The following is a case summary written by Kathleen A. Cashman-Kramer analyzing In re Sarria, 624 B.R. 250 (Dist. Ct. D. Idaho).
The U.S. District Court for the District of Idaho affirmed the decision of the bankruptcy court for the District of Idaho finding that a successful creditor in a non-dischargeability proceeding was entitled to an award of attorneys’ fees in prosecuting the action.
Creditor Leku Ona (“Leku”) brought an action against the Chapter 7 debtor Sarria and his wife under Section 523(a)(2)(A) alleging that Sarria fraudulently billed Leku for food and wine that he never delivered, and for which Leku had paid. The adversary proceeding was hotly litigated, including significant discovery and motions. Ultimately, the bankruptcy court concluded that Sarria had committed fraud and awarded Leku a non-dischargeable judgment in the amount of $2,490. Id at 252.
Leku then moved for an award of attorneys fees in the amount of $223,076.50 under Idaho Code section 12-120(3). The court concluded that fees were authorized by the statute, but reduced the amount sought, and awarded fees of $125,153. Id at 252-53.
Result and Reasoning
Sarria did not appeal the underlying amount of the judgment; rather, on appeal he raised two issues: (1) Leku was not the prevailing party, and (2) the bankruptcy court erred in awarding attorneys fees and costs.
On the prevailing party issue, Sarria alleged that the bankruptcy court erred because it did not apply an “overall view” analysis. In addition, he argued that he was the prevailing party, or at least both parties prevailed, for two reasons: the $2,490 judgment Leku received was much less than the damages sought, and codebtor Heather was dismissed entirely during trial. Id. at 254-55. The bankruptcy court disagreed noting that Sarria’s wife, Heather, nominally named, was voluntarily dismissed by Leku.
The district court found that the bankruptcy court had correctly analyzed and applied the law as to “claim by claim” analysis in this case, noting that the creditor had only asserted one claim, and prevailed on that claim, and that Sarria had presented no counterclaim. As a result, there was a single claim, and a single judgment, which warranted a finding that Leku was the prevailing party. Id. at 254. On the other issues, the district court rejected Sarria’s arguments finding that the differences between the amount Leku sought from Sarria and the judgment awarded was not as significant as Sarria claimed:
The complaint indicated that Leku Ona sought damages “in an amount to be proven at trial,” not $50,000. Dkt. 9-4, at 11. Eduardo’s hang up on $50,000 in damages comes from Leku Ona’s supplemental discovery responses in which Leka Ona suggested that damages might be that high. However, at a hearing two weeks later, Leku Ona indicated that damages would likely be far less than $50,000, and that problems of proof made it difficult for Leku Ona to assert damages as a sum certain. And, in its pretrial brief, Leku Ona indicated that it was seeking between $3,260 and $10,000 in damages. After judgment, the Bankruptcy Court noted that it was “not a surprise” that damages were low because it was “represented by [Leku Ona] pretty early on that this was a low damage case.” Dkt. 10, at 2. The court also recognized that Leku Ona was “candid throughout the proceedings that problems of proof” made the amount of damages difficult to determine. Dkt. 9-4, at 13. Thus, the record makes abundantly clear that the difference between the damages sought and the judgment of $2,490 was not as significant as Eduardo suggests.
Id. at 255.
This discussion echoed the discussion that the bankruptcy court had on this same issue when it considered Leku’s motion for an award of attorneys’ fees; see JA, LLC v. Sarria (In re Sarria), 606 B.R. 854 (B.Ct. D. Idaho 2019). Indeed, the bankruptcy court had specifically considered the reasonable fee award factors in Idaho R. Civ. P. 54(e)(3), and explicitly considered the disparate amounts of the judgment and fee award when it determined that Idaho law did not require the amount of attorneys’ fees awarded to be proportionate to a damages award. JA vs. Sarria, id. At 862-63. The district court agreed with this reasoning and did not disturb it on appeal. In fact, it also specifically noted that Idaho law did not require the amount of attorneys’ fees awarded be proportionate to the amount of the judgment. Sarria at 258. Finally, the district court affirmed that the bankruptcy court had correctly concluded that Idaho law dictates the award of fees including a determination of the entitlement (under Idaho Code 12-120(3)) and the reasonableness of such fees (under Idaho Rule of Civil Procedure 54(b)(3).
As a result, the district court fully affirmed the bankruptcy court’s determination that Leku was the prevailing party, and that the award of attorneys’ fees in the reduced amount was appropriate and reasonable.
The district court’s decision has not been appealed, and the time to do so has passed.
The decision seems fairly straightforward. It raises the question, however, would the result be the same under California law? A brief survey of cases under California law regarding whether an award of attorneys’ fees may be appropriate in a bankruptcy case, including one asserting fraud and non-dischargeability, yields many, many cases – too many to distill here at this time. One recent case, however, contains language that suggests that the Sarria result might be different in California. Specifically, in Mack v. Unruh (In re Mack), 2020 Bankr. LEXIS 2038* (9th Cir. BAP July 29, 2020), the BAP considered the question of whether attorneys’ fees would be recoverable in bankruptcy court for a fraud claim:
The Unruhs requested neither attorneys’ fees nor interest under their fraud cause of action. Likewise, the declarations they filed in support of entry of the Default Judgment cited the Notes as the basis for attorneys’ fees. There is no evidence in the record establishing that they requested an award of either attorneys’ fees or interest based on fraud.
Additionally, neither California law nor the Notes support an attorneys’ fee award based on a fraud recovery. Without citing to any authority, the Unruhs assert that a prevailing party in a California fraud action may recover attorneys’ fees as damages. To the contrary, there is no general right to attorneys’ fees in California based on fraud or otherwise, and, to the extent fees are recoverable based on express statute or agreement, they are recovered as costs. See Santisas v. Goodin, 17 Cal. 4th 599, 607 n.4, 71 Cal. Rptr. 2d 830, 951 P.2d 399 (1998).
Under CCP § 1032: “a prevailing party is entitled as a matter of right to recover costs in any action or proceeding.” Id. at 606 (quoting CCP § 1032). But CCP § 1033.5 limits the allowance of fees as “costs” under CCP § 1032 to instances where fees are authorized by contract, statute, or other law. Id. Here there is neither a statutory nor a contractual right to collect fees based on torts related to the contract. Narrowly drafted contract provisions that merely provide for attorneys’ fees to enforce or interpret a contract do not cover tort claims. Exxess Electronixx v. Heger Realty Corp., 64 Cal. App. 4th 698, 713, 75 Cal. Rptr. 2d 376 (1998). Such is the case here because the operative fee provision merely obligates Debtors to pay the Unruhs’ fees incurred as a cost of collection after a payment default. Thus, they could not recover fees on their fraud claim. And, again, they never sought attorneys’ fees based on fraud in the state court action; as discussed above, the Default Judgment could not grant relief not requested in their complaint.
In re Mack, Id., at *16-17.
On the other hand, the BAP has previously held that prevailing party attorneys’ fees may be recovered where the 523 action is based on fraud in inducing a party to enter a contract and the underlying contract has a broad provision for attorneys’ fees provision.
Accordingly, Clark had to show that the adversary proceeding against Arciniega was an “action on the contract” to recover attorney’s fees. A nondischargeability action may be considered an “action on a contract” even when the plaintiff only asserts one claim for fraud. See AT&T Universal Card Servs. Corp. v. Pham (In re Pham), 250 B.R. 93, 96 (9th Cir. BAP 2000) (even though plaintiff did not expressly specify breach of contract as a ground for relief, it nonetheless pleaded a contract cause of action because it sought “determination of [a] debt and recovery of attorney’s fees” based on its contract with the debtor). If the action involves contract and tort claims, attorney’s fees may only be recovered under Cal. Civ. Code § 1717 for the fees incurred to litigate the contract claims. In re Davison, 289 B.R. at 723 (citing Santisas, 17 Cal. 4th at 615).
Thus, whether Clark was entitled to an award of attorney’s fees under Cal. Civ. Code § 1717 for an “action on a contract” turns on whether the Settlement Agreement played an integral role in the nondischargeability action. In re Baroff, 105 F.3d at 442 (nondischargeability action “was an action on [the] contract because the document containing the attorney’s fee clause . . . played an integral role in the proceedings.”). In Baroff, the Ninth Circuit distinguished Grove v. Fulwiler (In re Fulwiler), 624 F.2d 908 (9th Cir. 1980), where the contract was collateral to the nondischargeability proceedings. Id. In Fulwiler, the bankruptcy [*39] court “did not adjudicate the validity of the note in determining whether the debt was dischargeable.” Id. (citing Fulwiler, 624 F.2d at 909-10). “Rather, the court determined that the debtors obtained the loan evidenced by the note through fraud.” Id. Unlike the note in Fulwiler, the document containing the attorney’s fees clause in Baroff — a settlement agreement purporting to release the parties from all other claims, including the disputed debts at issue — played an integral role in the nondischargeability action because the bankruptcy court needed to determine the enforceability of the settlement agreement to determine dischargeability. Thus, it was an “action on the contract” within the meaning of Cal. Civ. Code § 1717. Id.
Arciniega v. Clark (In re Arciniega), No. CC-15-1123-KiGD, 2016 Bankr. LEXIS 343, at *37-39 (B.A.P. 9th Cir. Feb. 3, 2016).
In short, be forewarned: do not assume from the result in Sarria that a prevailing creditor under a Section 523 case will automatically be entitled to attorneys’ fees. Do your homework first and be careful to plead the right to attorneys’ fees under any applicable statute or contract.
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 Ed Hays of Marshack Hays LLP (firstname.lastname@example.org).