Business Law

BAP holds that Section 108(c) does not toll California limitations period

The following is a case update analyzing a recent case of interest:

SUMMARY

In Phillips v. Gilman (In re Gilman), 603 B.R. 437 (9th Cir. BAP 2019), the U.S. Bankruptcy Appellate Panel of the Ninth Circuit ruled that following a bankruptcy filing, 11 U.S.C. § 108(c)(2) does not toll the two-year period for requesting postpetition, post-judgment fees and costs under California Code of Civil Procedure § 685.080.  

To read the full published decision, click here.

FACTS

Prepetition, Tammy R. Phillips and Tammy R. Phillips, a Professional Corporation (together, “Phillips”) obtained an $8,250 state court judgment against Kevin Gilman (“Debtor”).  The state court had awarded Phillips $100,000 in attorneys’ fees, however Phillips still sought a total award of $1 million in fees. 

In 2011, Debtor filed for bankruptcy protection under chapter 7.  Debtor claimed a homestead exemption in real property located in Van Nuys, California.  Phillips commenced an adversary proceeding seeking to deny Debtor’s discharge, and sought an order that Phillips was entitled to attorneys’ fees and costs as a part of the litigation. The bankruptcy court agreed, reasoning that the adversary proceeding was a part of judgment enforcement under California Code of Civil Procedure § 685.040.  Phillips did not request an award of the fees and costs at that time and the bankruptcy court did not rule on the appropriateness of any fees and costs.

Later, in the main bankruptcy case, Phillips successfully objected to the Debtor’s request for an enhanced homestead exemption.  Litigation to block the entirety of the homestead exemption remained pending.  After prevailing in part on the homestead exemption objection, Phillips moved for an award of fees and costs in the amount of $765,425 under CCP § 685.040 – all of which were incurred postpetition and in the main bankruptcy case.

After prevailing in the discharge denial litigation, Phillips moved for an award of another $1.4 million in fees plus costs under CCP § 685.040.  The bankruptcy court granted the fee request motions in part, but at significantly reduced amounts.  For the main bankruptcy case, the court awarded $134,214.50 in fees and $3,693.16 in costs.  For the adversary proceeding, the court awarded $162,613.60 in fees and $3,839.98 in costs.  The bankruptcy court determined that $322,000.05 of fees in the bankruptcy case and $942,154 of fees in the adversary proceeding were time-barred under CCP § 685.080.

REASONING

The BAP affirmed.  CCP § 685.040 authorizes post-judgment fees and costs in certain situations for enforcing a judgment.  CCP § 685.080 requires that if a judgment creditor files a motion to add post-judgment fees and costs, the motion must be filed before the judgment is satisfied, but not later than two years after the costs have been incurred.  The BAP rejected Phillips’ first argument that the bankruptcy court erred because they relied on Rule 54 of the Federal Rules of Civil Procedure, rather than CCP § 685.040, for several reasons:  Phillips failed to raise that argument at the bankruptcy court, Rule 54 does not contain an independent basis for a fee award, and the argument was inconsistent with arguments raised by Phillips at the bankruptcy court.

With respect to the discharge denial litigation, Phillips argued that the two-year period does not begin to run until the court enters the order denying discharge – i.e., when the party knows it prevailed in the litigation. The BAP rejected that argument, too.  Phillips claimed fees for enforcing the state court judgment, rather than for the discharge litigation. The BAP highlighted that Phillips was not seeking to enforce the discharge judgment, but rather the state court money judgment.  The BAP similarly rejected Phillips’ arguments that equitable tolling, federal preemption, the rule against interpreting statutes to permit mischief or absurdity, and other estoppel theories applied.  The BAP also ruled that the protections of CCP § 685.080 are not forfeited if section 685.050 is not plead as a defense. 

Finally, the BAP ruled that section 108(c) of the Bankruptcy Code did not toll CCP § 685.080 for postpetition fees.  Section 108(c) provides that when nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a nonbankruptcy court on a claim against the debtor or co-debtor protected under Sections 1201 or 1301, and such period has not expired before the petition date, then the period does not expire until the later of: (i) the end of such period, or (ii) 30 days after notice of the termination or expiration of the automatic stay or the co-debtor stay. 

The BAP held that Section 108(c) did not apply because the incurrence of the postpetition fees in objecting to the discharge and the homestead exemption did not occur before a nonbankruptcy court.  Further, Section 108(c) only applies to prepetition time limitations and all fees at issue were incurred postpetition.  Moreover, the automatic stay did not prohibit the incurrence of fees.

AUTHOR’S COMMENTARY

This opinion provides a cautionary tale on what to do to avoid having post-judgment enforcement fees and costs denied following a bankruptcy filing.  Judgment creditors have the option of filing a motion or a memorandum of costs to claim the fees.  It would have been more helpful had the BAP discussed the memoranda procedure in connection with a bankruptcy case as well.  Footnote 9 to the decision seems to suggest that creditors may file memoranda at 2-year intervals during litigation though the court may not rule on them until the conclusion of the litigation.  For cases where there is a clear proportionality issue, such as this one where the underlying judgment was for $8,250 yet the fees rocketed above a million dollars, filing memoranda may be a more efficient route for preserving the right to fees and costs instead of constantly preparing detailed fee motions, particularly where the only benefit to prevailing on the fee motion results in an enlarged unsecured claim that will still not be paid in full or which is self-dilutive.

These materials were written by Michael J. Gomez of Frandzel Robins Bloom & Csato, L.C. in Fresno, California (mgomez@frandzel.com).  Editorial contributions were provided by Maggie E. Schroedter of Higgs, Fletcher & Mack, LLP in San Diego, California (schroedterm@higgslaw.com).  Mr. Gomez and Ms. Schroedter are members of the Insolvency Law Committee.

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