Debtors Entitled to Fees for Creditor’s Collateral Attack on Contempt Motion

Posted by NCBRC - March 5, 2021

Where the creditor raised all its defenses to the debtors’ contempt motion in a collateral adversary complaint, the debtors were entitled to at least a portion of their attorney fees incurred in litigating the adversary proceeding under section 362(k)(1). Moon v. Rushmore Loan Management Services, LLC., No. 20-1199 (B.A.P. 9th Cir. Feb. 4, 2021) (unpublished).

When they filed for chapter 13 bankruptcy on March 26, 2013, the debtors had two mortgages on their home, the second of which, held by Rushmore Loan Management Services, was completely underwater. On December 5, 2013, the bankruptcy court granted the debtors’ motion to strip off Rushmore’s mortgage. Due to an error in its address, however, Rushmore did not receive court filings and did not have actual notice of the bankruptcy until December 20, 2014. The debtors successfully completed their plan and obtained a discharge in September, 2016. After discharge, the debtors reopened their bankruptcy seeking a contempt order against Rushmore for violation of the discharge injunction and the automatic stay resulting from Rushmore’s continued efforts to collect on the mortgage.

Two weeks before the scheduled hearing on the contempt motion, Rushmore filed an adversary proceeding arguing that the confirmation order and the lien-stripping order violated its due process rights. The parties filed competing motions to dismiss and for summary judgment in the adversary proceeding.

After a hearing on the contempt motion, the court awarded the debtors compensatory and punitive damages based on Rushmore’s willful violation of the automatic stay under § 362(k)(1). On appeal, the BAP vacated the order for compensatory damages, and remanded for reconsideration of the punitive damage award.

While that appeal was pending, the debtors sought attorney’s fees under section 362(k)(1) for the litigation costs associated with the contempt motion. The court awarded the debtors $67,007.94 in fees. Rushmore appealed that order to the BAP which found the debtors entitled to attorney’s fees, but remanded for reconsideration of the amount.

In the meantime, Rushmore voluntarily dismissed its adversary proceeding. The debtors then filed a second motion for attorney’s fees under section 362(k)(1) based on the costs of litigating Rushmore’s adversary proceeding and the additional costs of litigating the fee motion itself. The bankruptcy court denied the second fee motion, finding that the adversary proceeding did not constitute a continuation of Rushmore’s stay violation. The debtors appealed this ruling to the BAP for the Ninth Circuit.

The panel agreed with the bankruptcy court that Rushmore’s adversary proceeding was not a continuation of their stay violation. It went on, however, to address the remaining two issues of whether the debtors were nonetheless entitled to attorney fees for the adversary proceeding as a “collateral attack” on the contempt motion, and whether, when Rushmore voluntarily dismissed its adversary proceeding, the bankruptcy court lost jurisdiction to decide the second fee motion.

The panel found that, while Rushmore had a right to oppose the debtors’ contempt motion, it did not do so in connection with the motion or the hearing, but rather, did so solely in the form of its adversary proceeding which it filed shortly before the hearing and dismissed three months after. Furthermore, Rushmore did not merely seek to defend itself against the charge of violation of the automatic stay, but launched an affirmative attack on the contempt motion by seeking to strike it and shift responsibility to the debtors for the stay violation.

The panel found that, in the context of the adversary proceeding, the debtors were forced to “defend against certain arguments Rushmore should have, but failed to, raise in defense of the First Contempt Motion. And the [debtors] had to continue to defend against those arguments after the bankruptcy court had already rejected them in the First Contempt Order and awarded the [debtors] damages for Rushmore’s willful stay violation.” The panel noted that, by essentially defending itself against the contempt motion by filing the adversary proceeding, Rushmore had attempted an end run around the automatic stay statute.

As to Rushmore’s argument that the bankruptcy court was divested of jurisdiction once it voluntarily dismissed its adversary proceeding, the panel disagreed. It found that “’[i]t is well established that a federal court may consider collateral issues after an action is no longer pending[,]’ including a request for attorney’s fees.”

The panel concluded that because the adversary proceeding consisted of Rushmore’s defense to the automatic stay violation, at least some of the fees associated with it were compensable under section 362(k)(1). The panel vacated and remanded for a determination of an appropriate fee award.

Though no notice of appeal has been filed in this case, several appeals of other orders are currently pending in the Ninth Circuit, Nos. 21-60006,  21-60007, 21-60008, 21-60009.

Moon 9th BAP Feb 2021



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