Debtor Not Entitled to Attorney Fees Under State Statute for Alleged Bankruptcy Misconduct

Posted by NCBRC - January 19, 2022

The debtor was not entitled to an award of attorney fees under a state fee-shifting provision when she prevailed on her opposition to the creditor’s time-barred claims where the bankruptcy litigation was not connected to the substance of the claims but was a procedural issue dependent on misconduct of parties or attorneys and, therefore, federal law was controlling. LVNV Funding, LLC v. Andrade-Garcia, No. 21-1115 (B.A.P. 9th Cir. Jan. 11, 2022).

The debtor filed for chapter 7 bankruptcy in September, 2017, and converted to chapter 13 shortly thereafter. LVNV filed three proofs of claim for debts which were time-barred under state law. The debtor objected to the claims arguing that the debts were uncollectible. She sought a reward of attorney’s fees incurred in opposing the claims.

The bankruptcy court disallowed the claims under section 502(b)(1) as time-barred and awarded the debtor attorney’s fees as the “prevailing party” under Nev. Rev. Stat. 18.010(2)(b), which authorizes an award of attorney’s fees to a prevailing party if the opposing party’s claim “was brought or maintained without reasonable ground or to harass the prevailing party.”

LVNV appealed to the Ninth Circuit Bankruptcy Appellate Panel, arguing that NRS 18.010(2)(b) governs litigation misconduct and, under the ruling in Midland Funding, LLC v. Johnson, 137 S. Ct. 1407 (2017), it was not misconduct to file the claims. LVNV further argued that the state law was inapplicable because it was preempted by federal law.

At the outset the panel noted that, under Galam v. Carmel (In re Larry’s Apartment, L.L.C.), 249 F.3d 832, 836 (9th Cir. 2001), a prevailing party in bankruptcy may be entitled to attorney fees under state fee-shifting laws if “state law governs the substantive issues raised in the proceedings.” However, under B-Real, LLC v. Chaussee (In re Chaussee), 399 B.R. 225, 233 (9th Cir. BAP 2008), if the sanctions are based on procedural conduct in the federal litigation, federal law applies to its punishment. “The controlling issue is whether the award of attorney’s fees emanates from the substantive claim or from a party’s or attorney’s conduct in the litigation.”

The panel turned to the state law to determine whether it governs procedural conduct or substantive issues. NRS 18-010(2)(b) explicitly states its purpose to punish or deter vexatious or frivolous claims or defenses. The panel found this section related to procedural misconduct and that filing a claim is considered litigation “conduct.” Where that conduct occurs in the context of a bankruptcy case, federal law applies to its punishment.

The panel went on to state that a court has discretion to award attorney fees under NRS section 18.010(2)(b), if “the complaint was brought without reasonable ground or to harass the other party.” Midland Funding held that filing claims in bankruptcy for debts that are uncollectible due to lapsed limitations period is not a violation of the FDCPA. The Court reasoned that the definition in 101(5)(A) of a “claim” refers to a “right to payment” and is broad enough to encompass unenforceable claims. The panel added that even under Nevada law, the running of the statute of limitations does not affect the substantive cause of action, but is an affirmative defense which may be waived. Therefore, the debtor’s successful litigation was based not on substantive illegitimacy of the claim, but on application of a defense to that claim. Thus, even under NRS 18.010(2)(b), the debtor would not have been entitled to attorney’s fees. The panel summed it up saying “[b]ankruptcy courts may have discretion under certain state statutes to award attorney’s fees for disallowed time-barred claims, and fees may be awarded under Nevada law if provided for in a contract, but NRS § 18.010(2)(b) does not provide the authority.”

The panel reversed the bankruptcy court’s order awarding attorney fees.

Andrade-Garcia Jan 2022

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