Wrongful Motions to Lift Stay Are No Fun in the 9th Circuit

27 Nov Wrongful Motions to Lift Stay Are No Fun in the 9th Circuit

A major irritation for debtor attorneys in Chapter 13 cases is the filing of a motion to lift the automatic stay by a home loan creditor when debtor has made all payments required under the plan. I have had Chapter 13 cases where as many as three unwarranted motions were filed by the loan servicer and withdrawn before a final hearing on the motion. I am told this is not uncommon.

In the 9th Circuit, the holding in Johnson v. Righetti, 756 F.2d 738 (9th Cir. 1985) seems to take all of the fun out of winning a motion for the debtor. In reversing an award of the debtor’s attorney fees incurred in successfully defending a motion for relief from stay based on a state law reciprocity statute, the court in Johnson makes it clear that the question of the applicability of the bankruptcy laws to particular contracts is not a question of the enforceability of a contract but rather involves a unique, separate area of federal law 756 F.2d 738 at 740. While this sounds very much like the longstanding 9th Circuit Fobian rule recently disposed of by the Supreme Court in Travelers; that is not the case.

In Travelers, the US Supreme Court overruled In re Fobian, 951 F.2d 1149 (CA9 1991) and its rule that where the litigated issues involve not basic contract enforcement questions, but issues peculiar to federal bankruptcy law, attorney’s fees will not be awarded absent bad faith or harassment by the losing party.

Unfortunately, the Johnson holding was distinguished from Fobian in that it was based on the interpretation of a California statute; one remarkably similar to ORS 20.096, the Oregon law providing for reciprocity of attorney fees in enforcing a contract with a one-sided fee recovery provision.

It appears the attorney for debtor who proves that all required payments were made and prevails against the moving creditor may be out of luck when it comes to payment for time and effort incurred. On the other hand, the same case that denies fees in the stay relief context approves the use of state law attorney fee statutes to award attorney fees in contests over a proof of claim. If the secured creditor amends the proof of claim and adds fees and costs it incurred in connection with the losing motion, there is an opportunity to defend.

In addition, new bankruptcy 524(i) provides for penalties against a secured creditor for failing to honor a discharge order if the plan has been complied with by the debtor and all payments have been made. This means the secured creditor can not charge the debtor for its costs in bringing the motion it lost without risking court sanction. There is at least some small consumer benefit from the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.
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