In re Nancy Elaine YBARRA, Debtor, Boeing North American, Inc., Successor for Limited Purposes to Rockwell International Corporation, Appellant, v. Nancy Elaine Ybarra, Appellee.
No. 03-56314.
United States Court of Appeals, Ninth Circuit.
Submitted March 10, 2005. Filed Sept. 14, 2005.
1018
Nancy Elaine Ybarra, Santa Barbara, CA, pro se, for the appellee.
Before WARDLAW, PAEZ, Circuit Judges, and BEISTLINE, District
PAEZ, Circuit Judge.
After filing for bankruptcy protection, Nancy Elaine Ybarra (“Ybarra“) persuaded a state court to vacate the dismissal of an action she had filed against her former employer Rockwell International Corporation (“Rockwell“) prior to filing for bankruptcy. Rockwell prevailed and was awarded attorney fees and costs by the state court. The bankruptcy court held that despite Ybarra‘s discharge in bankruptcy, Rockwell could collect the portion of the fees and costs incurred after Ybarra filed for bankruptcy. In a divided opinion, the Bankruptcy Appellate Panel of the Ninth Circuit (“BAP“) reversed. The BAP majority held that the entire award was encompassed in the discharge. Boeing North American, Inc., as successor to Rockwell, appealed. We hold that the fees and costs incurred post-petition were not discharged, and therefore reverse.
I. Statement of Facts and Procedural History
In 1988, Ybarra sued Rockwell in Orange County Superior Court. Ybarra‘s Fifth Amended Complaint, filed in April of 1991, asserted two causes of action: 1) employment discrimination in violation of
On December 10, 1991, Ybarra filed a Chapter 11 bankruptcy petition. Ybarra did not initially schedule the cause of action against Rockwell. Ybarra v. Boeing N. Am., Inc. (In re Ybarra), 295 B.R. 609, 611 (9th Cir. BAP 2003). Rockwell first learned of the bankruptcy petition in 1993, and thereafter promptly objected to Ybarra‘s disclosure statement and moved to convert the case to Chapter 7. The bankruptcy court granted Rockwell‘s motion and converted the case in June of 1993.
The trustee for Ybarra‘s Chapter 7 bankruptcy estate agreed with Rockwell to settle the case via a compromise in which Rockwell would purchase Ybarra‘s cause of action for $17,500. Id. Although Ybarra objected to the proposed compromise, the bankruptcy court approved it on November 12, 1993. Thereafter the state court granted the trustee‘s and Rockwell‘s motion to dismiss Ybarra‘s lawsuit.
On September 29, 1993, Ybarra amended her schedule of exempt property to add the cause of action against Rockwell. The bankruptcy court sustained Rockwell‘s objection to Ybarra‘s claim of exemption on February 24, 1994. The BAP reversed this decision, and we affirmed the BAP. Ybarra v. Rockwell Int‘l Corp. (In re Ybarra), 124 F.3d 215 (9th Cir. 1997) (table), 1997 WL 579130.
On remand, the bankruptcy court ruled that the cause of action was exempt. The court gave Ybarra the option of either accepting $17,500 in full satisfaction and release of all claims against Rockwell (“the Election“), or taking ownership of “all right, title and interest” in the lawsuit.
Ybarra elected to take ownership of the cause of action. Thereafter, Ybarra successfully persuaded the state court to set aside the dismissal. Ybarra, 295 B.R. at 612. Ultimately, the state court granted summary judgment in favor of Rockwell. Rockwell then moved for an award of attorney fees and costs pursuant to
Meanwhile, the bankruptcy court had granted Ybarra a discharge in May of 1998 pursuant to
Ybarra appealed the bankruptcy court‘s decision to the BAP. The BAP, in a divided decision, reversed, holding that the entire fee and cost award was discharged in Ybarra‘s bankruptcy. Ybarra, 295 B.R. at 617. The majority opinion relied on Abercrombie v. Hayden Corp. (In re Abercrombie), 139 F.3d 755 (9th Cir. 1998), and Kadjevich v. Kadjevich (In re Kadjevich), 220 F.3d 1016 (9th Cir. 2000), both of which held that claims for post-petition attorney fees could not be granted administrative expense priority in the distribution of bankruptcy assets. Ybarra, 295 B.R. at 612-16. This case, however, involves whether Ybarra‘s debt to Rockwell was discharged, not whether Rockwell‘s claim should be accorded administrative expense priority in the distribution of the bankruptcy estate‘s assets. The BAP majority explained that it relied on the administrative expense priority cases because they turned on the issue of whether attorney fees were a pre-petition claim. Id. at 612. The majority distinguished Siegel on the ground that it involved a suit commenced post-petition. Id. at 616. The dissent argued that Siegel should apply because it involved the discharge of post-petition attorney fees, which, it reasoned, is a “different concern” from the issue of administrative expense priority in Abercrombie and Kadjevich. Ybarra, 295 B.R. at 624 (Baum, J., dissenting).3 Rockwell timely appealed.
II. Jurisdiction and Standard of Review
We have jurisdiction to review decisions of the BAP pursuant to
Ybarra argues that the BAP should be affirmed because the rule set forth in Abercrombie and Kadjevich applies to this case. Rockwell advances the BAP dissent‘s argument that Siegel controls. As we explain below, we agree with the BAP dissent‘s conclusion that this case is governed by the discharge principles recognized in Siegel, rather than the rules relating to administrative expense priority claims. Accordingly, we reverse the BAP‘s judgment and remand with directions to enter a judgment affirming the bankruptcy court. Because we conclude that this case is governed by the principles of discharge, we first address this area of bankruptcy law.
A. Discharge Pursuant to 11 U.S.C. § 727
A Chapter 7 bankruptcy discharge releases the debtor from personal liability for her pre-bankruptcy debts. United States v. Hatton (In re Hatton), 220 F.3d 1057, 1059-60 (9th Cir. 2000); 1 David G. Epstein et al., Bankruptcy § 1-7(e), at 12 (1992). A discharge is the “legal embodiment of the idea of the fresh start; it is the barrier that keeps the creditors of old from reaching the wages and other income of the new.” 2 id. § 7-16, at 312. If the debtor receives a discharge, the creditor will receive only its pro-rata share of the distribution of the property of the bankruptcy estate. 1 id. § 1-7, at 12.
Specifically, § 727 of the Bankruptcy Code (“the Code“)4 “discharges the debtor from all debts that arose before the date of the order for relief....”
The filing of a petition under Chapter 7 constitutes an “order for relief.” See
B. When a Claim Arises Under 11 U.S.C. § 727(b)
“[A] claim arises, for purposes of discharge in bankruptcy, at the time of the events giving rise to the claim....” O‘Loghlin v. County of Orange, 229 F.3d 871, 874 (9th Cir. 2000). For example, in Jensen, we held that environmental cleanup expenses incurred post-petition arising from pre-petition conduct were discharged in bankruptcy. 995 F.2d at 931. In O‘Loghlin, alleged violations of the Americans with Disabilities Act,
In Siegel, we addressed the issue of whether attorney fees incurred post-petition were discharged in bankruptcy.7 There, mortgagee Freddie Mac foreclosed on a property and filed suit in federal district court, seeking a deficiency judgment against Siegel, the mortgagor. Siegel, 143 F.3d at 528. Before that case went to trial, Siegel filed for bankruptcy. Id. Freddie Mac filed proofs of claim in the bankruptcy proceeding, to which Siegel did not object. Id. The bankruptcy court granted Freddie Mac relief from the automatic stay provisions of
After Siegel filed the bankruptcy petition, but two months prior to the discharge, he sued Freddie Mac in state court, alleging breach of duties under the deeds of trust. Id. at 528, 531. Freddie Mac removed the case to federal court. Id. at 528. The federal district court granted summary judgment to Freddie Mac on the ground that the action was barred by the res judicata effect of the bankruptcy proceeding. Id. The district court awarded Freddie Mac attorney fees incurred in pursuing its rights under the deeds of trust, pursuant to a provision in the deeds. Id. at 528, 531.
On appeal, Siegel argued that the claim for attorney fees was discharged in the bankruptcy proceedings. Id. at 532. We analyzed the issue under the framework of whether the claim was “contingent” pursuant to
Siegel‘s decision to pursue a whole new course of litigation made him subject to the strictures of the attorney‘s fee provi-
sion. In other words, while his bankruptcy did protect him from the results of his past acts, including attorney‘s fees associated with those acts, it did not give him carte blanche to go out and commence new litigation about the contract without consequences.
Id. at 534. On the basis of this post-petition voluntary action on the part of the debtor, we concluded that the award of post-petition attorney fees was not discharged. Id.
Siegel cited with approval two opinions that shed light on the boundaries of the definition of “claim” for the purposes of discharge. Id. at 533. Shure v. Vermont (In re Sure-Snap), 983 F.2d 1015 (11th Cir. 1993), addressed the discharge of debt under
The creditor sought attorney fees and costs incurred in the appeal pursuant to a contractual provision in the mortgage agreement. Id. The Eleventh Circuit held that because the debtor “voluntarily continued to litigate” after confirmation of the plan, it did so “at the risk of incurring post-confirmation costs involved in its acts.” Id. at 1018. The court characterized the appeal as being “initiated” by the debtor, and reasoned that the creditor “had no choice but to defend.” Id. It therefore awarded the creditor attorney fees incurred in the post-confirmation appeal, concluding that the fees were not discharged. Id. at 1019.
In Siegel, 143 F.3d at 533, we also cited In re Hadden, 57 B.R. 187, 190 (Bankr. W.D.Wis.1986), in which the bankruptcy court declined to discharge attorney fees incurred post-petition. In Hadden, the debtor initiated the state litigation pre-petition, and voluntarily continued the litigation after filing under Chapter 7. Id. at 188. The bankruptcy court noted that “bankruptcy was intended to protect the debtor from the continuing costs of pre-bankruptcy acts but not to insulate the debtor from the costs of post-bankruptcy acts.” Id. at 190. It therefore balanced the competing policy concerns of providing debtors with a fresh start and preventing post-bankruptcy acts taken with “impunity.” Id. The court concluded: “If the debtor chooses to enjoy his fresh start by pursuing pre-petition claims which have been exempted, he must do so at the risk of incurring the post-petition costs involved in his acts.” Id.; see also Big Yank Corp. v. Liberty Mutual Fire Ins. Co. (In re Water Valley Finishing, Inc.), 139 F.3d 325, 328 (2d Cir. 1998) (holding that a claim for sanctions in the amount of attorney fees was not discharged where, post-petition, the debtor rejected the creditor‘s settlement offer in bad faith).
In sum, we have held that post-petition attorney fee awards are not discharged where post-petition, the debtor voluntarily “pursue[d] a whole new course of litigation,” commenced litigation, or “return[ed] to the fray” voluntarily. Siegel, 143 F.3d at 533-34. We have also endorsed the notion that by voluntarily continuing to pursue litigation post-petition that had been initiated pre-petition, a debtor may be held personally liable for attorney fees and costs that result from that litigation.
Although administrative expense priority is not at issue in this case, the BAP majority relied on Abercrombie and Kadjevich, both involving administrative expense priority, because the outcome of those cases turned on whether attorney fees arose from a pre-petition claim. Ybarra, 295 B.R. at 612. The BAP dissent found the administrative expense priority caselaw inapt because
[t]he purpose of administrative expense priority is to facilitate the operation of the debtor in possession‘s business with a view to rehabilitation.... The purpose of a discharge is to provide the debtor with a fresh start, which is a different concern from determining administrative priority. The Ninth Circuit has not concluded that the standard for determining administrative expense status under
§ 503(b) and dischargeability under§ 727(b) is the same.
Id. at 624. We agree with the BAP dissent‘s assessment and hold that because our standards for determining administrative expense priority are animated by different purposes than are our standards for determining which claims are discharged in bankruptcy, Kadjevich and Abercrombie do not control this case.8
Whereas in discharge cases, the personal liability of the debtor is at issue, creditors seeking administrative expense priority are pursuing property of the bankruptcy estate. Section 507 of the Code sets forth the order of priority accorded to various classes of unsecured creditors when a Chapter 7 bankruptcy estate is liquidated. Administrative expense claims, defined in
the Code, only claims arising from post-petition transactions may be granted such priority. Kadjevich, 220 F.3d at 1019; Abercrombie, 139 F.3d at 758.
The purpose of administrative expense priority status is to encourage third parties to contract with the bankruptcy estate for the benefit of the estate as a whole. See Christian Life Ctr. Litig. Def. Comm. v. Silva (In re Christian Life Ctr.), 821 F.2d 1370, 1373 (9th Cir. 1987); Kadjevich, 220 F.3d at 1019 (noting that the purpose of granting priority to post-petition debts is “so that third parties will risk providing the goods and services that are necessary for a struggling debtor to reorganize“); see also Abercrombie, 139 F.3d at 757 (citing encouragement of third parties to deal with the debtor in possession and facilitate rehabilitation as purpose of the administrative expense priority). The central question in determining whether a claim is granted administrative expense priority is whether the third party should be paid at the expense of the debtor‘s existing unsecured creditors. See Total Minatome Corp. v. Jack/Wade Drilling, Inc. (In re Jack/Wade Drilling, Inc.), 258 F.3d 385, 389 (5th Cir. 2001).
By contrast, in the discharge context, the question is whether the debtor should be released from pre-petition debts so that she can be given a “fresh start.” See Jensen, 995 F.2d at 928. The discharge inquiry involves the existence of personal liability, while administrative expense priority concerns the distribution of assets from a limited pool. Even if a cause of action arose pre-petition, the discharge shield cannot be used as a sword that enables a debtor to undertake risk-free litigation at others’ expense. See Siegel, 143 F.3d at 533-34. Personal liability for fees incurred through the voluntary pursuit of litigation initiated post-petition is more consistent with the purpose of discharge. This policy difference supports our conclusion that the administrative expense priority cases do not control our determination of whether a claim is pre-petition or post-petition in the discharge context.
As the BAP noted, Siegel was decided less than six weeks after Abercrombie but failed to cite it. Ybarra, 295 B.R. at 613. Kadjevich was decided two years after Siegel, but does not discuss that case. In our view, the best explanation for this lack of integration is that Siegel involved discharge, while Abercrombie and Kadjevich involved administrative expense priority—two distinct areas of bankruptcy law with separate purposes. In sum, we conclude that the rules set forth in Abercrombie and Kadjevich do not apply to the question of whether debts are discharged.
D. Discharge of Rockwell‘s Attorney Fees and Cost Claims
In light of the foregoing discussion, we reaffirm that claims for attorney fees and costs incurred post-petition are not discharged where post-petition, the debtor voluntarily commences litigation or otherwise voluntarily “return[s] to the fray.” See Siegel, 143 F.3d at 533-34. Whether attorney fees and costs incurred through the continued prosecution of litigation initiated pre-petition may be discharged depends on whether the debtor has taken affirmative post-petition action to litigate a prepetition claim and has thereby risked the liability of these litigation expenses.
In this case, after petitioning for bankruptcy, Ybarra petitioned the bank-
The BAP reasoned that because the bankruptcy court‘s decisions not to exempt the lawsuit and to approve the settlement were later overturned, Ybarra‘s state suit should be considered continuous litigation, rather than the commencement of a new suit post-petition. Ybarra, 295 B.R. at 616. We disagree, and conclude that Ybarra‘s actions to revive the state suit were sufficiently voluntary and affirmative to be considered “returning to the fray.” Accordingly, we reverse the BAP‘s holding that the attorney fees incurred post-petition were discharged.
IV. Conclusion
In light of the foregoing, we conclude that the award of attorney fees and costs incurred post-petition was not discharged in Ybarra‘s bankruptcy.11 We therefore REVERSE.