If a debtor largely prevails in a dispute over a contract requiring the borrower to pay the lender’s counsel fees, California law requires the lender to pay the debtor’s counsel fees, according to an opinion from the Ninth Circuit last year, Penrod v. AmeriCredit Financial Services Inc., 802 F.3d 1084 (9th Cir. Oct. 1, 2015).
The same rule, however, does not apply when a debtor defeats a motion to modify the automatic stay. According to a June 20 decision by District Judge Haywood S. Gilliam, Jr. of San Francisco, the lender is not obligated to pay the debtor’s counsel fees if the debtor prevails on a lift-stay motion.
Section 1717 of the California Civil Code turns a unilateral obligation to pay attorneys’ fees into a reciprocal liability. In other words, if a contract imposes counsel fees on one party, California law imposes the obligation on both. By its terms, the fee-shifting statute applies only “in an action on a contract.”
In the appeal that came to Judge Gilliam, the bankruptcy judge had denied a lift-stay motion because the moving party had not shown that it was the holder of the mortgage and therefore lacked standing. On the debtor’s subsequent motion, the bankruptcy judge assessed the debtor’s counsel fees against the purported lender under Section 1717.
To impose the debtor’s counsel fees on the lender, the bankruptcy judge was obliged to hold that the Supreme Court’s 2007 decision in Travelers Casualty & Surety Co. of America v. Public Service Gas & Electric impliedly overruled In re Johnson, decided by the Ninth Circuit in 1985. Johnson held that an application to modify the automatic stay is not “an action on a contract,” as required by Section 1717.
Johnson reasoned that Section 1717 was not applicable because a lift-stay motion is only a motion, not “an action,” and does not address the validity of the contract. The lift-stay motion, according to Johnson, turns on bankruptcy law, not the validity of the contract.
Judge Gilliam dissected both Johnson and Travelers to hold that the Supreme Court had not impliedly overruled Johnson. Judge Gilliam also said that the Ninth Circuit reaffirmed the validity of Johnson in a 2016 opinion, Bos v. Board of Trustees.
Johnson overruled In re Fobian, where the Ninth Circuit held that a debtor entitled to recovery of attorneys’ fees must also show bad faith or harassment by the losing party. The Supreme Court held that Fobian was not authorized by the Bankruptcy Code.
The opinion by Judge Gilliam can have important pro-debtor application. If Section 1717 were to apply to lift-stay motions, a debtor who opposed and lost would see the lender’s counsel fees added to the secured claim. Since lift-stay motions are not actions on the contract, debtors in California can oppose modification of the automatic stay without increasing lenders’ secured and unsecured claims.
To read ABI’s analysis of Penrod, click here.