Wednesday, October 29, 2014

Bankruptcy Court Cannot Award Appellate Fees, Panel Rules

By Michael FullerThe Underdog Lawyer ®

Yesterday, the Ninth Circuit Bankruptcy Appellate Panel ruled that trial courts cannot reimburse consumers for the litigation expenses they incur defending frivolous appeals of contempt orders.

The case, In re Wallace, involved a family who had filed bankruptcy, in part, to stop a lawsuit against them by a creditor.

Creditors Cannot Continue Lawsuits after Bankruptcy

After the bankruptcy discharge order was entered, the creditor was held in contempt for continuing its lawsuit against the Wallace Family.

The creditor appealed the contempt order twice, but lost on appeal both times. The bankruptcy court affirmed its award of damages against the creditor, but denied the Family's request for reimbursement of attorney fees they incurred on appeal.

In its opinion, the Panel held that bankruptcy courts cannot compensate consumers for the attorney fees they incur defending contempt orders on appeal and remand.

The Panel relied on a prior Ninth Circuit opinion, In re Del Mission, Ltd., to justify its holding.

In the Del Mission case, the opinion held that section 105(a) of the Code does not permit bankruptcy courts to award fees incurred on appeal. The opinion reasoned that Appellate Procedure Rule 38 authorizes only appellate courts, not bankruptcy courts, to award reimbursement for defending a frivolous appeal.

As a result of the Panel's opinion, the Wallace Family is left with a $16,000 bill for successfully defending a sanctions award of just $3,000 damages.


The unfair result in this case highlights the problem with the American Rule, which generally requires parties to pay their own attorney fees, even when they win.

In this case, the Wallace Family was forced to give up their fresh start, despite having done nothing wrong, just to enforce their discharge.

As the Wallace Family now knows, the American Rule gives wealthy parties greater access to justice, and discourages underdogs from fighting for what's right. But God Bless America.

Kudos to Nevada attorney Christopher Burke for continuing to raise meritorious consumer bankruptcy issues before the Ninth Circuit on appeal.

Win, lose, or draw, Burke's hard-fought cases (Schwartz-Tallard, In re Mwangi, etc.) continue to shape the landscape of consumer bankruptcy litigation. With any luck, Congress might review some of the unintended consequences highlighted in his cases (In re Mwangi in particular) before it enacts the next round of Bankruptcy Code amendments.

Respectfully, I agree with the Panel in this case. FRAP 38 provided the Wallace Family the opportunity to petition the appellate court for fee reimbursement on appeal.

Consistent with the Supreme Court's March 2014 holding in Law v. Seigel, the Panel correctly decided that a bankruptcy judge's equitable powers under section 105(a) cannot conflict with remedies provided for elsewhere in the Bankruptcy Code or federal rules.

Monday, October 6, 2014

Supreme Court to Resolve Bankruptcy "Fees on Fees" Issue

By Michael FullerThe Underdog Lawyer ®

On Thursday the Supreme Court agreed to hear an appeal from the Fifth Circuit concerning the discretion of judges to award "fees on fees" under section 330 of the Bankruptcy Code.

Click here to read the Supreme Court's Order granting writs for certiorari in Asarco LLC v. Baker Botts.

What are "Fees on Fees"?

After bankruptcy professionals successfully litigate an issue on behalf of the estate, they must apply for fee compensation. Fee applications can be highly contested and cost professionals tens of thousands of dollars to defend.

"Fees on fees" are the fees incurred defending a fee application.

"Fees on fees" are generally not available under the American Rule, which says that each party must bear its own expenses.

However, "fees on fees" are commonly provided for under consumer protection statutes to encourage law enforcement by private litigants with little money or bargaining power.

The Circuits are split as to whether section 330 of the Bankruptcy Code allows judges to award so-called "fees on fees" for successfully defending a fee application.

The Circuit Split

The 11th Circuit (Grant v. George Schumann et al (1990)), and now the 5th Circuit, do not allow "fees for defense of fees" because defending a fee application does not "benefit a debtor’s estate" and is not "necessary to case administration."

The 11th and 5th Circuits acknowledge that "fees on fees" are allowed in the consumer protection context, such as FDCPA, automatic stay, and civil rights litigation. However, these courts feel that unlike consumer protection, Congress did not intend to encourage depletion of the estate under section 330 through "satellite fee litigation".

Other courts, including the 9th Circuit (In re Smith (2002)), allow "fees on fees" under section 330. These courts reason that compensating professionals for defending fee applications is discretionary so long as the work is "reasonable and necessary."

Effect on Consumer Bankruptcy Litigation

The Supreme Court's decision should have little impact on consumer bankruptcy litigation under the automatic stay and discharge injunction for a few reasons.

First, unlike section 330, Congress passed sections 362(k) and 524 to encourage Code enforcement through litigation.

Second, litigation under 362(k) and 524 protects (rather than depletes) the estate and typically serves to reign in overreaching creditors.

Sunday, September 28, 2014

The First Appearance of "Underdog" in a Legal Opinion

By Michael FullerThe Underdog Lawyer ®

The first appearance of the term "underdog" in a published legal opinion occurred on February 13, 1935.

The legal opinion, Leonard v. Houston, was entered after a jury trial in a dispute between two Pennsylvania construction contractors. At trial, the plaintiff and defendant both asserted claims against each other.

After the verdict was entered in favor of the defendant, one juror told the judge that the defendant won because he was quote, an "underdog".

After hearing the remark, the judge ordered a new trial, because "the verdict in the instant case was not a conscionable verdict and certainly not properly arrived at insofar as the juror in question was concerned."

The opinion, Leonard v. Houston, was written by Judge Moore of the Common Pleas Court of Allegheny County, Pennsylvania.

So remember folks, the first rule about jury nullification is -- you do not talk about jury nullification. (especially to the trial judge!)

Tuesday, September 16, 2014

Payday Lender Liable for Expenses Incurred Prosecuting its Bankruptcy Violation

By Michael FullerThe Underdog Lawyer ®

Last week, the Ninth Circuit Court of Appeals held that a bankruptcy violation doesn't "end" until a creditor either admits to liability or loses at trial.

The holding is important because it affects the ability of consumers to recover expenses incurred enforcing the bankruptcy rules.

Ninth Circuit Clarifies Sternberg

Last week's opinion, In re Snowden, clarifies a 2010 opinion called Sternberg v Johnston. In Sternberg, the Ninth Circuit held a consumer may not recover fees incurred solely seeking damages resulting from a stay violation.

The Ninth Circuit already clarified Sternberg once this year in its April opinion, In re Schwartz-Tallard. In Schwartz-Tallard, the court held that a consumer may recover expenses incurred litigating a disputed stay violation on appeal.

What Snowden Means for Consumers

"The Snowden and Schwartz-Tallard opinions both recognize the strong Congressional intent to ensure America's bankruptcy rules are enforced by consumers," says California consumer bankruptcy attorney Austin Houvener.

Snowden involved a payday lender who refused to return money it seized from a consumer in violation of the Bankruptcy Code's automatic stay.

Payday Lender Ordered to Pay

After a trial in bankruptcy court, the judge determined that the payday lender violated the automatic stay. As a result, the payday lender was ordered to return the money it seized from Ms. Snowden.

The bankruptcy court also compensated Ms. Snowden $12,000 for her emotional harm and $12,000 in punitive damages. However, the judge refused to compensate Ms. Snowden for the expenses she incurred proving the payday lender violated the stay.

The Ninth Circuit remanded the case back to bankruptcy court so Ms. Snowden could be compensated for the litigation expenses she incurred bringing the payday lender to justice. While she could not recover compensation pursuing her emotional harm and punitive damages, she was entitled to reimbursement for the attorney fees required to hold the payday lender liable at trial.

In her majority opinion, Judge McKeown appeared careful not to overturn Sternberg. The dissenting opinion in Schwartz-Tallard (substantially amended in a superseding filing in August 2014) raised serious concerns about whether overturning Sternberg required an en banc panel.

In his concurrence in Snowden, Judge Watford raised serious questions about whether Sternberg was correctly decided in the first place.

Wednesday, August 27, 2014

Wells Fargo Gets Free Pass in 9th Cir. Bankruptcy Cases

By Michael FullerThe Underdog Lawyer ®

Yesterday, the Ninth Circuit Court of Appeals ruled that Wells Fargo was immune from suit, despite the bank's intentional refusal to return bank funds subject to the automatic stay.

The opinion, In re Matter of Mwangi, highlights an exception to the general rule that creditors must promptly turn over bankruptcy estate property.

Wells Fargo Seizes Bank Funds

After the Mwangi Family filed for bankruptcy protection, Wells Fargo seized the funds in their bank accounts.

Wells Fargo's seizure allegedly violated a bankruptcy rule known as the "automatic stay" because the bank funds belonged to the trustee upon commencement of the case. See 11 U.S. Code § 362(a)(3).

After seizing the funds, Wells Fargo refused to turn the money over to the Mwangi Family or the trustee.

Wells Fargo Immune From Suit by Consumers

Despite Wells Fargo's policy, yesterday's opinion effectively immunizes the bank from suit by consumers under certain circumstances.

The opinion reasoned that the Mwangi Family had no technical legal interest in the bank funds when Wells Fargo seized them. Based on this technicality, the Court ruled the Mwangi Family was not "injured", and thus could not sue Wells Fargo for its alleged violation.


Wells Fargo frequently dismisses bankruptcy violations on appeal based on technicality loopholes.


- Walls v. Wells Fargo (9th Cir. 2002) (dismissed on technicality)
- Barrientos v. Wells Fargo (9th Cir. 2011) (dismissed on technicality)

When Wells Fargo can't find loopholes, it often forces consumers into confidential settlements:


- Espinosa v Wells Fargo (Ore. 2014) (Wells Fargo pays $35,000)
Thoma v Wells Fargo (Ore. 2013) (Wells Fargo pays $19,000)
- Culpepper v Wells Fargo (Ore. 2013) (Wells Fargo pays $37,500)

Wells Fargo's remorseless conduct in yesterday's Mwangi case reinforces its reign as bankruptcy's "bad boy" of banking.

The Bankruptcy Appellate Panel ("BAP") initially refused to dismiss the Mwangi lawsuit against Wells Fargo. The BAP is a special panel of appellate justices who are also practicing bankruptcy judges.

The BAP judges likely understood what consumer bankruptcy attorneys know all too well: Wells Fargo regularly disregards bankruptcy rules without consequence due to loopholes.

Loopholes exist, in large part because Congress allowed banking lobbyists to essentially draft their own amendments to the Bankruptcy Code.

Nowhere in the Ninth Circuit's opinion does the Court address the fact that Wells Fargo's nationwide policy seemingly violates federal law. Wells Fargo's own letter in the case admits the funds it seized were property of the estate.

The Ninth Circuit characterizes Wells Fargo's seizure as a "temporary administrative pledge". However, the facts indicate the freeze was far from "temporary", and the bank ultimately refused to "pledge" or otherwise turn over the funds to the trustee.

In practice, trustees commonly allow debtors to eat food, drive cars, and access bank accounts during bankruptcy that constitute "property of the estate." The Court's mechanical approach to "vesting" under section 541, even if correct, doesn't necessarily mean the Mwangi Family was not injured by the bank's seizure.

The Mwangi opinion may open the door to further creditor abuses in consumer bankruptcy. Specifically, the opinion helps immunize aggressive auto lenders that intentionally repossess family vehicles during the automatic stay.

Tuesday, August 5, 2014

Ninth Circuit Says Diversity Removal Deadline Is Not Jurisdictional

By Michael FullerThe Underdog Lawyer ®

For the second time this year, the Ninth Circuit upheld the rights of corporate defendants to remove state court lawsuits to federal court under questionable circumstances.

Yesterday, in Smith v. Mylan, Inc. the Court held that the one-year diversity removal deadline is not jurisdictional, and may be waived.

28 U.S.C. § 1332 governs "diversity" jurisdiction, and generally requires a plaintiff and defendant be citizens of different states.

(for more on the Ninth Circuit's March 2014 National Banking Act removal opinion in Rouse v. Wachovia Mortgage, click here)

How does removal work?

Certain lawsuits that qualify under 28 U.S.C. § 1441 et seq. may be removed by defendants from state court to federal court. To learn why corporations prefer federal court, click here.

Generally, the deadline to remove is 30 days from service of the lawsuit. See § 1446(b).

However, if a lawsuit doesn't qualify for removal when it is filed, and is later amended to qualify for diversity jurisdiction, the case may be removed within one year after the original filing date. See § 1446(c).

Diversity jurisdiction in this context may occur when out-of-state defendants are added or dismissed from a lawsuit after it is filed. See § 1332.

What is the impact of yesterday's holding?

Yesterday's holding in Smith v. Mylan, Inc. favors corporate defendants but it's impact is negligible.

Unless you've sued an out-of-state corporation, the holding has no impact on your case.

Even then, the holding is only relevant if your lawsuit adds or dismisses an out-of-state defendant more than one year after filing.

And even if that rare scenario, all you must do is timely object by filing a motion to remand the case back to state court.

In the Smith case, the consumer didn't object to the corporation's late notice of removal. When the district court judge filed his own objection (called 'sua sponte'), the Court of Appeals reversed him.

Pro tip: 'sua sponte' is Latin for "of their own accord".

The Court of Appeals held the one-year requirement under § 1446(c) is not jurisdictional, meaning the requirement may be waived if a consumer fails to object. For this reason, the Court held the remand was improper.


I rarely deal with removal issues because I'm a plaintiff's lawyer and almost exclusively file cases in federal court. That being said, the two golden rules I remember about removal issues from law school are:

(1) orders to remand are generally not reviewable, and 
(2) federal courts must always maintain subject matter jurisdiction.

Both of these rules run contrary to yesterday's fairly unique holding. Before reading the opinion, and having never reviewed the legislative history on point, I might have sided with the district court judge.

But now I know, and as they say, that's half the battle.

Monday, August 4, 2014

Vote for the Underdog Law Blog ®

By Michael FullerThe Underdog Lawyer ®

In the last seven months, the Underdog Law Blog ® received over 41,000 unique visitors, making it the self-proclaimed "fastest-growing outlaw law blog in North America!"

If you like my Blog, or if you just like America, or if the power of Christ compels you, please cast your vote by Aug. 8 in the ABA Journal 2014 Blawg 100 here.

If you know me, you know how much pointless professional popularity contests mean to me. And remember Mom, IP addresses are traceable, so no double-voting.

Take 30 seconds, vote here: ABA 2014 Blawg Top 100 Contest

Take care,

- The Underdog Lawyer ®