In re: Chartri Daecharkhom

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: February 18, 2014
• Docket: NV-13-1034-TaJuKi
• Status: Published

Opinion

FILED FEB 18 2014 1 ORDERED PUBLISHED SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 O F TH E N IN TH C IR C U IT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 6 In re: ) BAP No. NV-13-1034-TaJuKi ) 7 CHARTRI DAECHARKHOM, ) Bk. No. 2:11-bk-13396-LED ) 8 Debtor. ) Adv. No. 2:11-ap-01152-LED ______________________________) 9 ) CHARTRI DAECHARKHOM, ) 10 ) Appellant, ) 11 ) v. ) O P I N I O N 12 ) WAUGH REAL ESTATE HOLDINGS, ) 13 LLC, ) ) 14 Appellee. ) ) 15 Argued and Submitted on January 24, 2014 16 at Las Vegas, Nevada 17 Filed - February 18, 2014 18 Appeal from the United States Bankruptcy Court for the District of Nevada 19 Honorable Thad J. Collins,* Bankruptcy Judge, Presiding 20 21 Appearances: Christopher Burke argued for appellant Chartri Daecharkhom; Kathryn Holbert of the Law Office of 22 Brian D. Shapiro, LLC argued for appellee Waugh Real Estate Holdings, LLC. 23 24 Before: TAYLOR, JURY, and KIRSCHER, Bankruptcy Judges. 25 26 27 * United States Bankruptcy Judge for the Northern District 28 of Iowa, sitting by designation. 1 TAYLOR, Bankruptcy Judge: 2 3 Chartri Daecharkhom (the “Debtor”) appeals from the 4 bankruptcy court’s order awarding less than the full amount of 5 his requested attorney’s fees and costs under § 523(d).1 The 6 bankruptcy court determined that creditor Waugh Real Estate 7 Holdings, LLC (“Waugh”) was not substantially justified in 8 pursuing a § 523(a)(2) nondischargeability action on a consumer 9 debt and that the requested fees and costs were reasonable. It 10 then awarded reduced fees and costs based on a determination 11 that special circumstances justified reduction. 12 We hold that a special circumstances determination within 13 the meaning of § 523(d) requires a complete disallowance of fees 14 and costs. We also conclude on this record that special 15 circumstances justifying fee disallowance did not exist. Thus, 16 we REVERSE and REMAND. 17 FACTS2 18 Waugh filed an adversary complaint against the Debtor and 19 sought a nondischargeability determination under § 523(a)(2). 20 The allegedly nondischargeable debt arose in the context of a 21 consumer mortgage loan. The bankruptcy court entered a judgment 22 after trial in favor of the Debtor. Afterward, the Debtor moved 23 1 24 Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. 25 2 Many of the relevant background facts in this case are 26 set forth in the bankruptcy court’s opinion granting judgment 27 for the Debtor. See Waugh Real Estate Holdings, LLC v. Daecharkhom (In re Daecharkhom), 481 B.R. 641 (Bankr. D. Nev. 28 2012).

2 1 for an award of fees and costs under § 523(d), contending that 2 Waugh’s nondischargeability action was not substantially 3 justified within the meaning of the same statutory provision; in 4 particular, he sought $8,441.50 in fees and $14.80 in costs. 5 The bankruptcy court heard the matter and orally granted 6 the Debtor’s motion. There was considerable argument about 7 substantial justification, but the bankruptcy court focused, 8 among other things, on Waugh’s failure to advance any evidence 9 at trial of the original lender’s reliance on the Debtor’s 10 allegedly fraudulent statements. It ultimately found that Waugh 11 proceeded without substantial justification, so it then examined 12 the fee request. The bankruptcy court expressed discomfort with 13 a full fee award, but concluded, after review, that the 14 requested fees and costs were reasonable. Notwithstanding these 15 conclusions, the bankruptcy court then awarded reduced fees of 16 $4,500. In doing so, the bankruptcy court announced that it 17 “pick[ed] the number out of the air a little bit” and that its 18 decision was informed by the “special circumstances” exception 19 of § 523(d). Hr’g Tr. (Dec. 11, 2012) at 20:24-25; 21:1-3. It 20 then entered an order confirming its oral ruling. It never 21 identified the alleged special circumstances. 22 The Debtor appeals from the award order. 23 JURISDICTION 24 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 25 §§ 1334 and 157(b)(2)(A) and (I). We have jurisdiction under 28 26 U.S.C. § 158. 27 ISSUE 28 Did the bankruptcy court abuse its discretion in awarding

3 1 less than the full amount of the Debtor’s requested fees and 2 costs under § 523(d)? 3 STANDARD OF REVIEW 4 We review an award of fees and costs under § 523(d) for an 5 abuse of discretion. Heritage Pac. Fin., LLC v. Montano (In re 6 Montano), 501 B.R. 96, 104 (9th Cir. BAP 2013). A review of an 7 abuse of discretion determination involves a two-pronged test; 8 first, we determine de novo whether the bankruptcy court 9 identified the correct legal rule for application. See United 10 States v. Hinkson, 585 F.3d 1247, 1261-62 (9th Cir. 2009) (en 11 banc). If not, then the bankruptcy court necessarily abused its 12 discretion. See id. at 1262. Otherwise, we next review whether 13 the bankruptcy court’s application of the correct legal rule was 14 clearly erroneous; we will affirm unless its findings were 15 illogical, implausible, or without support in inferences that 16 may be drawn from the facts in the record. See id. 17 DISCUSSION 18 Section 523(d) allows a debtor who successfully defended a 19 § 523(a)(2) objection to discharge of a consumer claim an 20 opportunity for fee recovery where the creditor’s pursuit of the 21 litigation was not substantially justified. Congress created 22 this potential for fee shifting in recognition of the fact that 23 consumer debtors often lack the financial wherewithal to defend 24 against even meritless claims and, as a result, may settle even 25 if the claim is frivolous or brought in bad faith.3 26 3 27 See H.R. Rep. 95-595, at 365 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6321 (“The purpose of the provision is to 28 (continued...)

4 1 Section 523(d), thus, provides: 2 If a creditor requests a determination of dischargeability of a consumer debt under [§ 523(a)(2)], 3 and such debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a 4 reasonable attorney’s fee for, the proceeding if the court finds that the position of the creditor was not 5 substantially justified, except that the court shall not award such costs and fees if special circumstances would 6 make the award unjust. 7 Under this provision, a debtor carries the initial burden to 8 establish three particular elements and, if met, the burden 9 shifts to the creditor to prove that its actions were 10 “substantially justified.” In re Montano, 501 B.R. at 114 11 (describing the three elements). 12 On appeal, there is no dispute that the determination of 13 discharge involved a consumer debt or that the Debtor prevailed 14 and the debt was discharged. In awarding fees and costs under 15 § 523(d), the bankruptcy court also determined that Waugh was 16 not substantially justified in pursuing its nondischargeability 17 claim. Neither party challenges that aspect of the bankruptcy 18 court’s ruling and, thus, we do not review the substantially 19 20 3 (...continued) 21 discourage creditors from initiating false financial statement exception to discharge actions in the hopes of obtaining a 22 settlement from an honest debtor anxious to save attorney’s fees. Such practices impair the debtor’s fresh start.”); 23 S. Rep. No. 95-989, at 6 (1978), reprinted in 1978 U.S.C.C.A.N. 24 5787, 5792. (“[We have] received considerable testimony that creditors have used these exceptions to threaten debtors into 25 settlements which the debtors agree to in order to save attorneys’ fees . . . . [We] oppose[] this practice and 26 [include] a provision that . . . where the court finds that the 27 objection to discharge . . . was frivolous, or not brought in good faith, the court may award attorneys’ fees and costs to the 28 debtor.”).

5 1 justified determination on appeal. 2 Notwithstanding the determination that a 3 nondischargeability proceeding is not substantially justified, a 4 creditor can defend against fee recovery if it establishes 5 special circumstances that make the award unjust. Courts 6 interpret this exception “with reference to traditional 7 equitable principles.” First Card v. Hunt (In re Hunt), 238 8 F.3d 1098, 1104 (9th Cir. 2001) (citing Matter of Hingson, 954 9 F.2d 428, 430 (7th Cir. 1992)). As this Panel previously noted, 10 “traditional equitable principles” frequently refers to 11 “circumstances suggesting unfair dealing or an abuse of the 12 legal process.” See Kilbey v. Nawrocki (In re Nawrocki), No. 13 AZ-09-1221, 2010 WL 6259978, at *8 n.11 (9th Cir. BAP Mar. 3, 14 2010); see also Stine v. Flynn (In re Stine), 254 B.R. 244, 252 15 (9th Cir. BAP 2000), aff’d, 19 F. App’x 626 (9th Cir. 2001) 16 (neither inaccuracies in a debtor’s bankruptcy petition and 17 schedules nor counsel’s pro bono representation of debtor 18 constitute special circumstances); Commercial Fed. Bank v. 19 Pappan (In re Pappan), 334 B.R. 678, 684 (10th Cir. BAP 2005) 20 (special circumstances did not exist based on creditor’s 21 employment of debtor or debtors’ borrowing history with the 22 creditor). In this context, it would correctly include a 23 situation where a debtor’s improper action or inaction made it 24 impossible or unduly difficult for a creditor to identify the 25 deficiencies that rendered its case meritless. 26 The bankruptcy court did not expressly identify the rule of 27 law it used in determining whether special circumstances 28 existed. It also failed to identify the exact special

6 1 circumstances on which it ultimately relied. Our review of the 2 record, however, establishes that the bankruptcy court did not 3 apply general equitable principles and did not find debtor 4 misconduct sufficient to justify complete fee disallowance. 5 The plain language of § 523(d) and case law construing the 6 statutory provision, albeit sparse, make clear that if the 7 bankruptcy court determines that special circumstances within 8 the meaning of § 523(d) exist, an award of fees and costs is 9 statutorily unavailable. See 11 U.S.C. § 523(d) (“[T]he court 10 shall not award such costs and fees if special circumstances 11 would make the award unjust.”) (emphasis added); Matter of 12 Hingson, 954 F.2d at 429-30 (special circumstances authorizes 13 the denial of fees and costs under § 523(d)); In re Hunt, 238 14 F.3d at 1104 (same). It, thus, follows that the inverse is also 15 true: if special circumstances do not justify total fee 16 disallowance, they do not justify any fee reduction. In sum, 17 and contrary to Waugh’s position, under § 523(d) a fee award and 18 the special circumstances exception are mutually exclusive 19 determinations. 20 The record shows that at the hearing, the bankruptcy court 21 focused on two alleged special circumstances: the Debtor’s 22 failure to schedule Waugh and issues related to the Debtor’s 23 deposition. Then, in rendering its oral ruling, the bankruptcy 24 court stated that special circumstances informed its decision to 25 award fees and costs in the amount of $4,500. The bankruptcy 26 court failed to make any express findings, so we do not know 27 what special circumstances allegedly justified its ruling. We 28 agree, however, with the implicit determination that the two

7 1 factors argued as special circumstances by Waugh were not 2 sufficient to justify complete fee disallowance. 3 Waugh first complains that it was not scheduled as a 4 creditor. The Debtor explains and the record reflects, however, 5 that he properly scheduled the debt and identified Waugh’s 6 predecessor-in-interest as a secured creditor. And Waugh had 7 notice of the bankruptcy case sufficient to file a timely 8 nondischargeability complaint. Even if we agree that Waugh lost 9 the opportunity to attend the § 341(a) meeting through no fault 10 of its own, the evidence is not clear that this was the Debtor’s 11 fault or that examination of the Debtor at the § 341(a) meeting 12 (or otherwise) would have assisted Waugh in recognizing that it 13 had no evidence of reliance by the original lender as to the 14 Debtor’s allegedly false statements. 15 Similarly, the fact that Debtor requested a translator 16 shortly before a scheduled deposition does not evidence the type 17 of special circumstances that justify complete fee disallowance 18 on this record. At trial, the bankruptcy court stopped the 19 proceeding to allow the Debtor to obtain the assistance of a 20 translator. The Debtor’s language difficulties were not 21 feigned. And, in any event, Waugh unilaterally decided not to 22 conduct the deposition when it had to pay for a translator. 23 There is no evidence in the record that the Debtor refused to 24 attend or cooperate if translation allowing him to create an 25 accurate record was available. And, again, the Debtor’s 26 testimony would not help Waugh in filling the gaping hole in its 27 case; the Debtor could not provide evidence of the internal 28 workings of the original lender and its reliance on his

8 1 allegedly fraudulent statements. 2 Once a bankruptcy court determines that a fee award is 3 appropriate under § 523(d), it has the opportunity to reduce 4 fees as a debtor is entitled only to reasonable fees and costs. 5 See In re Hunt, 238 F.3d at 1105 (noting that “[t]he primary 6 method used to determine a reasonable attorney fee in a 7 bankruptcy case is to multiply the number of hours expended by 8 an hourly rate”) (internal quotation marks and citation 9 omitted). Here, the record makes clear that the bankruptcy 10 court reviewed the time and billing statement of Debtor’s 11 counsel and found that the fees were reasonable. We agree. It 12 appears that the bankruptcy court, while acknowledging the 13 economy inherent in this fee request, still desired a fee 14 reduction. Its reliance on special circumstances to reduce 15 rather than disallow reasonable fees and costs, however, was not 16 appropriate. 17 Based on the foregoing, the bankruptcy court abused its 18 discretion by misinterpreting its discretion to adjust a 19 § 523(d) award for attorney’s fees and costs. See In re Stine, 20 254 B.R. at 251 (“[T]he court’s authority under § 523(d) to deny 21 attorney’s fees on the ground of special circumstances is not a 22 license to the bankruptcy judge to make decisions on 23 idiosyncratic notions of equity, fair dealing, or family 24 justice.”) (internal quotation marks and citation omitted). 25 CONCLUSION 26 We REVERSE the bankruptcy court’s award of attorney’s fees 27 and costs under § 523(d) and REMAND this matter with 28 instructions to enter an award of $8,456.30.