Landlord's Bankruptcy Attorney Fees Recoverable in Superior Court

As discussed in an earlier post, the US Supreme Court will shortly decide Travelers Casualty & Surety Co. v. Pacific Gas and Electric Co., on the issue of whether unsecured creditors with contracts including an attorney fees clause may recover fees for litigation in the bankruptcy court which relates strictly to issues of federal bankruptcy law. In the meantime, on February 22 the California Court of Appeal decided Circle Star Center Associates v. Liberate Technologies (2007 WL 533564), a case which expands entitlement to recover in state court attorney fees incurred in a bankruptcy case.

Circle Star was involved in a dispute with its tenant Liberate Technologies. Liberate stopped paying rent, moved out, and filed a chapter 11 petition in Delaware (Case No. 04-11299-PJW). Judge Walsh granted Circle Star’s motion to transfer the case to the Northern District of California. After the transfer, Judge Carlson granted Circle Star’s motion to dismiss the case as a bad faith chapter 11 filing. The unpublished opinion (Case No. 04-31394) noted among other things that Liberate’s $212 Million in unrestricted cash far exceeded its debts, and that Liberate was seeking to limit Circle Star’s rejection damages claim under Bankruptcy Code section 502(b)(6).

The Bankruptcy Court accepted an amicus curaie brief on the motion from Professor G. Eric Brunstad, Jr. of Yale Law School, a contributing editor to Colliers. Prof. Brunstad was also at that time the vice chair of the ABA Business Bankruptcy Committee. Prof. Brunstad did not appear on behalf of any client, trade association, or other party with a legitimate interest in the outcome of the case. He is, I guess, such an expert that he is welcome to meddle in anyone’s bankruptcy case, even at the trial court level.

Post dismissal, Circle Star’s pending Superior Court complaint was amended to seek an award of $1.2 Million in attorney fees incurred in the bankruptcy case. The trial court sustained a demurrer to the attorney fee claim. The Court of Appeal (1st District Division 3) reversed. The opinion acknowledges that the fees would not have been recoverable in bankruptcy court. However, the Court reasoned that after the dismissal the fees would not burden a bankruptcy
estate, and that dismissal should end any restriction on recovery which applied under
bankruptcy law.

Also note: The attorney fee clause referred to fees incurred in “any action . . . arising out of this lease.” The Court ruled that this language was ambiguous as to the inclusion of bankruptcy fees, and that Circle Star was entitled to introduce extrinsic evidence as to what the parties intended by the phrase “any action.”

Chapter 13 Escape Hatch Closing?

How many times have you seen this happen? A chapter 7 bankruptcy trustee discovers an asset, or a prepetition transfer of assets, conveniently omitted from the schedules. The trustee takes the first step to recover the asset or avoid the transfer. The debtor then escapes by converting the case to chapter 13, divesting the trustee of power to pursue the asset.
In the Ninth Circuit, conversion as of right under Bankruptcy Code section 706(a) was available even in a case of bad faith. In re Croston, 313 B.R. 447 (Bankr. App. 9th Cir. 2004). In the Southern District of California, our chapter 13 trustees are keeping track of these converted cases, in order to avoid later dismissal for failure to prosecute, or after a default under a confirmed plan.
As of February 21, 2007, there is authority for a creditor, or a chapter 7 trustee, to prevent bad faith conversion in the first instance. In Marrama v. Citizensbank of Massachusetts, 2007 WL 517340 the Supreme Court ruled 5-4 that the debtor’s motion to convert may be denied in a case of bad faith. As stated in the opinion:

Marrama made a number of statements about his principal asset, a house in Maine, that were misleading or inaccurate. For instance, while he disclosed that he was the sole beneficiary of the trust that owned the property, he listed its value as zero. He also denied that he had transferred any property other than in the ordinary course of business during the year preceding the filing of his petition. Neither statement was true. In fact, the Maine property had substantial value, and Marrama had transferred it into the newly created trust for no consideration seven months prior to filing his Chapter 13 petition. Marrama later admitted that the purpose of the transfer was to protect the property from his creditors.

In creating a judicial qualification to the apparent absolute right to convert under section 706(a), the Court stated “the broad authority granted to bankruptcy judges to take any action that is necessary or appropriate ‘to prevent an abuse of process’ described in § 105(a) of the Code is surely adequate to authorize an immediate denial of a motion to convert filed under § 706 in lieu of a conversion order that merely postpones the allowance of equivalent relief and may provide a debtor with an opportunity to take action prejudicial to creditors.” Take that, strict constructionists! Not surprisingly, the dissenters included Alito, Thomas and Scalia. Chief Justice Roberts joined the dissent, which serves as our first indication of how he may factor on the bankruptcy "strict construction" debate in the future.

Attorney Fees for Unsecured Creditors

A major decision as to the rights of unsecured creditors to obtain awards of attorney fees for litigating bankruptcy claims is sneaking up on us. Last October, the Supreme Court granted certiorari in Travelers Casualty & Surety Co. v. Pacific Gas and Electric Co. Travelers issued unsecured surety bonds for PG&E, and appeared in the chapter 11 case to protect its contingent claim. Travelers, represented by Millbank Tweed, appeared and made apparently unsuccessful objections to the disclosure statement, running up $167,000 in attorney fees in the process (nice work if you can get it?) Bankruptcy Judge Montali found that the fees were unnecessary and that PG&E was not the prevailing party. Undaunted, PG&E appealed unsuccessfully to the District Court (2004 WL 5167592) and to the Ninth Circuit (2006 WL 285977). The case was argued on January 16, 2007.
In re Fobian, 951 F.2d 1149, 1153 (9th Cir.1991) held that a bank which successfully objected to confirmation of a chapter 12 plan could not recover attorney fees against the debtor, since the issue of plan confirmation was solely one of bankruptcy law, not state law. Travelers is arguing to overrule Fobian. The case has huge ramifications for consumers and bankruptcy trustees. For example, in dischargeability litigation attorney fees are required to be apportioned between state law and bankruptcy law issues. In re Baroff, 105 F.3d 439 (9th Cir. 1997). If Fobian is overruled, it will open the door to recovery of fees in objections to unsecured claims, for example.

Chapter 7 Attorney Retainers - Fair Game?

Can the trustee get her hands on a pre-petition retainer paid to the debtor’s counsel? The subject is being revisited in the bankruptcy courts following the Supreme Court’s decision in Lamie v. U.S. Trustee, 124 S.Ct. 1023 (2004). I think of Lamie as the case which resolved a controversy over the “drafting error” in the 1994 amendment to §330(a), holding that a chapter 11 debtor’s lawyer can’t be compensated from the estate unless that lawyer is employed by the trustee with Court approval (and abrogating In re Century Cleaning Services, Inc., 195 F.3d 1053 (9th Cir. 1999), which allowed such compensation where the services were necessary to estate administration).
Now the other shoe has dropped, in an Oregon bankruptcy case In re Hill, 355 B.R. 260 (Bankr. D. Ore. 2006). In Hill the debtor’s counsel received a $5,000 advance retainer in a chapter 7 case, which was deposited into his client trust account. Counsel paid himself $2,115.15 for prepetition bankruptcy services. The Rule 2016 Statement reflected that “[t]he unpaid balance due and payable” to the lawyer was zero, and that “the source of payments to be made by debtor(s) to the undersigned for the unpaid balance remaining, if any, will be from earnings, wages and compensation for services performed, and gifts, loans, tax refunds, and cash retainer of $2,675.85” Bankruptcy Judge Trish Brown granted the Trustee’s motion to compel turnover of the trust account balance as of the petition date. An appeal is now pending in the District Court.
What happened to the notion that a debtor’s attorney obtains a security interest in the retainer, perfected by possession of the funds? Hill holds that the lien is irrelevant because the debtor’s counsel can’t be compensated.
It was important to the reasoning of Hill that the retainer paid to counsel was a “true retainer” not completely earned upon receipt by the lawyer. However, debtor attorneys trying to structure their retainers as flat fees are forced to describe in their fee agreements, as precisely as they can, what they are committed to do, post-petition, for the flat fee. Post-BAPCPA, where post-petition litigation issues not involving an adversary proceeding are more likely to arise, these promises may prove awkward.