Penrod Giveth and Bos Taketh Away

I thought I knew where we are on attorneys fees after the 9th Circuit ruled in In re Penrod that a creditor fighting with a debtor in a bankruptcy case, is an effort by the creditor to collect its debt form the debtor, and therefore an “action on the contract” and therefore, assuming there is a right to attorneys fees in the contract, the bankruptcy court can award attorneys fees to the debtor.

My friend Peter Lively was surprised to hear me say recently that I think that Penrod allows for attorneys fees to the debtor anytime the debtor defeats any creditor efforts in a bankruptcy case including stay relief motions, oppositions to plan confirmation, battles over property values, cash collateral, plan fights.  His sense was that since Penrod was over the issue of bifurcating a car loan, it didn’t necessarily extend out to everything else.  He promised to look into it further.

In Penrod Judge Watford wrote:

“Under California law, an action is ‘on a contract’ when a party seeks to enforce, or avoid enforcement of, the provisions of the contract.  AmeriCredit sought to enforce the provisions of its contract with Penrod when it objected to confirmation of her proposed Chapter 13 plan.”

“AmeriCredit insisted that it was entitled to have its claim treated as fully secured.  The only possible source of that asserted right was the contract—in particular, the provision in which Penrod granted a security interest in her Taurus to secure ‘payment of all you owe on this contract.’”

To me, if the creditor can ask for fees, the debtor gets fees.  The creditor asks for fees for everything.

My glee over this ruling came to a crashing halt recently when I read In re Bos.   In Bos, the 9th Circuit says that litigating dischargeability  matters in bankruptcy court is still not an action on a contract,” and therefore there is no right to fees, at least under the contract.

In Bos, the 9th Circuit denied the request for fees saying the non-dischargeability action was not “on the contract.”   “[W]e have previously held that a nondischargeability action is ‘on a contract’ within section 1717 if ‘the bankruptcy court needed to determine the enforceability of the . . . agreement to determine dischargeability.’”  “[I]f the bankruptcy court did not need to determine whether the contract was enforceable, then the dischargeability claim is not an action on the contract within the meaning of [California Civil Code] § 1717.”

Bos commented on Penrod,

“Penrod incurred her attorney’s fees in an action that sought ‘to enforce, or avoid enforcement of, the provisions of the contract’ between herself and one of her creditors.  Specifically, the action underlying Penrod’s motion for fees had asked ‘whether [a] provision of the contract should be enforced according to its terms, or whether its enforceability was limited by bankruptcy law to exclude [a particular] portion of the loan.  By prevailing in that litigation, Penrod obtained a ruling that precluded [her creditor] from fully enforcing the terms of the contract.’   Penrod’s action, in other words, required ‘the bankruptcy court . . . to determine the enforceability of the . . . agreement,’ and so it was comfortably an action ‘on a contract’ within section 1717’s previously recognized reach.”

David Gould sent me a nice ABI blog post discussing the June 20, 2016 opinion of a district court judge who held categorically that “Section 1717 was not applicable because a lift-stay motion is only a motion, not ‘an action,’ and does not address the validity of the contract.  The lift-stay motion, according to Johnson, turns on bankruptcy law, not the validity of the contract.”

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