Relief from Stay Motion Not “Action on a Contract” for Fee-Shifting Purposes

Posted by NCBRC - July 5, 2016

A California statute requiring reciprocal fee-shifting when a contract provides for fee-shifting for the benefit of only one party, does not apply when the action is for relief from stay in bankruptcy. Green Tree Servicing, Co. v. Giusto, No. 15-2105 (N.D. Cal. June 20, 2016).

Jacqueline Giusto inherited real property encumbered by a note and deed of trust. When she filed for bankruptcy she stopped making payments on the note. Green Tree Servicing, as servicer for Bank of America, filed a motion for relief from stay to allow it to initiate foreclosure proceedings. Ms. Giusto filed a brief in opposition arguing that Green Tree did not have standing to bring the motion. The bankruptcy court agreed. Ms. Giusto then sought to recover costs and attorney’s fees incurred by reason of the motion arguing that the note’s provision entitling Bank of America to recoup fees and costs incurred in the effort to collect on a debt was made reciprocal by operation of California Civil Code § 1717.  That statute provides: “In any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees in addition to other costs.”

Relying on In re Johnson, 756 F.2d 738 (9th Cir. 1985), Green Tree countered that a motion for relief from stay was not an “action on a contract,” and, therefore, the reciprocal attorney fee law did not apply. The bankruptcy court, however, found that Johnson was overruled by Travelers Casualty & Surety Co. of America v. PG&E, 549 U.S. 443 (2007), and found that because Green Tree sought relief from stay to enforce the terms of the contract the fee reciprocity law applied.

On appeal the district court, after finding that the attorney fee award was a final, appealable order, turned to the holding in Johnson. In Johnson, the court found, under almost identical factual circumstances, that a motion for relief from stay was not an action on a contract because it was not an attempt to enforce the terms of the contract but was instead an action arising out of bankruptcy concerns, such as adequate protection, and therefore exclusively a matter of federal law. Under the reasoning in Johnson, the Giusto court concluded that California’s fee reciprocity statute did not apply.

Turning to whether the Johnson decision was overruled or abrogated by Travelers, the Giusto court found it was not. Travelers came to the Supreme Court after the  lower courts relied on Ninth Circuit precedent, In re Fobian, 951 F.2d 1149 (9th Cir. 1991), to find that a prevailing party cannot recover fees for litigation issues “peculiar to federal bankruptcy law.” The case involved a chapter 11 proof-of-claim issue. The Court held that, contrary to the broad holding in Fobian, the default application of the American Rule against fee-shifting may be altered by valid contractual terms so long as the Bankruptcy Code does not prohibit it. In fact, where the issue is whether a proof-of-claim should be allowed, litigation often turns on non-bankruptcy law. The Court noted that the Fobian rule was based on three Ninth Circuit cases, including Johnson, in which prevailing debtors sought attorney’s fees. The Court distinguished Johnson as having failed “as a matter of state law,” when that court found the action was not “on a contract,” within the meaning of the state statute. On the other hand, Fobian stated a broad rule against contractual fee-shifting in the context of a bankruptcy action.

The Giusto court found the Travelers decision did not address and therefore did not overrule the portion of Johnson holding that an action for relief from stay was not an action on a contract. The court found Johnson did not rely on the Fobian rule but instead considered the “application of state law,” to determine whether the fee action before it was “on a contract.” “If Johnson had refused to consider the application of state law in the first instance, then this Court would agree that it was abrogated by Travelers. But as Travelers itself confirmed, Johnson did not so hold. 549 U.S. at 452 & n.3.”

Having found that Johnson, which held that a motion for relief from stay was not an action on a contract under state law, was still good law, the Giusto court held that the bankruptcy court’s award to Ms. Giusto was in error. It reversed.

Giusto ND Cal opinion June 2016


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