Sofris v. Maple-Whitworth (In re Maple-Whitworth, Inc.)
Ninth Circuit Court of Appeals Case No. 07-56537
February 10, 2009
Two groups disputed the ownership and control of an apartment building in Beverly Hills, California owned by Maple-Whitworth, Inc. Certain parties related of one group filed an involuntary Chapter 11 case against this corporation. After the bankruptcy court denied this involuntary petition and dismissed the case, Maple-Whitworth sought to recover $42,257 in attorneys' fees and costs against only one of the parties who had filed the petition, Sofris. He challenged the award on a waiver theory: that Maple-Whitworth had waived its right to attorney fees and costs through a release executed on its behalf. The bankruptcy court did not address this waiver argument, deferring to a pending state court proceeding to determine control over Maple-Whitworth and thus the validity of the waiver. Instead the bankruptcy court apportioned the fees and costs among a number of the petitioners, under a common law theory of joint and several liability. Sofris appealed (apparently not happy about paying even just a portion of the fees).
Discretionary Relief under § 303(i)
§ 303(i) is the statutory basis for attorney fees in unsuccessfully petitioned bankruptcies:
If the court dismisses a petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment—
1) against the petitioners and in favor of the debtor for—
A) costs; or
B) a reasonable attorney’s fee . . ..The heart of the Ninth Circuit Panel's opinion on this issue is that the:
bankruptcy court erred by interpreting the unambiguously discretionary language of the statute as requiring that all petitioners be joined and served with the motion because all were jointly and severally liable as a class. . . .. [This] interpretation of § 303(i) as incorporating the common law doctrine of joint and several liability . . . is contrary to the individualized exercise of discretion unambiguously authorized by the statute, and ignores the consideration of the totality of the circumstances in imposing liability required by our precedent. . . .. In exercising its discretion whether to award fees and costs, the bankruptcy court may consider factors such as relative culpability among the petitioners, the motives or objectives of individual petitioners in joining in the involuntary petition, the reasonableness of the respective conduct of the debtors and petitioners, and other individualized factors. . . .. Tort concepts and class theories of liability are irrelevant to these discretionary and flexible considerations.The Panel held that even though the bankruptcy court had applied the wrong standard, it did not abuse its discretion in awarding fees and costs against Sofris, and so affirmed this portion of the bankruptcy court's ruling.
The Waiver Defense
The Ninth Circuit Panel noted that § 303(i) allows a prevailing debtor to waive rights to attorney fees and costs, so "[i]t was an abuse of discretion not to resolve the contested waiver issue before awarding fees and costs. . . .. [T]he bankruptcy court has a non-delegable statutory obligation to make findings on this contested issue because it directly affects Maple-Whitworth’s right to § 303(i)(1) relief."
The Court remanded the case to the bankruptcy court to make findings on this waiver defense.
(NOTE: The Ninth Circuit's original opinion of February 20, 2009 referred to the underlying case as an involuntary Chapter 7 one, but corrected this to an involuntary Chapter 11 in its supplemental opinion of March 11, 2009.)
by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com
PLEASE NOTE that this Litigation Report and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
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