No Attorneys' Fees for Litigation Over Bankruptcy Stay

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By Daniel Gill

June 22 — A debtor was not entitled to an award of attorneys' fees for successfully opposing a motion for relief from the Bankruptcy Code's automatic stay brought to exercise foreclosure rights, a district court ruled on June 20 ( Green Tree Servicing LLC v. Giusto, 2016 BL 196785, N.D. Cal., No. 15-cv-02105-HSG, 6/20/16 ).

Judge Haywood S. Gilliam, Jr. of the U.S. District Court for the Northern District of California reversed the decision of a bankruptcy court which had found that the Supreme Court in its 2007 Travelers decision had overruled the Ninth Circuit's 1985 In re Johnson opinion.

Judge Gilliam found that Johnson was still good law and that a motion for relief was not an “action under contract” for which fees could be awarded under the loan agreement.

Filing Bankruptcy and Defaulting on Mortgage

Jacqueline N. Giusto filed a Chapter 13 case on Oct. 21, 2013. Chapter 13 of the Bankruptcy Code allows individuals receiving regular income to obtain debt relief while retaining their property. To do so, the debtor must propose a plan that uses future income to repay all or a portion of his debts over a three to five year period.

After she commenced her bankruptcy case, the debtor stopped paying the mortgage on a property she had inherited, the court said. Because of the bankruptcy, the secured creditor, Bank of America, N.A., was barred from taking any action to enforce its rights from the note secured by the property and a deed of trust it held therefor; the debtor was protected by the automatic stay created by Bankruptcy Code Section 362(a).

In December 2013, Green Tree Servicing LLC, purportedly acting under a power of attorney granted by Bank of America, filed a motion with the bankruptcy court for relief from the automatic stay, pursuant to 11 U.S.C. §362(d), so that the bank could exercise its foreclosure rights under the note and deed of trust.

No Standing, No Relief, and Award of Fees

The debtor opposed Green Tree's motion for relief from stay on the grounds that the movant had failed adequately to establish that it had standing to enforce the note and trust deed. Although the bankruptcy court directed the company to file evidence establishing its claim of standing, Green Tree failed to file a “proper declaration,” the court said, and consequently the bankruptcy court denied the relief from stay motion without prejudice (meaning that the company was not barred from seeking the same or similar relief at another time).

Almost two years after the unsuccessful motion for relief from stay was filed, the debtor moved for an award of attorneys' fees and costs she incurred by opposing the motion. The basis for fees was contractual: the Bank of America note had a provision entitling it to recover fees and costs “it incurred from any debt collection efforts,” and in California, a contract that provides that one party can be awarded attorney fees is reciprocal “in any action on a contract” by operation of Calif. Civil Code §1717(a).

Precedential Contest

In its opposition to the fees motion, Green Tree relied on Johnson v. Righetti (In re Johnson), 756 F.2d 738 (9th Cir. 1985), which held that a motion for relief from stay was not “an action on the contract,” so Calif Civ. Code §1717(a) couldn't apply to authorize attorneys' fees and costs to the prevailing party.

The bankruptcy court, however, held that In re Johnson had been overruled by the Supreme Court in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 549 U.S. 443 (2007). The bankruptcy court determined that the relationship between the debtor and the bank was contractual, so therefore the motion to lift the stay was an “action on the contract” which triggered Civil Code §1717, the court said. The bankruptcy court awarded fees against the loan servicing company, and this appeal followed.

The district court, reviewing the bankruptcy court's application of the law de novo (i.e., anew, without deference to the lower court's opinion), examined the question of whether Travelers in fact overruled Johnson, which—if still good law—was on point and would require a reversal of the bankruptcy court.

In Johnson, the Ninth Circuit concluded that a relief from stay motion is not an “action on a contract,” because it is a summary proceeding (and thus not an “action”) limited to the distinct bankruptcy issue of whether the creditor seeking relief has “adequate protection” of its interests and whether the subject property is “necessary for an effective reorganization,” the court said. The circuit court contrasted stay relief motions with objections to a creditor's claim, which involve a challenge of the validity of the claim under state law (there typically being no such fundamental challenge in stay relief litigation).

In Travelers, decided about 22 years after Johnson, the Supreme Court examined whether a party could rely on a contractual attorneys' fee provision to recover fees incurred during bankruptcy litigation. The court overruled the Ninth Circuit's decision in Fobian v. W. Farm Credit Bank (In re Fobian), 951 F.2d 1149 (9th Cir. 1991), and held that a surety could recover contractual attorneys' fees incurred litigating the treatment of its claim in a bankruptcy case. The court overruled what it called “the Fobian rule,” which provided that attorneys' fees can't be awarding for litigating issues “peculiar to federal bankruptcy law.”

Johnson Not Overruled

Saying it understood why the bankruptcy court might conclude that Travelers had overruled Johnson, the court nevertheless concluded that the bankruptcy court erred and that Johnson remained good Ninth Circuit law. Even though the Supreme Court in Travelers noted that Fobian had relied on Johnson, the court “never touched on Johnson's holding that a motion to lift a bankruptcy stay under 11 U.S.C. §362(d) was not an action on the contract within the meaning of California Civil Code §1717(a),” the court said.

Other Ninth Circuit cases cited Johnson post- Travelers, the court said, and it explained that neither it nor the bankruptcy court could “alter the Ninth Circuit's current interpretation of the status of Johnson.”

Finally, the court confirmed that the bankruptcy court erred when it concluded that the relief from stay motion constituted an “action on the contract.” In fact, the court said, the motion was a summary proceeding defeated on a challenge of standing, and the enforceability of the subject promissory note itself was never part of the challenge.

The actual appellant before the district court was Ditech Financial LLC, which succeeded to Green Tree Servicing LLC subsequent to the filing of the appeal.

The appeal was decided without oral argument. The appellant was represented by Malcolm & Cisneros, Irvine, Calif., and the debtor-appellee was represented by The Mlnarik Law Group, Inc., Santa Clara, Calif.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

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