In re Ybarra: Ninth Circuit Holds That Claims Arising from the Debtor's Postpetition Pursuit of Litigation Commenced Prepetition Are Non-Dischargeable
In "Boeing North American, Inc. v. Ybarra (In re Ybarra)", 424 F. 3d 1018 (9th Cir. 2005), the Ninth Circuit Court of Appeals has held that an award of attorney's fees and costs incurred post-petition in defending a cause of action commenced pre-petition is not discharged.
In In re Ybarra, after filing a Chapter 11 petition, the debtor revived state court litigation that it had initiated approximately three years earlier. The defendant ultimately prevailed on summary judgment and obtained an award of attorney's fees and costs under California law. In considering the defendant's subsequent motion to enforce this award, the Bankruptcy Court held that the portion of the award attributable to the post-petition period was not discharged.
The Bankruptcy Appellate Panel?in a divided decision?reversed, holding that the entire award had been discharged. The BAP's majority opinion attempted to reconcile the holdings of the Court of Appeals in Abercrombie v. Hayden Corp. (In re Abercrombie), 139 F.3d 755 (9th Cir. 1998), Kadjevich v. Kadjevich (In re Kadjevich), 220 F. 3d 1016 (9th Cir. 2000), and Siegel v. Federal Home Loan Mortgage Corp., 143 F. 3d 525 (9th Cir. 1998). Abercrombie rejected administrative expense treatment of a claim where that claim had as its "source" a pre-petition contract. Kadjevich, relying on Abercrombie, also rejected administrative expense treatment of a claim, in this case since the "source" of the award of attorney's fees was a pre-petition tort claim. Siegel held that where attorney's fees were granted in connection with litigation both commenced and pursued post-petition, that fee award was not discharged. The BAP opinion reconciled the holdings based on temporal distinctions with respect to the source of the claims, while at the same time expressing its dissatisfaction with the distinction it inferred the Court of Appeals to have made. Since Abercrombie and Kadjevich dealt with claims commenced pre-petition, while the debtor in Siegel commenced its action post-petition, the court held that, the debtor in Ybarra should receive a complete discharge as her claims were commenced pre-petition.
The Ninth Circuit Court of Appeals, however?adopting the reasoning set forth by Judge Baum in his dissenting opinion?reconciled its three earlier holdings based on the idea that the standards for determining administrative priority are based on different objectives than the standards for determining dischargeability. Administrative expense priority allocates estate property at the expense of unsecured creditors in order to encourage third parties to contract with a debtor in possession. Accordingly, such claims will be allowed if the claimant can establish a direct and substantial benefit to the estate resulting from a post-petition transaction with the debtor in possession. Discharge litigation, however, concerns the scope of personal debtor liability not the allocation of estate property. The discharge shield is not meant to allow the debtor to pursue risk-free litigation.
Having clarified why Abercrombie and Kadjevich did not apply, the Ninth Circuit Court of Appeals relied instead on its prior decision in Siegel. There the Court reasoned that while bankruptcy protects a debtor from past acts, the debtor may not without consequences either initiate litigation post-petition or "return to the fray" to continue pre-petition litigation. Accordingly, the attorney's fees and costs incurred by Ybarra post-petition were not discharged since she "returned to the fray" by reviving her state suit.
Accord Shure v. Vermont (In re Sure-Snap), 983 F. 2d 1015 (11th Cir. 1993) (where a debtor voluntarily continued to litigate after plan confirmation, it did so at the risk of incurring post-confirmation costs).