In re DiBattista (2nd Cir.)

The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:

SUMMARY

In a recent published opinion, the Second Circuit Court of Appeals (the Court) held that a debtor who successfully defends an appeal of an order finding a creditor in contempt for violation of the discharge injunction is entitled to an award of appellate attorney’s fees as part of the sanctions which are available for such a finding. In re DiBattista, 2022 WL 1548286 (2nd Cir. May 17, 2022).

To view the opinion, click here. 

FACTS

In 2009 debtor Bret S. DiBattista (debtor) filed a chapter 7 bankruptcy case. The bankruptcy court entered a discharge order which released the debtor from liability for most of his debts, including his mortgage. Despite that order, the servicer of that mortgage, Selene Finance L.P. (Selene), made continuous attempts to collect on the delinquent mortgage payments, including reporting the delinquency to the credit agencies. The debtor reopened his case in 2019 and commenced a contempt proceeding against Selene for violation of the discharge order, seeking sanctions. The bankruptcy court found Selene in contempt and awarded the debtor $9046.60 in legal fees and $17,500.00 for damages.

Selene appealed that award to the district court which upheld the contempt finding but remanded for a clarification of the basis for the damages. On remand, the bankruptcy court clarified its reasoning and again awarded the $17,500.00 in compensatory damages. Debtor’s counsel then moved the court for an award of the appellate attorney’s fees incurred in defending the appeal. The bankruptcy court denied the fees, concluding that taking the appeal was not further contempt of the discharge order and also ruling that the debtor needed to request the fees from the district court. Debtor’s counsel appealed that decision to the district court, which affirmed the denial, concluding that a “bankruptcy judge has simply not been empowered by Congress to award legal fees incurred in connection with an appeal to the district court.”

Debtor’s counsel appealed to the Court, which reversed the lower courts’ legal conclusions and remanded for the bankruptcy court to rule on the reasonableness of the fees.

REASONING

The Court noted two provisions of the Bankruptcy Code which bear on the authority of the bankruptcy court to award attorney’s fees. First, § 524 which provides for a discharge order which operates as an injunction against any action against a debtor based on a discharged debt. Second, § 105 which empowers the bankruptcy court to “issue any order…that is necessary … to carry out the provisions of this title.” The combination of those statutory provisions authorizes the bankruptcy court to impose civil contempt sanctions, which can include an award of attorney’s fees and damages. Notwithstanding those provisions, the lower courts reasoned that no fees could be awarded because the appeal was not a violation of the discharge order and because the request had to be made in the first instance to the district court. The Court disagreed on both counts.

Second Circuit authority, Weitzman v Stein, 98 F. 3d 717 (2nd Cir. 1996), controlled the outcome here. In Weitzman, a non-bankruptcy contempt proceeding, the Court had ruled that appellate fees could be awarded as part of the contempt sanction because “ultimately ‘none of this [litigation] would have been necessary’ if the contemnor had simply obeyed the district court’s order.” Id. The Court saw no reason why the outcome here should be any different, particularly because a “failure to compensate the victim of contempt with appellate fees could leave the victim worse off for seeking to enforce a discharge order…” Moreover, since the bankruptcy court had made the finding of contempt and was empowered by § 105 to award sanctions, including fees, it was empowered to award all fees caused by the contempt.

The Court rejected Selene’s attempt to distinguish Weitzman, depending on whether the contempt victim was the appellant or appellee, concluding that it was the debtor’s success on appeal which entitled him to fees. Other arguments were summarily rejected, resulting in the reversal and remand.

AUTHOR’S COMMENTS

This decision reminds me of the Ninth Circuit’s en banc decision in In re Schwartz-Tallard, 803 F. 3d 1095 (9th Cir. 2015), whereby the circuit reversed its own precedent and ruled that fees incurred in appellate defense of an order finding a violation of the automatic stay (awarding damages and fees) could also be awarded under the court’s contempt power. Although that decision was based on the statutory right to fees provided by § 362(k), the rationale behind the holdings was the same. If a party is entitled to an award of attorney’s fees in the trial court, ordinarily that party is entitled to recover fees incurred in successfully defending the order on appeal. Therefore, at least two circuits have empowered bankruptcy courts to award appellate fees for order violations, rulings that seem totally correct since the fees arose only because of the contemnor’s acts. Section 105 still has meaning in that context.

This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.