Monday, June 15, 2015

SCOTUS Denies "Fees on Fees" for Bankruptcy Estate Professionals

Today the U.S. Supreme Court decided that professionals employed by bankruptcy estates are not entitled to reimbursement for time spent defending their fee applications.

See related post: Supreme Court to Resolve Bankruptcy "Fees on Fees" Issue

Today's opinion, Baker Botts v Asarco, involved law firms hired by the estate of a bankrupt copper mining company to prosecute fraudulent transfer claims.

The law firms successfully sued various entities on behalf of the mining company and obtained several billion dollars for the estate.

The bankruptcy judge compensated the firms over $124 million for their time spent prosecuting the case, including over $5 million for time spent defending their fee applications over the mining company's objection.

The Supreme Court affirmed the Court of Appeals for the Fifth Circuit in holding that the sections 327(a) and 330 of the Bankruptcy Code do not permit compensation for time spent defending fee applications.

The Court recognized that the American Rule traditionally requires each party to pay their own attorney fees, absent specific Congressional intent to the contrary. The Court reasoned that Congress could have provided for "fees on fees" for bankruptcy professionals, as it did in section 110(i)(1)(C) for the U.S. trustee, but chose not to.

Written by Michael Fuller.


Michael Fuller is a partner at OlsenDaines in Portland, Oregon and an adjunct consumer law professor at Lewis & Clark Law School.

Fuller's boutique banking law practice focuses on bankruptcy enforcement under the automatic stay and discharge injunction.

Wednesday, May 20, 2015

9th Circuit Reverses FDCPA Judgment on Excessive Interest Claim

By Michael Fuller, The Underdog Lawyer ®

Last week the 9th Circuit Court of Appeals ruled in favor of a debt collector by reversing summary judgment against it on an FDCPA claim for allegedly collecting excessive interest.

In May 2012, a consumer received a collection letter demanding she pay a dental debt of $3,144, plus 10% interest.

The consumer sued the collector under the FDCPA, claiming the demand for 10% interest was not permitted under her contract or California law.

The district court later entered summary judgment in favor of the consumer, reasoning that California Civil Code did not allow collection of prejudgment interest without first obtaining a judgment.

The Ninth Circuit panel disagreed and reversed the district court. The panel's opinion, Diaz v. Kubler Corp., interpreted California law to allow prejudgment interest without a judgment, so long as the debt amount was calculable on a particular day.

Friday, April 3, 2015

SCOTUS Considers Overturning 1992 Pro-Creditor Bankruptcy Opinion

By Michael Fuller, The Underdog Lawyer ®

Last week, the U.S. Supreme Court heard oral argument in companion cases arising under Section 506 of the Bankruptcy Code.

The issue in both cases was whether consumers may wipe out underwater second mortgage liens in chapter 7 bankruptcy.

What is Lien Stripping?

The practice of "lien stripping" is widespread across the country in chapter 13 bankruptcy. The practice is allowed under chapter 7 of the Bankruptcy Code only in the 11th Circuit.

The Supreme Court's 1992 opinion Dewsnup v. Timm held that mortgage lien rights generally survive chapter 7 bankruptcy.

How Was the Dewsnup Opinion Reached?

The Dewsnup case was decided 6-2.

Justice Thomas took no part in the decision, and Justices Scalia and Souter dissented. Of the six justices that supported the Dewsnup opinion, only one (Kennedy) remains on the Supreme Court.


Before oral argument last week, I commented that the case seemed like a no-brainer based on Dewsnup and its progeny.

However, after oral argument, some legal experts now predict the SCOTUS could effectively overturn Dewsnup.

After reviewing the oral argument transcript, I'm updating my prediction to 6-3 in favor of Bank of America, while keeping my fingers crossed.

Thursday, March 5, 2015

Contract Claim Against FDIC Not Preempted by FIRREA, Ninth Circuit Rules

By Michael Fuller, The Underdog Lawyer ®

Yesterday, a Ninth Circuit Court of Appeals panel ruled in favor of a bank on a breach of contract claim against the FDIC.

Click here to read yesterday's opinion in Bank of Manhattan v FDIC.

FDIC Breaches Contract

The bank claimed that the FDIC took receivership of a loan participation agreement, then breached the agreement by selling the loan interest without the bank's consent.

The FDIC argued the bank's breach of contract claim was entirely preempted by federal banking law (the FIRREA).

The district court rejected the FDIC's argument and held the FIRREA doesn't permit the FDIC to breach contracts without consequence.

In a 2-1 opinion, the Ninth Circuit panel affirmed the district court's ruling.

FIRREA Preemption

The panel distinguished a prior case where the Ninth Circuit had held that the FIRREA preempted a California statute regulating asset transfers.

The court reasoned that the prior case's holding was limited to preemption of statutory regulations, as opposed to contractual entitlements to compensation.

The opinion limited its preemption analysis in part because the text of the FIRREA "allows the FDIC to disaffirm or repudiate any contract it deems burdensome and pay only compensatory damages."

Judge Rawlinson wrote a dissent, arguing that there was no principled distinction between preemption analysis of state statute and of state common law.

Sunday, March 1, 2015

Creditor Lacks Standing to Bring Automatic Stay Claim, Bankruptcy Panel Rules

On Friday, the Ninth Circuit Bankruptcy Appellate Panel affirmed an order denying a creditor's claim for damages resulting from an automatic stay violation.

The case, In re Yan, involved a creditor who sought fee reimbursement and punitive damages against a consumer who previously filed bankruptcy.

The bankruptcy judge determined that the consumer had willfully violated the automatic stay by suing the creditor in state court.

However, the creditor's motion was ultimately denied because the judge determined the creditor lacked standing to bring a claim under the automatic stay.

On appeal, the panel agreed with the bankruptcy judge that the creditor lacked standing to sue the debtor. 

The panel recognized that Congress intended the automatic stay to protect debtors and trustees, not creditors. The panel was also persuaded by the fact that the creditor's claim had already been paid in full by the trustee. 

The panel also ruled that the bankruptcy judge had no inherent authority to sanction the debtor for conduct that took place in state court.

Thursday, February 26, 2015

'Bad Faith' Costs Consumer Automatic Stay Protection, Bankruptcy Panel Rules

By Michael Fuller, The Underdog Lawyer ®

Last week, the Bankruptcy Appellate Panel for the Ninth Circuit affirmed an order annulling the automatic stay in a consumer bankruptcy case.

The consumer, Jamshid Sazegar, filed an emergency chapter 13 petition, in hopes of stopping the sale of his Beverly Hills property to a potential buyer.

However, Sazegar never notified the buyer he filed bankruptcy.

The chapter 13 case was ultimately dismissed because Sazegar didn't file the necessary paperwork and failed to appear at his meeting of creditors.

Almost three years later, after the Beverly Hills property was sold to the buyer, Sazegar argued that the automatic stay in his prior case voided the sale.

Section 362(a) of the Bankruptcy Code triggers an automatic stay that generally protects consumers from losing their property to sale or foreclosure while in bankruptcy. However, section 362(d) allows the automatic stay to be annulled in the interests of fairness.

The appellate panel affirmed the bankruptcy court's order granting the buyer's motion to annual the automatic stay.

The panel determined that the equities favored granting the buyer's motion because the consumer failed to fulfill his duties under the Code and never provided notice of his case to the buyer.

Monday, February 9, 2015

"Technical" Bankruptcy Violation Constitutes Contempt, Panel Rules

By Michael Fuller, The Underdog Lawyer ®

The Ninth Circuit Bankruptcy Appellate Panel recently affirmed a contempt order entered against an attorney who prosecuted consumers in violation of the discharge order.

The January 29 opinion, In re Segal, involved a married California couple whose debts were discharged in bankruptcy.

Lawsuit Violated Discharge Injunction

After the attorney was sent a copy of the discharge order, the attorney filed claims against the couple in state court. The claims were based in part on a civil judgment debt discharged in bankruptcy.

The Panel rejected the attorney's argument that his violation was "technical" in nature and thus not contemptuous.

"Mailbox Rule" Applies to Bankruptcy Notices

The Panel also rejected the attorney's argument that he didn't have sufficient knowledge of the discharge order.

The Panel held that under the mailbox rule, proof that the order was mailed to the attorney was sufficient to satisfy the knowledge requirement.

The Panel affirmed the bankruptcy court's determination that the attorney's failure to promptly dismiss his claims violated the discharge order. 

At trial, the evidence showed the attorney waited over three months to eventually dismiss his claims.

Sternberg Not Applicable to Contempt

The Panel also rejected the attorney's argument that he wasn't liable to pay litigation expenses incurred by the debtors after his contempt was remedied.

The Panel held that Sternberg v Johnston, which limits fee recovery in automatic stay litigation, was not applicable to a contempt proceeding under the discharge injunction.

Commentary (Nerd Alert)

The Panel's analysis of punitive damages exposure under sections 105 and 524 was inconsistent with well-established treatises and recent Ninth Circuit dicta by former Chief Judge Kozinski.

See Espinosa v. United Student Aid Funds, 553 F.3d 1193, fn.7 (9th Cir. 2008) (Willful discharge violations entitle aggrieved debtors to actual damages, punitive damages, and attorney fees).

See also 2 Collier Bankruptcy Manual (3d rev. ed.) ¶ 524.02[2][c]) (same).

Even if In re Dyer is still controlling in the Ninth Circuit, the Panel failed to adjust its dollar amount threshold analysis for inflation.

The Hanshaw opinion, cited by In re Dyer, implied that any fine above $5,000 "at least in 1989 dollars" may not be allowable without a jury trial.

The Panel incorrectly interpreted this passage to mean, "Under no circumstances should the relatively mild non-compensatory fine exceed several thousand dollars."