Mark Houle, United States Bankruptcy Judge.
On March 4, 2009, Matthew and Diana Mighell ("Debtors") filed a Chapter 11 voluntary petition. On September 18, 2009, the case was converted to Chapter 7. On August 26, 2010, Debtors received a standard discharge.
On January 19, 2016, Debtors filed a Motion for Contempt against Daniel Brown ("Brown"). On January 27, 2016, Brown filed his opposition. Debtors filed their reply on March 14, 2016. On April 4, 2016, an order to show cause why Brown
On May 20, 2016, Debtors filed a brief in support of their motion. On June 21, 2016, Brown filed his opposition brief. After a continuance on July 20, 2016, Debtors filed their reply brief on August 10, 2016. On September 14, 2016, Brown filed a motion to continue hearings, which was opposed by Debtors on September 21, 2016. On October 4, 2016, an amended order was entered continuing the hearing until December 7, 2016.
On November 13, 2016, Brown filed another opposition. On November 17, 2016, Debtors filed another reply. By document filed on November 29, 2016, Brown corrected certain technical flaws in his opposition. On November 30, an order was entered continuing the hearing until December 20. At the hearing on December 20, 2016, the Court took the matter under submission.
In December 2008, Debtors and Brown began discussions regarding representation of Debtors in a state court proceeding,
On September 9, 2010, Brown filed a fee application requesting $25,420 for services provided outside the scope outlined in the bankruptcy retainer. Brown's application made clear that these fees were accrued while Debtors were in a Chapter 11, prior to the conversion date. On September 15, 2010, Trustee objected on the basis that Brown failed to seek employment authorization from the court and failed to disclose any subsequent fee arrangement. On January 5, 2011, an order was entered denying the fee application.
On March 30, 2010, the underlying state court proceeding resulted in a jury verdict in favor of two of Debtors' companies in the amount of $1,066,000. Debtors appear to have then fired Brown immediately after the issuance of the state court verdict. The verdict was subsequently overturned on appeal.
On March 21, 2012, Brown filed a complaint against the Debtors in state court for breach of contract, breach of implied covenants, quantum meruit, unfair business practices, and fraud. The complaint requested damages in relation to both representation in the state court proceeding and in the bankruptcy proceeding. The complaint was amended on July 1, 2013, to drop all causes of action except quantum meruit. On October 21, 2013, Debtors filed a cross-complaint against Brown for negligence. On February 2, 2014, Debtors amended their cross-complaint to add causes of action for breach of fiduciary duty and deceit.
Debtors make the following arguments in support of their contention that Brown has violated the discharge injunction: (1) Brown's filing of the state court complaint violated the discharge injunction because the underlying services were provided pre-petition; (2) to the extent Brown is seeking repayment of fees associated with bankruptcy, those fees can only be paid pursuant to Bankruptcy Court order, but Brown's application has already been denied by the Court; (3) Brown has engaged in various dishonest billing practices; (4) Brown has harassed debtor-wife's mother and committed other unprofessional acts; and (5) Brown has violated attorney-client privilege. Only the first argument has merit. It is not clear how (2) through (5) are related to the discharge injunction.
Brown argues in response that all fees arose post-petition and are therefore not subject to the discharge injunction. Brown additionally contends that if the claims were discharged, he did not "willfully" violate the discharge injunction, because he subjectively believed the claims were not discharged at the time he filed the state court complaint.
There are two preliminary matters which allow quick disposition. First, to the extent that Brown is attempting to collect on a disputed claim for fees for bankruptcy services rendered post-petition and pre-conversion, that action is a violation of the discharge injunction. 11 U.S.C. § 348(b) (2010) provides:
Furthermore, the second page of the discharge issued by this court states: "If this case was begun under a different chapter of the Bankruptcy Code and converted to chapter 7, the discharge applies to debts owed when the bankruptcy case was converted." Therefore, while the bankruptcy services provided by Brown were provided post-petition, they were provided pre-conversion, and, therefore, were discharged. Second, there is extensive discussion and confusion regarding the actual merits and details of any claim Brown does or does not possess.
11 U.S.C. § 524(a)(2)(2010) states:
Section 524(a) can be enforced through the court's contempt power under 11 U.S.C. § 105(a). In re Bennett, 298 F.3d 1059, 1069 (9
The Ninth Circuit's comments on sanctions for violation of the automatic stay best illustrate the willfulness standard: "Willful violation does not require a specific intention to violate the automatic stay. Rather, the statute provides for damages upon a finding that the defendant knew of the automatic stay and that the defendant's actions which violated the stay were intentional." In re Pace, 67 F.3d 187, 191 (9
Given the quotations provided above, ZiLOG's footnoted comment that "willfulness" can depend upon subjective intent seems to be an aberration, and it seems to have been mostly ignored in subsequent authority within the Ninth Circuit. See, e.g., Espinosa v. United Student Aid Funds, Inc., 553 F.3d 1193, 1205, n.7 (9
In re Chionis appears to be the only case that recognized ZiLOG's deviation and thoroughly addressed the issue. 2013 WL 6840485 (9
Chionis then said that ZiLOG's statement was in the context of an unusual case — a case where the bankruptcy court itself had sent misleading notices. Id. at *7. This factual scenario is similar to the narrow exception that permits a criminal defense based upon mistake of law. See UNIFORM MODEL PENAL CODE § 2.04 (3)(b) (mistake of law defense permitted when one "acts in reasonable reliance upon an official statement of the law, afterward determined to be invalid or erroneous, contained in (i) a statute or other enactment; (ii) a judicial decision, opinion or judgment; (iii) an administrative order or grant of permission; or (iv) an official interpretation of the public officer or body charged by law with responsibility for the interpretation, administration or enforcement of the law defining the offense."). Chionis then stated:
Id. at *8. Given the compelling analysis presented in Chionis (which recognized that the factual situation in ZiLOG was analogous to that which would allow a mistake of law defense in most jurisdictions), the fact that the pre-ZiLOG interpretation of willfulness appears to have been retained by the vast majority of judges, and Supreme Court precedent which weighs against considering the subjective intent of the contemnor, the Court concludes that the proper standard is whether Brown: (1) knew of the discharge;
Here, it is clear that the actions at issue were intentional and that Brown knew of the discharge injunction, since he was actively involved in the bankruptcy case at the time. Therefore, the remaining question is whether there was, in fact, a violation of the discharge.
11 U.S.C. § 727(b) (2005) states, in part: "Except as provided in section 523 of this title, a discharge under subsection (a) of this section discharges the debtor from all debts that arose before the date of the order for relief under this chapter." A violation of the discharge occurs when: "(1) the creditor took an action to collect, recover or offset a particular debt as a personal liability of the debtor, and (2) such debt is a debt discharged under section 727. A debt is discharged if it arose before the date of the order for relief and has not been excepted from discharge as provided in section 523 of this title." In re Azevedo, 506 B.R. 277, 282 (Bankr. E.D. Cal. 2014).
11 U.S.C. § 101 (2010) defines debt as "liability on a claim" and defines claim as:
The definition of claim, and, therefore, damages, is thus extremely broad under the Bankruptcy Code. See e.g., In re Jensen, 995 F.2d 925, 929 (9
"To facilitate this broad definition and the fresh start policy, the Ninth Circuit ordinarily employs the `fair contemplation test' in determining when a claim arises." In re Gillespie, 516 B.R. 586, 591 (9
Id. at 1024. "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." Id. at 1026.
There is some confusion regarding the scope of the Ybarra exception. The Ybarra exception is clearly illustrated by its holding: "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." Ybarra, 424 F.3d at 1027 (emphasis added). This holding is tailored to ensure that the Debtor cannot obtain a post-petition benefit (the continued prosecution of litigation) while not being saddled with any corresponding duty to pay for that benefit. See, e.g., In re Gillespie, 516 B.R. 586, 591 (9
Matter of Hadden, a case not binding on this court, but relied upon by Ybarra, illustrates this principle. 57 B.R. 187 (Bankr. W.D. Wis. 1986). Hadden stated:
Id. at 188. Therefore, the initial question is whether the claim was incurred post-petition or pre-petition.
The Ninth Circuit, however, appears to have subsequently narrowed the scope of Ybarra, by reincorporating the "fair contemplation test":
In re Castellino Villas, A.K.F. LLC, 836 F.3d 1028, 1036 (9
Here, the Debtors unquestionably continued to pursue litigation post-conversion that had been initiated pre-conversion; the verdict was not rendered until more than six months after conversion. Therefore, some of the attorney's fees were incurred post-petition, but, in accordance with the narrowing of the Ybarra rule by Castellino Villas, followed by Baroni, even if the attorney's fees were incurred post-petition, Brown must still show they were outside the fair contemplation of the parties to survive discharge.
As Hadden makes clear, if an attorney fee arising from a contractual arrangement results in fees both pre-petition and post-petition, the fees that arise pre-petition are considered pre-petition claims that are subject to discharge. Therefore, it necessary to review Brown's claims which Debtors rely on to form the basis of their motion. Brown's most expansive state court complaint included eight causes of action: (1) breach of contract (oral contract); (2) breach of contract (contingency agreement); (3) breach of contract (bankruptcy agreement); (4) breach of implied covenants; (5) quantum meruit-unjust enrichment (state court proceeding); (6) quantum meruit-unjust enrichment (bankruptcy matters); (7) unfair business practices under § 17200; and (8) fraud. As shown below, each cause of action asserts either a pre-petition claim, or is a post-petition claim subject to discharge because it was within the fair contemplation of the parties at the time of conversion.
Brown alleges in his state court complaint that an oral contract was formed containing the general terms that would eventually form the two representation contracts. Brown simply alleges a general breach of that oral contract; the referenced exhibit, however, makes clear Brown is referring to a breach of that part of the agreement that deals with the state court proceeding. Because compensation as to that proceeding as governed by the "oral contract", according to the allegations made by Brown in his complaint, was based on a percent of money obtained, the fees would naturally arise post-conversion (at the time the state court judgment was rendered). The claim for attorneys' fees, however, would have been in the fair contemplation of the parties at the time of conversion since this oral contract was allegedly formed approximately nine months before conversion, and "a whole new course" of litigation was not begun. Therefore, under the "fair contemplation" standard
The second cause of action, for breach of the contingency fee agreement, requires separate analysis because the relevant contractual provisions are more extensive than those that comprise the alleged oral contract.
Section 4 of the contingency fee arrangement, titled "Legal Fees," states, in part:
Section 11, titled "Discharge and Withdrawal" states, in part:
The second cause of action in Brown's state court complaint appears to alternatively suggest that Debtors owed Brown pursuant to the contingency provision, and that Debtors owed Brown pursuant to the discharge/withdrawal provision of the representation agreement. The former, under the Ybarra rule, would have arose post-conversion, according to Brown's account and Section 4, since it would have matured at the time the state court judgment was issued. The latter, under the Ybarra rule, would also have arisen post-conversion, according to Brown's account and in accordance with Section 4 of the representation agreement, since the duty to compensation Brown for reasonable services would have matured at the time the state court judgment was issued. Nevertheless, under the In re Castellino Villas standard, attempting to collect on the basis of either provision would have been within the "fair contemplation" of the parties at the time of conversion, because the contract was formed pre-conversion and a new course of litigation was not initiated.
The third cause of action, for breach of the bankruptcy retainer agreement, is more straightforward. As Brown's fee application with the Court made clear, the services provided by Brown which Brown asserts were outside the scope of the flat fee arrangement were provided post-petition and pre-conversion. The relevant contractual provision relied upon by Brown states: "The $5,000.00 fee will be fixed, whether we spend less time, or if we spend more time on your Bankruptcy, unless unusual circumstances arise.... [u]nless unusual circumstances arise as described above, you will not be billed for hourly fees." Brown's third cause of action seeks to recover on hourly fees that were due to unusual circumstances. Because these fees were incurred pre-conversion, they were discharged. Therefore, this
Brown's fourth cause of action is for breach of the implied covenants of good faith and fair dealing. Brown alleges that this breach occurred because Debtors "breached their obligations of good faith and fair dealing by breaching the contracts, treating the Plaintiff unfairly, and committing fraud against the Plaintiff, all in such a manner as to deprive the Plaintiff from deriving any benefit whatsoever from any one or all three of the contracts that were entered into between the Plaintiff and the Defendants." While Brown's claim does not directly specify whether he believes this breach occurred pre-conversion or post-conversion, it would appear Brown has alleged that the continuing action of Debtors constituted the breach, with parts occurring both pre-conversion (fraud) and post-conversion (breach of contract). Because Brown has failed to differentiate between a pre-conversion claim (which would have been discharged) and a post-conversion claim (which would not have been discharged), the cause of action itself represents a violation of the discharge injunction since it seeks to recover, in part, on a discharged claim.
Brown's fifth cause of action is quantum meruit-unjust enrichment (legal services-civil matter). In California, "[t]he elements of quantum meruit are: (1) that the plaintiff performed certain services for the defendant, (2) the reasonable value [of the services can be determined], (3) [the services] were rendered at defendant's request, and (4) [the services] are unpaid." Moreno v. SFX Ent., Inc., 2015 WL 4573226 at *7 (C.D. Cal. 2015) (quoting Cedars Sinai Med. Ctr. v. Mid-W. Nat'l Life Ins. Co., 118 F.Supp.2d 1002 (C.D. Cal. 2000) (citing Haggerty v. Warner, 115 Cal.App.2d 468, 475, 252 P.2d 373 (Cal. Ct. App. 1953))). Chronologically, there are two actions: (1) defendant requests that plaintiff provide services, and (2) the performance of those services. The latter step must have two additional characteristics: (1) that the value of the services can be ascertained and that compensation was not received for those services. These characteristics are not events, however, and therefore the final event to occur which triggers liability under a theory of quantum meruit is the performance of the services. Here, services were performed both pre-conversion and post-conversion. Therefore, liability under a quantum meruit theory for the services performed pre-conversion would have arisen pre-conversion, and thus been discharged. Because liability under this cause of action was partially discharged, this cause of action is a violation of the discharge injunction.
Brown's sixth cause of action is quantum meruit-unjust enrichment (legal services-bankruptcy matters). Here, the entirety of the bankruptcy services were provided pre-conversion, and, therefore, liability under this claim was entirely discharged. Because liability under this cause of action was discharged, this cause of action is a violation of the discharge injunction.
Brown's seventh cause of action is unfair business practices under CAL. BUS. & PROF. CODE § 17200. Again this claim fails to distinguish between pre-conversion and post-conversion violations. "To bring a UCL claim, a plaintiff must show either an (1) unlawful, unfair, or fraudulent business act or practice, or (2) unfair, deceptive,
Brown's eighth cause of action is fraud. "Under California law, the elements of a claim for fraud are "(a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or `scienter'); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damages." Vaccarino v. Midland Nat. Life Ins. Co., 2003 WL 3200500 at *10 (C.D. Cal. 2013) (quoting Lazar v. Superior Court, 12 Cal.4th 631, 638, 49 Cal.Rptr.2d 377, 909 P.2d 981 (Cal. 1996). Chronologically, this means that three events must occur: (1) the misrepresentation, (2) the reliance on the misrepresentation, and (3) the incurrence of damages. Brown's account of the incurrence of damages states: "The Plaintiff has been harmed in that he has expended a very significant number of hours on the Defendants' legal matters and has incurred a number of costs related to these matters, but has not been paid or reimbursed at all by any of the Defendants for these items." Therefore, the damages were incurred, and the cause of action fulfilled (according to Brown's complaint), at the time Brown provided services. Because services were pre-conversion and post-conversion, the claim was partially discharged. Because liability under this cause of action was partially discharged, this cause of action is a violation of the discharge injunction.
Brown's first cause of action in the amended complaint is quantum meruit — reasonable value of work, labor, and services (civil matter). Here, services were performed both pre-conversion and post-conversion. Therefore, liability under a quantum meruit theory for the services performed pre-conversion would have arisen pre-conversion, and, therefore, been discharged. Because liability under this cause of action was partially discharged, this cause of action is a violation of the discharge injunction.
Brown's second cause of action in the amended complaint is quantum meruit — reasonable value of work, labor, and services (bankruptcy matter). Here, the entirety of the bankruptcy services were provided pre-conversion, and, therefore, liability under this claim was entirely discharged. Because liability under this cause of action was discharged, this cause of action is a violation of the discharge injunction.
For the reasons discussed above, the Court holds Brown in civil contempt for violation of the discharge injunction. Specifically, the Court finds Brown's first
Movant is required to submit evidence demonstrating actual damages and costs. The Court will hold a hearing on the issue of damages on March 22, 2017. Debtors' evidence and opening brief is due February 22, 2017. Brown's responsive brief, if any, is due March 1, 2017. Debtors' reply brief, if any, is due March 8, 2017.
IT IS SO ORDERED.
