In re Castellino Villas, LLC (Picerne Construction Corp. v. Castellino Villas, LLC)

Bankruptcy court properly denied a creditor’s claim for attorney fees incurred in successfully prosecuting a mechanics lien suit against debtor, since the Chapter 11 plan which allowed the creditor to proceed with the suit did not allow for recovery of attorney fees and the fees would have been fairly within creditor’s contemplation at the time the compromise Chapter 11 plan was prepared and approved.  Picerne prevailed in arbitration on its mechanics lien claim against Castellino, forcing Castellino to file a Chapter 11 bankruptcy petition.  Castellino’s Chapter 11 plan was approved—as a settlement it allowed Picerne to proceed with its state court action to foreclose its mechanics lien.  However, confirmation of the Chapter 11 plan discharged Castellino from its pre-petition debts which included all debts that were within the claimant’s fair contemplation when the petition was filed, even if the claim was contingent or had not yet accrued. Here, Picerne’s claim for attorney fees arose prepetition under the fair contemplation test and so was discharged upon confirmation of the Chapter 11 plan.  The bankruptcy court therefore properly denied Picerne’s claim for attorney fees incurred in the state court mechanics lien foreclosure suit.

Ninth Circuit Court of Appeals (Ikuta, J.); September 6, 2016; 2016 WL 4608146

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