In the Ninth Circuit, forgetting to raise discharge as a defense in state court isn’t fatal. At least if the creditor later asks the bankruptcy court to rule on whether the debt was discharged, the debtor can raise the defense that it waived at an earlier time in state court.
The debtor was a party to an agreement awarding attorneys’ fees to the prevailing party. While the litigation was pending, the debtor filed bankruptcy and received a discharge.
After bankruptcy, the creditor prevailed on some claims in state court and sought attorneys’ fees. The debtor did not assert the discharge as an affirmative defense to the claim for attorneys’ fees. The state court ultimately assessed attorneys’ fees against the debtor.
The creditor reopened the debtor’s bankruptcy to seek a declaration about the discharge of attorneys’ fees. The bankruptcy court decided that the debtor had “returned to the fray” and was liable for attorneys’ fees because claim preclusion barred her from raising the defense that she had not asserted in state court.
The Ninth Circuit Bankruptcy Appellate Panel affirmed, observing that the claim was contingent and ordinarily would have been discharged. In the case of a claim for attorneys’ fees when the debtor “returns to the fray,” the BAP was bound by a unique rule in the Ninth Circuit. See Boeing North America Inc. v. Ybarra (In re Ybarra), 424 F.3d 1018 (9th Cir. 2005).
Under Ybarra, a claim for attorneys’ fees is deemed to arise after discharge if the debtor has returned to the fray. The rule was designed to prevent debtors from engaging in risk-free litigation after bankruptcy.
In a nonprecedential, four-page per curiam opinion on March 6, the Ninth Circuit reversed.
The circuit court ruled that the claim was contingent and therefore discharged in bankruptcy. The claim was contingent because the creditor could “fairly and reasonably” contemplate the existence of the claim, since it had not been resolved during the bankruptcy.
Next, the circuit decided that the California doctrine of claim preclusion did not bar the debtor from raising discharge in bankruptcy court even though she had not asserted the defense in state court.
The appeals court said that “a discharge in bankruptcy remains effective ‘whether or not discharge of such debt is waived,’” citing Section 524(a)(1) and In re Gurrola, 328 B.R. 158, 170 (B.A.P. 9th Cir. 2005).
The circuit court ruled that the claim for attorneys’ fees had been discharged because the debtor was “not barred by claim preclusion from bringing a claim for violation of the discharge injunction.”
The circuit opinion did not cite or distinguish Ybarra.
Questions: Would the result have been the same if the debtor had sought a declaration of dischargeability in bankruptcy court after having failed to raise the defense in state court? What if the debtor had raised the defense but the state court had ruled that the debt was not discharged? Could the debtor take a second bite at the appeal in bankruptcy court, or would the Rooker/Feldman doctrine prevent relitigation?
Click here to read an ABI report about a district court decision from the Southern District of New York in 2016 declining to follow Ybarra.
In the Ninth Circuit, forgetting to raise discharge as a defense in state court isn’t fatal. At least if the creditor later asks the bankruptcy court to rule on whether the debt was discharged, the debtor can raise the defense that it waived at an earlier time in state court.
The debtor was a party to an agreement awarding attorneys’ fees to the prevailing party. While the litigation was pending, the debtor filed bankruptcy and received a discharge.
After bankruptcy, the creditor prevailed on some claims in state court and sought attorneys’ fees. The debtor did not assert the discharge as an affirmative defense to the claim for attorneys’ fees. The state court ultimately assessed attorneys’ fees against the debtor.
The creditor reopened the debtor’s bankruptcy to seek a declaration about the discharge of attorneys’ fees. The bankruptcy court decided that the debtor had “returned to the fray” and was liable for attorneys’ fees because claim preclusion barred her from raising the defense that she had not asserted in state court.
The Ninth Circuit Bankruptcy Appellate Panel affirmed, observing that the claim was contingent and ordinarily would have been discharged. In the case of a claim for attorneys’ fees when the debtor “returns to the fray,” the BAP was bound by a unique rule in the Ninth Circuit. See Boeing North America Inc. v. Ybarra (In re Ybarra), 424 F.3d 1018 (9th Cir. 2005).