Business Law

In re Bartenwerfer – Debtors Beware: Creditor’s Attorneys’ Fees for Prosecuting Section 523 Action May Also Be Non-Dischargeable, Regardless of the Amount

In Bartenwerfer v. Buckley (In re Bartenwerfer), 613 B.R. 730 (9th Cir. BAP Apr. 23, 2020), the Bankruptcy Appellate Panel for the Ninth Circuit—in the third appeal in the case relating to the nondischargeable judgment—determined that the creditor’s attorney’s fees were wholly nondischargeable. Since the factual predicates for the creditor’s state court fraud and non-fraud claims were inextricably intertwined, apportioning the fees was impossible. Because the debtors failed to meet their burden to identify or explain why the creditor’s fees were unrelated to his nondischargeable fraud claim and failed to make specific objections to the creditor’s fee request, the BAP affirmed the bankruptcy court’s determination that the creditor was entitled to his attorney’s fees as part of the nondischargeable judgment.


To review the published opinion, click here.

Background

Pre-petition, appellant-debtors remodeled and sold a home in San Francisco to appellee Buckley, who later discovered significant defects in the property.  A lengthy and complicated three-year battle then ensued in state court, including debtors’ cross-complaints against Buckley and the debtors’ contractors, culminating in a 19-day state court trial.  At the conclusion, the jury found in Buckley’s favor on his breach of contract, negligence, and failure to disclose claims, awarding damages which the state court reduced to $234,671, plus prejudgment interest, attorney’s fees, and costs.  Before the state court could hear Buckley’s motion for attorney’s fees, the debtors responded by filing a chapter 7 case.  Buckley then filed an adversary proceeding to have the judgment determined to be nondischargeable.

After trial in the adversary proceeding, the bankruptcy court entered judgment in favor of Buckley declaring the state court judgment nondischargeable under Bankruptcy Code section 523(a)(2)(A).  Buckley then moved to have his attorney’s fees and costs of $378,491 incurred in the state court litigation added to the judgment as a nondischargeable debt. The debtors opposed. The bankruptcy court sided with Buckley, subject to a determination that his fee request was reasonable, which resulted in a reduced award of $348,483.53 to eliminate clerical and travel fees. The bankruptcy court amended the nondischargeable judgment to award Buckley his nondischargeable fees.

The fee award was appealed by both parties, and the BAP initially remanded the case back to the bankruptcy court to determine what portion of the fees, if any, were attributable to the debtor’s fraudulent conduct.  On remand, Buckley argued that, because the state court claims were “both factually and legally intertwined,” fee apportionment was impossible. The bankruptcy court agreed, and the burden shifted to the debtors to specify which time entries or fee categories were not attributable to the debtors’ fraudulent conduct.  The bankruptcy court found that the debtors failed to meet their burden and awarded Buckley his fees in full, plus prejudgment interest at the rate of 10% per annum from the date of entry of the state court judgment. The debtors appealed and the BAP affirmed.

Reasoning

The BAP held that the bankruptcy court applied the correct legal standard governing apportionment of fees. While the BAP agreed that Buckley, as the prevailing party at trial, bore the initial burden of establishing that his fees stemmed from the nondischargeable fraud claims, it also noted specifically that “[F]ee apportionment is not required if the issues in the various claims are ‘so inextricably intertwined that it would be impractical or impossible to separate the attorney’s time into compensable and noncompensable units,’ Harman v. City & Cty. of S.F., 158 Cal. App. 4th 407, 417, 69 Cal. Rptr. 3d 750 (2007).”

The BAP then examined the record below and ultimately concluded that a significant overlap of facts and issues existed between the claims in the state court action and the adversary proceeding. The bankruptcy court painstakingly articulated the overlapping factual predicates and issues in the claims asserted by the parties to conclude that Buckley was not required to apportion his fees because his claims were premised on a common core of facts that were inextricably intertwined.

The BAP then turned to the issue of whether the debtors identified specific time entries or other matters relative to the hours requested, which would reduce the fee request.  In so failing to meet their burden, the BAP noted that the debtors: (1) did not make specific objections to specific time entries; (2) argued generally that the time entries contained block billing; and (3) identified only broad categories of fees as “extraneous” to the fraud claims, without identifying why they were objectionable. As a result, the BAP held that the debtors failed to carry their burden. The BAP ultimately concluded that the bankruptcy court did not abuse its discretion in finding that the fees could not be apportioned and that the debtors failed to make specific objections to the time entries. Therefore, the fees requested were allowed in full.   

Author’s Comment

It’s clear that the facts underlying the breadth of the claims found at trial—and that resulted in the finding that the underlying judgment was nondischargeable—went a long way to the BAP’s agreement with the bankruptcy court that the claims were inextricably intertwined and, hence, the fees sought were reasonable.  Examples included: (1) the debtors could not assert blanket objections to time related to mediation, experts, and research on claims, and they failed to highlight specific entries nor did they provide clear argument for disallowing such fees; (2) the debtors’ objections to fees incurred related to their potential liability for negligently hiring and supervising contractors were properly overruled; (3) the debtors’ objections to fees incurred in discovery relating to defects not specifically included in the nondisclosure claim were properly overruled, since appellee’s complaint included undiscovered defects that should have been disclosed by the debtors, and, hence, were related to the fraud claim; and (4) the debtors’ objections relating to their knowledge and awareness of the condition of the Property and understanding of obligations under the sale contract were properly overruled.  The examples, the BAP reasoned, coupled with the length of the litigation (more than 5 years) and two trials (the first for 19 days in the state court, and the second of unknown duration in the bankruptcy court) demonstrate that the BAP’s consideration of the reasonableness of the fees sought, and of the bankruptcy court’s dealing with the issues on remand, was well reasoned and reached the appropriate result. 

These materials were authored by Kathleen A. Cashman-Kramer, Of Counsel at Sullivan Hill Rez & Engel (Cashman-Kramer@Sullivanhill.com), with editorial contributions from ILC member Joseph Boufadel of Salvato Law Offices in Los Angeles (JBoufadel@salvatolawoffices.com).

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