SARAH SHARER CURLEY, Bankruptcy Judge.
This matter comes before the Court on a "Motion for Order Establishing that Country Mutual's Claim for Post-Effective Date Attorneys' Fees is Not Subject to Being Discharged Under Debtor's Plan" (the "Motion") filed on October 31, 2013 by Country Mutual Insurance Company ("Country"). Timothy Ray Wright ("Debtor" or "Wright") filed a Response on November 18, 2013, and Country filed a Reply on November 27, 2013. The Court held a hearing on the matter on December 3, 2013, and took the matter under advisement at that time.
In this Memorandum Decision, the Court has set forth its findings of fact and conclusions of law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure. The issues addressed herein constitute a core proceeding over which this Court has jurisdiction. 28 U.S.C. §§ 1334(b) and 157(b) (West 2013).
The Debtor filed his Chapter 11 petition on December 14, 2009. Prior to the petition date, on or about January 23, 2009, Wright filed a lawsuit against Country and others in the Maricopa County Superior Court, CV2009-002285 (the "State Court Lawsuit"), arising out of claims for damages and a turnover of insurance proceeds under Policy No. A02K6384937 for damage resulting from a fire on January 25, 2008, at the residence located at 9121 N. 69th Street, Paradise Valley.
On May 21, 2010, Country filed its original Proof of Claim ("POC") with this Court, asserting a claim for attorneys' fees and costs incurred in the State Court Lawsuit in the amount of $28,41.69.
The Debtor filed an Objection to Country's claim on January 25, 2012, and Country filed a Response on February 8, 2012. Thereafter the parties filed a Stipulation resolving the Debtor's objection to Country's proof of claim on March 16, 2012.
The Court entered an order confirming the Debtor's Plan of Reorganization on May 17, 2012. The Plan's Effective Date was June 1, 2012 (the "Effective Date").
Country argues that the March 16, 2012 Stipulation between the parties specifically left open the issue of whether any post-confirmation fees and costs awarded to Country in the State Court Lawsuit would be subject to discharge in the bankruptcy case. Country requests that the Court enter an order holding that the post-effective date fees and costs are not subject to discharge. According to Country, Wright chose to pursue his claims against Country following the confirmation of the Plan, and is, therefore, personally responsible for the Post-Confirmation Fee Award (fees and costs incurred by Country after the Plan's Effective Date).
The Debtor makes two arguments. First, Wright argues that the motion is time-barred because Country failed to file an objection to the Debtor's discharge by the November 29, 2011 deadline set forth in the Court Order dated October 13, 2011.
The Motion is not time-barred. In this case, Country is not seeking to deny Wright a discharge, nor is Country seeking an order excepting the attorney's fees and costs from discharge under Bankruptcy Code Section 523. Rather, Country is seeking a finding that the Post-Confirmation Fee Award, that is contained in the state court judgment and rendered after the Effective Date of Wright's Plan, does not constitute a pre-petition or pre-confirmation claim that may be discharged as a part of Wright's Plan.
There is, however, a separate basis to conclude that Country's Motion is not time-barred. The parties entered into a Stipulation preserving their respective rights as to whether Country had a pre-petition or pre-confirmation debt concerning certain attorneys' fees and costs that were incurred in the State Court Lawsuit. Country does not argue that its debt is based on fraud or other proscribed conduct, nor does Country argue that its debt is the type of enumerated debt, such as child support or taxes, that would be excepted from discharge under Section 523. Therefore, the bar-date under Section 523 cannot apply to this dispute. Country does not argue that Wright should be denied a discharge for improper actions pursuant to Section 1141(d)(2). In fact, Country has consistently stated that it does not object to Wright receiving a discharge under Section 1141(d). Rather, Country seeks a final determination as to when a certain portion of its debt arose. Such a determination is not within the parameters of an objection to a debtor's discharge and, thus, cannot be subject to being time-barred. Therefore, the Court concludes that Country's Motion is not time-barred.
The parties agree that there are no controlling Ninth Circuit decisions that are directly on point. However, there are several decisions that assist the Court in its analysis of the issues presented herein.
In the decision of Siegel v. Fed. Home Loan Mortgage Corp., 143 F.3d 525, 534 (9th Cir.1998), Siegel and Gerber, his partner, executed two promissory notes that were secured by two deeds of trust and other collateral on separate parcels of real property. Siegel and Gerber experienced financial problems, and attempted to sell one of the properties. They subsequently defaulted on the obligations, and the creditor foreclosed on the property. When the creditor sought a deficiency judgment in the federal district court, Siegel filed a Chapter 7 bankruptcy petition. The creditor subsequently filed two proofs of claim, one for each property, since Siegel had by then defaulted on the obligation as to the second property. Neither Siegel nor the trustee filed an objection to the proofs of claim. In March of 1994, the creditor moved for relief from the automatic stay to proceed with foreclosure of the second property, and the Court granted the relief requested. In relatively quick succession, on June 10, 1994, Siegel received his discharge, and on June 30, 1994, the case was closed. On August 2, 1994, the creditor foreclosed on the second property.
In April of 1994, while Siegel's Chapter 7 case was pending, Siegel and Gerber commenced an action in the Superior Court of the State of California, alleging
The Ninth Circuit discussed the "interesting, but ineffective" tactic of Siegel. Id. at 531. Siegel never objected to the creditor's proofs of claim, when doing so would have rendered Siegel solvent if he were successful. Rather, Siegel chose to file his separate action against the creditor even before Siegel's case was closed. The Ninth Circuit described his tactics as discharging his obligations to the creditor, "while keeping his own claims against it." Id.
As to the creditor's request for attorneys' fees, the deeds of trust provided for their recovery, if the lender pursued rights thereunder. The bankruptcy proceedings did not alter, amend, or vitiate such a valid contractual provision. Siegel's discharge only extinguished his personal liability. Id. As to Siegel's personal liability, he was discharged from all debts that arose before the filing of his Chapter 7 petition. Thus, the Ninth Circuit concluded that the issue could be resolved if it determined when the attorneys' fee debt arose. Id. at 532. The parties agreed that Siegel executed the relevant loan documents prior to when he filed his bankruptcy petition, but Siegel's act or conduct that gave rise to the creditor's attorneys' fee award occurred post-discharge.
The question of when the debt arises under the Bankruptcy Code is governed by federal law. The Bankruptcy Code defines a debt as a "liability on a claim." 11 U.S.C. § 101(12)(West 2013). The term debt "is therefore coextensive with [the definition of a] `claim.'" Id. at 532 citing In re Daghighfekr, 161 B.R. 685 (9th Cir. BAP 1993). 11 U.S.C. § 101(5)(A)(West 2013) defines a claim as a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured: or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured." This broad definition of claim ensures that all legal obligations of the debtor, "no matter how remote or contingent," will be dealt with in the bankruptcy proceedings. 143 F.3d at 532.
The Ninth Circuit concluded that the discharge had freed Siegel from the "untoward effects of contracts he had entered into." Unlike a corporation's obligations to indemnify an officer for attorneys' fees that was a form of compensation set forth in a pre-petition contract that did not accrue until the officer incurred the attorneys' fees post-petition, Siegel did not need to wait to determine what others might do as to whether any actual liability attached to Siegel. Rather, Siegel "choose to return to the fray and to use the contract as a weapon. It is perfectly just, and within the purposes of bankruptcy, to allow the same weapon to be used against him." Id. at 533.
Since the attorneys' fees awarded pursuant to a contract are considered a part of the contract and may be discharged at the
Id. at 534. Thus, Siegel was responsible for the attorneys' fees under the contract.
The decision of In re Ybarra reached the same result on similar facts. The chapter 7 trustee negotiated a settlement with the creditor, a creditor which the debtor had sued prepetition. Subsequently, the Bankruptcy Appellate Panel reversed the bankruptcy court's decision that the cause of action was not exempt, so the debtor was then given the choice of either accepting the settlement that the trustee had negotiated or taking ownership of the lawsuit. The debtor chose the latter, and incurred $456,884.03 in attorneys' fees. Following the decision of In re Siegel, the Ninth Circuit held that "post-petition attorney fee awards [were] 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." In re Ybarra, 424 F.3d 1018, 1024 (9th Cir.2005). See also In re Lees, 2-03-06143 PHXCGC, 2007 WL 1992127 (Bankr.D.Ariz. July 5, 2007) (holding that attorneys' fees were not discharged where chapter 7 debtor continued litigation post-petition.)
Although chapter 7 cases, the decisions of Ybarra and Siegel cite to In re Sure-Snap Corp., 983 F.2d 1015, 1017 (11th Cir.1993), which was a chapter 11 case. In Sure-Snap, the Eleventh Circuit held that confirmation of a debtor-mortgagor's Chapter 11 plan did not discharge the debtor of a contractual attorneys' fee obligation incurred post-confirmation as result of its appeal from a pre-confirmation order upholding the validity of a mortgage agreement. Id. In another decision, Nukote Int'l, Inc. v. Office Deport, Inc., 09-82363-CIV, 2011 WL 2784565 (S.D.Fla. July 14, 2011), the debtor/plaintiff had commenced a pre-petition a state court case and later filed a chapter 11 petition. The debtor had sued Office Depot for breach of contract, misrepresentation and several claims under the Bankruptcy Code. Again, presumably any recovery would have benefitted the unsecured creditors. However, the court concluded, as did the Sure-Snap court, that the confirmation of the debtor's chapter 11 plan discharged the debtor from its pre-confirmation liabilities only. Thus, with little discussion, the court concluded that the debtor was personally liable for post-confirmation fees and costs. Id.
Wright relies primarily on the decision of In re SNTL Corp., 571 F.3d 826 (9th Cir.2009) in support of his position.
The Ninth Circuit affirmed the Bankruptcy Appellate Panel decision of In re SNTL Corp., 380 B.R. 204 (9th Cir. BAP 2007) and adopted the Panel opinion as the opinion of the Circuit. SNTL Corporation and its affiliates filed Chapter 11 petitions on April 26, 2000. SNTL confirmed its plan of reorganization, became SNIG pursuant to said plan, a litigation trust was formed, and a litigation trustee ("Trustee") was appointed. The Centre Insurance Company ("Centre") had filed a proof of claim in excess of $294,488,911, including $3 million in attorneys' fees, but not including contingent and unliquidated amounts. In March 2005, Centre filed an amended proof of claim. The Trustee objected to the proof of claim and its amendment. The Trustee asserted that Centre had released its claims against SNIG pre-petition, that the released claims could not be revised post-petition, and that Centre could not include attorneys' fees incurred post-petition. Id. at 830.
The Panel determined that at least a portion of Centre's claim was not released pre-petition, because when Centre returned a preferential payment, the liability of SNIG's predecessor, SNTL, was revived. Id. at 834-838. Under Section 502(b)(1), a claim is not allowable if it is unenforceable "for a reason other than because such claim is contingent or unmatured." Id. at 838. Centre had a contingent claim, but the contingency was removed post-petition. The removal of the contingency, however, did not result in the disallowance of the claim. Id.
The Panel next considered whether attorneys' fees and costs would be awarded to Centre although they were incurred post-petition. The Panel stated that the United States Supreme Court did not resolve the issue in Travelers, but simply remanded the matter to the Ninth Circuit. Travelers Cas. and Sur. Co. of America v. Pacific Gas & Elec. Co., 549 U.S. 443, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007). The Panel first discussed the interplay between Section 502, the disallowance of claims, and Section 506, the treatment of secured claims. The Panel concluded that Section 506 does not bar attorneys' fees for all but over-secured creditors. If Congress intended such a result, it would have so stated in Section 502. Id. at 841-842.
The Panel then considered the date the claim arose and whether that should include attorneys' fees that were incurred post-petition. However, the Panel's focus was on Section 502(b)(1) and the statement that the court shall consider the claim "as of the date of the filing of the petition." The Panel stated that the parties execution of the prepetition agreement gave rise to a contingent, unliquidated attorney-fee claim. So long as the right to collect the fees existed pre-petition, the fact that the fees were actually incurred post-petition did not preclude recovery as part of an allowable pre-petition claim for the fees. Id. at 843.
An individual debtor poses a more nuanced approach. The individual debtor does not receive a discharge upon confirmation of the plan. 11 U.S.C. § 1141(d)(5)(West 2013). In this case, Wright did not receive a discharge upon confirmation of his Plan. The State Court Lawsuit also remained an asset of the bankruptcy estate post-confirmation. However, as discussed in more detail hereinafter, without full disclosure of the risks associated with the State Court Lawsuit to his creditors, Wright chose to pursue his claims, because he would receive a substantial benefit for himself, with little or no benefit for his unsecured creditors.
In this case, the Court's order confirming his Plan states that the Reorganized Debtor "shall retain and may (but shall not be required to) investigate and prosecute all of the Debtor's claims and causes of action." See Confirmation Order, DE 1787, Paragraph 37, Page 6, Lines 25-28. The Order also bifurcates the Country claim into two separate types of Reserved-For Claims: one, a general, unsecured claim; the other, an administrative expense.
During oral argument, the Court also reviewed the Disclosure Statement to the Fourth Amended Plan of Reorganization of the Debtor and discussed it with the parties. Of concern to the Court was the lack of disclosure to the creditors and interested parties of the risks associated
Post-confirmation litigation is unique. As noted previously, the Court and the parties are unable to locate any decision that decides the issue in the context of the chapter 11 case filed by an individual. An objective review of the litigation is necessary to determine when the liability that is incurred post-confirmation actually arises. Given the facts of this case, the Court concludes that the Debtor must be responsible for the Post-Confirmation Award. The Award shall not be subject to a discharge, and shall remain the sole liability of Wright.
Although Wright argues that certain issues as to whether the Post-Confirmation Award is property of the estate and whether Wright's fiduciary duties to recover the Award as property of the estate are relevant to the Court's decision, the Court disagrees. The Court concludes that the critical issue is when the Post-Confirmation Award arose: pre-petition, post-petition, or post-confirmation. The Court has answered that question: post-confirmation. As such, the Debtor is personally responsible for the Award, and the Post-Confirmation
Based upon the foregoing, the Court concludes that the Post-Confirmation Award of Country is not subject to discharge in this case. Wright shall be personally liable for payment of the Post-Confirmation Award in full, and said Award shall survive the discharge granted to Wright in this case. Country is to lodge an appropriate form of order that is consistent with this decision.
