The Ninth Circuit Bankruptcy Appellate Panel (the BAP) recently ruled that state laws which provide for attorney’s fee awards are applicable in bankruptcy litigation only if they are connected to the substance of the claims and are not dependent on misconduct or improper purpose of parties or attorneys. With this holding, the BAP reversed an award of attorney’s fees to a debtor based on a successful objection to a time-barred claim. LVNV Funding, LLC v. Andrade-Garcia (In re Andrade-Garcia), 2022 WL 98048 (9th Cir BAP 1/11/22).
To view the opinion, click here.
Debtor Antonia Andrade-Garcia (Debtor) filed a chapter 7, which was converted to a chapter 13 in 2017. In February 2018 LVNV Funding, LLC (LVNV) filed three proofs of claim, which attached documents which established the latest transaction dates were in 2006. Debtor filed objections to the claims, arguing that they were barred by the applicable Nevada statute of limitations based on the last transaction dates on the face of the claims. Debtor also requested attorney’s fees under NRS § 18.010(2)(b) which awards fees to a prevailing party when a court finds that a claim was brought without reasonable ground or to harass the prevailing party. The statute states its intent: “[to] punish for and deter frivolous or vexatious claims…[which] overburden limited judicial resources, hinder the timely resolution of meritorious claims and increase the costs of engaging in business and providing professional services to the public.” NRS § 18.010(2)(a)-(b).
In response to the objections, LVNV admitted the claims were outside the statute of limitations but opposed any award of attorney’s fees because filing the claims was not wrongful conduct under the holding of Midland Funding, LLC v Johnson, 137 S.Ct. 1407 (2017). After a hearing, the bankruptcy court disallowed the claims and determined Debtor, as the prevailing party, was entitled to fees by operation of the fee-shifting provision of NRS §18.010(2)(b). It distinguished Midland Funding as a Fair Debt Collection Practices Act case and ruled that because the claims were disallowed under Nevada law, its fee-shifting statute applied.
LVNV appealed to the BAP which reversed in a published opinion.
The BAP first noted that the Ninth Circuit has established when an award of attorney’s fees under state law in a bankruptcy proceeding is appropriate: “a prevailing party in a bankruptcy proceeding may be entitled to an award of attorney fees in accordance with applicable state law if state law governs the substantive issues raised in the proceedings.” Ford v. Baroff (In re Baroff), 105 F.3d 439, 441 (9th Cir. 1997) (emphasis added). Since the LVNV claims had been disallowed under Nevada law, the BAP was tasked with determining whether the fees were authorized as a matter of substantive law or if the provision allowing the fees was procedural in nature.
The BAP looked to the language of the statute to answer the question. Section 18.010 allows an award of fees to the prevailing party under two scenarios. Subsection (a) applies if the recovery is less than $20,000, inapplicable here because there is no ‘recovery” in a claim objection. Debtor had therefore used subsection (b), which as noted above states its intent is to punish for or deter frivolous or vexatious claims and defenses. The factual predicate for a subsection (b) award is the opposing party’s action in filing or maintaining a groundless claim. Here that action was filing a time-barred claim. The BAP concluded such conduct was procedural and therefore federal, not Nevada, law would apply to determine whether any fees could be awarded.
Considering the federal procedural right to fees, the BAP looked at prior BAP authority, B-Real, LLC v Chaussee (In re Chaussee), 399 B.R. 225, 233 (9th Cir. BAP 2008), which held that the Bankruptcy Code preempts substantive state law remedies stemming from improperly filing bankruptcy claims. Moreover, Midland Funding noted that since a claim is a “right to payment,” which is broad enough to encompass unenforceable claims, and a statute of limitations defense must be raised as an affirmative defense, just filing a time-barred claim is not improper conduct. Therefore, the statute in question could not give rise to a fee award for frivolous behavior because the claim was not groundless. Therefore, the fee award was reversed because the relevant Nevada statute was a procedural remedy and no sanctionable conduct occurred under federal law.
Based on the Ninth Circuit authority in Baroff, this is the correct decision. The Nevada statute was not just a fee-shifting provision because it was intended to deter improper conduct in a judicial setting. That stated purpose makes it a procedural remedy, unrelated to the substantive reason these claims were disallowed. The case law regarding an award of attorney’s fees under state law provisions in a bankruptcy proceeding is complex. It must be analyzed by counsel on a case by case basis. This decision adds to the issues which a fee applicant must address when seeking a prevailing party award in bankruptcy court.
It is easy to understand why the bankruptcy court awarded fees here. Multitudes of time-barred claims are filed regularly in bankruptcy proceedings. When they are filed in a Chapter 13, counsel must make a cost-benefit analysis of whether it is in the best interest of the debtor to object – i.e., will the fees incurred in objecting exceed what the claimant might be paid under a low percentage plan. Those fees, if allowed, will burden the debtor or diminish the return to other legitimate creditors, or both. If the bankruptcy court can ease that burden by ordering the claimant to pay attorney’s fees, the entire system will function more fairly for all. Unfortunately, that outcome here was not successful.
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.