Reversing the bankruptcy court, the Ninth Circuit Bankruptcy Appellate Panel held that a state law granting attorneys’ fees to a party defeating a groundless claim is procedural and therefore not enforceable in bankruptcy court.
The BAP was careful to say that the bankruptcy court would have been bound to shift fees if it were provided by contract or pursuant to a substantive state statute.
The chapter 13 debtor filed her original petition in 2017. The creditor filed three proofs of claim. The last transaction underlying the claims occurred in 2006. The debtor objected to the claims, because they were patently disallowable under the Nevada statute of limitations.
The bankruptcy court disallowed the claims and granted the debtor almost $4,000 in attorneys’ fees under a Nevada statute. See In re Andrade-Garcia, 627 B.R. 158 (Bankr. D. Nev. March 4, 2020). To read ABI’s report, click here.
The Nevada statute, NRS 18.010, allows the prevailing party to recover attorneys’ fees when the claim “was brought or maintained without reasonable ground . . . .”
The creditor appealed only the award of attorneys’ fees and won a reversal in a January 11 opinion for the BAP by Bankruptcy Judge Scott H. Gan.
The reversal was ordained in the Ninth Circuit by Galam v. Carmel (In re Larry’s Apartment L.L.C.), 249 F.3d 832, 836 (9th Cir. 2001). There, the appeals court ruled “that state law applies when an allowance of attorney’s fees is connected to the substance of the case.”
On the other hand, when the fee award is based on the conduct of the parties, Larry’s Apartment says the state law is procedural and not applicable. In those circumstances, the bankruptcy court must follow federal sanction law.
Judge Gan analyzed the Nevada law, concluding that it was designed to regulate misconduct. He said that filing the time-barred claims was considered “conduct” in the bankruptcy court.
Regarding conduct, Judge Gan cited the BAP’s own precedent where the appellate panel “previously held that the Bankruptcy Code preempts substantive state law remedies stemming from alleged misconduct in filing bankruptcy claims. See B-Real LLC v. Chaussee (In re Chaussee), 399 B.R. 225, 233 (9th Cir. BAP 2008).”
Quoting Chaussee, Judge Gan said that state sanction statutes are preempted because “Congress wished to leave the regulation of the parties before the bankruptcy court in the hands of the federal courts alone.” Id. at 233-34. He therefore held that “federal law not state law governs,” because “the conduct which NRS § 18.010(2)(b) seeks to deter occurred in the bankruptcy court.”
Judge Gan reversed for a second reason: The filing of the claims was not groundless.
In part, Judge Gan was following Midland Funding, LLC v. Johnson, 137 S. Ct. 1407 (2017), where the Supreme Court held that filing a time-barred claim in bankruptcy court does not violate the federal Fair Debt Collection Practices Act. To read ABI’s report, click here.
In the context of both the FDCPA and the Bankruptcy Code, a time-barred claim has not been extinguished. Rather, the statute of limitations is an affirmative defense that can be waived. Judge Gan therefore held that the filing of the proofs of claim was not groundless, thus barring invocation of the Nevada statute.
Judge Gan did not slam the door entirely. The underlying contract had not been introduced. He suggested that the debtor could have been entitled to an award of fees if the contract had provided for fee-shifting. He also said that bankruptcy courts “may have discretion under certain state statutes to award attorney’s fees for disallowed time-barred claims.”
Reversing the bankruptcy court, the Ninth Circuit Bankruptcy Appellate Panel held that a state law granting attorneys’ fees to a party defeating a groundless claim is procedural and therefore not enforceable in bankruptcy court.
The BAP was careful to say that the bankruptcy court would have been bound to shift fees if it were provided by contract or pursuant to a substantive state statute.