Picerne Construction Corp. v. Castellino Villas, A.K.F. LLC (in re Castellino Villas, A.K.F. LLC)

In re Castellino Villas, A.K.F. LLC, No. 12-57186 (9th Cir. Sep. 6, 2016). Published.
A chapter 11 debtor that continues after plan confirmation to defend a creditor’s prepetition lien-enforcement action has not “returned to the fray,” and the creditor’s postpetition attorney-fee claim is discharged.
Procedural context:
Picerne brought a prepetition state-court action against Castellino to foreclose a mechanic’s lien against an apartment complex. Under Castellino’s confirmed chapter 11 plan, the prepetition litigation would go forward to determine whether the lien was valid, properly perfected, and enforceable; Picerne’s plan treatment depended on the result of that litigation. After trial, the state court held that Picerne’s lien was valid, but that, under the confirmation order, the state court lacked authority to award attorney fees to Picerne. Picerne moved the bankruptcy court for a ruling that the state court had authority to award fees. The bankruptcy court denied the motion, and both the district court and the Ninth Circuit affirmed.
If, before the petition date, a creditor can fairly or reasonably contemplate that it will have a claim for attorney fees if it prevails in litigation against the debtor, then the fee claim will be treated as having arisen before the petition date and be discharged; in that case, the fees are treated as a contingent part of the prepetition claim, which becomes fixed when the fees are incurred. But if, after the petition date, the debtor voluntarily undertakes a new course of litigation, or “returns to the fray,” any postpetition liability for attorney fees is not discharged. Here, the postconfirmation litigation continued Picerne’s prepetition action and did not result from Castellino returning to the fray. Because Picerne could have fairly or reasonably contemplated before the petition date that it would have a claim for fees if it prevailed in the litigation, confirmation discharged the fee claim.
Michael J. Melloy, Senior Circuit Judge for the Eighth Circuit Court of Appeals, and Jay S. Bybee and Sandra S. Ikuta, Ninth Circuit Judges. Opinion by Judge Ikuta.

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