Business Law

Bank of the West v. Curtis (In re Curtis) (9th Cir.)

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The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, Ret.), analyzing a recent decision of interest:

SUMMARY

In a recent nonprecedential disposition, the Ninth Circuit (the Court) denied a prevailing debtor’s right to attorney’s fees arising from a nondischargeability adversary because the proceeding was not an action “on a contract” under California Civil Code § 1717. Bank of the West v Curtis (In re Curtis), 2022 WL 1439131 (9th Cir. May 6, 2022).

To view the opinion, click here

FACTS

Debtor Dennis Curtis guaranteed two loans from Bank of the West (BOW) to his closed corporation, Valley Floor Covering, Inc. (Valley). After Valley defaulted on the loans, in February 2019 BOW and Curtis entered into a forbearance agreement by which BOW agreed to forebear from collecting for six months in exchange for payments, guarantees and financial disclosures from Curtis. Two months later, Curtis filed a chapter 7 bankruptcy. BOW filed a complaint. asserting that Curtis’s debt to it was nondischargeable due to alleged misrepresentations in the financial statements provided in connection with the forbearance agreement. Curtis moved unsuccessfully for summary judgment, arguing that the forbearance agreement was illusory and unenforceable. The bankruptcy court denied the motion, finding that factual issues existed regarding the interpretation and enforceability of the forbearance agreement.

A second summary judgment by Curtis focused on BOW’s lack of evidence regarding reliance and damages. The bankruptcy court granted that motion, ruling that because BOW failed to provide evidence that it lost valuable collection remedies – a showing necessary to establish damages in the forbearance context – judgment in favor of Curtis was warranted. Curtis then filed a motion for attorney’s fees under Cal. Civ. Code § 1717, which makes an attorney’s fee clause reciprocal to the prevailing party in an action on a contract. The bankruptcy court granted the motion and awarded $87,040 in fees. BOW appealed to the district court, which reversed and vacated the award. Curtis appealed to the Court, which affirmed the district court because the action was not one “on a contract.”

REASONING

Section 1717 has the effect of making reciprocal an otherwise unilateral contractual obligation to pay attorney’s fees. The Ninth Circuit has previously determined that three conditions must be met before § 1717 applies: (1) the action must be on a contract; (2) the contract must provide that attorney’s fees incurred to enforce it shall be awarded to one of the parties or the prevailing party; and (3) the party seeking the fees must be the prevailing party. At issue here was whether the action was “on a contract.”

In the context of a nondischargeability action, all claims for which sound in tort, for the action to be “on a contract,” the bankruptcy court must need to determine the enforceability of the agreement to decide dischargeability. If enforcement is not at issue, then the dischargeability claim is not an action on the contract. Here, the bankruptcy court granted summary judgment to Curtis by relying on a provision of Ninth Circuit case law concerning the damages element of a fraud claim in a forbearance context, not California law. It was not required to interpret the agreement and whether it could be enforced; therefore, Curtis did not prevail on a contract. The ruling rested solely on grounds based in tort. The Court affirmed denial of the fees since § 1717 was inapplicable.

AUTHOR’S COMMENTS

I write on an unpublished disposition because attorney’s fee awards in bankruptcy proceedings are complex and this case serves as a good reminder of some relatively well-settled principles. After 21 years as a bankruptcy judge, including 10 years on the BAP, and 4 years reviewing cases in retirement, I can unequivocally state that the case law interpreting fee awards is vast and nuanced. Fee awards in nondischargeability actions are among the most complex, because they often turn on the wording of an attorney’s fee clause and how that clause would be applied in a state court action.

If a state court would award fees to a prevailing party in a tort action, then the bankruptcy court may do so in a nondischargeability action based on that tort within the scope of what the state court would have done. If the state court would not award fees, then no fee award can be made in the bankruptcy court. Adding to the variables is the limitation on the reciprocity provided by § 1717. If an action is not “on a contract”, then it is conceivable that the creditor might be awarded fees for prevailing on a tort claim (such as fraud or willful and malicious conduct), but the debtor would be denied fees because the attorney’s fee clause is unilateral. This presents one more hurdle for the usually impecunious debtor to deal with when trying to defend a nondischargeability action. Even if he or she wins, unless a debtor defending a fraud claim can show the creditor was not substantially justified in bring the action (see § 523(d)), a fee award for prevailing is unlikely. 

This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.


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