Opinion ID: 754205
Heading Depth: 2
Heading Rank: 2

Heading: Award of Attorney's Fees to Freddie Mac

Text: 21 Despite the fact that Freddie Mac's rights under the notes and deeds of trust had been decided in the bankruptcy court and Freddie Mac's claims had been discharged there, Siegel chose to sue on the theory that Freddie Mac had breached the deeds of trust's promises. Unfortunately for him, the deeds of trust provide for attorney's fees if the lender is pursuing its rights under them. There is no dispute that the provision was valid under state law and would apply here if the bankruptcy proceedings did not, somehow, affect it. For purposes of this action, it was not affected by those proceedings. 22 In the first place, the mere fact that Siegel obtained a bankruptcy discharge did not eliminate the provision. That is, it cannot be said that the whole contract merged into that judgment. As the Supreme Court pointed out in Johnson v. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150, 2153, 115 L.Ed.2d 66 (1991), a discharge in bankruptcy extinguishes only 'the personal liability of the debtor.'  (Citation omitted). Thus, the Court found that a creditor's right to foreclose on the mortgage survives or passes through the bankruptcy. Id. Similarly, as the Bankruptcy Appellate Panel has held, a discharge in bankruptcy does not end a party's obligation, but merely prevents one method of collection. See Cortez v. American Wheel, Inc. (In re Cortez), 191 B.R. 174, 178 (9th Cir. BAP 1995); see also Hall v. National Gypsum Co., 105 F.3d 225, 229 (5th Cir.1997). Thus, Siegel's discharge in bankruptcy did not extinguish the contractual attorney's fee provision. The provision itself may have fallen dormant, but it was reviviscible. 23 But, Siegel argues, the bankruptcy court's June 10, 1994, discharge of his obligations must have included Freddie Mac's claim for attorney fees. Under 11 U.S.C. § 727(b), a debtor is discharged from all debts that arose before the date of the order for relief under [Chapter 7]. Thus, whether Freddie Mac's claim for attorney's fees was discharged in bankruptcy will depend on when the attorney's fee debt arose. See California Dep't of Health Servs. v. Jensen (In re Jensen), 995 F.2d 925, 929 (9th Cir.1993) (suggesting that inquiry regarding whether debt is discharged depends on when claim arose); In re Rosteck, 899 F.2d 694, 696 (7th Cir.1990) (The answer to [the discharge] question depends upon when the ... debt arose.). Both parties agree that the contract provision for attorney's fees was executed prior to Siegel's filing bankruptcy. Similarly, the parties do not dispute that for our purposes Siegel's acts which gave rise to Freddie Mac's award occurred post-discharge. 24 The question of when a debt arises under the bankruptcy code is governed by federal law. See In re Jensen, 995 F.2d at 930 n. 5 ( 'The determination of when a claim arises for purposes of bankruptcy law should be a matter of federal bankruptcy law....' ); Corman v. Morgan (In re Morgan), 197 B.R. 892, 896 (N.D.Cal.1996) (finding that determination of when a claim arises under the bankruptcy code should be governed by federal law), aff'd, 131 F.3d 147 (9th Cir.1997); Cohen v. North Park Parkside Community Ass'n (In re Cohen), 122 B.R. 755, 757 (Bankr.S.D.Cal.1991) (However, federal bankruptcy law, rather than California state law, governs when a debt arises for purposes of determining dischargeability.); see also Employees' Retirement Sys. v. Osborne (In re THC), 686 F.2d 799, 803-04 (9th Cir.1982) (applying federal law to determine when parties had obligations under indemnification agreement). The Code defines a debt as liability on a claim. 11 U.S.C. § 101(12). The term debt is therefore coextensive with [the definition of a] 'claim'. Daghighfekr v. Mekhail (In re Daghighfekr), 161 B.R. 685, 687 (9th Cir. BAP 1993). 25 Pursuant to section 101(5)(A), a claim is 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. (emphasis added). This 'broadest possible definition' of 'claim' is designed 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 Jensen, 995 F.2d at 929 (quoting H.R.Rep. No. 95-595, at 309 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6266; S.Rep. No. 95-598, at 22 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5808) (alteration in original). Thus, we must ask whether the claim for attorney's fees was contingent and therefore discharged in its entirety. We think not. 26 A contingent claim is  'one which the debtor will be called upon to pay only upon the occurrence or happening of an extrinsic event which will trigger the liability of the debtor to the alleged creditor.'  Fostvedt v. Dow (In re Fostvedt), 823 F.2d 305, 306 (9th Cir.1987); see also In re Dill, 30 B.R. 546, 548 (9th Cir. BAP 1983), aff'd, 731 F.2d 629 (9th Cir.1984) (defining contingent claim as a claim that has not accrued and which is dependent upon a future event). Any doubts regarding the dischargeability of a claim should be resolved in favor of finding that a contingent claim existed. In re THC, 686 F.2d at 802. Siegel asks us to read those principles in an unreflective way, and to decide that the attorney's fee provision was contingent because it could not take effect unless Siegel did something. No doubt the future is always contingent, but that does not mean that a bankrupt is discharged regarding everything he might do in the future. None of our authorities are to the contrary. Not surprisingly, an unreflective reading is the wrong reading. 27 In In re THC, 686 F.2d at 803-04, we did hold that a contractual claim for indemnification based on events that occurred post-petition was provable in bankruptcy because the contractual provision was a contingent claim entered pre-petition. As such, the plaintiff's claim for indemnification, which was wholly contingent and unmatured at the time when creditors could file proofs of claim, was time barred. See id. at 801. In reaching that conclusion, we accepted the bankruptcy court's rationale that the creditor's claim arose when the indemnification agreement was executed, not when the contingency took place. See id. at 802. Similarly, in Christian Life Ctr. Litig. Defense Comm. v. Silva (In re Christian Life), 821 F.2d 1370, 1374 (9th Cir.1987), we denied an attorney's fee claim for legal fees as an administrative expense in a bankruptcy proceeding. Administrative expenses are given priority in bankruptcy  'in order to secure goods and services necessary to an orderly and economical administration of the estate after the petition is filed.'  Id. at 1373 (citation omitted). Thus, [c]laims that arise from a creditor's pre-petition services to the debtor are not entitled to administrative expense treatment. Id. at 1373-74. Although the legal fees expended in defending a corporate officer in In re Christian Life were actually incurred post-petition, we held that the claim arose pre-petition because the corporation's obligation to indemnify the officer arose from pre-petition services, i.e., it was a form of compensation. See id. at 1374. In reaching that conclusion, we emphasized that [i]t makes no difference that the duty to indemnify [the officer] for litigation expenses ... did not accrue until after the petition was filed when [the officer] incurred those expenses; the critical fact is that the claim for indemnity arose from pre-petition services [the officer] provided the corporation. Id. 28 Those cases did not specifically deal with attorney's fees provisions in a contract, but there is nothing about attorney's fees provisions that would render them unprovable. We have held as much. See, e.g., Highlands Ins. Co. v. Bozzo (In re Bozzo), 693 F.2d 90, 92 (9th Cir.1982); Toys R Us, Inc. v. Esgro, Inc. (In re Esgro, Inc.), 645 F.2d 794, 798 (9th Cir.1981); Hartman v. Utley, 335 F.2d 558, 559 (9th Cir.1964). But In re THC and In re Christian Life did deal with situations where the possibility of a claim against the debtor was fixed and entirely out of his hands before he entered bankruptcy. In other words, he had a possible liability, and whether actual liability would attach to him was contingent upon what others might do. Were he not discharged, that very real threat would stay with him and remain a millstone around his economic neck as he attempted a fresh start. The very purpose of bankruptcy proceedings would be cut away. Indeed, a person with enormous possible indemnification liability could never effectively obtain a fresh start. That is decidedly not a proper result, but it is also not the case at hand. 29 This is a case where the debtor, Siegel, had been freed from the untoward effects of contracts he had entered into. Freddie Mac could not pursue him further, nor could anyone else. He, however, chose to return to the fray and to use the contract as a weapon. It is perfectly just, and within the purposes of bankruptcy, to allow the same weapon to be used against him. 30 Other courts, which have considered the issue have reached the same conclusion. Thus, in Shure v. Vermont (In re Sure-Snap), 983 F.2d 1015, 1018 (11th Cir.1993), the debtor chose to sue on an agreement which provided for attorney's fees, and then sought to avoid the effect of that provision. The court said: 31 The confirmation of Sure-Snap's Chapter 11 plan discharged its pre-confirmation liabilities under the Agreement. The attorney fees Bradford seeks were incurred by Bradford in defending a post-confirmation appeal initiated by Sure-Snap. Sure-Snap voluntarily continued to litigate the validity of the Agreement after confirmation of its Chapter 11 plan. Bradford had no choice but to defend. By choosing to appeal the validity of the Agreement after confirmation, Sure-Snap did so at the risk of incurring post-confirmation costs involved in its acts. [B]ankruptcy was intended to protect the debtor from the continuing costs of pre-bankruptcy acts but not to insulate the debtor from the costs of post-bankruptcy acts. 32 Id. at 1018 (citation omitted); see also Irmas Family Trust v. Madden (In re Madden), 185 B.R. 815, 819 (9th Cir. BAP 1995); Danzig Claimants v. Grynberg (In re Grynberg), 113 B.R. 709, 713 (Bkrtcy.D.Colo.1990), aff'd, 966 F.2d 570 (10th Cir.1992); In re Hadden, 57 B.R. 187, 190 (Bankr.W.D.Wis.1986). In fine, Siegel's decision to pursue a whole new course of litigation made him subject to the strictures of the attorney's fee provision. In other words, while his bankruptcy did protect him from the results of his past acts, including attorney's fees associated with those acts, it did not give him carte blanche to go out and commence new litigation about the contract without consequences. Thus, we affirm the district court's award of attorney's fees in favor of Freddie Mac. 33 Freddie Mac is also entitled to attorney's fees on appeal pursuant to the underlying deeds of trust. We will remand to the district court for further proceedings on this issue. See 9th Cir. Rule 39-1.8.