When Can a Bankruptcy Court Award Attorney’s Fees under California Civil Code Section 1717?
There are numerous instances over the years where parties have attempted, using state court statutes such as California Civil Code section 1717, to recover their attorneys fees in bankruptcy cases. In Crescent Associates,the U.S. Bankruptcy Court for the Central District of California recently dealt with this very issue and found that, while the plaintiff debtor could recover its attorney fees from the defendant in connection with litigating an adversary proceeding, it could not recover fees that were related solely to the bankruptcy case.
To read the full published decision, click here.
In October 2018, Debtor and Plaintiff Crescent Associates LLC (“Debtor”) removed a state court action against Eyal Ben Dror (“Dror”) to the Bankruptcy Court. Debtor’s complaint alleged claims for declaratory relief and damages for slander of title and for cancellation of instrument. Debtor alleged that it was the record title holder of two parcels of real property (the “Multiview Properties”) as a result of a foreclosure sale on May 14, 2018.
Prior to the foreclosure sale, ADY Property, LLC and MJK 18, LLC owned the Multiview Properties. Four years earlier, Joe Klein and his business entity, MJK 18 LLC, entered into an agreement with Dror (the “Klein Agreement”) which set forth the terms for the parties’ acquisition of unrelated real property on Beverly Glen Drive (the “Beverly Glen Property”). Dror was to advance all funds, and any additional costs, for the purchase of the Beverly Glen Property, with Dror and Klein each holding a 50% interest. In turn, Klein and MJK 18 agreed to guarantee Dror’s investment and provided, as security for the guarantee, junior deeds of trust on the Multiview Properties (the “Dror Deeds of Trust”). The agreement also provided that in the event Klein was unable to deliver his required funds, Klein would withdraw his ownership in the Beverly Glen Property or quitclaim his interest to Dror, and that if Klein withdrew his shares, Dror agreed not to seek any recovery on the Klein guarantee. When Klein was unable to fulfill his obligations, Dror obtained judgment against Klein, granting Dror sole ownership of the Beverly Glen Property pursuant to the Klein Agreement. Crescent Associates, 2021 WL 1245913 at *1-*2.
At issue in the removed action was whether Dror should have released the Dror Deeds of Trust on the Multiview Properties. Debtor sought declaratory relief that the obligations secured by the Dror Deeds of Trust had been satisfied and that the guarantees were extinguished by the entry of judgment in favor of Dror and the transfer of title to the Beverly Glen Property to Dror. Debtor also sought cancellation of the Dror Deeds of Trust and damages for slander of title based on Dror’s refusal to remove the Dror Deeds of Trust from and after July 26, 2018. Debtor also sought punitive damages in connection with the Slander of Title Claim. Id. at 2.
The Bankruptcy Court granted the Debtor’s motion for summary judgment and denied Dror’s, finding that when Dror elected to take title to the Beverly Glen Property, he no longer had the right to “seek any recovery on any guarantees” provided by the Klein Agreement. Those “guarantees” were extinguished as were the Dror Deeds of Trust. The Court ordered the Dror Deeds of Trust cancelled and of no further force and effect and held that Dror had no claim against the estate. The issue of damages remained open as well as Plaintiff’s right to attorney fees, for which the Court set a hearing; the Parties agreed on the record that the matter would be submitted on written evidence and argument. Debtor timely filed its Motion for Damages and declarations in support; which was ultimately opposed by Dror. After the hearing, the Court ruled in part for the Debtor.
Entitlement to an Award of Attorney Fees under Civil Code Section 1717
Debtor sought attorney fees and costs of $304,498.28 pursuant to the Klein Agreement and Civil Code section 1717 and as damages and punitive damages of $76,124.57. The Bankruptcy Court found that the Debtor, as the prevailing party in the adversary proceeding, was entitled to attorney fees and costs under California Civil Code section 1717 from July 11, 2018, the date of entry of judgment in the state court litigation through confirmation of the plan in the underlying bankruptcy case. However, it examined the different fee components requested, as follows: (1) Bankruptcy counsel’s fees in the amount of $178,804.94; (2) Special litigation counsel’s fees in the amount of $98,369; and (3) United States Trustee’s (“U.S. Trustee”) fees in the amount of $27,324.34.
The Bankruptcy Court specifically found that attorney fees and costs were appropriate under Section 1717 since the Debtor was the prevailing party, and there was an attorney fees provision in the Klein Agreement, even though the Debtor was not a party to the original contract. Specifically, the court noted that where a contractual provision provides a right to attorney fees recovery to one party or to the prevailing party, the prevailing party is entitled to reasonable attorney fees, whether it is the party specified in the contract or not, citing Santisas v. Goodin, 17 Cal. 4th 599, 614–16 (1998). The Bankruptcy Court also noted that Section 1717, which was enacted to ban unfair one-sided fee provisions, has been expanded over time and California case law made it clear that the action must be “on the contract” and the party must prevail “on the contract.” Id. At *3. (citing Khan v. Shim, 7 Cal.App.5th 49, 55 (2016).
When it addressed Dror’s assertion that Section 1717 does not apply to the Klein Agreement because the Debtor was a non-signatory party to the Klein Agreement, the Bankruptcy Court, construing Cargill, Inc. v. Souza, 201 Cal.App.4th 962, 966, 968–69 (2011), noted that a non-signatory party may be entitled to contractual attorney fees for litigation in which “the non-signatory party “stands in the shoes of a party to the contract.” Id. at 966 (citation omitted).
Thus, the Bankruptcy Court concluded that, because the Debtor was purchaser of the Multiview Properties at a foreclosure sale, it stood in the shoes of Klein when it was required to litigate with Dror to enforce the terms of the Klein Agreement to remove the Dror Deeds of Trust: “[t]hus, [Debtor] as successor to the prior owners of the Multiview Properties may recover reasonable attorney fees incurred in an action on the contract.” It awarded the Debtor fees in the amount of $98,369.00 under Section 1717. Id. At 4-5.
Debtor’s Request for Fees Related to the Chapter 11 Case.
However, in addressing the Debtor’s request for attorney fees for the conduct and confirmation of a plan of reorganization and for the U.S. Trustee fees paid in the bankruptcy case (fees of its chapter 11 bankruptcy’s general counsel in the amount of $178,804.94, and quarterly fees charged by the U.S. Trustee in the amount of $27,324.34), the Bankruptcy Court would not extend Section 1717. It found that the Debtor did not demonstrate that the bankruptcy case was an action “on the contract,” citing Bos v. Board of Trustees, 818 F.3d 486 (9th Cir. 2016), because it was collateral to the dispute. Attorney fees cannot be awarded under Section 1717 because the action did not litigate the validity of the contract or consider state law governing the contract.
The Court is unpersuaded by Plaintiff’s contention that the bankruptcy case was an action on the contract. Plaintiff’s assertion that it had no other recourse but to file bankruptcy in order to clear title and sell the Multiview Properties does not make the case an action on the contract. Filing bankruptcy was merely one of Plaintiff’s options. Plaintiff could have settled or resolved its dispute in state court and brought the matter to a conclusion there. But, as asserted by Plaintiff, under these circumstances it chose to seek what in its view was a more expeditious route via the bankruptcy courts.
Crescent Associates,2021 WL 1245913. at 4.
As a result, the Bankruptcy Court denied the Debtor’s claim to recover its chapter 11 bankruptcy’s general counsel’s fees and costs and the quarterly fees imposed by the U.S. Trustee under the Klein Agreement and Section 1717.
California Civil Code Section 2941
With respect to Debtor’s claims under California Civil Code section 2941(d) for damages and attorneys fees, the Bankruptcy Court, citing In re Luchini, 511 B.R. 664, 677 (Bankr. E.D. Cal. 2014), found that the Debtor was not entitled to either because the Debtor did not assert a claim for recovery of fees under Section 2941(d) in the Complaint, having raised it for the first time in the Motion for Damages, and because the Debtor did not and could not demonstrate that the bankruptcy case was necessary for it to enforce the Klein Agreement. Id. At *6.
The Bankruptcy Court allowed an award of attorney fees for the removed action under the Klein Agreement but not the attorney fees and U.S. Trustee fees incurred in connection with the bankruptcy case:
[Debtor] has not demonstrated that these are damages that flow from the refusal to reconvey the Dror Deeds of Trust. This Court was required to make a determination as to the application of the reconveyance requirement in the Klein Agreement based on the ruling in the state court litigation. Further, as noted above, Plaintiff did not demonstrate that the bankruptcy case was necessary for it to enforce the Klein Agreement. Indeed, the adversary was filed originally in state court and removed to the bankruptcy court upon the filing of the chapter 11 case. The Court cannot find that all of the fees associated with the chapter 11 case were the result of the Dror litigation and his failure to release the Dror Deeds of Trust. As a result, no damages will be awarded. . . .
Crescent Associates,2021 WL 1245913 at *6.
Slander of Title
The Bankruptcy Court also stated that it could not find slander of title by Dror in this case. Specifically, it found that, because under California law slander of title requires allegations that a person, without a privilege to do so, published a false statement that disparaged title to property and caused the property owner some special pecuniary loss or damage, and Plaintiff cited no authority for the proposition that Dror’s failure to remove a lien without more can form the basis for a slander of title claim, then the Bankruptcy Court declined to award actual or punitive damages.
The bankruptcy court awarded the Debtor fees in the amount of $98,369, which fees directly related to the removed action only.
In my experience, the result here is consistent with what I have seen other bankruptcy judges decide over the years. As long as the party can establish a basis under Civil Code section 1717 for an award of fees, those fees will be allowed (assuming reasonable). Other fees related to the bankruptcy filing and case, however, will not be awarded. Since the Debtor’s argument that the chapter 11 case would not have been necessary because it “had no other reason to file bankruptcy as it was not insolvent and there was sufficient equity to pay all debts, including Defendant’s, had he prevailed” (Crescent Associates,2021 WL 1245913 at * 4) could not serve as a basis for an award of fees, perhaps the better course would have been to not file the chapter 11 and instead fight the matter to conclusion in state court.
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 Meredith King of Higgs Fletcher & Mack (email@example.com).