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FILED

AUG 28 2014

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. NC-13-1455-KuDJu

)

PAUL DUNCAN GILLESPIE, ) Bk. No. 09-55224

)

Debtor. ) Adv. No. 09-05208

______________________________)

 )

RAYMOND A. BECHTOLD, )

)

Appellant, )

)

v. ) OPINION

)

PAUL DUNCAN GILLESPIE, )

)

Appellee. )

______________________________)

Argued and Submitted on July 24, 2014

at San Francisco, California Filed – August 28, 2014

____________________

Appeal from the United States Bankruptcy Court

for the Northern District of California

Honorable Arthur S. Weissbrodt, Bankruptcy Judge, Presiding

 

Appearances: Marc L. Shea of Shea & McIntyre, A.P.C argued for

appellant Raymond A. Bechtold; Wayne A. Silver

argued for appellee Paul Duncan Gillespie.

 

Before: KURTZ, DUNN and JURY, Bankruptcy Judges.
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KURTZ, Bankruptcy Judge:

INTRODUCTION

For purposes of the discharge injunction, when does an

attorney’s fees claim arise? When the fees are incurred or when

the underlying claim arises? The bankruptcy court held that,

because the debtor’s participation in postpetition litigation was

“not entirely voluntary,” the creditor’s fees claim arose

prepetition and hence was subject to the debtor’s chapter 71

discharge. In so holding, the bankruptcy court distinguished

Boeing N. Am., Inc. v. Ybarra (In re Ybarra), 424 F.3d 1018,

1026-27 (9th Cir. 2005).

We disagree with the bankruptcy court. The bankruptcy court

misconstrued the meaning of voluntariness as used in Ybarra and

did not identify any meaningful distinction between Ybarra and

the instant case. Accordingly, we REVERSE AND REMAND.

FACTS

The debtor, Paul Duncan Gillespie, owned and controlled

several companies, including Dymatix, Inc. At the time of

Gillespie’s chapter 7 bankruptcy filing, Gillespie and his

companies were parties to a lawsuit commenced by Raymond Bechtold

in the Santa Clara County Superior Court (Case No. 08-CV-119735). 

The state court lawsuit arose from Gillespie’s default on a loan,

which in turn led the lender, Giga-tronics, Inc., to sell all of

its interest in the collateral securing the loan to Bechtold.

1 Unless specified otherwise, all chapter and section

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

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This collateral apparently consisted of much of Dymatix’s assets

including its general intangibles and its intellectual property. 

Bechtold then attempted to enforce his right to possession of the

collateral, which right Gillespie and Dymatix disputed. Among

other things, Gillespie and Dymatix asserted that Giga-tronics’

sale of the collateral to Bechtold constituted a wrongful

foreclosure because Giga-tronics failed to obtain possession of

the collateral before conducting the sale. In addition,

Gillespie and Dymatix filed a number of cross-claims against

Bechtold for breach of contract, conversion, breach of fiduciary

duty and tortious interference with contractual relations.

On June 22, 2009, several days before Gillespie’s bankruptcy

filing, the state court issued an order providing for Gillespie’s

incarceration based on the failure of Gillespie and Dymatix to

fully comply with the state court’s prior prejudgment writ of

possession, which had directed Gillespie and Dymatix to turn over

all of the collateral to Bechtold. Dymatix filed its chapter 7

bankruptcy at the same time as Gillespie (Bk. No. 09–55233).

The commencement of the bankruptcy cases on July 1, 2009,

did not result in the cessation of the litigation between the

parties. To the contrary, the litigation expanded into the

bankruptcy court forum. Among other things, Bechtold filed a

series of relief from stay motions seeking permission to pursue

his state law remedies in the state court. Bechtold also filed

adversary proceedings against Dymatix and Gillespie seeking a

bankruptcy court determination of his ownership of and

entitlement to the collateral. In addition, Bechtold’s adversary

complaint against Gillespie initially contained claims for relief

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under §§ 523(a)(2) and (4), but Bechtold later abandoned his

exception to discharge claims by omitting them from his third

amended complaint filed in February 2010. 

In response to the third amended complaint, Gillespie filed

in March 2010 an answer and roughly a dozen counterclaims against

Bechtold. The counterclaims largely mirrored the cross-claims

Gillespie had filed in the state court. Whereas Gillespie has

characterized his cross-claims and counterclaims as merely

defensive in nature, the pleadings themselves tell a different

story. Both his state court cross-claims and his bankruptcy

court counterclaims requested compensatory damages, punitive

damages, costs and attorney’s fees.

In May 2010, the bankruptcy court granted Bechtold limited

relief from the automatic stay to permit him to proceed with some

aspects of the state court litigation. The relief from stay

order explicitly prohibited Bechtold from enforcing any judgment

he might obtain in the state court against Gillespie or Dymatix,

or from seeking any damages for prepetition events. But the

order explicitly permitted Bechtold to proceed to trial on the

issue of his rights in the collateral. The order also stayed the

two adversary proceedings Bechtold had filed against Gillespie

and Dymatix, inasmuch as they sought essentially the same relief

as Bechtold was seeking from the state court. Eventually, after

Bechtold obtained the relief he was seeking from the state court,

the bankruptcy court dismissed his adversary proceedings.

In October 2010, the state court held trial and in March 

2011 issued a final judgment in favor of Bechtold. Among other

things, the state court determined that, since July 2008,

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Bechtold had been the owner of the collateral and was entitled to

possession of the collateral. Based on that determination, the

state court directed Dymatix and Gillespie to turn over any

collateral still in their possession. The judgment furthermore

enjoined Dymatix and Gillespie from any further use of the

collateral. Additionally, the judgment ruled against Dymatix and

Gillespie on all of their cross-claims. In a post-judgment

order, the state court awarded against both Dymatix and Gillespie

$134,573 in fees that Bechtold had incurred postpetition in

litigating the dispute both in the state court and in the

bankruptcy court.

Bechtold then filed two motions in the bankruptcy court

seeking, among other things, permission to enforce both the nonmonetary relief granted by the state court and its fee award. 

Between May 2011 and September 2013, a period of well over two

years, Bechtold and Gillespie both filed numerous papers in the

bankruptcy court regarding whether Bechtold should be permitted

to enforce his right to possession and exclusive use of the

collateral as well as his fee award. 

In fact, by September 2011, the bankruptcy court by oral

tentative ruling seemingly had resolved the fee issue. More

specifically, the bankruptcy court orally ruled at a hearing held

on September 23, 2011, that Ybarra applied to Bechtold’s

attorney’s fee claim. According to the bankruptcy court, the

fees incurred postpetition would be treated as a postpetition

claim for purposes of the discharge injunction because Gillespie

voluntarily returned to the fray and continued to litigate with

Bechtold in the state court after Gillespie commenced his

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bankruptcy case and even after Bechtold had abandoned his

nondischargeability claims. After Bechtold abandoned his

nondischargeability claims, the bankruptcy court reasoned,

Gillespie could have exited the state court litigation without

any concern of continuing exposure for prepetition debts in light

of his bankruptcy discharge.

Instead of walking away from the state court litigation, the

bankruptcy court noted, Gillespie took affirmative steps to

resume that litigation. In particular, Gillespie objected to the

chapter 7 trustee’s proposed sale to Bechtold of the estate’s

interest in the state court lawsuit and in the collateral in

exchange for a cash payment of $14,000. Then, Gillespie

successfully overbid for the same property, agreeing to pay the

chapter 7 trustee $32,000 to purchase essentially the same assets

from the trustee. The court entered an order approving the sale

to Gillespie in February 2010, shortly after Bechtold abandoned

his nondischargeability claims against Gillespie. 

In essence, the bankruptcy court determined that Gillespie 

affirmatively and voluntarily acted postpetition by purchasing

the estate’s interest in his disputed claims against Bechtold and

the collateral and by voluntarily returning to the state court

litigation to press those claims. But after the state court

completely rejected all of Gillespie’s claims, the bankruptcy

court explained, Gillespie sought to characterize all of these

claims as purely defensive in nature. Under these circumstances,

the bankruptcy court concluded, Ybarra was apposite and its rule

regarding the discharge of attorney’s fees incurred postpetition

should be followed.

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Even so, the bankruptcy court’s initial written order on the

subject matter of Bechtold’s motions, an order entered in October 

2011, explicitly reserved all issues regarding the effect of the

discharge injunction on Bechtold’s entitlement to enforce the

state court judgment.

At the conclusion of the September 23, 2011 hearing, the

court indicated that there were two small lingering issues that

still needed deciding. One concerned whether the state court

properly included fees incurred by Bechtold in prosecuting his 

nondischargeability claims (before Bechtold abandoned those

claims). The other concerned whether the bankruptcy court should

forbear from issuing its final order on the matter until after

Gillespie’s state court appeal had run its course. The court

continued the hearing so that it could ponder these issues. 

In the ensuing months, the parties filed a seemingly endless

series of supplemental papers, and the bankruptcy court held a

number of continued hearings. Some of the papers and hearings

addressed issues that already had been addressed by the court

while others raised new issues. Nonetheless, on several

occasions, the court orally re-confirmed or “finalized” its prior

tentative ruling regarding the fee issue. For instance, in March

2012, the court stated as follows:

At the last hearing held December 8th, 2011, the Court

finalized the previous tentative ruling from September

2011 that Defendant, quote: “. . . returned to the fray

by purchasing the bankruptcy estate’s litigation rights

and pursuing those rights in the State Court

litigation.” As a result the Chapter 7 discharge does

not discharge Defendant’s debt for post-petition

attorney’s fees and costs awarded by the State Court.

Hr’g Tr. (March 6, 2012) at 3:25-4:9. The court once again

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orally re-confirmed its fee ruling at a hearing held in November

2012.

Nonetheless, in its final written decision on the fee issue,

the court reversed itself and held that In re Ybarra did not

apply and that the postpetition fees had been discharged. In so

holding, the court primarily relied on the fact that Gillespie

was a defendant in the state court litigation, whereas the debtor

in Ybarra was the plaintiff. The bankruptcy court acknowledged

that Gillespie affirmatively pursued its cross-claims in the

state court litigation postpetition, but still concluded that

Gillespie had not “voluntarily borne the risk of incurring

attorneys’ fees in pursuing the litigation” postpetition because

Bechtold had initiated the litigation as plaintiff.

The bankruptcy court further reasoned that Gillespie’s

postpetition participation in the state court litigation “was not

entirely voluntary” because, if he had not purchased the estate’s

interest in the collateral and in the state court litigation and

had not thereafter pressed his claims in the state court, he

would have forfeited any interest he had in the collateral, in

his cross-claims and in his defenses against Bechtold’s claims. 

On September 9, 2013, the bankuptcy court entered its final

memorandum decision and order, and Bechtold timely appealed.

JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C.

§§ 1334 and 157(b)(2)(A) and (O). We have jurisdiction under 28

U.S.C. § 158.

ISSUE

Did the bankruptcy court correctly interpret In re Ybarra

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when it concluded that Bechtold’s fee claim constituted a

prepetition claim and hence was covered by Gillespie’s chapter 7

discharge?

STANDARDS OF REVIEW

The scope of a chapter 7 discharge is a question of law that

requires use to construe the discharge provisions of the

Bankruptcy Code. Hassanally v. Republic Bank (In re Hassanally),

208 B.R. 46, 48 (9th Cir. BAP 1997). We review questions of law

de novo. Id.

DISCUSSION

The only question raised in this appeal is whether the

attorney’s fees the state court awarded against Gillespie

constitute a prepetition debt or a postpetition debt for purposes

of Gillespie’s chapter 7 discharge.

A chapter 7 discharge releases the debtor from personal

liability for debts arising “before the date of the order for

relief under this chapter” and enjoins creditors from enforcing

or collecting upon those debts. See § 727(b); see also

§ 524(a)(2); Heilman v. Heilman (In re Heilman), 430 B.R. 213,

218 (9th Cir. BAP 2010). Under the Bankruptcy Code, the term

“debt” means liability on a claim. § 101(12). The existence of

such a claim ordinarily is determined by reference to

nonbankruptcy law – particularly state law. In re Hassanally,

208 B.R. at 49.

But federal law determines when a claim arises for

bankruptcy purposes. SNTL Corp. v. Ctr. Ins. Co. (In re SNTL

Corp.), 571 F.3d 826, 839 (9th Cir. 2009); Zilog, Inc. v. Corning

(In re Zilog, Inc.), 450 F.3d 996, 1000 (9th Cir. 2006). To

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ascertain when a claim arises for purposes of the discharge

injunction, we must first consider the Bankruptcy Code’s broad

definition of the term “claim,” which means a:

(A) right to payment, whether or not such right is

reduced to judgment, liquidated, unliquidated, fixed,

contingent, matured, unmatured, disputed, undisputed,

legal, equitable, secured, or unsecured; or [a]

(B) right to an equitable remedy for breach of

performance if such breach gives rise to a right to

payment, whether or not such right to an equitable

remedy is reduced to judgment, fixed, contingent,

matured, unmatured, disputed, undisputed, secured, or

unsecured.

§ 101(5).

The Bankruptcy Code utilizes an exceptionally broad

definition of the term “claim” in order to ensure that “all legal

obligations of the debtor, no matter how remote or contingent,

will be able to be dealt with in the bankruptcy case.” In re

SNTL Corp., 571 F.3d at 838 (quoting Cal. Dep’t of Health Servs.

v. Jensen (In re Jensen), 995 F.2d 925, 929-30 (9th Cir. 1993)). 

This broad definition “is critical in effectuating the bankruptcy

code’s policy of giving the debtor a ‘fresh start.’” In re

Jensen, 995 F.2d at 930. 

To facilitate this broad definition and the fresh start

policy, the Ninth Circuit ordinarily employs the “fair

contemplation” test in determining when a claim arises. See,

e.g., In re SNTL Corp., 571 F.3d at 839; In re Zilog, 450 F.3d at

1000; In re Jensen, 995 F.2d at 930. This test dictates that a

claim arises when the claimant “can fairly or reasonably

contemplate the claim’s existence even if a cause of action has

not yet accrued under nonbankruptcy law.” In re SNTL Corp., 571

F.3d at 839 (citing Cool Fuel, Inc. v. Bd. of Equalization (In re

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Cool Fuel, Inc.), 210 F.3d 999, 1007 (9th Cir. 2000)).

However, the Ninth Circuit has adopted a different standard

for determining for discharge purposes when an attorney’s fee

claim arises. Under that standard, even if the underlying claim

arose prepetition, the claim for fees incurred postpetition on

account of that underlying claim is deemed to have arisen

postpetition if the debtor “returned to the fray” postpetition by

voluntarily and affirmatively acting to commence or resume the

litigation with the creditor. In re Ybarra, 424 F.3d at 1026-

1027. The Ybarra court explained that, “[e]ven if a cause of

action arose pre-petition, the discharge shield cannot be used as

a sword that enables a debtor to undertake risk-free

[postpetition] litigation at others’ expense.” Id. at 1026. The

Ybarra court further explained that, while Congress intended the

discharge to relieve debtors from costs associated with their

prepetition acts even if such costs continue to accrue

postpetition, it did not intend to insulate debtors from costs

associated with postpetition acts. Id. at 1024 (citing In re

Hadden, 57 B.R. 187, 190 (Bankr. W.D. Wis. 1986)).

The Ybarra rule applies regardless of whether the litigation 

begins prepetition or postpetition, regardless of the nature of

the underlying claim, and regardless of the forum in which the

postpetition litigation takes place. See, e.g., In re Ybarra,

424 F.3d at 1023-24; Siegel v. Fed. Home Loan Mortg. Corp., 143

F.3d 525, 533-34 (9th Cir. 1998); Shure v. Vermont (In re

Sure-Snap), 983 F.2d 1015, 1017-19 (11th Cir. 1993). 

The bankruptcy court here acknowledged that Gillespie

affirmatively acted to resume his participation in the state

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court litigation with Bechtold. Gillespie did so by purchasing

the estate’s interest in the collateral and in the state court

lawsuit and by litigating the state court action to its

conclusion. Nonetheless, the bankruptcy court still held that

Gillespie’s return to the state court litigation was not

voluntary within the meaning of Ybarra. The bankruptcy court

concluded that Gillespie’s postpetition litigation activity was

not entirely voluntary because Gillespie stood to lose any

interest he otherwise might have had in the collateral and in the

cross-claims and defenses he asserted in the state court lawsuit

unless he continued to actively assert those interests in the

lawsuit.

But this cannot be what Ybarra had in mind when it stated

that “Ybarra’s actions to revive the state suit were sufficiently

voluntary and affirmative to be considered ‘returning to the

fray.’” In re Ybarra, 424 F.3d at 1027. Any time debtors hold

disputed claims or property interests at the time of their

bankruptcy filing, those claims or interests are at risk of being

forfeited unless they or their estate take postpetition action to

preserve them. This was precisely the state of affairs each of

the debtors faced in Ybarra, Siegel and Sure-Snap. Thus, in

determining whether a debtor’s postpetition actions were

voluntary, Ybarra could not have meant that bankruptcy courts

should assess whether the debtors were compelled to act to

prevent the loss of their asserted interests and claims.

The bankruptcy court further ruled that Ybarra does not

apply when, as here, the debtor is the named defendant in the

postpetition litigation. According to the bankruptcy court,

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Ybarra only should apply when the debtor is the named plaintiff. 

The bankruptcy court offered no explanation for this limitation

of Ybarra, except to note that it had not found any cases in

which the Ybarra rule had been applied to a debtor who engaged in

postpetition litigation nominally as a defendant. 

We disagree with the bankruptcy court’s attempt to limit

Ybarra in this manner. The focus of Ybarra’s inquiry does not

turn upon who is named as plaintiff and who is named as

defendant. Rather, the focus of the Ybarra inquiry is on the

debtor’s motivation for engaging in the postpetition litigation

and whether the debtor “returned to the fray” to press his

disputed claims and property interests or for some other purpose. 

See id. at 1023-24; see also In re Sure-Snap Corp., 983 F.2d at

1018; In re Hadden, 57 B.R. at 190.

We acknowledge that these three decisions do not specify

where the line between voluntary and involuntary always should be

drawn. Nonetheless, these three decisions support the conclusion

that Gillespie is not entitled to a discharge of Bechtold’s

postpetition attorney’s fees given that Gillespie chose to resume

his participation in the state court action postpetition in order

to preserve his or her asserted interest in the collateral, in

his cross-claims, and in his defenses to Bechtold’s claims.

The bankruptcy court explicitly found here that Gillespie

continued to pursue the state court litigation postpetition for

these purposes. While the bankruptcy court later reversed itself

regarding the voluntariness of Gillespie’s postpetition actions,

the bankruptcy court never reversed its findings regarding the

underlying purposes of Gillespie’s postpetition litigation

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activity, and neither party appealed the bankruptcy court’s

findings in this regard. Consequently, we accept those findings

as true. See Sachan v. Huh (In re Huh), 506 B.R. 257, 272 (9th

Cir. BAP 2014) (en banc).

Moreover, we agree with these findings. The state court

litigation was, at bottom, a dispute over ownership of the

collateral, with each side using the litigation as an opportunity

to assert their respective interests in the collateral and to

assert claims for damages to the extent their respective property

interests were interfered with.2 Simply put, whichever side was

nominally designated as the plaintiff and whichever was nominally

designated as the defendant did not, in this instance, change the

fundamental nature and purpose of the litigation.

The only other ground the bankruptcy court offered for

distinguishing Ybarra was that the debtor there was offered a

monetary settlement as an alternative to continued postpetition

litigation, whereas Gillespie here was not offered any money in

lieu of continuing to assert his interests in the collateral and

the state court lawsuit. However, as we already have explained

above, the focus of the Ybarra test is on the purpose of the

postpetition litigation. Thus, any distinction regarding what,

if anything, the debtor was offered to not pursue his or her

2

 Of course, as a result of Gillespie’s bankruptcy

discharge, by the time Gillespie resumed his participation in the

state court action, Gillespie no longer had any exposure on

account of Bechtold’s damages claims arising from Gillespie’s

prepetition interference with Bechtold’s property interests in

the collateral. See generally In re Hassanally, 208 B.R. at 54-

55 (holding that construction defects claims arose prepetition

when the tortious conduct occurred and hence were discharged). 

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asserted interests and claims is immaterial, except to the extent

it tends to demonstrate the underlying purpose of the

postpetition litigation.

Aside from the bankruptcy court’s reasoning, Gillespie

similarly argues that he had no choice but to return to the fray,

so the bankruptcy court correctly determined that his return to

the fray was not voluntary. As Gillespie puts it, he “never had

the option of enjoying his fresh start, because Bechtold

contended that Gillespie was wrongfully in possession of [the

collateral], and that Gillespie’s continued wrongful possession

was actionable despite Gillespie’s [c]hapter 7 discharge.” Aple.

Resp. Brief (Jan 27, 2014) at p. 25.

Gillespie’s argument is fallacious. It improperly equates

Gillespie’s entitlement to a fresh start and his entitlement to

the benefit of his chapter 7 discharge with an entitlement to

indefinitely impede Bechtold’s right as owner to exclusive use

and possession of the collateral. In other words, Gillespie’s

chapter 7 discharge rights did not alter or entitle him to alter

Bechtold’s property interests. Bechtold’s property interests

passed through Gillespie’s bankruptcy proceedings unaffected. 

See Dewsnup v. Timm, 502 U.S. 410, 418 (1992). “[A] bankruptcy

discharge extinguishes only one mode of enforcing a claim –

namely, an action against the debtor in personam – while leaving

intact another – namely, an action against the debtor in rem.”

Johnson v. Home State Bank, 501 U.S. 78, 84 (1991).

Moreover, Gillespie’s argument is inconsistent with Ybarra’s

teaching that, “[i]f the debtor chooses to enjoy his fresh start

by pursuing pre-petition claims . . ., he must do so at the risk

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of incurring the post-petition costs involved in his acts.” In

re Ybarra, 424 F.3d at 1024 (quoting In re Hadden, 57 B.R. at

190).

In sum, the bankruptcy court committed reversible error

because it misconstrued Ybarra. In addition to reversing the

bankruptcy court’s ruling, we must remand this matter for further

findings. The record indicates that a portion of the attorney’s

fees Bechtold incurred postpetition were incurred while Gillespie

was still under the cloud of Bechtold’s nondischargeability

claims. The bankruptcy court must determine whether and to what

extent, before Bechtold abandoned his nondischargeability claims,

Gillespie engaged in his postpetition litigation activity for the

purpose of limiting or preventing his exposure on account of the

nondischargeability claims. To that extent, under Ybarra,

Bechtold’s postpetition fees should be considered discharged. We

express no opinion regarding how the bankruptcy court should

apportion Bechtold’s postpetition fees between those that are

discharged and those that are not discharged. Instead, we leave

it to the bankruptcy court to address that issue in the first

instance.

CONCLUSION

For the reasons set forth above, we REVERSE AND REMAND.

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