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Irvine Business & Commercial Law Blog

Ninth Circuit Decision Makes Virtually All Attorneys' Fees Incurred by Debtors in the Enforcement of the Automatic Stay Recoverable

In Easley v. Collection Serv. Of Nev., 910 F.3d 1286 (9th Cir. 2018), the Ninth Circuit Court of Appeals clarified a prior holding about the scope of attorneys' fees recoverable for enforcing the automatic stay. In particular, the court decided in In re Schwartz-Tallard, 803 F.3d 1095 (9th Cir. 2015) that reasonable attorneys' fees and costs incurred in defending a judgment rendered pursuant to Bankruptcy Code Section 362(k). Instead of defending a judgment, Easley successfully appealed an incorrect judgment in his favor. In reaching its decision, the court noted that Section 362(k) operates as a fee-shifting statute and that a fee award should not be diluted by "the time and effort spent on the claim itself," including successfully challenging an award or defending the same. Accordingly, it appears that virtually all reasonable attorneys' fees incurred by debtors in the enforcement of the automatic stay may be recoverable damages under 11 U.S.C. § 362(k).

A Release of Potential Claims Can Constitute a Fraudulent Conveyance

In Potter v. Alliance United Ins. Co., 2019 Cal. App. LEXIS 666, the California Court of Appeal considered whether a "Release and Settlement Agreement" releasing an insurance company from any claims for negligence, delay, bad faith, etc. and an agreement to forego any assignment of such claims constituted a fraudulent conveyance.

Debtor Does Not Have to Pay For Exempt Property to Comply With Absolute Priority Rule

In Todeschi v. Juarez (In re Juarez), BAP No. AZ-19-1028-FLB, published on August 21, 2019, the Ninth Circuit Bankruptcy Appellate Panel ("BAP") decided a split in the lower courts concerning whether a debtor must pay for its exempt property in order to comply with the absolute priority rule (Bankruptcy Code Section 1129(b)(2)(B)). The BAP said no. The BAP reasoned that exempt property is not property of the bankruptcy estate and as such, exempt property is not included in the phrase "any property" in the requirement of Section 1129(b)(2)(B)(ii) that a debtor (or a junior class of claims) "will not receive or retain any property." Put simply, a debtor may retain exempt property without having to make a new value contribution. Good news for Chapter 11 debtors, but not a surprising decision.

Marital Settlement Agreement Does Not Relieve Debtor of Non-Dischargeable Liability

In U.S. Dep't of Educ. v. Carrion (In re Carrion), BAP No. SC-18-1234-FBKu (May 31, 2019), the Ninth Circuit Bankruptcy Appellate Panel ("BAP") held that a debtor remained personally liable for the entire amount of a student loan debt despite a marital settlement agreement ("MSA") providing for his former wife to assume half of the debt. While married, the debtor borrowed $21,894 from the U.S. Department of Education ("Department") to pay tuition for his son's college education. In June 2011, the debtor and his then wife filed a joint chapter 7 bankruptcy petition, listing the student loan as debt belonging to the debtor husband. Two years later, in their dissolution proceeding, the husband and wife entered into a marital settlement agreement providing that they would each be liable for half of the educational loan. The debtor commenced an adversary proceeding against the Department alleging that the debt was void because the promissory note was executed as a result of identity theft and that the educational debt was discharged. The bankruptcy court rejected the identity theft argument, but found that only one half of the educational loan was nondischargeable under 11 U.S.C. § 523(a)(8).

Declaration By Assignee's Agent Confirming Agent is in Possession of Original Promissory Note Establishes Standing to Seek Relief from the Automatic Stay

In Harms v. Bank of New York Mellon (In re Harms), BAP No. NC-18-1284-STaB (July 9, 2019), the Ninth Circuit Bankruptcy Appellate Panel ("BAP") held that an assignee of a beneficial interest under a deed of trust had established its standing to seek relief from the automatic stay by producing a declaration by the assignee's agent confirming that the agent was in possession of the original promissory note. The dispute between the parties arose from a promissory note ("Note") secured by a deed of trust which had been assigned to Bank of New York Mellon ("BONYM"). The Debtor asserted that BONYM had not presented admissible or sufficient evidence to support its claim that it possessed the original Note or otherwise was entitled to enforce the Note. The BAP reviewed a supplemental declaration filed by BONYM ("Declaration") where the declarant ("Declarant") identified herself as the Assistant Vice President for Bank of America, N.A. ("BofA"), the servicing agent for BONYM. In the Declaration, the Declarant stated she had reviewed the collateral file maintaining the Debtor's loan and was able to confirm that BofA was and is in possession of the original Note. The Debtor objected that (1) Declarant had not claimed to have personally seen the Note or personally verified BONYM's possession of the Note, and (2) Declarant's knowledge was based on inadmissible hearsay.

A Release of Potential Claims Can Constitute a Fraudulent Conveyance

In Potter v. Alliance United Ins. Co., 2019 Cal. App. LEXIS 666, the California Court of Appeal considered whether a "Release and Settlement Agreement" releasing an insurance company from any claims for negligence, delay, bad faith, etc. and an agreement to forego any assignment of such claims constituted a fraudulent conveyance.

Supreme Court Adopts Objective Standard for Contempt for Discharge Violations, Overturning Ninth Circuit Precedent

In Taggart v. Lorenzen, 587 U.S. ___ (2019), the Supreme Court has clarified the standard under which a creditor may be held in civil contempt for violating a bankruptcy discharge order. Taggart was a former co-owner of a company with two other owners. The company and other owners sued Taggart for breach of their operating agreement. Before trial, Taggart filed for Chapter 7 bankruptcy and ultimately received a discharge of his pre-petition debts. Notwithstanding their knowledge of the discharge, the attorney for the company and other co-owners sought and obtained an award from the state court of post-petition attorney fees against Taggart. Pursuant to In re Ybarra, 424 F.3d 1018 (9th Cir. 2005), a creditor is not entitled to post-petition attorney fees stemming from prepetition litigation unless the bankruptcy debtor returns to the fray. In this case, it was ultimately decided that Taggart had not returned to the fray, leaving the remaining question of whether the company and co-owners should be held in civil contempt for violating the discharge order.

Stricter Interpretation Required: The Strategic Lawsuits Against Public Participation Statute Requires Analysis of Both Content and Context

On May 6, 2019, the Supreme Court of California published an opinion drastically altering the way strategic lawsuits against public participation ("SLAPP") statutes are interpreted. The anti-SLAPP statute allows for a "special motion to strike meritless claims early in litigation - but only if the claims arise from acts in furtherance of a person's right of petition or free speech...in connection with a public issue." (pg. 1) The case setting this in motion, Filmon.com Inc. v. Doubleverify Inc., deals with two for-profit companies who are disputing how one company was portrayed in a confidential report. The trial and appellate courts both held Doubleverify, Inc's reports were protected under the anti-SLAPP statute. They further held context was irrelevant in analyzing whether an anti-SLAPP statute was applicable. However, the Supreme Court of California reversed this decision, holding "the context of a defendant's statement is relevant, though not dispositive, in analyzing whether the statement was made 'in furtherance of' free speech 'in connection with' a public issue." (pg. 2)

Trademark Licensee's Rights Not Rescinded Upon Debtor/Licensor's Rejection of the License

The Supreme Court of the United States (SCOTUS) resolved a circuit split when it recently held in Mission Product Holdings, Inc. v. Tempnology, LLC, No. 17-1657 (May 20, 2019) that the debtor's rejection of Mission's license agreement did not terminate Mission's rights to use the debtor's trademarks because outside of bankruptcy, a licensor's breach cannot revoke the licensee's continuing rights. The SCOTUS focused on the language in Section 365(a) of the Bankruptcy Code that rejection constitutes a breach. Since breach is not defined in the Bankruptcy Code, the SCOTUS looked to the result of a licensor's breach outside of bankruptcy, which is that "a licensor's breach cannot revoke continuing rights given to a counterparty under a contract." In other words, "rejection breaches a contract but does not rescind it" when breach is deemed to have occurred pre-petition. 

Actual Intent to Cause Injury is Not Required Under Bankruptcy Code Section 523(a)(6)

In In re Hamilton, BAP Nos. SC-17-1126 and SC-17-1123, the Ninth Circuit Bankruptcy Appellate Panel ("BAP") considered the intent requirement for non-dischargeability of a debt under Section 523(a)(6). The debtor argued that the Supreme Court case of Kawaauhau v. Geiger, 523 U.S. 57 (1998) required actual intent or specific intent to cause injury to meet the "willful" injury requirement of Section 523(a)(6). The BAP clarified that while Geiger held that an intent to cause harm was required, it did not elaborate as to "the precise state of mind required," as stated by the Ninth Circuit in Petralia v. Jerchich (In re Jercich), 238 F.3d 1202 (9th Cir. 2001). The BAP commented that the holding in Jercich that the debtor must intentionally commit the act with a substantial certainty that injury will occur is controlling and not at odds with Geiger. As such, the BAP confirmed that a specific intent to cause injury is not required to meet the "willful" standard under Section 523(a)(6) but rather, only a substantial certainty that injury will occur as found in Jercich.

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