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In re Hoopai

September 14, 2009

IN THE MATTER OF: LEHUA HOOPAI, DEBTOR,
COUNTRYWIDE HOME LOANS, INC., APPELLANT,
v.
LEHUA HOOPAI, APPELLEE.



Appeal from the Ninth Circuit Bankruptcy Appellate Panel Klein, Brandt, and Montali, Bankruptcy Judges, Presiding. BAP No. HI-06-01328-KmoB.

The opinion of the court was delivered by: Paez, Circuit Judge

FOR PUBLICATION

OPINION

Argued and Submitted November 20, 2008 -- Honolulu, Hawaii

Before: Mary M. Schroeder, Richard A. Paez, and N. Randy Smith, Circuit Judges.

Countrywide Home Loans, Inc. appeals from the Bankruptcy Appellate Panel's vacature of a bankruptcy court order awarding Countrywide $83,542.87 in attorneys' fees and costs pursuant to Hawaii Revised Statutes section 607-14. Countrywide argues that it is entitled to the fees as an overse-cured creditor pursuant to 11 U.S.C. § 506(b) (2000), or, alternatively, as the prevailing party pursuant to Hawaii state law, section 607-14. Because § 506(b) governs an overse-cured creditor's entitlement to attorneys' fees incurred prior to confirmation of a Chapter 13 plan and preempts state law, we conclude that both the bankruptcy court and the Bankruptcy Appellate Panel ("BAP") erred in evaluating Country-wide's fee claim as falling entirely under Hawaii law. We further conclude that debtor Lehua Hoopai was the prevailing party under Hawaii Revised Statutes section 607-14. We therefore vacate the bankruptcy court's order, and remand for the court to award reasonable pre-confirmation fees to Countrywide pursuant to § 506(b), and to reconsider Hoopai's claim for fees as the prevailing party pursuant to section 607-14.

I. Background

A. Pre-Chapter 13 Background

The genesis of the dispute between appellee Lehua Hoopai ("Hoopai") and appellant Countrywide Home Loans, Inc. ("Countrywide"), was Hoopai's default on two loans from Countrywide, which were secured by mortgages on her real property in Kamuela, Hawaii. Following the default, Countrywide scheduled a non-judicial foreclosure sale for April 23, 2004.

But on the day the sale was to be held, Hoopai filed a pro se petition under Chapter 11 of the Bankruptcy Code, automatically staying the sale. There were numerous problems with the filing, described by the bankruptcy court as possessing "many of the hallmarks of a bad faith filing." Hoopai claimed as assets trademarks and copyrights covering her own name, failed to list Countrywide as a creditor, and filed financial schedules that "contained numerous questionable entries." Additionally, she lacked sufficient funds to service her secured debts. The Office of the United States Trustee moved to dismiss or convert the case to Chapter 7, and Hoopai herself later moved to dismiss the case. The bankruptcy court ultimately dismissed the case on September 8, 2004, and Countrywide rescheduled the foreclosure sale for October 15, 2004.

Unbeknownst to Countrywide, on September 21, 2004, Hoopai signed a contract to sell the property to Anna Fern White ("White") for $300,000. The contract provided for a deposit of $1,000, with the remainder of the sale price dependent on White's acquisition of a new mortgage. Hoopai also allowed White to take possession of the property.

With Countrywide unaware of Hoopai's contract with White, the foreclosure sale went forward as planned on October 15. The Maluhia Trust ("Maluhia") offered a high bid of $159,000, which was accepted; Maluhia paid the full price at the conclusion of the auction. However, Countrywide did not record the affidavit of sale as required by Hawaii Revised Statutes section 667-5 to conclude the sale.

B. Post-Petition/Pre-Confirmation Period

Three days after the sale, Hoopai filed another bankruptcy petition, this time under Chapter 13, commencing the current case. Hoopai's Chapter 13 plan envisioned completion of the sale to White and full payment of Countrywide's claims from the sale's proceeds. An automatic stay enjoined Countrywide from completing the sale.

Seeking to complete the sale to Maluhia, Countrywide filed a motion, joined by Maluhia, for relief from the stay. Countrywide argued that the foreclosure sale had extinguished Hoopai's interest in the property, and that the property was therefore not part of the bankruptcy estate. Hoopai opposed the motion, and filed a motion for court approval to sell the property to White. Countrywide opposed both Hoopai's motion to sell and confirmation of her Chapter 13 plan.

The bankruptcy court determined that the house was property of the bankruptcy estate. The court thus denied Country-wide's motion for relief from the automatic stay, and granted Hoopai's motion for approval of the sale to White. On February 23, 2005, the bankruptcy court confirmed Hoopai's Chapter 13 plan.

C. Post-Confirmation Period

Maluhia appealed the bankruptcy court's orders to the United States District Court for the District of Hawaii, and sought a stay of the order granting Hoopai's motion for approval to sell the property pending appeal. The court granted a stay pending appeal, but required Maluhia to post a supersedeas bond in the amount of $335,000. Although Countrywide did not join the appeal, it "monitored" the proceeding, conferred with Hoopai's counsel, and participated in some settlement discussions. The district court ultimately affirmed the bankruptcy court's two orders, entering final judgment for Hoopai on November 25, 2005.

Hoopai then sought Countrywide's consent to sale of the property free of the liens so that she could close the sale to White. A dispute over the amount due to Countrywide arose, with Countrywide claiming entitlement to $236,317.65 after accounting for interest, costs, and attorneys' fees, and Hoopai asserting that this claim was inflated. Countrywide refused Hoopai's offer to release an "undisputed amount" of approximately $158,000 at closing and to hold the disputed amount in escrow in exchange for Countrywide's release of its liens on the property. Returning to the bankruptcy court, Hoopai moved to sell the house free and clear of the liens, with sale proceeds held in escrow and attached by liens if necessary. Countrywide opposed the motion, and asked the court to order Hoopai to release the full amount sought, or, if the court were unwilling to do that, to attach liens to the balance of the sale proceeds. The court granted Hoopai's motion, but ordered that $176,927.72 be released to Countrywide at closing and that the liens attach to the remainder of the proceeds of the sale.

On January 31, 2006, Hoopai and White closed the sale, and Hoopai paid Countrywide $176,927.72, with the remainder of the proceeds held in escrow, in accordance with the court's order.

D. The Present Attorneys' Fees Dispute

1. Proceedings Before the ...


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