On May 10, 2024, in Saxum Stone, LLC v. Lennar Multifamily Builders LLC, the Oregon Bankruptcy Court interpreted conflicting Ninth Circuit precedent and held that prevailing party attorney fees are generally not recoverable after an underlying dispute is dismissed for lack of subject matter jurisdiction.[1] Presently, in the bankruptcy courts of the Ninth Circuit, if a defendant succeeds in having litigation dismissed due to lack of subject matter jurisdiction, it cannot recover its legal fees for defending the litigation unless there is “an independent grant of jurisdiction to do so.”[2] This is an issue that is ripe for abuse, and worth keeping an eye on.
Background
In 2019, a group of related tile and stone businesses operating in Oregon, Washington, and Idaho filed voluntary Chapter 11 bankruptcy cases. In 2020, the cases were converted to cases under Chapter 7, and the companies’ assets and liabilities were consolidated for administration within bankruptcy (the “Consolidated Estate of Former W2W Entities”). In August of 2020, an interested party in the Former W2W Entities’ bankruptcy case, Saxum Stone, filed an adversary proceeding against another interested party, Lennar Multifamily Builders. The next month Lennar moved to dismiss the complaint for lack of subject-matter jurisdiction, which the Bankruptcy Court denied.
In November 2022, Saxum Stone moved for summary judgment asking the Court find that it had jurisdiction. At a January 2023 hearing on that motion, Judge David W. Hercher asked the parties to brief and argue the jurisdiction issue. Oral argument was held in February 2023 and in September 2023, the Court ruled that it lacked subject-matter jurisdiction and dismissed the complaint. Lennar timely moved for an award of fees and costs,[3] which was briefed and argued (in January 2024), leading to the Court’s issuance of the Opinion in May 2024.[4]
Holding
In ruling that fees are not recoverable, the Court acknowledged that Ninth Circuit precedential opinions appear to be in conflict, as some decisions allow for the award of fees, while others do not. It then recognized the Court’s obligation to attempt to distinguish all relevant cases in such a manner that the opinions do not conflict.[5] Ultimately, the Court found the rule to be that “a federal court lacking subject-matter jurisdiction over an action also lacks authority to award prevailing-party attorney fees absent an independent grant of jurisdiction”[6] and cases that appear to conflict with this principal are exceptions to that rule. The Opinion is an impressive walk along the tightrope of existing Ninth Circuit caselaw on the issue of awarding fees when subject-matter jurisdiction is lacking. It cites 14 different cases that address this issue or were cited by Lennar in support of its request for fees, and interprets all of them in a manner that avoids any direct conflict.
The Court looked to the principal provided in Latch v. United States that “[a]s a general rule, if a district court has wrongfully exercised subject matter jurisdiction over a dispute, the appellate court must vacate the district court’s decision, including any award of attorney’s fees.” It then followed a line of cases relying upon Latch to conclude that it had no jurisdiction to award attorney fees due to the lack of subject-matter jurisdiction over the underlying claims.
Takeaway
The consequence of the Opinion is that it removes the leverage a prevailing party fee award can provide against the filing of a baseless claim over which a court lacks jurisdiction, which may lead to abuse of the litigation process by bankruptcy litigants who can force parties to incur substantial unrecoverable fees. For now, defendants are caught in a bind. If they win and are awarded attorney’s fees, the fee award can be reversed pursuant to Latch if subject-matter jurisdiction is later found to be lacking. Those who successfully argue for dismissal of an adversary proceeding because of the Bankruptcy Court’s lack of subject-matter jurisdiction will be unable to recover their, presumably substantial, fees.[7]
Although Lennar has appealed this decision to the Ninth Circuit Bankruptcy Appellate Panel (BAP), at this moment, litigants in Bankruptcy Courts within the Ninth Circuit find themselves in the unenviable position of being unable to recover fees incurred if the Court lacks subject-matter jurisdiction. While this author does not expect the BAP will attempt to overturn the Ninth Circuit precedents followed by the Court in this Opinion, should Lennar appeal to the Ninth Circuit, we may see a final resolution changing the precedent to eliminate this inequitable result.
[1] A copy of this Opinion (the “Opinion”) is available on the GovInfo website: https://www.govinfo.gov/content/pkg/USCOURTS-orb-3_20-ap-03085/pdf/USCOURTS-orb-3_20-ap-03085-1.pdf
[2] Opinion at 19.
[3] Per the contract between Saxum and Lennar, as described in Lennar’s motion for fees, a prevailing party in litigation is entitled to recover attorneys’ fees.
[4] Opinion at 2-3.
[5] Opinion at 7, citing Hale v. State of Arizona, 967 F.2d 1356, 1365 (9th Cir. 1992).
[6] Opinion at 3, referencing Latch v. United States, 842 F.2d 1031 (9th Cir. 1988).
[7] In its motion for fees, Lennar sought fees and costs in excess of $80,000 for defending this adversary proceeding.
Tags: Bankruptcy and Creditors’ Rights
