Business Law

Rushmore Loan Mgmt. Servs., LLC v. Moon (In re Moon), 2021 Bankr. LEXIS 27 (B.A.P. 9th Cir. 2021)

The following is a case update written by Leonard Gumport analyzing a recent case of interest.

Summary

In Rushmore Loan Mgmt. Servs., LLC v. Moon (In re Moon), 2021 Bankr. LEXIS 27 (B.A.P. 9th Cir. 2021) (unpublished), the United States Bankruptcy Appellate Panel for the Ninth Circuit (“BAP”) ruled that attorney’s fees and costs are recoverable under 11 U.S.C. § 362(k)(1) even if the debtor is not personally liable for their payment and has not signed a fee agreement. A copy of Moon 2 can be found here.

Facts

On March 26, 2013, Willie N. Moon (“Willie”) and Adnette M. Gunnels-Moon (“Adnette”) (collectively, the “Moons”) filed a joint petition for relief under chapter 13 (the “Case”) in the United States Bankruptcy Court for the District of Nevada. Among Adnette’s creditors was Rushmore Loan Management Services, LLC (“Rushmore”), which held a promissory note and underwater junior trust deed from Adnette. The Moons’ creditor mailing matrix contained an incorrect address for Rushmore. 

On April 7, 2014, the bankruptcy court confirmed the Moons’ amended chapter 13 plan, which provided for monthly payments over approximately two years. The plan did not provide for payments to Rushmore, and it first received informal notice of the Case in December 2014, during a telephone call with Willie. On September 28, 2016, the bankruptcy court granted the Moons a discharge. On October 3, 2016, the bankruptcy court closed the Case.

In November 2018, the Moons consulted with attorney Christopher P. Burke (“Burke”), who was not their prior counsel in the Case. The Moons did not enter into a written fee agreement with Burke. On January 4, 2019, on behalf of the Moons, Burke applied for and obtained an order reopening the Case. On January 18, 2019, on behalf of the Moons, Burke filed a motion (the “Contempt Motion”) for civil contempt sanctions and damages under 11 U.S.C. § 362(k)(1) against Rushmore for violating the automatic stay and the discharge injunction.

On February 25, 2020, following a two-day evidentiary hearing, the bankruptcy court filed its decision (the “2/25/20 Decision”) on the Contempt Motion. The bankruptcy court ruled that Rushmore willfully violated the automatic stay during December 2014-September 2016. The bankruptcy court awarded $100,742.10 in compensatory damages to the Moons against Rushmore for willfully violating the automatic stay, plus $200,000 in punitive damages. The bankruptcy court ruled that it would award fees and costs to the Moons in an amount to be determined. In the 2/25/20 Decision, the bankruptcy court ruled that Rushmore was not liable for civil contempt of the discharge injunction because the Moons did not prove when Rushmore had actual knowledge of the discharge injunction. Rushmore and the Moons filed appeals to the BAP from the 2/25/20 Decision.

On March 6, 2020, on behalf of the Moons, Burke filed a motion (the “Fee Motion”) for an award of attorney’s fees and costs to the Moons against Rushmore pursuant to 11 U.S.C. § 362(k)(1). The Moons filed an amended Fee Motion on March 11, 2020. The fees sought totaled $56,150 for 112.3 hours of Burke’s time at an hourly rate of $500 for services rendered during November 2016 through April 2020. The Fee Motion sought total costs of $10,857. The amended Fee Motion sought a fee enhancement of 50% above the requested lodestar amount. On April 1, 2020, Rushmore filed opposition to the Fee Motion.

On May 29, 2020, in In re Moon, 2020 Bankr. LEXIS 1430 (Bankr. D. Nev. 2020), the bankruptcy court entered an order (the “Fee Order”) that awarded $56,150 in attorney’s fees and $10,857.94 in costs in favor of the Moons and against Rushmore. The bankruptcy court denied the requested fee enhancement. From the Fee Order, Rushmore appealed, and the Moons cross-appealed.

On January 7, 2021, in Rushmore Loan Mgmt. Servs., LLC v. Moon, 2021 Bankr. LEXIS 28 (B.A.P. 9th Cir. 2021) (“Moon 1”), the BAP affirmed in part and vacated and reversed in part the 2/25/20 Decision. The BAP affirmed the bankruptcy court’s ruling that Rushmore willfully violated the automatic stay as to Adnette. The BAP vacated the $100,000 in emotional distress damages awarded to Willie; vacated the $200,000 punitive damages award; and remanded to the bankruptcy court for further consideration of punitive damages.

On the same day, in Moon 2, the BAP affirmed in part, vacated, and reversed in part the bankruptcy court’sruling on the Fee Motion. The BAP remanded to the bankruptcy court to “reconsider the attorney’s fee award in all respects.” Moon 2, 2021 Bankr. LEXIS 27, at 3. 

Reasoning

In Moon 2, the BAP decided that “the Moons ‘incurred’ and could recover attorney’s fees and costs under § 362(k)(1) even though they had not paid any fees to Mr. Burke nor were they expected to pay him out-of-pocket for his services.” Id. at 13-14.

First, the BAP concluded that precedent showed that 11 U.S.C. § 362(k)(1) is a fee-shifting statute and should be construed by analogy to other federal fee-shifting statutes. In American Servicing Company v. Schwartz-Tallard (In re Schwartz-Tallard), 803 F.3d 1095, 1099-1101 (9th Cir. 2015) (en banc), the Ninth Circuit Court of Appeals held that § 362(k)(1) is a “fee-shifting statute” that entitles a debtor to attorney’s fees and costs. Moon 2, at 7.

Interpreting other federal fee-shifting statutes, the Supreme Court and the Ninth Circuit have held that fees and costs were incurred even when the plaintiff was not personally liable for them. Id. at 10. “This is true whether counsel is representing the plaintiff on a contingent fee basis or pro bono publico.” Ibid. Bankruptcy courts within the Ninth Circuit have held that attorney’s fees were recoverable under 11 U.S.C. § 362(h), the statutory predecessor of § 362(k)(1), even though the services were provided on a contingent fee basis. Id. at 11-12. Cases stating that § 362(k)(1) is not a fee-shifting statute “flat-out contradict” Ninth Circuit law. Id. at 12.

Second, the BAP concluded that the purpose of § 362(k)(1) would be defeated if debtors had to incur personal liability for their attorney’s fees and costs as a condition to recovering them from the defendant. The BAP stated: “To hold that a debtor ‘incurs’ the ‘actual damages’ of attorney’s fees only if the debtor is personally liable for paying them would defeat the statute’s purpose: making it possible for injured, impecunious debtors to obtain counsel to bring suit and vindicate their rights against violators of the automatic stay.” Id. at 13.  

Third, the record reflected that the Moons had an obligation to pay their attorney. The BAP stated: “[T]o the extent it was necessary, the Moons’ testimony established that they were obligated to pay Mr. Burke in the event they prevailed and there was a recovery of attorney’s fees from Rushmore.” Id. at 14. It was reasonable to infer from the trial testimony of the Moons “that they intended to turn over to Mr. Burke whatever amount of attorney’s fees they were awarded in the action against Rushmore.” Ibid.

Fourth, the lack of a written fee agreement did not defeat the Moons’ right to an award of fees and costs under 11 U.S.C. § 362(k)(1). Id. at 14. The oral agreement between the Moons and Burke did not violate Rule 1.5(c) of the Nevada Rules of Professional Conduct, requiring contingent fee agreements to be in writing. Burke did not seek a contingent fee, i.e., payment via a percentage of the Moons’ recovery. Rushmore did not cite any Nevada authority “where an attorney was denied fees or a fee was reduced in a fee-shifting context because of the lack of a written fee agreement.” Id. at 14 n.6. The BAP noted that “it would have been better practice” to have a written fee agreement. Id. at 14.

Fifth, the BAP stated that Rushmore “raised other arguments before the bankruptcy court that it appears to have abandoned on appeal.” Moon 2, at 4 n.4. Those arguments included arguments relying on 11 U.S.C. § 329(a) and Fed.R.Bankr.P. 2016, “which were not relevant here.” Ibid.

The BAP vacated the Fee Order and remanded for reconsideration by the bankruptcy court. The bankruptcy court’s Fee Order did not explain why it awarded fees under § 362(k)(1) “for what appears to be time spent on the discharge injunction violation.” Id. at 15.

In addition, the BAP’s decision in Moon 1, reversing and vacating in part the 2/25/20 Decision,required a remand and reconsideration of the Fee Order. On remand, the bankruptcy court could reconsider whether to award a fee enhancement. Moon 2,at 16.  

Author’s Comments

11 U.S.C. § 362(k)(1) provides: “Except as provided in paragraph (2), an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.” An evident purpose of this statutory text is to mandate the recovery of all actual damages, including attorney’s fees and costs, incurred by an individual debtor who is injured by a willful violation of the automatic stay. Less evident is whether this statutory text mandates the award of attorney’s fees and costs when the debtor has not paid for them and has no obligation to pay for them. To date, the Supreme Court and the Ninth Circuit Court of Appeals have not decided this issue concerning the meaning of § 362(k)(1).

A takeaway is that counsel on both sides of the issue should study the BAP’s unpublished decision in Moon 2, which grapples with the issue and discusses contrary precedent, including Heupel v. Nielsen (In re Nielsen), 2017 U.S. Dist. LEXIS 799, at 6 (D. Colo. 2017); Dean v. Carr (In re Dean), 490 B.R. 662, 670 (Bankr. M.D. Pa. 2013); In re Thompson, 426 B.R. 759, 765-67 (Bankr. N.D. Ill. 2010); Hutchings v. Ocwen Fed. Bank. FSB (In re Hutchings), 348 B.R. 847, 910 (Bankr. N.D. Ala. 2006); In re Hedetneimi, 297 B.R. 837, 843 (Bankr. M.D. Fla. 2003).

A decisive interpretation of § 362(k)(1) by the Supreme Court or Ninth Circuit will determine whether attorney’s fees and costs can be recovered when a debtor is represented by pro bono counsel. As reflected by Moon 2, lower courts have disagreed. For example, in Hedetneimi, the Florida bankruptcy court stated: “Because Debtor is represented pro bono through Central Florida Legal Services, and is thus not responsible for payment of attorney’s fees, she is not entitled to an award thereof.” Id., 297 B.R. at 842. In contrast, in Vu v. Lin (In re Vu), 591 B.R. 596 (Bankr. E. D. Pa. 2018), the Pennsylvania bankruptcy court stated: “I will not follow the courts who require that counsel actually bill their clients without regard to their poverty. Our noble profession should look with approval at actions such as counsel’s in this case.” Id. at 607. See also In re Johnson, 601 B.R. 365, 382 (Bankr. E.D. Pa. 2019) (“In addition, the Court follows those courts which allowed compensation to pro bono counsel for their efforts to remedy egregious stay violations without regard to the ability of their clients to pay.”).

Note the BAP’s caution that “it would have been better practice” for debtor’s counsel to have a written fee agreement. Moon 2, at 14. In undertaking to represent a debtor even for the limited purpose of remedying a violation of the automatic stay, debtor’s counsel should document the contract for legal services. See Fed.R.Bankr.P. 2016(b); 11 U.S.C. § 329(b); see also Bus. & Prof. Code § 6147(a) (contingent fee agreement must be in writing); id. § 6148(a) (contract for legal services must be in writing when reasonably foreseeable expense to client will exceed $1,000).

These materials were written by Leonard L. Gumport of Gumport Law Firm, PC in Pasadena (lgumport@gumportlaw.com). Editorial contributions were provided by Aaron E. de Leest of Danning, Gill, Israel & Krasnoff, LLP (adeleest@danninggill.com).

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