In re: Onenoa Faavevela Faitalia and Soi Faitalia

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: December 6, 2016
• Docket: HI-16-1170-JuTaKu
• Status: Published

Opinion

FILED DEC 06 2016 1 SUSAN M. SPRAUL, CLERK 2 ORDERED PUBLISHED U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. HI-16-1170-JuTaKu ) 6 ONENOA FAAVEVELA FAITALIA and ) Bk. No. 15-00698-RJF SOI FAITALIA, ) 7 ) Debtors. ) 8 ______________________________) ) 9 VILLAGE PARK COMMUNITY ) ASSOCIATION, ) 10 ) Appellant, ) 11 v. ) O P I N I O N ) 12 ONENOA FAAVEVELA FAITALIA; ) SOI FAITALIA, ) 13 ) Appellees. ) 14 ______________________________) 15 Argued and Submitted on November 17, 2016 at Pasadena, California 16 Filed - December 6, 2016 17 Appeal from the United States Bankruptcy Court 18 for the District of Hawaii 19 Honorable Robert J. Faris, Bankruptcy Judge, Presiding _________________________ 20 21 Appearances: John Winnicki, Deeley King Pang & Van Etten, argued for appellant Village Park Community 22 Association; Jean Christensen and Edward Maguaran argued for appellees Onenoa Faavevela Faitalia 23 and Soi Faitalia. _________________________ 24 25 Before: JURY, TAYLOR, and KURTZ, Bankruptcy Judges. 26 27 28 1 JURY, Bankruptcy Judge: 2 3 Onenoa Faavevela Faitalia and Soi Faitalia (collectively, 4 Debtors) filed a motion to value their real property for the 5 purpose of stripping off the asserted secured claim of Village 6 Park Community Association (Association) in their chapter 131 7 case. The bankruptcy court found that the Association’s lien 8 was wholly unsecured and entered an order granting Debtors’ 9 motion. The court also held that Debtors were entitled to their 10 attorney’s fees and costs under Hawaii law. 11 Debtors then filed a motion and supporting declarations 12 seeking attorney’s fees and costs under Hawaii Revised Statutes 13 (HRS) § 514B-157, which is a reciprocal attorney fee statute 14 pertaining to certain actions between a condominium association 15 and its owner-members. After a hearing, the bankruptcy court 16 found that Debtors were entitled to their fees and costs under 17 HRS § 421J-10(a) — an analogous statute pertaining to planned 18 community associations — and entered an order awarding Debtors 19 $27,397.89 in attorney’s fees and costs against the Association. 20 This appeal followed. For the reasons explained below, we 21 REVERSE. 22 I. FACTS 23 A. Prepetition Events 24 The Association consists of the unit owners of a planned 25 residential community known as the Village Park Community, 26 1 Unless otherwise indicated, all chapter and section 27 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 28 “Rule” references are to the Federal Rules of Bankruptcy Procedure.

-2- 1 established and governed by the Declaration of Protective 2 Covenants for Village Park Community, dated March 13, 1979 3 (Covenants), and located in Honolulu, Hawaii. Debtors are 4 members of the Association based on their ownership of a home 5 located within the Village Park Community. 6 The Covenants authorize and require the Association to 7 assess and collect from its members annual membership fees and 8 other assessments, which are personal debts and obligations of 9 the member against whom they are assessed. If a member fails to 10 pay the assessments of the Association when due, the Association 11 may obtain a lien on the unit or unit owned by the member by 12 recording a notice of lien in the Bureau of Conveyances. The 13 lien secures the member’s obligation for unpaid assessments 14 arising before or after recordation of the lien, annual interest 15 at twelve percent, and costs of collection including reasonable 16 attorney’s fees. 17 Debtors failed to pay the Association’s annual membership 18 fees for several years, which resulted in the assessment by the 19 Association of late fees against them which also remained 20 unpaid.2 21 In 2009, the Association assigned Debtors’ debt for the 22 delinquent assessments to the law firm of Deeley King Pang & Van 23 Etten for collection. The law firm’s collection efforts 24 included demand letters, payment plans, and the recordation of a 25 notice of lien. Ultimately, in October 2010, the law firm 26 commenced a foreclosure action in the state court against 27 2 28 The Association’s appraisal which is part of the record shows that the monthly assessment is $11.67.

-3- 1 Debtors’ property. In August 2011, J.P. Morgan Mortgage 2 Acquisition (J.P. Morgan), the first trust deed holder, also 3 commenced a foreclosure action against Debtors’ property. A few 4 months later, the state court granted the Association’s motion 5 to consolidate the foreclosure lawsuits against Debtors. J.P. 6 Morgan did not further pursue foreclosure because it entered 7 into a loan modification with Debtors. 8 On May 19, 2015, the Association filed and served a motion 9 for default judgment, summary judgment, and for interlocutory 10 decree of foreclosure in the circuit court foreclosure action. 11 A declaration of indebtedness attached to the motion for summary 12 judgment shows that Debtors owed the Association $1,168.51 as of 13 May 11, 2015. Debtors did not respond to the motion. 14 B. Bankruptcy Events 15 Instead, on June 8, 2015, Debtors filed their chapter 13 16 petition. In Schedule A, they listed the value of their real 17 property at $540,000. In Schedule D, Debtors showed a secured 18 claim against their property for $609,000 and listed $7,000 19 owed to the Association as disputed. Their chapter 13 plan 20 provided for monthly payments of $380 over three years with an 21 estimated 6.6% return to unsecured creditors. 22 On July 29, 2015, the Association filed a proof of claim 23 showing a secured claim for $11,579.79, consisting of Debtors’ 24 delinquent assessments and various fees owed to the Association. 25 The next day, the Association objected to Debtors’ chapter 13 26 plan on the grounds that it failed to provide for payment of the 27 Association’s claim and was filed in bad faith. 28 One day later, Debtors filed an amended plan and a motion

-4- 1 to value their real property which sought to modify or strip off 2 the Association’s lien because the amount of the first priority 3 mortgage encumbering their residence exceeded the value of the 4 property. 5 The Association objected to the amended plan and motion to 6 value on several grounds: (1) the value of the property was not 7 supported by admissible evidence; (2) the plan was not filed in 8 good faith; (3) the plan failed to provide for payments on the 9 Association’s claim; (4) Debtors failed to provide for payment 10 of post-petition assessments; and (5) Debtors failed to commit 11 all of their disposable income to plan payments. 12 At the confirmation hearing on September 17, 2015, the 13 bankruptcy court scheduled the confirmation of Debtors’ plan and 14 their valuation motion for an evidentiary hearing on March 1, 15 2016. 16 In January 2016, Debtors filed a motion for summary 17 judgment contending that the mortgage on their property 18 ($613,419.89) exceeded the appraised value of the property 19 ($530,000). 20 The Association filed an opposition to Debtors’ motion and 21 a counter motion for summary judgment. The Association 22 requested the court to deny confirmation and dismiss Debtors’ 23 case based on bad faith. The Association further asserted that 24 the modification of Debtors’ mortgage loan was invalid and 25 resulted in the lender’s claim exceeding the value of Debtors’ 26 property. Due to the invalid modification, the Association 27 maintained that its lien was senior to the $164,000 debt 28 incurred through the modification and thus there was

-5- 1 approximately $100,000 of equity after deducting the first loan 2 from the appraised value of $545,000. According to this 3 argument, the Association’s lien could not be stripped off. 4 Attached to the counter motion for summary judgment was the 5 Association’s appraisal of the property showing a value of 6 $545,000. 7 In opposition to the Association’s counter motion, Mr. 8 Faitalia submitted a declaration stating that Debtors had acted 9 in good faith in filing the bankruptcy petition. He explained 10 that the relationship with the Association had been frustrating 11 to him since he did not understand how an annual fee of $100- 12 $130 could turn into more than $11,000. He also declared that 13 the stripping off of the Association’s lien was permitted by law 14 so he did not understand how that could be bad faith. Finally, 15 in a separate pleading, Debtors maintained that the loan 16 modification was permitted by the original mortgage documents 17 and was not a new loan as no new money had been loaned. Rather, 18 the additional sum of $164,000 was added to the principal and 19 the term of the note was extended to fifty years. According to 20 Debtors, the full amount of the principal retained priority over 21 the Association’s junior lien. 22 On February 16, 2016, the bankruptcy court heard the 23 parties’ cross motions for summary judgment and confirmation of 24 Debtors’ plan. Ultimately the bankruptcy accepted the 25 Association’s appraisal of $545,000 as the value of the 26 property. The court also found that the modification of 27 Debtors’ loan (actually two modifications) added interest and 28 unpaid monthly payments back to the mortgage and that no further

-6- 1 money was loaned. Accordingly, the court found that this was 2 not the kind of modification which would allow the junior 3 lienholder to jump up in the priority schedule. 4 As a result of these conclusions, the bankruptcy court 5 granted Debtors’ motion for summary judgment because there was 6 no equity in the property after deducting amounts owed to the 7 first trust deed holder. The court held that it was proper to 8 treat the Association’s claim as wholly unsecured. The 9 bankruptcy court also held that Debtors, as the prevailing 10 parties, were entitled to their attorney’s fees and costs under 11 Hawaii statutory law. Finally, the bankruptcy court concluded 12 that under a totality of circumstances analysis, Debtors acted 13 in good faith and thus confirmed their chapter 13 plan. 14 On March 9, 2016, the bankruptcy court entered the order 15 granting Debtors’ motion for summary judgment, finding the claim 16 of the Association wholly unsecured. On March 15, 2016, the 17 bankruptcy court entered an order granting Debtors’ motion to 18 value collateral and a separate order confirming Debtors’ 19 chapter 13 plan. 20 On April 7, 2016, Debtors filed a motion for attorney’s 21 fees and costs from the Association. Debtors’ request was based 22 on HRS § 514B-157, which gives unit owners the reciprocal right 23 to collect fees and costs from an association if the claim 24 asserted by the association was not substantiated. Debtors 25 maintained that the sweep of the statute’s reciprocity provision 26 was broad. They further argued that their fee request was 27 supported under the holdings in Travelers Cas. & Sur. Co. v. 28 Pac. Gas & Elec. Co., 549 U.S. 443, 445 (2007) and Hoopai v.

-7- 1 Countrywide Home Loans, Inc. (In re Hoopai), 369 B.R. 506, 510 2 (9th Cir. BAP 2007), aff’d in part & rev’d in part on other 3 grounds, 581 F.3d 1090 (9th Cir. 2009). 4 Finally, Debtors relied upon the bankruptcy court’s 5 decision in In re Beck, 2014 WL 6606577 (Bankr. D. Haw. Nov. 5, 6 2014). In Beck, the debtor filed a motion to determine value 7 for the purpose of stripping off the lien of the association. 8 The bankruptcy court applied HRS § 514B-157 and awarded the 9 debtor his attorney’s fees and costs. The court reasoned that 10 the association’s proof of claim was the equivalent of an effort 11 to collect the delinquent assessments owed by the debtor, to 12 preserve the right to foreclose its lien, and to enforce the 13 provisions of the condominium declaration and bylaws. Since the 14 debtor prevailed on the lien strip motion, the bankruptcy court 15 held that the association’s lien rights were not substantiated 16 within the meaning of the statute. 17 The Association opposed Debtors’ request for fees, 18 contending that the bankruptcy court wrongly decided Beck. In 19 that regard, the Association maintained that the court 20 incorrectly started its analysis from the premise that the 21 association’s filing of a proof of claim asserting a lien 22 against the debtor’s apartment was in effect an attempt to 23 collect delinquent assessments within the meaning of HRS § 514B- 24 157(a). According to the Association, even if the filing of a 25 proof of claim could be deemed to be a collection effort, the 26 proof of claim here was allowed — Debtors did not object to the 27 Association’s proof of claim and the Association remained 28 entitled to collect the delinquent fees. The Association

-8- 1 further pointed out that its lien was not found to be invalid 2 under state law or the provisions of the Association’s lien 3 declaration and bylaws. In short, the Association maintained 4 that clearly there was no action to foreclose on its lien. 5 The Association also pointed out that this proceeding, like 6 Beck, involved the debtor’s motion to value collateral and to 7 modify the Association’s lien rights under bankruptcy law. 8 Therefore, it did not involve any claims by the Association to 9 which HRS § 514B-157(a) applied. 10 Finally, the Association relied on Schmidt v. Bd. of Dirs., 11 836 P.2d 479 (Haw. 1992), where the Supreme Court of Hawaii 12 declined to interpret the predecessor statute to HRS § 514B-157 13 so broadly. There, in interpreting the term “enforce”, the 14 court held that the statute only permitted an award of fees in 15 an action to impose an affirmative course of action on an 16 association by compelling obedience to any provision of its 17 declaration, by-laws, house rules, or any enumerated provision 18 of chapter 514A. 19 On May 10, 2016, the bankruptcy court heard the matter. 20 Initially, the Association contended that HRS § 514B-157(a) and 21 Beck did not apply because the Association was governed by HRS 22 Chapter 241J which applied to planned communities. The 23 Association conceded that the statutes at issue were analogous, 24 but argued that there was a difference in the language, and on 25 that basis asked that the case be rebriefed to address the 26 correct section. The court declined to continue the matter and 27 ruled at the hearing. 28 The bankruptcy court distinguished Schmidt, stating that it

-9- 1 had nothing to do with the monetary rights of the parties to 2 collect maintenance fees or the secured status of maintenance 3 fees, but involved a damage claim based on the condition of the 4 property. In the end, the bankruptcy court followed its 5 previous analysis in Beck. The court found that by filing a 6 proof of claim the Association was taking an action to collect 7 delinquent assessments and, in effect, to foreclose its lien, 8 because the Association filed as a secured claimant and the 9 Association did not have a secured claim. The bankruptcy court 10 found that Debtors were the prevailing parties in the matter and 11 therefore they were entitled to reasonable attorney’s fees.3 12 The court granted Debtors’ motion and directed them to submit 13 declarations on the amount of the attorney’s fees and costs. 14 Thereafter, Debtors filed a declaration showing that they 15 had paid $1,047.12 for the appraisal. Debtors’ attorney also 16 submitted a declaration and supporting time records requesting 17 an award of attorney’s fees and costs in the total amount of 18 $27,571.89. 19 The Association opposed, arguing that (1) Debtors failed to 20 establish that they agreed to pay their attorney the amounts 21 claimed in the request; (2) the hourly rate charged by Debtors’ 22 attorney was not reasonable; (3) the amount of time expended was 23 not reasonable; (4) the printing costs were unjustified; 24 25 3 At the hearing, the Association’s counsel asked the 26 bankruptcy court to certify the decision to the Hawaii Supreme Court if it ruled that attorney’s fees and costs were authorized 27 under the statute. The bankruptcy court declined the request, concluding that it was not a “difficult” question and thus 28 certification was unnecessary.

-10- 1 (5) expert witness fees were not an allowable cost; and (6) the 2 attorney’s fees and costs claimed by Debtors against the 3 Association should be offset by the non-dischargeable, post- 4 petition assessments for the Association’s dues and fees owed by 5 Debtors. 6 In a Memorandum Decision, the bankruptcy court awarded 7 Debtors fees and costs under HRS § 421J-10, the statute applying 8 to planned communities. The court found that the fee request 9 was reasonable both as to the hourly rate and the time expended. 10 The bankruptcy court disallowed the printing costs, but allowed 11 Debtors their appraiser’s fee. Finally, the bankruptcy court 12 denied the offset request. 13 On May 25, 2016, the bankruptcy court entered an order 14 granting Debtors’ motion awarding $26,350.77 for attorney’s fees 15 and $1,047.00 for the appraisal as an expense. The Association 16 filed a timely notice of appeal from that order. 17 On August 4, 2016, the bankruptcy court denied the 18 Association’s request for stay pending appeal without prejudice 19 to a possible proposal for a stay pending appeal on a secured 20 basis. The Association then sought a stay from the Panel. On 21 August 19, 2016, the Panel denied the Association’s request for 22 a stay pending appeal without prejudice on a secured basis. On 23 September 7, 2016, the bankruptcy court granted the 24 Association’s motion for a stay pending appeal on the condition 25 that it post a supersedeas bond in the amount of $45,000 within 26 one week from the date of the order. The bond was evidently 27 posted. 28

-11- 1 II. JURISDICTION 2 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 3 §§ 1334 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. 4 § 158. 5 III. ISSUE 6 Did the bankruptcy court err as a matter of law when it 7 awarded Debtors attorney’s fees and costs under HRS § 421J-10? 8 IV. STANDARD OF REVIEW 9 We review the bankruptcy court’s interpretation and 10 application of a state statute governing the award of attorney’s 11 fees de novo. Kona Enters. v. Estate of Bishop, 229 F.3d 877, 12 883 (9th Cir. 2000). 13 V. DISCUSSION 14 Under the “American Rule,” prevailing parties in federal 15 court are not ordinarily entitled to attorney’s fees unless 16 authorized by contract or statute. Alyeska Pipeline Serv. Co. 17 v. Wilderness Soc’y, 421 U.S. 240, 257 (1975). This default 18 rule applies to bankruptcy litigation, but “can, of course, be 19 overcome by statute.” Travelers, 549 U.S. at 448. Following 20 Travelers, the question of whether parties to a bankruptcy 21 proceeding are entitled to attorney’s fees under Hawaii law is 22 purely a question of state law. See Americredit Fin. Servs., 23 Inc. v. Penrod (In re Penrod), 611 F.3d 1158 (9th Cir. 2015). 24 Here, the bankruptcy court based its award of fees and 25 costs to Debtors on HRS § 421J-10(a), which applies to planned 26 community associations and not, as requested by Debtors, HRS 27 § 514B-157 which applies to condominium property. Because the 28 Association is a planned community association, our resolution

-12- 1 of this case turns on the interpretation of HRS § 421J-10(a), 2 which states: 3 (a) All costs and expenses, including reasonable attorneys’ fees, incurred by or on behalf of the 4 association for: 5 (1) Collecting any delinquent assessments against any unit or the owner of any unit; 6 (2) Foreclosing any lien on any unit; or 7 (3) Enforcing any provision of the association 8 documents or this chapter; 9 against a member, occupant, tenant, employee of a member, or any other person who in any manner may use 10 the property, shall be promptly paid on demand to the association by such person or persons; provided that 11 if the association is not the prevailing party, all costs and expenses, including reasonable attorneys’ 12 fees, incurred by any such person or persons as a result of the action of the association, shall be 13 promptly paid on demand to the person by the association. The reasonableness of any attorney’s 14 fees paid by a person or by an association as a result of an action pursuant to paragraph (2) shall be 15 determined by the court. . . . (Emphasis added.) 16 HRS § 421J-1.5 states that chapter 421J “shall be liberally 17 construed to facilitate the operation of the planned community 18 operation.” 19 In awarding Debtors their attorney’s fees and costs, the 20 bankruptcy court reasoned that by filing a proof of claim in the 21 bankruptcy case the Association was in essence seeking to 22 collect its delinquent assessments or assert its right to 23 foreclose on its lien within the meaning of HRS § 421J-10(a). 24 From that proposition, the bankruptcy court concluded that 25 Debtors were the prevailing parties in the valuation contest and 26 thus were entitled to their fees and costs under the Hawaii 27 statute. We are not persuaded by this reasoning. 28 As with all questions of statutory interpretation, we begin

-13- 1 with the plain language of the statute. Lamie v. U.S. Trustee, 2 540 U.S. 526, 534 (2004); Ariz. Health Care Cost Containment 3 Sys. v. McClellan, 508 F.3d 1243, 1249 (9th Cir. 2007); State v. 4 Wheeler, 219 P.3d 1170, 1177 (Haw. 2009). If the statute is 5 clear, the inquiry is at its end, and we enforce the statute on 6 its terms. United States v. Ron Pair Enters., Inc., 489 U.S. 7 235, 241 (1989). In construing the statute, we also keep in 8 mind that we must apply the law as we believe the Hawaii Supreme 9 Court would apply it. Gravquick A/S v. Trimble Navigation Int’l 10 Ltd., 323 F.3d 1219, 1222 (9th Cir. 2003). 11 HRS § 421J-10(a) permits fees and expenses incurred by the 12 Association only if the Association was “collecting” delinquent 13 assessments, “foreclosing” on its lien, or “enforcing” its 14 covenants. While these terms are not defined in HRS Chapter 15 421J, the use of these active verbs denotes some type of 16 affirmative conduct relating to those described acts. 17 In Schmidt v. Bd. of Dirs., the Hawaii Supreme Court was 18 called upon to interpret the meaning of the word “enforce” in 19 HRS § 514A-94(b), the predecessor statute to HRS § 514B-157 and 20 the statutory counterpart to HRS § 421J-10, applicable to 21 condominium associations. 836 P.2d 479. There, the court 22 adopted the plain meaning of the word “enforce” and stated that 23 the “plain and obvious” application of HRS § 514A-94(b) is to an 24 owner’s substantiated claim against an association or its board 25 to impose an affirmative course of action upon the association 26 to put into execution - or compel obedience to - any provision 27 of its declaration, by-laws, house rules, or any enumerated 28 provision of HRS chapter 514A. Id. at 483.

-14- 1 The court noted that the Schmidts did not seek to enforce 2 any affirmative action on the part of the Association to comply 3 with any provision of the Association’s declaration, by-laws, 4 house rules, or HRS Chapter 514A. Rather, in their own words, 5 they were seeking damages for the Association’s failure to 6 comply with its by-laws and declaration. Since the Schmidts did 7 not seek to compel obedience to the Association’s by-laws and 8 declaration, the court found that HRS § 514A-94(b) did not apply 9 to their action and reversed the award of attorney’s fees. 10 The holding in Schmidt reinforces the conclusion that the 11 correct interpretation of the statutory terms “collecting” 12 (delinquent assessments) or “foreclosing” (a lien) requires some 13 affirmative conduct against Debtors or their property. However, 14 due to the automatic stay, once Debtors filed their petition, 15 the Association was prohibited from affirmatively pursuing the 16 very acts described in the statute. See § 362(a)(1), (4), and 17 (6). 18 We acknowledge that as a general rule, the automatic stay 19 does not apply to the filing of a proof of claim. See Arneson 20 v. Farmers Ins. Exch. (In re Arneson), 282 B.R. 883, 893 (9th 21 Cir. BAP 2002); Rein v. Providian Fin. Corp., 270 F.3d 895, 22 904–905 (9th Cir. 2001). Nonetheless, we are not persuaded that 23 a creditor’s proof of claim in a bankruptcy case constitutes an 24 effort to “collect”, “foreclose”, or “enforce” within the 25 meaning of HRS § 421J-10(a). The plain language of HRS § 421J- 26 10(a) requires the “collecting” of delinquent assessments to be 27 against Debtors or their property and “foreclosing” a lien must 28 also be against Debtors’ property. However, “the purpose for

-15- 1 filing a claim is not to affirmatively target [Debtors] 2 personally or their property, but to receive distributions from 3 the bankruptcy estate.” See Clayton v. Roundup Fundings, LLC 4 (In re Clayton), 2010 WL 4008335, at *3 (Bankr. E.D. Wash. Oct. 5 12, 2010) (explaining why the filing of a proof of claim did not 6 violate the automatic stay); See also Rule 3021 (requiring 7 distributions under plans to be made only to those creditors 8 whose pre-petition claims are “allowed.”). 9 We thus conclude that the mere filing of a proof of claim 10 does not entail the affirmative acts contemplated by HRS § 421J- 11 10(a) even under a liberal construction of the statute. It 12 follows that the statute has no applicability under these 13 circumstances. 14 Moreover, the bankruptcy court’s reasoning cannot withstand 15 scrutiny under a prevailing party analysis. “In determining 16 which party is the prevailing party in complex litigation, 17 Hawaiian courts focus on which party prevailed on the ‘disputed 18 main issue.’” In re Hoopai, 581 F.3d at 1102. There can be no 19 disagreement that the disputed main issue in Debtors’ valuation 20 motion was the value of Debtors’ property under § 506(a) and the 21 amount due on the senior secured lien. The valuation of real 22 property for purposes of lien stripping is unique to chapter 13 23 and federal bankruptcy law. Not surprisingly, nowhere in HRS 24 § 421J-10(a) or Chapter 421J is there any mention of valuation 25 for purposes of lien stripping. In short, the disputed issue 26 upon which the bankruptcy court found Debtors to be prevailing 27 parties is not covered by the statute. 28 Furthermore, Debtors never objected to the Association’s

-16- 1 proof of claim nor did the bankruptcy court ever find that the 2 Association’s lien was invalid. Indeed, since the Association’s 3 lien was stripped under § 506(a) for purposes of plan 4 confirmation, if Debtors fail to complete their plan the 5 Association’s lien remains on their property under Hawaii law 6 unless later found invalid. In short, Debtors were not the 7 prevailing parties in any sense. Accordingly, the bankruptcy 8 court erred in awarding them fees and costs on this basis. 9 Finally, our conclusion does no harm to the policies 10 supporting the American Rule. If proofs of claim were construed 11 as the equivalent of collecting delinquent assessments or 12 foreclosing on a lien under HRS § 421J-10(a), creditors seeking 13 distributions from the estate would confront potential liability 14 for attorney’s fees simply because a debtor enforced his or her 15 statutory rights under § 506(a) and successfully stripped the 16 creditor’s lien from his or her property. One should not be 17 penalized under a state law statue for filing a proof of claim, 18 which is a requirement for distribution from the chapter 13 19 estate, nor should one be penalized for defending a valuation 20 motion filed by a debtor who is exercising his or her statutory 21 rights under the Bankruptcy Code. See Kaanapali Hillside 22 Homeowners’ Ass’n, 145 P.3d at 907 (citing Fleischmann 23 Distilling Corp. v. Maier Brewing Co., 386 U.S. 714, 718 (1967) 24 (“[S]ince litigation is at best uncertain one should not be 25 penalized for merely defending or prosecuting a 26 lawsuit. . . .”)). In short, a reciprocal compensatory remedy 27 to either party under these circumstances is inappropriate. 28 In sum, we conclude that the bankruptcy court erred in

-17- 1 awarding Debtors their attorney’s fees and costs under HRS 2 § 421J-10(a). In light of our decision, it is unnecessary to 3 discuss the other issues raised by the Association. 4 VI. CONCLUSION 5 For the reasons stated, we REVERSE. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -18-