Category Archives: Ninth Circuit Court of Appeals

July 6, 2015

Ninth Circuit Holds That Confirmed and Substantially Consummated Bankruptcy Plan is Appealable to District Court

The Equitable Mootness Doctrine

    The entry of an order confirming a plan of reorganization is probably the most significant event in a bankruptcy case.  Shortly after a confirmation order enters, parties to the case often invest funds, alter operations, sell assets, and otherwise implement the reorganization.  Accordingly, courts have developed a doctrine called “equitable mootness” to protect the finality of confirmation orders.  See, e.g., Rev. Op. Grp. v. ML Manager LLC (In re Mortgs. Ltd.), 771 F.3d 1211, 1215 (9th Cir. 2014) (“An appeal is equitably moot if the case presents transactions that are so complex or difficult to unwind that debtors, creditors, and third parties are entitled to rely on the final bankruptcy court order.”).

    The Ninth Circuit has developed four factors to determine whether an appeal is equitably moot.  They are: (1) whether the appealing party sought a stay of the confirmation order; (2) whether the plan has been substantially consummated; (3) whether the remedy sought will affect third parties unfairly; (4) whether the court can fashion effective and equitable relief without significantly upsetting the confirmed plan.  See In re Thorpe Insulation Co., 677 F.3d 869, 881 (9th Cir. 2012).

 The Transwest Decision

    The Ninth Circuit recently held that a confirmed bankruptcy plan could be reconsidered on appeal although the plan had been substantially consummated.  This was because, in the Court’s view,  the other three factors weighed in favor of appellate review and against application of the equitable mootness doctrine.  See In re Transwest Resort Props., Inc., 2015 WL 3972917 (9th Cir. July 1, 2015).  Link to Transwest Decision  The Transwest decision calls into question the finality of confirmation orders in the Ninth Circuit.  It should be of particular interest to third party investors in bankruptcy estate assets, as well as to parties seeking to appeal confirmation of a plan of reorganization.

    In Transwest, the debtors proposed a plan of reorganization by which a private equity fund (“Investor”) would invest at least $30 million and become the sole owner of two hotels.  The plan was opposed by the secured creditor (“Creditor”), who had purchased $260 million of secured claims before and during the bankruptcy.  The debtor’s plan was confirmed by the bankruptcy court.  Creditor appealed the confirmation and moved to stay the implementation of the plan.  Debtor and Investor successfully opposed the stay at the bankruptcy and district court levels and the plan was substantially consummated—the Investor assumed operating contracts and began running the hotels.

    Creditor appealed to the Ninth Circuit.  Despite substantial consummation of the plan, the Ninth Circuit held that the Creditor’s appeal was not equitably moot.  Id. at *1.  It noted that in other circuits, including the First and Second Circuits, substantial consummation creates a presumption of equitable mootness.  Id. at *5.  In the Ninth Circuit, however, substantial consummation is just one of four factors courts must consider.  Analyzing the other factors, the Court held that each one disfavored application of the equitable mootness doctrine. 

    The critical lynchpin of the Court’s analysis—and the portion that makes the case most notable—is the Court’s coinclusion that “[Investor’s] involvement in the reorganization process means it is not the type of innocent third party . . . equitable mootness . . . is intended to protect.”  Id. at *6.  After it became seriously engaged in the process of buying the hotels from the estate through the plan, Investor did what most investors in its position would do: it weighed in on the terms of the confirmation order, filed briefs supporting the plan and opposing Creditor’s attempts to defeat confirmation, and then opposed Creditor’s request for a stay.   Because Investor participated in the case in this manner, the Court held that Investor’s reliance interests could not be considered in the equitable mootness analysis.  In other words, to be equitably moot, the appeal would have to unfairly upset the interest of some otherthird partyBecause any amendment to the plan would impact only the monetary distribution between Investor and Lender, the appeal was not equitably moot.  Id. 


    As noted by the dissent, the Ninth Circuit’s Transwest holding may have the effect of discouraging parties from investing in bankruptcy estate assets.  Potential investors should be aware that even after they obtain a bankruptcy court order memorializing the terms of their transaction with the estate, that order could be subject to revision until all appeals are concluded.  Accordingly, investors may want to consider phasing their investments over time or eliminating their performance obligations (and unwinding prior investments) if the terms of the confirmed plan are amended on appeal. 

    On the other hand, the Transwest decision holds promise for parties who have unsuccessfully opposed confirmation of a reorganization plan.  The Ninth Circuit’s narrow construction of the equitable mootness doctrine means that parties enjoy a greater likelihood of having their confirmation objections heard on appeal.

May 12, 2015

Ninth Circuit Holds That a Judgment Arising from the Sale of a Member Interest in a Limited Liability Company may be Subordinated Pursuant to 11 U.S.C. Sec. 510(b)

The Ninth Circuit recently held that a judgment arising from the sale of a member’s interest in a limited liability company may be subordinated as a claim arising from rescission of a purchase or sale of a security of a debtor and, therefore, is to be subordinated to claims of unsecured creditors pursuant to § 510(b) of the Bankruptcy Code.  In Pensco Trust Company et al v. Tristar Esperanze Properties, LLC (In re Tristar Esperanza Properties, LLC), 2015 WL 1474990 (9th Cir. 2015), Jane O’Donnell, a member of Tristar, acquired her interest in the debtor in 2005 for a price of $100,000.  In 2008, O’Donnell exercised her right under the operating agreement to withdraw from the LLC, and Tristar elected under the operating agreement to purchase her interest.  When they could not agree on a price, the dispute was submitted to an arbitrator O’Donnell a “net award of damages,” including the value of her interest in Tristar plus fees, costs and interest.  When the Tristar failed to pay, O’Donnell sought and obtained a state court judgment against Tristar for the amount awarded by the arbitrator.

Tristar subsequently filed bankruptcy and brought an adversary proceeding against O’Donnell seeking to subordinate her claim under 11 U.S.C. § 510(b) as a “claim . . . for damages arising from the purchase or sale of a security” in the debtor.  O’Donnell asserted that her judgment was not a claim for damages, arguing that the concept of damages requires some sort of wrongdoing or compensation for an injury, whereas her claim consisted only of the unpaid purchase price of her member interest in the debtor.  The Ninth Circuit disagreed with O’Donnell and affirmed the BAP’s decision that her claim was subject to subordination under § 510(b).

The Ninth Circuit began its analysis by looking at the plain language of § 510(b), which states in relevant part:  “a claim arising from rescission of a purchase or sale of a security of the debtor . . . [or] for damages arising from the purchase or sale of such a security . . . shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security.”  The court reiterated a previous holding that § 510(b) “sweeps broadly” and “extends beyond the securities fraud claims” discussed in the report issued by the House of Representatives. 

O’Donnell first asserted that her claim was not a claim for damages but merely a fixing of the amount due under the operating agreement for Tristar’s purchase of her member interest.  The court rejected the argument, first because the arbitration award was explicitly an award of damages on which O’Donnell had obtained a judgment, and second because it found no Congressional intent to treat a judgment fixing a purchase price for a security differently from non-judgment claims arising from the purchase and sale of securities in the debtor. 

O’Donnell also argued that her claim, by reduction to judgment, had been converted from an equity claim in the debtor to a debtor claim against the debtor.  Admittedly, for the three years following the issuance of her judgment, O’Donnell had not been a member of the debtor and did not enjoy the rights and privileges of a member as of the date of the bankruptcy filing. There was no dispute that, on the date of the bankruptcy filing, she was a creditor and not an equity holder of the debtor.  While noting opinions from other courts agreeing with O’Donnell’s position, the Ninth Circuit disagreed, stating that “the critical question for purposes of § 510(b) . . . is not whether the claim is debt or equity at the time of the petition, but rather whether the claim arises from the purchase or sale of a security.”  The court held that such a claim must be subordinated, even if the claimant was not an equity holder as of the petition date, “if there is a sufficient ‘nexus or causal relationship between the claim and the purchase’ or sale of securities.”  In short, the focus is not to be on what the claim is, but rather what the claim arises from.  Because O’Donnell’s claim arose from an award for the purchase and sale of a security, it was to be subordinated under § 510(b).

April 14, 2015

Ninth Circuit Holds that the FDIC is Subject to Damage Claims for Breach of Bank’s Pre-Receivership Contractual Obligations

In a recent opinion, the Ninth Circuit Court of Appeals held that the FDIC may be liable in damages to a counter party for breach of a bank’s pre-receivership contract.  Bank of Manhattan v. Federal Deposit Insurance Corporation, 2015 WL 898232 (9th Circ. 2015).  The facts in Bank of Manhattan involved a participation agreement between two banks.  Bank of Manhattan’s predecessor in interest – Professional Business Bank (“PBB”) – sold a participation interest in a loan to First Heritage Bank (“Heritage”).  The participation agreement contained two key provisions relevant to the case:  (1) Heritage could not transfer its interest in the loan without PBB’s prior written consent and (2) PBB was granted a right of first refusal entitling it to repurchase Heritage’s interest in the loan on the latter’s receipt of a bona fide third party offer. 

About one year after the participation agreement was executed, the FDIC was appointed by the Comptroller of the Currency as receiver of Heritage’s assets.  By operation of law (18 U.S.C. § 1821(d)(2)(A)) the FDIC became the successor in interest to Heritage as to all of its assets and liabilities.  Several months after its appointment as receiver for Heritage, the FDIC – without first seeking PBB’s consent or providing it an opportunity to exercise its right of first refusal – sold the participation interest to Commerce First Financial (“CFF”).  When the borrower on the loan defaulted, PBB sued to collect the debt.  CFF brought an action to enforce its rights as the successor to Heritage’s participation interest, and PBB filed a third party complaint against the FDIC for breach of the participation agreement.  The FDIC filed a motion to dismiss the third party complaint, asserting the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) preempted PBB’s claims.  The District Court’s denial of the motion was appealed to the Ninth Circuit Court of Appeals, which affirmed the decision in a split opinion.

On appeal, the FDIC contended that FIRREA frees it from complying with any pre-receivership contractual obligations.  However, the District Court had held that 12 U.S.C. § 1821(d)(2)(G)(i)(II), which states that the FDIC as receiver may “transfer any asset or liability of the institution in default . . . without any approval, assignment, or consent with respect” thereto did not immunize the agency from damage claims if it elects to breach pre-receivership contractual arrangements.  In commencing its review, the Ninth Circuit noted that the case did not “arise in a precedential vacuum.”  First, the court distinguished its prior opinion in Sahni v. American Diversigied Partners, 83 F.3d 1054 (9th Cir. 1996).  In Sahni, the Ninth Circuit held that § 1821(d) preempted a California statute that required the consent of all general partners prior to a transfer of the bulk of a partnership’s assets.  The court held that Sahni, which involved a statutory rather than a contractual restriction on transfer, was not applicable. 

Instead, the court found that its prior decision in Sharpe v. FDIC, 126 F.3d 1147 (9th Cir. 1997) to be more relevant.  In Sharpe the court held that the FDIC can escape liability under pre-receivership contracts only through its right under 12 U.S.C. § 1281(e), which authorizes it to disaffirm or repudiate any contract it deems burdensome and pay only compensatory damages.  The court also relied on the opinion of the D.C. Circuit in Waterview Management Co. v. FDIC, 105 F.3d 696 (D.C. Cir. 1997), which held that § 1821(d) does not preempt pre-receivership purchase-option contracts and that such contracts are appropriately governed by § 1821(e)’s provisions on repudiation and compensatory damages.  Specifically, the court held that “section 1821(d) merely permits the transfer of a failed bank’s assets without prior approval, while section 1821(e) governs the mechanisms by which such transfers are executed if the disputed assets are burdened by pre-existing contractual obligations.” 

The court considered the distinction between state statutory transfer restrictions and contractual restrictions to be key.  The court held that § 1821(d)’s preemption works to preempt statutory transfer restrictions but does not extend to contractual restrictions:  “To rule otherwise would permit the FDIC to succeed to powers greater than those held by the insolvent bank, as implausible result when FIRREA provides that the FDIC, as receiver, ‘shall . . . succeed to all rights, titles, powers, and privileges of the insured depository institution.’”  12 U.S.C. § 1821(d)(2)(A).

As a result, because the FDIC sold Heritage’s participation interest without first obtaining PBB’s consent or offering it a right of first refusal as required by the participation agreement, the FDIC was subject to PBB’s claims for damages arising from that breach.

March 31, 2015

Ninth Circuit Holds Discharged Debts are Still Debts for Purposes of Determining Eligibility to File under Chapter 12

In a case of first impression, the Ninth Circuit held that the unsecured portion of a secured debt, for which the debtor’s liability has been discharged in a prior chapter 7 proceeding, is still a debt for determining the debtor’s eligibility to be a debtor under chapter 12 of the Bankruptcy Code.  Davis v. U.S. Bank (In re Carolyn Davis), 2015 WL 662001 (9th Cir. 2015).  Carolyn Davis owned three parcels of real property on which she created a vineyard.  The appraised value of the three parcels totaled $1,600,000, and Davis owed debts secured by the properties totaling $4,100,000.  When her vineyard venture failed, Davis filed a personal chapter 7 case and received a discharge of her liability on the three loans.  She then filed a chapter 12 petition seeking to restructure the secured debt.  At the time, the statutory limit for debt in order to be eligible to file a chapter 12 petition was $3,792,650.  Although the loans secured by her real property totaled $4,100,000, Davis contended she was eligible to file a chapter 12 petition because the value of the collateral securing these loans was below the statutory limit and she had received a discharge of her liability on these loans in her chapter 7 case.

The bankruptcy court dismissed her chapter 12 petition concluding her “aggregate debts” exceeded the statutory limit of $3,792,650 in effect at the time under 11 U.S.C. § 101(18)(A).  The Ninth Circuit BAP affirmed, holding that the term “aggregate debts” in § 101(18)(A) included the unsecured portion of the debts secured by her real property even though her personal liability for the debts had been discharged.  The Ninth Circuit affirmed.

In concluding the bankruptcy court and BAP had reached the correct conclusion, the Ninth Circuit began with viewing the plain language of the statute.  First it noted that a “debt” is a “liability on a claim.”  11 U.S.C. § 101(12).  Next, it noted that the Code defined the term “claim” as a “right to payment . . . or right to an equitable remedy for breach of performance.”  11 U.S.C. § 101(5).  Citing the U.S. Supreme Court’s opinion in Pa. Dept. of Pub. Welfare v. Davenport, 495 U.S. 552 (1990), the Ninth Circuit stated “the plain meaning of a ‘right to payment’ is nothing more nor less than an enforceable obligation, regardless of the objectives [sought] in imposing the obligation,” and that “the meanings of ‘debt’ and ‘claim’ [were intended by Congress to] be coextensive.”  Further, the Ninth Circuit noted the opinion of the U.S. Supreme Court in Johnson v. Home State Bank, 501 U.S. 78 (1991), where the Court held that a debtor must include a mortgage lien in a chapter 13 plan even though the obligation secured by the mortgage was discharged in an earlier chapter case.  As a result, the Ninth Circuit concluded that the word “claim” in § 101(5) is to be given the “broadest definition available.” 

The Ninth Circuit held that the creditors’ right to foreclose in rem against the debtor’s properties constituted a “debt” and a “claim” even though the debtor’s personal liability had been previously discharged.  As a result, the debtor’s “aggregate debts” for purposes of determining eligibility exceeded the statutory limit, and the dismissal of the debtor’s chapter 12 case was affirmed.

March 17, 2015

Ninth Circuit BAP Holds Law v. Siegel Precludes Barring a Debtor’s Amendment of Exemptions on Grounds of Bad Faith or Equity

In its opinion in Gray v. Warfield (In re Gray), 523 B.R. 170 (9th Cir. BAP 2014), the Ninth Circuit BAP held that the U.S. Supreme Court’s decision in Law v. Siegel, 134 S. Ct. 1188 (2014) precludes a bankruptcy court from denying a debtor’s amendment of his claim of exemption on equitable grounds.

Prior to filing bankruptcy, the Grays prepaid three months of rent on their residence, but did not list the prepaid rent as an asset in their schedules.  At the 341 meeting the trustee questioned their payment of $2707 to their landlord, at which time the debtors disclosed they had prepaid several months rent, including rent for the first two months after their bankruptcy filing.  Following the 341 meeting, the debtors amended their schedules to disclose the prepaid rent and also to assert an exemption in it, an exemption allowed by applicable state law.  The trustee filed an objection to the amended exemption, contending the debtors’ failure to list the asset initially constituted equitable grounds for denying the exemption, arguing the debtors acted in bad faith in failing to disclose the asset in the first place.  The bankruptcy court sustained the objection, and the debtors appealed. 

On appeal the BAP analyzed the question in light of the U.S. Supreme Court’s opinion in Law v. Siegel.  The BAP noted two pre-Law v. Siegel opinions which held that a debtor could be denied the right to amend his exemption schedule if the debtor’s failure to initially disclose the asset was done in bad faith:  (1) the Ninth Circuit’s opinion in Martinson v. Michael (In re Michael), 163 F.3d 526, 529 (9th Cir. 1998 (“Whether the [debtors] could amend their schedules post-petition is separate from the question whether the exemption was allowable.”); (2) Doan v. Hudgins (In re Doan), 672 F.2d 831, 833 (11th Cir. 1982).  The BAP initially concluded that the distinction noted by the Ninth Circuit in Michael is meaningless—denying a debtor the right to amend an exemption schedule on equitable grounds has the identical effect of disallowing the exemption. 

The BAP then looked to well-settled case law to the effect that a claimed exemption is presumptively valid, and also that Fed. R. Bankr. Proc. 1009(a) gives a debtor the right to amend any schedule “as a matter of course at any time before the case is closed” without court approval.  The court also noted that, prior to Law v. Siegel, courts had crafted judicially created exceptions to limit the right to amend on a showing of either the debtor’s bad faith or prejudice to creditors. 

The BAP concluded that Law v. Siegel changed the landscape, and that courts no longer may deny a debtor’s right to amend his claims of exemption on findings of bad faith or other equitable grounds:  “The Supreme Court’s definitive position that the Bankruptcy Code does not grant bankruptcy courts ‘a general, equitable power . . . to deny exemptions based on a debtor’s bad-faith conduct’ is clearly irreconcilable with the use of judicially created remedies either to bar amendments or to disallow amended exemptions.” 

However, the BAP noted the Supreme Court in Law v. Siegel, recognizes that exemptions created under state law are governed in their allowance by state law.  Consequently, the BAP remanded the case to the bankruptcy court to determine if applicable state law provided equitable grounds for denial of the exemption.

February 3, 2015

Ninth Circuit Adopts a Strict “Dominion” Test for Purposes of Determining Initial Transferee Status under 11 U.S.C. sec. 550(a), With “Control” Playing No Part

In its opinion in Mano-Y&M, Ltd. V. Dane S. Field (In re The Mortgage Store, Inc.), 2014 WL 6844630 (9th Cir. 2014), the Ninth Circuit adopted a strict “dominion” test for purposes of determining who is the initial transferee of an avoidable transfer, clearly stating that equitable concepts of “control” play no part in determining initial transferee status.  In doing so, the court stated that the Ninth Circuit BAP’s decision in McCarty v. Richard James Enters., Inc. (In re Presidential Corp.), 180 B.R. 233 (9th Cir. BAP 1995) is no longer good law.

The facts of The Mortgage Store involved a sale of property, with the purchase price paid in part by a loan from The Mortgage Store to the purchaser.  The loan proceeds, along with the balance of the purchase funds, were deposited into a trust account held by the seller’s law firm, where they were held pursuant to an escrow agreement.  The attorney disbursed the funds pursuant to the purchase agreement.  It turned out that The Mortgage Store had been operating a Ponzi scheme, and the bankruptcy trustee brought an action against Mano-Y&M (“Mano”), as seller, to recover the loan proceeds it had been paid through the closing.  Mano contended the purchaser, for whose benefit the loan proceeds were transferred, was instead the initial transferee of the monies paid by The Mortgage Store in connection with the transaction.  The Ninth Circuit disagreed, held the seller was the initial transferee of the funds, and affirmed the judgment in favor of the bankruptcy trustee.

The court began its analysis with noting that § 550(a) does not define the term “initial transferee.”  The court referred to its prior adoption of the “dominion” test in Universal Serv. Admin. Co. v. Post-Confirmation Comm. Of Unsecured Creditors of Incomnet Commc’n Corp. (In re Incomnet), 463 F.3d 1064 (9th Cir. 2006) where it stated:  “Under the dominion test, a transferee is one who . . . has dominion over the money or other asset, the right to put the money to one’s own purposes.”  Id. at 1070. The court stated that a key factor in the dominion test is “whether the recipient of the funds has legal title to them” and whether the recipient has “the ability to use [the funds] as he sees fit.”  Id. at 1071.  The court cited to the Seventh Circuit’s opinion in Bonded Financial Services, Inc. v. European American Bank, 838 F.2d 890, 894 (7th Cir. 1988), where the Seventh Circuit held that a person will have dominion over a transfer if he is “free to invest the whole [amount] in lottery tickets or uranium stocks.” 

Following the Ninth Circuit’s decision in Incomnet, the Ninth Circuit BAP used a “dominion and control” test in In re Presidential, a test which arguably had been condoned by the Ninth Circuit.  See Schafer v. Las Vegas Hilton Corp. (In re Video Depot, Ltd.), 127 F.3d 1194 (9th Cir. 1997).  Elements of “control” for purposes of determining initial transferee status require courts to “step back and evaluate the transaction in its entirety to make sure that their conclusions are logical and equitable.”  The control test is a more flexible approach which empowers a court to utilize concepts of equity in determining who is an initial transferee. 

The Ninth Circuit in The Mortgage Store held that equitable concepts of “control” play no part in determining who is an initial transferee for purposes of § 550(a) and that the sole standard is one of “dominion.” 

Applying the strict dominion standard, the court affirmed the finding that the seller, whose legal title to the funds was unquestioned, and had the right to compel payment of the funds by the escrow agent to him following his execution of the documents conveying title to the property to the purchaser.  The purchaser had no ability to manipulate the funds on his own accord.  Mano had not argued that any other person, such as the attorney acting as the escrow agent, was the initial transferee.  Because the court found the purchaser was not the initial transferee, and because Mano had not argued that anyone else was, the court affirmed the judgment in favor of the bankruptcy trustee.

If Mano had argued that the attorney acting as escrow agent was the initial transferee, would the Ninth Circuit have agreed?  The opinion does not say, but the question is an open one. 

December 9, 2014

Ninth Circuit Rules That a Debtor May in Certain Circumstances Recover Attorney’s Fees Incurred in Prosecuting a Stay Violation (Or, How a Creditor can Turn a Small Debt Owed to it by the Debtor into a Large Debt it Must Pay to the Debtor)

If a creditor violates the automatic stay by seizing property of the estate and fails to cure that violation before the debtor files an action under sec. 362(k), may the debtor recover his attorney’s fees for prosecuting the stay violation under sec. 362(k)?  The Ninth Circuit Court of Appeals recently ruled that, in these circumstances, attorney’s fees incurred in prosecuting a stay violation are recoverable by a debtor against the creditor committing the violation.

In Snowden v. Check into Cash of Washington, Inc. (In the Matter of: Rupanjali Snowden), 769 F.3d 651 (9th Cir. 2014), the debtor obtained a payday loan from Check into Cash of Washington (“CIC”), giving CIC a post-dated check to repay the loan.  Before the loan came due, the debtor stopped payment on the check and advised CIC that she would be filing bankruptcy.  Following this information, and after the debtor filed bankruptcy, CIC engaged in harassing conduct—calling her at work numerous times each day even after she told them to stop, and requiring the debtor to call CIC’s offices every day or it would call her “references” and give them embarrassing information about her.  After the debtor filed bankruptcy, CIC successfully used an electronic funds transfer to debit the debtor’s account for the amount of the loan, causing the debtor’s account to be overdrawn and for the debtor to incur bank charges.

The debtor filed a motion for sanctions against CIC, seeking a return of the funds which CIC had taken from her bank account post-petition, and damages for overdraft fees, emotional distress, punitive damages and attorney’s fees.  The debtor offered to settle the sanctions motion for $25,000.  CIC rejected and sent the debtor a counter offer of $1,445. However, CIC never returned the monies it took from the debtor account after the debtor filed bankruptcy.  After hearing the evidence at trial, the bankruptcy court awarded the debtor damages for the funds taken, bank fees, and emotional distress as well as punitive damages and attorney’s fees.  At issue in the appeal was the bankruptcy court’s ruling that the debtor could recover attorney’s fees only up to the date of CiC’s counter offer, and could not recover attorney’s fees incurred in the prosecution of the motion for sanctions or in CIC’s appeal from the order.  The bankruptcy court reasoned that CIC’s offer was a tender that would have remedied the stay violation had the debtor accepted it.  In so ruling, the bankruptcy court relied on the Ninth Circuit’s decision in Sternberg v. Johnston, 595 F.3d 938 (9th Cir. 2010). 

One of the issues before the Ninth Circuit was whether CIC’s tender of $1,445—without an actual return of the monies it took in violation of the automatic stay—“remedied” the stay violation such that any attorney’s fees incurred by the debtor were not in remedying the stay violation but purely in pursuing her claim for damages.  The bankruptcy court had relied on the Ninth Circuit’s decision in Sternberg, which held that attorney’s fees incurred in enforcing the automatic stay and in remedying violations of the stay can be recovered, but fees incurred in prosecuting a claim for damages for violation of the automatic stay, are not.  Id. at 940.  The court stated that in Sternberg it had interpreted sec. 362(k) against the “American Rule” under which parties are presumed to bear their own litigation costs, and concluded that actual damages under sec. 362(k) refers to “actual losses.”  The Ninth Circuit stated its Sternberg opinion stands for the proposition that, once the stay violation ends, any fees a debtor incurs after that point in pursuit of a damage award are not “actual damages” within the meaning of sec. 362(k).  The court stated that Sternberg establishes a bright-line rule that attorney’s fees incurred in an attempt to collect damages once the stay violation has ended are not recoverable in a proceeding under sec. 362(k). 

However, the court then concluded that CIC’s “tender” did not end the stay violation.  First, in making its counter offer, CIC insisted that it had never violated the automatic stay.  Consequently, the court stated the debtor had to go to court in order to establish the stay violation and, in so doing, end it.  The court pointed to its decision in In re Schwartz-Tallard, No. 12-60052, 2014 WL 4251571 (9th Cir. 2014) as support.  In Schwartz-Tallard the court permitted an award of attorney’s fees incurred in defending an appeal from the decision of the bankruptcy court finding a stay violation, holding the debtor was entitled to fees because she “was forced to defend [the] appeal to validate the bankruptcy court’s ruling that [the creditor] had violated the stay, and to preserve her right to collect the pre-remedy damages awarded by the bankruptcy court.”  Consequently, the court viewed the debtor’s conduct as similar to the conduct in Schwartz-Tallard:  the debtor was not using the stay as a sword but instead as a shield from CIC’s assertions that it had not violated the stay.  The court stated:  “CIC unsuccessfully maintained [that it did not violate the stay] through the litigation in the bankruptcy court. Snowden had to proceed with the litigation to establish a violation of the automatic stay; put differently, she had to go to court to end the stay violation.”  As a result, the court held that the fees the debtor incurred in remedying the stay violation after receiving CIC’s counter-offer fell squarely within the meaning of “actual damages” under sec. 362(k).  This conclusion was further supported by the fact that CIC’s settlement offer did not include an actual physical return of the monies it wrongfully took from her account following her bankruptcy filing. 

In the end, the court concluded that attorney’s fees incurred by the debtor in seeking a finding that CIC had violated the stay could be included in her damages under sec. 362(k).  However, the court went on to hold that, under the American Rule, the debtor could not recover attorney’s fees she incurred in proving her monetary damages. 

This decision should be heeded by creditors in the Ninth Circuit.  CIC, a payday lender, clearly violated the automatic stay when it effected an electronic funds transfer from the debtor’s bank account to pay its pre-petition debt.  Yet, it never returned those funds to the debtor and, from the language of the opinion, may have had actual knowledge of the case at the time it effected the transfer.  Had it done so, its liability for the debtor’s attorney’s fees could have been limited to those incurred prior to its settlement offer. 

November 25, 2014

Ninth Circuit BAP Reluctantly Holds That a State Court Civil Contempt Proceeding is not Subject to the Automatic Stay, Following Ninth Circuit Court of Appeals Precedent under the Bankruptcy Act

Citing Ninth Circuit precedent from cases under the Bankruptcy Act, , the Ninth Circuit BAP reluctantly held that a pre-petition state court civil contempt proceeding is exempt from the automatic stay of sec. 362 of the Bankruptcy Code.  The decision of the BAP is Yellow Express, LLC v. Mark Dingley (In re: Dingley), 514 B.R. 591 (9th Cir. BAP 2014).

Pre-petition Yellow Express brought an action against the debtor and two LLCs he owned and controlled seeking judgment on various causes of action.  The debtor and his LLCs failed to appear for depositions, and the state court imposed sanctions against them.  When the debtor and his LLCs failed to pay the sanctions, Yellow Express filed an application for an order to show cause why the defendants should not be held in contempt for failure to pay the sanctions.  The state court entered an order requiring the defendants to appear in court to show cause why they should not be held in contempt for failing to pay the discovery sanctions.  Following the issuance of the Order to Show Cause and the date of the contempt hearing, Dingley filed a personal bankruptcy case, but neither of the LLCs filed bankruptcy.  The debtor’s state court and bankruptcy counsel notified Yellow Express’ attorney of the bankruptcy filing, asserting the contempt hearing could not proceed in light of the bankruptcy filing.  Yellow Express’ attorney replied that Ninth Circuit authority excepted a state court contempt proceeding from the automatic stay, relying on the David v. Hooker, Ltd., 560 F.2d 412 (9th Cir. 1977) and Dumas v. Atwood (In re Dumas), 19 B.R. 676 (9th Cir. BAP 1982).  The state court vacated the contempt hearing, but requested the parties submit briefing on the applicability of the stay to the contempt hearing.  Yellow Express’ attorney submitted its brief as ordered by the state court, with its brief arguing that the contempt proceeding could proceed against the debtor.

The debtor filed a motion in the bankruptcy court to enforce the automatic stay, contending the automatic stay prevented the state court from proceeding with the contempt action against the debtor and seeking sanctions against Yellow Express for willful violation of the stay for filing its state court brief asserting that the stay did not apply to the contempt proceeding.  Yellow Express responded, again contending the contempt action was excepted from the stay under prior Ninth Circuit precedent.  The bankruptcy court ruled that the contempt proceeding was stayed by the bankruptcy filing and further imposing sanctions against Yellow Express, finding it violated the stay by urging the state court to proceed with the contempt hearing, which was designed to force the debtor to pay the discovery sanctions which had been imposed pre-petition.

On appeal, the BAP reversed, albeit reluctantly.  The BAP noted that the Ninth Circuit has created a bright-line rule on whether the automatic stay applies to state court contempt proceedings:  if the sanction order “does not involve a determination [or collection] of the ultimate obligation of the bankrupt nor does it represent a ploy by a creditor to harass him” the automatic stay does not prevent the contempt proceeding from going forward.  Hooker, 560 F.2d at 418.  Hooker also involved a state court discovery sanction, directing the debtor to answer interrogatories and pay attorney’s fees.  The Ninth Circuit in Hooker held the automatic stay suspends, but does not dismiss, pre-petition state court actions, and that not every aspect of a pre-petition state court action is suspended by the stay. Specifically, the Ninth Circuit ruled that a proceeding addressing the debtor’s disobedience of a state court order issued prior to the automatic stay is not suspended by the stay, as such proceedings are not an “attempt in any way to interfere with the property which had passed to the control of the bankruptcy court; it sought merely to vindicate its dignity which had been affronted by the contumacious conduct of a person who ignored its order.”  Id.  Following enactment of the Bankruptcy Code, the Ninth Circuit BAP in Dumas, relying on Hooker,  held that a bankruptcy filing does not stay a sentencing hearing on a pre-petition state court contempt action for violating a subpoena.

The BAP also noted that other courts had interpreted Hooker as creating a judicially-crafted exception to the automatic stay of sec. 362(a).  KuKui Gardens Corp. v. Holco Capital Group, 675 F. Supp. 2nd 1016 (D. Haw. 2009); Lowery v. McIlroy & Millian (In re Lowery), 292 B.R. 645, (Bankr. E.D. Mo. 2003).  The BAP further noted that other courts have criticized Hooker  and Dumas, stating that there should be no judicially-created exceptions to the automatic stay.  In addition, the BAP referred in its opinion to other courts which had distinguished Hooker and Dumas, finding that a state court civil contempt proceeding can be justified if it is brought solely to deter wrongful conduct such as showing disrespect to the court, but is not justified if a creditor is using it merely to collect money due.  See In re Musaelian, 286 B.R. 781 (Bankr. N.D. Cal. 2002).  Finally, the BAP noted that two courts, including the Ninth Circuit, have excepted pre-petition contempt proceedings under one of the statutory exceptions found in sec. 362(b).  Alpern v. Lieb, 11 F.3d 689  (7th Cir. 1993); Berg V. Good Samaritan Hosp. (In re Berg), 230 F. 3d 1165 (9th Cir. 2000). 

The BAP ultimately reached its decision to reverse the bankruptcy court based on the precedent of Hooker and Dumas, ruling that a contempt action for nonpayment of court-ordered sanctions is not stayed by the automatic stay of sec. 362 unless the contempt proceeding turns on the determination or collection of the underlying debt.  The concurring opinion stated that, while Hooker is binding, its creation of the judicially-crafted exception to the automatic stay for state court contempt proceedings, is inconsistent with the modern breadth of the automatic stay and at odds with the plain language of the statute.  The majority opinion saw merit in the concurrence’s statement, but stated that it is up to the Ninth Circuit to determine whether Hooker remains valid law.

September 3, 2014

Ninth Circuit — Bank Did Not Violate Automatic Stay by Placing Administrative Hold on Chapter 7 Debtors’ Bank Accounts

On August 26, 2014, the Ninth Circuit Court of Appeals held that Wells Fargo (the “Bank”) did not violate the automatic stay by placing a temporary administrative hold on a chapter 7 debtor’s bank accounts.  See In re Mwangi, 2014 WL 4194057 (9th Cir. 2014).  Holland & Hart represented the Bank in this significant victory.

The United States Supreme Court long ago held that a bank may impose an administrative hold on a debtor’s bank account to preserve the bank’s setoff rights.  See Citizen’s Bank of Maryland v. Strumpf, 516 U.S. 16 (1995).  The Ninth Circuit’s Mwangi decision builds on the Strumpf holding and establishes that an administrative hold may be proper even if its purpose is not to preserve setoff rights.


The Mwangis, chapter 7 debtors, held four accounts at the Bank with an aggregate balance of $52,000.  When the Bank became aware of the Mwangis’ bankruptcy filing, it placed an administrative hold on all four accounts, and sent two letters: one to the chapter 7 trustee requesting instructions as to how to dispose of the account funds, and one to the Mwangis’ counsel informing him of the administrative hold that would last until the Bank received instructions from the Trustee or until 31 days after the meeting of creditors.

The Mwangis requested that the Bank lift the administrative hold.  The Bank refused to do so without the chapter 7 trustee’s consent.  The Mwangis then moved for sanctions, alleging that the Bank willfully violated the automatic stay, which motion the bankruptcy court denied.  The Mwangis then filed a class action adversary proceeding on the same basis.  The bankruptcy court dismissed the adversary action with prejudice, and the district court affirmed. 

Statutory Background

The filing of a bankruptcy petition gives rise to an automatic stay that prohibits, among other things, “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.”  See Bankruptcy Code § 362(a)(3).  It also automatically creates an estate that includes all legal or equitable interests of the debtor.  See Bankruptcy Code § 541(a).  On the petition date, a chapter 7 debtor is required to turn over to the chapter 7 trustee all of the debtor’s property.  See Bankruptcy Code § 521(a)(4).  Pursuant to Bankruptcy Code § 522, the Debtor may claim certain property as exempt from the estate, and if no party objects to the exemption, the property becomes exempt, in most cases, 30 days after the meeting of creditors.  See Fed. R. Bankr. P. 4003(b)(1).  A Nevada statute exempts from a debtor’s estate 75% of the debtor’s weekly disposable earnings.  See Nevada Revised Statutes § 21.090(1)(g). 

The Ninth Circuit’s Holding

The Mwangis argued that they were injured by the administrative hold during two periods: (1) after the Debtor claimed the property as exempt, but before the exemption became effective; and (2) after the exemption became effective. 

The Ninth Circuit held that the Mwangis could not allege a plausible injury relating to either period.  After a debtor claims property as exempt, but before the objection period expires, the allegedly exempt property remains property of the estate.  Mwangi at *7.  Thus, during that period, the Mwangis had no right to possess or control the accounts funds, and could allege no plausible injury.

When the objection period expires (typically 30 days after the meeting of creditors), exempt property revests in the debtor and ceases to be property of the estate.  The Mwangis alleged a violation of § 362(a)(4), which notably refers only to property of “the estate,” not property of the debtor.  Thus, once the exempt account funds revested in the Mwangis, the Bank’s administrative hold could not violate § 362(a)(4) because it did not affect estate property.  Id.


The Mwangi decision, like the Supreme Court’s 1995 Strumpf decision, should comfort banks that seek to impose administrative holds on debtors’ bank accounts.  This is particularly true where, as in Mwangi, the bank’s motivation for the administrative hold is to comply with the Bankruptcy Code and Rules.