharged in debtor’s bankruptcy.⁶

2. Discharge injunction

Ybarra argues that entry of the judgment in state court violated the § 524 discharge injunction, which provides that a discharge “voids any judgment at any time obtained, to the extent that such judgment is a determination of the personal liability of the debtor with respect to any debt discharged” and “operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived[.]” § 524(a)(l)-(2). See Ruvacalba v. Munoz (In re Munoz), 287 B.R. 546, 550-53 (9th Cir. BAP 2002).

The discharge injunction, however, is “inapplicable to [a creditor’s] postpetition defensive action in a prepetition suit brought by the debtor.” Gordon v. Whit-more (In re Merrick), 175 B.R. 333, 336 (9th Cir. BAP 1994). Thus, the filing of a motion for costs does not violate the discharge injunction.

Here, appellee’s fees were included in its memorandum of costs, and we see no material difference between a motion for costs and one that includes both costs and attorney fees. It follows that appellee did not offend the § 524(a)(2) discharge injunction by filing its memorandum of costs. Likewise, the mere entry of the judgment did not offend the discharge injunction.

The award itself, however, constitutes a judgment that purports to establish the personal liability of the debtor with respect to a debt that was discharged under § 727. Hence, the judgment is void under § 524(a)(1), and it would be a violation of the § 524(a)(2) discharge injunction to attempt to collect it.

CONCLUSION

The bankruptcy court erred in determining that the attorney fees and costs awarded by the state court were not discharged. Therefore, we REVERSE.

2 . Chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330, unless otherwise indicated.

3 . The prior federal appeals were: BAP No. CC-93-2331, aff’d, 40 F.3d 1247, 1994 WL 654924 (9th Cir.1994); BAP No. CC-94-1264, aff’d, 124 F.3d 215, 1997 WL 579130 (9th Cir.1997); BAP No. CC-99-1616, aff’d, 243 F.3d 552, 2000 WL 1728359 (9th Cir.2000); BAP No. CC-00-1179, aff’d, 21 Fed.Appx. 672 (9th Cir.2001). The state appeal was: No. E029752, Cal. Ct.App. (4th Dist, Div.2).

4 .No. CC-94-1264, aff’d, 124 F.3d 215, 1997 WL 579130 (9th Cir.1997).

5 . The dissent discusses a fourth case, O’Loghlin v. County of Orange, 229 F.3d 871 (9th Cir.2000). We do not view O’Loghlin as helpful to the analysis. That case involved statutory violations that occurred postpetition and postconfirmation. They were either separately actionable or were part of a continuing violation for which the claim was not discharged. In this case, Ybarra simply continued to pursue her prepetition claim, ultimately resulting in an award of attorney fees when she was unsuccessful. Ybarra did not engage in any postpetition statutory violations.

6 . Because we conclude that the fees were discharged, we need not consider Ybarra’s argument that appellee’s motion for leave to collect the fees is barred by claim preclusion.