Post-Petition Attorneys' Fees Can Withstand Discharge if Debtor Affirmative Resumes Participation in Litigation Even Where Debtor is a Defendant

In an opinion filed August 28, 2014 by the Ninth Circuit Bankruptcy Appellate Panel ("BAP") in In re Gillespie, BAP No. NC-13-1455-KuDJu, the Court reversed the bankruptcy court because the bankruptcy court misconstrued In re Ybarra, 424 F.3d 1018 (9th Cir. 2005) in discharging post-petition attorneys' fees awarded against the debtor.

Pre-petition, the debtor was involved in litigation relating to a default on a loan and the lender's sale of the debtor's and his company's collateral to Bechtold. After the bankruptcy was filed, Bechtold obtained limited relief from stay and trial was eventually held in the state court. The state court ruled in favor of Bechtold and awarded attorneys' fees to Bechtold which were incurred post-petition. The bankruptcy court, despite findings made to the contrary, found that Ybarra did not apply because in Ybarra, the debtor was the plaintiff, but here, the debtor was the defendant and thus did not voluntarily bear the risk of incurring attorneys' fees in pursuing litigation. As such, the bankruptcy court held that the post-petition fees owed by Bechtold were discharged.

The BAP reversed, finding that even though the debtor was the defendant in the state court action, he did affirmatively act to resume his participation in the state court action by purchasing the estate's interest in the collateral and in the state court action, and by litigating the state court action to its conclusion. The BAP noted that Ybarra could not have meant that anytime a debtor is a defendant in an action, participation in litigation post-petition is not voluntary or that the requisite inquiry is whether a debtor is compelled to act to prevent the loss of his interests and claims. Rather, Ybarra applies only when the debtor has "returned to the fray" for whatever reason. Here, the debtor continued his participation in the state court litigation to preserve his asserted interest in the collateral, in his cross-claims, and in his defenses. This was sufficient for the BAP to hold that the debtor's post-petition involvement in the state court action was voluntary and as such, his Chapter 7 discharge did not discharge the post-petition attorneys' fees owed to Bechtold.

For the full opinion, please click here.

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