Second District Reverses Denial of Fees/Costs to Judgment Creditor For Efforts to Enforce Judgment in Bankruptcy Court.
Based on supremacy clause issues, thorny issues have arisen over the years as to what attorney’s fees and costs a judgment creditor can obtain for bankruptcy court activities when a subsequent state court action remains to enforce a judgment that survives a dismissed bankruptcy case. The next surveyed decision squarely holds that judgment creditors are entitled to an award of post-judgment fees and costs incurred in bankruptcy court, after a bankruptcy dismissal, to enforce a surviving judgment, with the statutory predicate being Code of Civil Procedure section 685.040.
Section 685.040 provides: “The judgment creditor is entitled to the reasonable and necessary costs of enforcing a judgment. Attorney’s fees incurred in enforcing a judgment are not included in costs collectible under this title unless otherwise provided by law. Attorney’s fees incurred in enforcing a judgment are included as costs collectible under this title if the underlying judgment includes an award of attorney’s fees to the judgment creditor pursuant to subparagraph (A) of paragraph (10) of subdivision (a) of Section 1033.5.”
This statutory provision was fully in play in Jaffe v. Pacelli, Case No. B200103 (2d Dist., Div. 3 Aug. 1, 2008) (certified for publication), a 3-0 decision authored by Justice Aldrich.
When the convoluted procedural history is pared down, judgment debtor had a default judgment entered against him for almost $460,000 based on a promissory note with an attorney’s fees clause way back in October 1996. The judgment was renewed in March 2003, having swelled to over $900,000. Judgment debtor took judgment creditor through several state court appeals, but was unsuccessful. Judgment creditor filed a state court fraudulent conveyance action against judgment debtor, but debtor filed a Chapter 7 bankruptcy in August 2004. Judgment creditor filed a nondischargeability complaint in bankruptcy court, with a default judgment eventually entered in this action in November 2005. After more unsuccessful appeals, the bankruptcy court dismissed judgment debtor’s bankruptcy case and closed judgment creditor’s adversary proceeding. Judgment creditor litigated the state court fraudulent conveyance action, getting the trial court to strike judgment debtor’s answer in February 2007.
Judgment creditor then turned back to the state court case originating the underlying promissory note default judgment. He sought fees and costs between the March 2003 judgment renewal and February 2007 for efforts in enforcing the 1996 judgment (everyone forgot that it went back that for, didn’t they). Judgment creditor sought fees and costs in prosecuting the state court fraudulent conveyance action, in defending the numerous appeals, and in undertaking activities in the bankruptcy court to enforce the judgment. The trial court granted judgment creditor $575,666.76, broken down as $534,571.25 in fees and $41,095.51 in costs. Significantly, however, the trial court denied judgment creditor fees and costs expended in the bankruptcy proceedings.
Judgment creditor appealed the denial of fees/costs for bankruptcy efforts, obtaining a reversal by the Second District, Division Three in Jaffe.
Because the trial court believed it did not have the authority to grant fees under Code of Civil Procedure section 685.040, the review standard was de novo.
The primary impetus for reversal was the appellate panel’s determination that the trial court erred in rejecting an award of bankruptcy fees and costs based on the forum being different (federal bankruptcy court), even though section 685.040 did not make this an inconsequential concern.
Jaffe heavily relied on Circle Star Center Associates, L.P. v. Liberate Technologies, 147 Cal.App.4th 1203, 1210 (2007), which decided that fees incidental to a bankruptcy are awardable by a state court, following dismissal of a bankruptcy case, as a matter of law under Civil Code section 1717. By parity of reasoning, the Jaffe panel found that Circle Star’s reasoning equally applied to statutory fees/costs awardable under section 685.040—given it was a statutory right, rather than a penalty.
In the case before the Second District in Jaffe, Justice Aldrich found that the dual requirements of section 685.040 were met: (1) judgment debtor’s entire bankruptcy filing was commenced to avoid paying the operative default judgment; and (2) the promissory note which gave rise to the judgment had a fees clause.
Thus, judgment creditor was entitled to a remand to obtain fees and costs incurred in the bankruptcy proceedings. “To conclude otherwise would encourage judgment debtors to file bogus bankruptcy petitions and potentially escape paying for attorney fees and costs incurred by the creditors in combating these petitions.” (Slip Opn., at p. 13.)