Attorney Fees for Preparation of Fee Application Disallowed, In a Very Specialized Context. But What Are the Lessons For You?

4/10/08
In re Columbia Aircraft Manufacturing Corp., Case No. 07-33850-elp11
UNPUBLISHED LETTER RULING, by Judge Elizabeth Perris

This 8-page single-space unpublished letter by Judge Parris in this Chapter 11 case has virtually no direct relevance in the Chapter 7 and 13 worlds, except tangentially as to an attorney fee issue. In her letter the judge ruled on a number of legal issues to streamline an evidentiary hearing on an application for final compensation by the corporate debtor’s financial advisory and investment banking service provider (“ING”). Through these services, the debtor corporation was sold post-petition to Cessna Aircraft. For these services ING applied for $1,150,000 in fees and more than $26,000 in expenses, which the unsecured creditors’ committee objected to all but $50,000.

Most of Judge Parris’ rulings had to do with the appropriate legal standard for determining the amount of fees to be paid to an entity authorized for postpetition employment by the court under 11 USC §327 and §330, and the application of this standard to various allegations by the committee that ING had not done the work it had agreed to do. She ruled that “professionals … should be paid comparably to rates they would receive outside bankruptcy, so that professional will be willing to serve in bankruptcy cases.” As to the 7 specific issues about the quality of ING’s work, they are so limited to the services of a financial adviser and investment banker and the specific facts of this case that they don’t merit detailing here, especially since this is just an unpublished letter ruling.

The one attorney fee issue worth some attention pertained to whether ING should be paid ITS attorney’s fees for the legal services involved in preparing ING’s fee application. Perhaps contrary to expectations—since generally an attorney’s services in preparing a fee application are allowed—in this rather specialized context Judge Perris disallowed such fees here. Although ING itself had been appropriately employed by debtor through a court order under §327, its counsel had not. So its counsel’s attorney fees for preparing ING’s fee application were disallowed, A prepetition contract between ING and its counsel, not presented to or approved by the court, did not help its case, especially because the prepetition executory contract between ING and the debtor had been rejected by the court, and there was no prior written consent to such fees by the debtor, much less court approval.

BOTTOM LINE: Regardless of the unusual context here, the mantra is the same: get prior court approval for attorney fees or risk having them disallowed.

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

© 2008 Bankruptcy Litigation Support for Attorneys

Motion to Enforce Automatic Stay Against FED Lawsuit Denied, Landlord Could Take Possession, 9th Circ.Burden of Proof Not Met for TRO

3/27/08
In re Nathan Leston Skinner; Case No. 08-60574-aer13
PUBLISHED opinion, by Judge Randall L. Dunn
(a Eugene Division case assigned to Judge Radcliffe, but because of his unavailability for an expedited hearing, it was heard by and the opinion written by Judge Dunn of the Portland Division)

The facts of the case made for an easy decision not to enforce the stay: the debtor was not named as either lessee, guarantor of the lease, or a proposed occupant of the property in the lease agreement or lease application (only as a reference for the lessee); nor did he indicate any leasehold interest in either Schedule A or B, or any executory contracts or unexpired leases in Schedule G, or the unlawful detainer lawsuit in his Statement of Financial Affairs; nor did his Ch. 13 Plan include any provision to assume the lease or avoid any liens against the debtor’s personal possessions located at the property. Debtor’s only argument seemed to be his assertion that the landlord would be paid through the Plan, and landlord was listed in Schedule F with an unliquidated, disputed claim of unknown amount, but Judge Dunn gave that short shrift because the entire amount calculated to be paid through the Plan was well short of the unlawful detainer judgment amount recently entered against the non-debtor tenant named on the lease agreement. The situation was not helped by the fact that this non-debtor tenant had filed about 10 bankruptcies in the past dozen years, the most recent resulting in a dismissal with a 180-day bar to refiling, which had not yet expired.

This published opinion is nevertheless interesting because it reminds us of the grounds for a temporary restraining order or preliminary injunction in the 9th Circuit, for which the moving party has the burden of proving “either (1) a combination of probable success on the merits and the possibility of irreparable injury if relief is not granted, or (2) the existence of serious questions going to the merits and that the balance of hardships tips sharply in its favor.” First Brands Corp. v. Fred Meyer, Inc., 809 F.2d 1376, 1381 (9th Cir. 1987). Judge Dunn ruled that it was unlikely that debtor would succeed in showing he had a valid leasehold interest, in part because the judge could consider debtors schedules, signed under penalty of perjury, to be admissions of his lack of interest in the leasehold. The judge also found no evidence of any potential irreparable harm since his schedules indicated no personal possessions at the premises except for a modest amount of clothing which landlord’s counsel committed to mailing to debtor, no serious questions on the merits, and the balance of hardships in favor of the landlord because he had not received rent payments “over a considerable period of time.”

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

© 2008 Bankruptcy Litigation Support for Attorneys

Chapter 13 Debtors' Attorney Fees Lose Out to Secured Creditors: Under BAPCPA, "equal monthly payments" Must Start at Confirmation

In re Sanchez, Oregon Bankruptcy Court Case No. 07-62144-aer13
PUBLISHED opinion by Judge Albert Radcliffe
March 19, 2008

Judge Radcliffe goes against what he characterizes as the “slight majority view,” holding that BAPCPA’s new “equal monthly payments” rule does not allow the expedited payment of attorney fees by providing for smaller “adequate protection payments” to a secured creditor followed by larger “equal monthly payments” later in the Plan. However, the judge does provide some clues, albeit of limited practical value, where some front-loading of debtors’ attorney fees might work.

The judge cites four bankruptcy courts in other circuits which have addressed this BAPCPA statutory construction question—apparently there are no circuit court opinions--and he sides with the one court favoring purchase money “910 days” secured creditor payments over debtors’ attorney fees, after detailing what he sees as the flaws in the three court opinions favoring the attorney fees. The judge’s analysis in rejecting the rationales of the three courts allowing expedited payments to attorney fees—each of which arrived at that conclusion slightly differently—is beyond our scope here.. He asserts generally that he is merely enforcing the plain language of the statutes while these other courts applied “strained interpretations.” Essentially, the 3 majority courts made statutory distinctions between post-confirmation “adequate protection” payments of § 1325(a)(5)(B)(iii)(I) and the “equal payments” of § 1325(a)(5)(B)(iii)(II), effectively allowing smaller “adequate protection” payments to continue after confirmation until debtors’ attorney fees were paid, after which the larger “equal payments” would begin and be paid through the rest of the Plan. But Judge Radcliffe, closely following In re Denton, 370 BR 441 (Bankr. S.D. Ga. 2007), argues that this is a false distinction, and thus that “pre-confirmation adequate protection payments under § 1326(a)(1)(C) may not be extended beyond confirmation when the monthly amount is less than the amount of payment on the allowed secured claim under the plan,” that is the “equal monthly” payment.

Judge Radcliffe finishes with a final footnote in which he throws debtors’ attorneys a bone, some clues, limited in practical value as they are, for successful expedited payment of debtors’ attorney fees. This footnote is worth quoting here in full:
“While this court’s holding may appear to undercut the speed at which a Chapter 13 debtor’s attorney’s fees may be paid, this isn’t necessarily so. The type of stepped payments Debtors propose are not per se, non-confirmable. A secured creditor may always accept its proposed treatment under § 1325(a)(5)(A). If the creditor objects to stepped payments, debtors are not precluded from making room for payment of attorney’s fees by modifying the plan to amortize the secured claim at a lower (but equal) monthly payment over a longer period. All that is required under § 1325(a)(5)(B)(iii) is that the proposed equal monthly payments pay the secured claim
and be sufficient to adequately protect the creditor’s interest. Here, while WFA has not contested that $50 per month adequately protects its interest, that amount is insufficient to amortize its claim, even over the maximum 60 months permitted.”

BOTTOM LINE: The judge’s suggestions notwithstanding, this opinion significantly limits debtors’ attorneys in front-loading their fees ahead of “910 day” secured creditors. Assuming the other Oregon judges will be following his opinion, and until there is a contrary ruling in the 9th Circuit or possibly a persuasive opinion in another Circuit, in many Ch. 13 cases debtors’ attorneys will be paid slower and thus with greater risk of not being paid at all.

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

© 2008 Bankruptcy Litigation Support for Attorneys

Debtors NOT Denied Discharge Although Failed to Disclose Recent Auction of Business Assets in SOFA & at §341 Hearing

3/13/08
Hildebrand v. Browning, Adv. No. 07-3171
UNPUBLISHED LETTER RULING ON TRIAL, by Judge Elizabeth L. Perris

Judge Perris presented her ruling after trial on a creditor’s § 727(a)(4) and § 727(a)(5) grounds for denial of discharge. § 727(a)(4) refers to false oaths by debtors and § 727(a)(5) to failure to explain satisfactorily any loss or deficiency of assets.

The creditor had sold debtors a flower store about two years earlier, for which debtors continued to owe a balance of the purchase price. Barely a month before debtors filed the underlying Chapter 7 case, they had auctioned off all the inventory of that business, grossing almost $7,000 in proceeds, but they failed to list this auction on their Statement of Financial Affairs or inform the trustee about it at the §341 hearing, notwithstanding direct questions put to them there about sales or transfers within the previous 4 years. Then 31 days after the hearing, debtors filed an amended SOFA disclosing the auction.

Judge Perris ruled that even though both these omissions, in the SOFA and at the hearing, were false and material, they were NOT intentional or fraudulent. As for the omission in the SOFA, Judge Perris held that their omissions were not intentional or fraudulent because debtors listed their business and its demise in their initial bankruptcy documents, and thus they were not trying to hide the auction of the business assets. She was also convinced by the testimony of the debtors that their inaccurate answers to the questions at the § 341 hearing were not intentional. And Judge Perris clearly found important that debtors filed an accurate amended SOFA before the trustee or creditors had discovered the error and before this adversary proceeding was filed.

As to allegedly false testimony in a deposition and at trial by each of the debtors, Judge Perris ruled that the evidence showed either that the debtors misunderstood the questions and thus testified inaccurately but did not do so knowingly and fraudulently, or else that the specific testimony complained of was not either not false or not intentionally so.

As to § 727(a)(5), a failure to explain satisfactorily a loss or deficiency of assets did NOT arise from: 1) the failure to sell the business, even though there appeared to be some interested buyers; 2) the failure to get the highest possible sale price for that business: or 3) a failure to get a better price for the sale of the inventory. The last of these issues could be referred to the trustee as a potential fraudulent transfer, but the judge indicated that the evidence before her did not seem to support anything other than an arms length transaction with a disinterested auctioneer.

Judge Perris referred a number of times of the lack of documentary or other potentially available evidence which hurt plaintiff’s case. The most direct example: one of the debtors testified that they did not accept one of the offers to buy the business because it did not include an assumption of the remaining debt to the creditor, whereas the person who made the offer testified at trial that the offer had in fact included such an assumption. But plaintiff failed to produce that written offer at trial so Judge Perris concluded that debtor must have misunderstood the offer and that this misunderstanding was not necessarily unreasonable.

BOTTOM LINE: This adversary proceeding would likely have been altogether avoided had debtors clearly understood the SOFA questions at the outset and had they been completed by the attorney accurately. But debtors’ counsel’s relatively quick action in filing an amended SOFA seemed to be instrumental in convincing Judge Perris of the debtors’ lack of knowing, fraudulent intent. On the other hand, had creditor’s counsel presented into evidence the business purchase offer and some other missing evidence directly supporting the allegations, depending on what that evidence would have been, creditor would have had a better chance at prevailing.

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

© 2008 Bankruptcy Litigation Support for Attorneys

Brother of Ch. 11 Debtor's Founder Must Pay to Creditor's Committee $248,000 on an old "House Acct." & on Debtor's Loan Payoff for Ex-Wife's Stock

3/07/08
Ron Troutman v. Official Committee of Unsecured Creditors, U.S. District Court Case # 07-6106-HO, appeal of Bankruptcy Adv. Case # 3-6317-aer
arising in Ch. 11 case In re Troutman Investment Company.
UNPUBLISHED opinion by US District Court Judge Michael Hogan on appeal of Judge Radcliffe’s unpublished findings in an adversary proceeding.

This appeal turned largely on rules of pleading and of evidence:

1) The “house account” (charges defendant had made over the years for personal purchases at Emporium and elsewhere debited to that account):
a) Pleading: “Under federal rules, a complaint need only contain a short and plain statement of the claim showing an entitlement to relief. Fed. R. Civ. P. 8(a).” So even though the complaint’s claims for relief were titled otherwise, the allegations “were sufficient to provide notice of what was being sought and why,” thus allowing “account stated” and “open account” theories of recovery to proceed to trial.
b) Sufficient evidence for an “account stated” and “open account” found through the following facts: defendant’s assertions about the “house account” in his prior divorce case, statements of account received by defendant from debtor to which he did not object, that defendant made payments on the account, and the business records of debtor showing the account.
c) The facts of the case did not support the application of Oregon statutes ORS 10.095(8) and 40.135 (1), dealing with evidentiary presumptions in situations where evidence could not be presented or was willfully suppressed.
d) Under FRPC. 9017 and the Federal Rules of Evidence 1101(b), the Oregon Rules of Evidence do not apply. Further, under Federal Rules of Evidence 302, the Oregon evidentiary presumptions sought by defendant were not applicable here because those presumptions did not pertain to an element of an Oregon claim or defense, but rather were merely “tactical” presumptions.
e) Defendant was judicially estopped from asserting the inaccuracy of the “house account’s” outstanding balance as established in his divorce case, because his new position is clearly inconsistent with his position in that prior case, he had succeeded in persuading the divorce court to accept his earlier position, and allowing him to change his earlier position now would give him an unfair advantage.

2) The $150,000 Loan (to buy out defendant’s ex-wife for her share of debtor’s stock, paid by debtor’s principal but then assigned to debtor):
a) Pleading: See above re “short and plain statement” rationale for allowing plaintiff to assert an assignment argument at trial. In addition, a deposition and the subsequent pretrial order referred clearly to this assignment argument, so defendant was sufficiently put on notice.
b) Defendant’s inability to amend answer for defenses or counterclaims to assignment argument: When defendant had notice of the assignment argument from a November 2004 deposition but did not move to amend until August 2006 at “the eve of trial” scheduled for October 2006, he was not permitted to amend because this constituted undue delay, prejudice to plaintiff in reopening discovery so late, and likely futile in any event because “the proposed counterclaims and defenses were weak at best.”
c) Since under Oregon law an “an assignment may be oral or written and no special form is necessary provided that the transfer is clearly intended as a present assignment of the interest held by assignor,” the following facts were sufficient to establish defendant’s liability for the $150,000 loan: debtor’s founder and principal’s instructed debtor’s account manager to pay off defendant’s loan, informed her that defendant would pay it off, and also instructed her to put this receivable into the general receivables account for shareholders, where she labeled it as owed by defendant, and the accounting records continued to show the receivable as still owing.

BOTTOM LINE: The brother of corporation debtor’s founder and principal must pay unsecured creditors’ committee nearly $248,000 in receivables, consisting of 1) the balance in this brother’s house account, even though that account was established in 1963, and 2) a loan paid off by the debtor to buy out brother’s ex-wife’s stock in the debtor, even though that payoff occurred 5 years pre-petition.

Watch out for those informal pre-petition family arrangements, even those, ESPECIALLY those, from years or even decades ago.

Know the federal pleading and evidence rules, especially as they interplay with Oregon substantive and evidentiary law, before venturing into bankruptcy litigation.

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

© 2008 Bankruptcy Litigation Support for Attorneys

Judge Radcliffe Shoots Down Virtually All Ch. 13 Plan Language Proposed to Prevent Mortgage Service Fees & Misapplied Plan Payments

Are you familiar with the alternate language that Judge Radcliffe proposes here for this purpose? And you know debtors’ remedies under BAPCPA’s new §524(i) against creditors who willfully fail to credit plan payments?

2/12/08
In re Lee & Amanda Anderson; Case No. 07-60532-aer13
PUBLISHED opinion by Judge Albert E. Radcliffe

In this published opinion Judge Radcliffe analyzes, paragraph by verbatim paragraph, a set of 6 special Ch. 13 plan paragraphs that had been suggested in an article in NCLC Reports: Bankruptcy & Foreclosure Edition (Nov/Dec 2006 ed.). These paragraphs were intended to help implement BAPCPA’s § 524(i), which created a remedy for debtors against creditors who willfully fail to credit plan payments appropriately. So these suggested paragraphs directed how the 2 home lenders were to account for plan payments, how to deal with arrearage claims, and they proposed remedies for improper accounting of payments. Debtors argued that § 524(i) prevails over the “creditor’s rights” laid out in the anti-modification language of § 1322(b)(2) to the extent there was any conflict.

Upon objection by two creditors secured solely by debtors’ residence, Judge Radcliffe ruled that debtors’ rationale was flawed, and he methodically rejected virtually every word in every one of the proposed special paragraphs, mostly because they were “surplusage,” repetitive of what is already in the Plan boilerplate, or otherwise “unnecessary,” ambiguous, or “inappropriate” under § 1322(b)(11) by seeking to modify what can not be modified.

The sole and minor exception that he permitted was an expansion of a noticing requirement on creditors about changes to the escrow amounts, requiring notice to debtors’ attorney and to the trustee in addition to the usual notice just to debtor. The judge held that such “additional notice is more in the nature of a procedural requirement to aid Chapter 13 administration, than a modification and is therefore permissible.”

Judge Radcliffe acknowledged the worthiness of part of the debtors’ goal, to avoid surprises about the balance due on home mortgages at the end of a Plan, and in a final footnote to the opinion provided some guidance towards this goal, by suggesting some alternate Plan language.

“G.O. 97-1 already provides a set of procedures. However, its scope is limited. A plan provision expanding that scope, such as: “The procedures set out in G.O. 97-1 (as amended by G.O. 98-1), shall apply to all arrearage amounts (pre and post-petition), including all fees and costs, claimed by [the mortgage-secured creditors] Umpqua and Citifinancial,” would likely be “appropriate.” However, the court thinks it fair to alert the parties that this District’s Local Bankruptcy Rules are currently being revised, and it is probable that G.O. 97-1.4(b)(5)’s “deemed cure” provisions will not survive the revisions. If “deemed cure” language is in fact stricken from the revised local rules, insertion of similar language into a Chapter 13 plan, with the broadened scope outlined above, would also seem appropriate.”

Indeed these General Orders ARE all now superseded by the amended Local Bankruptcy Rules effective 8/08/08. This applies not just to the G. O. referred to in this footnote but also to the other G. O.’s and LBR’s referred to in this opinion. So look closely at the pertinent new LBR’s before relying on this opinion.

The other language suggested by the judge is:
“Post-petition mortgage payments to secured creditor shall be applied to the first postpetition payment due under the terms of the contract. Payments from the trustee to secured creditor shall be applied to its pre-petition loan arrears claim. As long as debtor timely pays all post-petition payments, secured creditor shall not assess any fees or other charges on the basis that a post-petition payment is late.

“Lender shall send such billing statements, coupons and statements regarding postpetition advances and/or charges on the loan directly to the debtor as it customarily sends when no bankruptcy has been filed.”

BOTTOM LINE: The remedy provided in BAPCPA through § 524(i) is limited, both by the specific conditions stated within it and the many other requirements in the Code, especially § 1322(b)(2), about what a Chapter. 13 plan may contain. But a good debtors’ attorney is mindful about protecting his clients from residential creditors’ misapplication of plan payments, both by understanding and using the § 524(i) remedy, and by incorporating appropriate special language into the plan consistent with Judge Radcliffe’s guidance here.

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

© 2008 Bankruptcy Litigation Support for Attorneys

Pre-Petition Credit Counseling Requirement is NOT Jurisdictional and So Case Not Dismissed IF Would Produce Illogical, Unjust or Capricious Result

2/5/08
In re David & Lynn Bartlett, Case No. 07-63647-fra13
UNPUBLISHED opinion, by Judge Frank Alley

Pre-petition credit counseling requirement is NOT jurisdictional and so a case should not be dismissed IF doing so would “produce an illogical, unjust, or capricious result. But that condition was not met here, so this case was dismissed.
What does it take to meet this condition and avoid dismissal in spite of not strictly complying with the credit counseling requirement?


These Chapter 13 debtors filed their case 185 days after completing their credit counseling, 5 days later than the 180-day maximum permitted by §109(h)(1). They completed a second credit counseling 4 days AFTER their case was filed, the same day that the court issued an order requiring either the filing of a credit counseling certificate showing compliance with the 180-day rule, the filing of a motion for an extension of time to file, or an exemption from the credit counseling requirement. The next day the debtors filed a motion for extension of time to file a certificate, in which they sought to excuse their failure to meet the 180-day rule on the basis of the repossession of their vehicle and the resulting delay in the filing of their case, arguing that dismissal would be prejudicial to creditors and add unnecessary administrative costs for the filing of a subsequent case.

Judge Alley indicated a split in bankruptcy court opinions, even quoting one court that the “vast majority” of courts strictly construe the 180-day requirement, but he nevertheless held that this statute is not jurisdictional and that equitable exceptions to strict compliance can be made to avoid “an illogical, unjust, or capricious result.” He analogized to a 1991 9th Circuit BAP decision, In re Luna, 122 B.R. 575, which held that §109(g), regarding another 180-day rule (restricting the filing of a new case after the dismissal of a prior case), was not jurisdictional and thus exceptions to strict compliance to it were appropriate in the same limited circumstances quoted immediately above.

But the judge held that these conditions were not met here because: 1) the inconvenience and expense of re-filing the case is not illogical and unjust; and 2) the Bankruptcy Code provides for relief from payment of a new filing fee and for extension of the automatic stay, thus making equitable remedies inappropriate.

Acknowledging the “substantial inconvenience to the parties” if a creditor were to aggressively pursue debtors’ assets between the dismissal of this case and the filing of the next one, Judge Alley concludes his opinion by helping to avoid this possibility by delaying the dismissal for 10 days.

BOTTOM LINE: The “illogical, unjust, or capricious result” standard of §109(g) is tough to meet, so watch that 180-day consumer credit counseling period like a hawk. In this case it appeared to the judge that this deadline was missed simply by oversight.

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

© 2008 Bankruptcy Litigation Support for Attorneys

Debtor's Breach of Prior-Employer’s Non-Compete Agreement IS Dischargeable Under Sect. 523(a)(6), But Does Not Allow for Contractual Attorney Fees

Home Instead Senior Care of Oregon v. Treon, Adv. No. 07-03159
From In re Jamie Lynn Treon; Case No. 07-31112-elp7
PUBLISHED opinion, by Judge Elizabeth Perris
January 4, 2008

Although a debtor breached a Non-Compete Agreement with her former employer, Judge Perris held that this employer did not prevail in its nondischargeability complaint against debtor under § 523(a)(6) because it failed to prove either of the necessary prongs of the 9th Circuit’s test: that debtor committed an intentional tort, and that her conduct caused willful and malicious injury. Attorney fees under the Agreement were not awarded to the employer because it did not prevail in establishing nondischargeabilty; but debtor also did not get attorney fees because it breached the Non-Compete Agreement upon which the right to attorney fees was based.

Even though this case is fact intensive, it is worthwhile reading for Judge Perris’ discussion of the 9th Circuit case law on § 523(a)(6) and its application to Oregon law, specifically the tort of intentional interference with an economic relationship.

Consistently the 9th Circuit has held that § 523(a)(6) claims must establish that 1) debtor’s conduct was tortious, and 2) caused willful and malicious injury.

Debtor’s conduct here was not tortious because the evidence did not establish 3 of the 6 necessary elements under Oregon law for the tort of intentional interference with an economic relationship: 1) a valid business relationship that debtor interfered with, 2) her intentional interference with that relationship, and 3) a causal effect between this interference and the damage to the economic relationship. As Judge Perris applied the facts: 1) At the time debtor started working for a former customer of the former employer that customer had already independently terminated its contract with the employer, so there was no business relationship for the debtor to interfere with. 2) There was no interference because the customer contacted debtor, not the other way around, and any interference would have been unintentional because debtor understood that the customer no longer had a relationship with her former employer and so did not believe she was interfering with any such relationship. And 3) there was no causal relationship between any possible interference by debtor and any economic damage because there was an independent reason the former customers no longer worked with the employer--these customers could no longer could afford the employer’s services and indeed had in the interim hired another private caregiver.

Willfulness is defined in the 9th Circuit as intending the consequences or injury resulting from an act and not just intending the act itself, or at least believing that that the consequence or injury is substantially certain to occur from the conduct. Debtor did not act willfully because she accepted employment with a former customer of her prior employer only after learning that this customer had earlier cancelled the contract with the employer and after getting legal advice that she could work for former but not ongoing customers of the employer.

Debtor’s conduct in working for a former customer of employer was not malicious in that it was 1) not done intentionally in that the Agreement did not explicitly forbid contracting with the employer’s former customers, debtor had limited education, and thus reasonably relied on her attorney’s advice about this issue, and 2) was done with a just cause or excuse in, again, her reasonable reliance on her attorney’s advice.

The attorney fee discussion is enlightening, both for its rationale in holding that the ostensible prevailing party, the debtor-defendant, was NOT entitled to contractual attorney fees, and for its valuable dicta about the 2007 U.S. Supreme Court case which had overturned a 9th Circuit opinion about attorney fees in dischargeability litigation.

First as to Judge Perris’ ruling against allowing debtor’s attorney fees, the Non-Compete Agreement provided for attorney fees to employer if it were to “prevail in a legal proceeding to remedy a breach . . . of this Agreement.” This clause was made reciprocal to debtor-defendant through ORS 20.096(1), but that statute by its language limits that reciprocal right to the party prevailing “on the claim”, the claim which “is made based on a contract.” So the contractual “claim” upon which debtor-defendant had to prevail was the breach of the Agreement. But because Judge Perris ruled that she DID indeed breach the Agreement, by working within 90 days of the end of her employment with a prior and potentially future customer of the employer, she was not entitled to attorney fees even though otherwise completely prevailing on the nondischargeability claim.

And second, the U.S. Supreme Court case Judge Perris cited is Travelers Cs. & Surety Co. of Am. V. Pac. Gas & Elec. Co., 127 S.Ct. 1199 (2007), which had overturned the 9th Circuit’s disallowance of a creditor’s contractual attorney fee claim. The 9th Circuit had disallowed that attorney fee claim on the argument that the attorney’s services pertained strictly to federal bankruptcy law and not to contractual law. Although Judge Perris makes clear that she doesn’t have to dig into the impact of Travelers here because debtor-defendant’s breach of the Agreement did not make her even potentially eligible for attorney fees, the judge is warning the bar to be aware of this Supreme Court opinion’s potential impact in future cases.

BOTTOM LINE: This is an excellent source for 9th Circuit law under § 523(a)(6), Oregon law of intentional interference with an economic relationship, and about contractual attorney fees in adversary proceedings. It is worth spending 15 minutes to read this opinion, for sure before dealing with any §523(a)(6) claim or with any attorney fee issue in a nondischargeability case.

by Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

© 2008 Bankruptcy Litigation Support for Attorneys