BAP affirms award of attorneys fees to debtor after defense of 523(a)(2) action

This is pretty interesting and very surprising.  It seems to me to make the whole “is this an action on a contract” issue go away, as long at there is some relevant contract with an attorney’s fees provision.

Asphalt Professionals, Inc. v. Davis (In re Davis), (unpublished) 1:10-bk-17214-VK (9th Cir. BAP  July, 2019)

Issue:    Did the bankruptcy court properly award attorneys fees to the debtor after ruling in debtor’s favor in a 523(a)(2) action?

Holding:   Yes.  Even though the 523 action was not “on the contract,” fees are still appropriate under CCP 1021 which “permits recovery of attorney’s fees by agreement, for tort as well as contract actions.”   Further, CCP 1032(b) gives the prevailing party “costs” which include “Attorney’s fees, when authorized by . . . Contract.” CCP 1033.5(a)(10).

Judge Victoria Kaufman, Central District of California

Faris, Lafferty, Kurtz

The creditor here sued the debtor and certain of his corporations for breach of contract, alter ego and fraud.  The state court gave the creditor judgment against the corporate entities for breach of contract and against the debtor based on alter ego.  It did not rule (apparently) on the fraud.  Judgment was $3 million for breach of contract which included $1.5 million for fees.  During these proceedings, the debtor filed chapter 7.  The creditor filed a non-dischargeability complaint alleging fraud and also sought denial of the discharge.  After trial, the bankruptcy court ruled for the debtor which was affirmed by the BAP.  The bankruptcy court then awarded attorneys fees to the debtor for approximately $100,000.  The court ruled that CA CCP 1717 did not apply because the action in bankruptcy court was not “on the contract.”  She found however that CA CCP 1021 “permits recovery of attorney’s fees by agreement, for tort as well as contract actions.”   Further, CCP 1032(b) provides “a prevailing party is entitled as a matter of right to recover costs in any action or proceeding.”  Finally, “Costs” include “Attorney’s fees, when authorized by . . . Contract.” CCP 1033.5(a)(10).

The BAP affirmed.  Citing the California Supreme Court:

California Code of Civil Procedure section 1021 provides that, except where specifically provided by statute, parties are free to enter their own agreements regarding payment of fees.  Similarly, a prevailing party may ordinarily recover “costs,” §§ 1021 and 1032(b), and parties may contractually designate fees as recoverable costs, § 1033.5(a)(10). Pursuant to these provisions, “[p]arties may validly agree that the prevailing party will be awarded attorney fees incurred in any litigation between themselves, whether such litigation sounds in tort or in contract.”  Santisas v. Goodin, 17 Cal. 4th 599 (1998)

The language in the contract was generally that in an action arising from the contract, if [debtor's entities] prevails, it would receive reasonable attorneys fees.  The next sentence said, that if [creditor] prevails, [debtor entities] would pay reasonable attorneys fees.  The bankruptcy court ruled and the BAP agreed that both of these clauses are reciprocal under California law.  Further, the debtor was not a party to the contracts personally but the court ruled that since he was found to be the alter ego by the state court, he was a “party” for these purposes.  For one thing, the creditor argued everywhere in state court that debtor was a party and was therefore judicially estopped.

The bankruptcy court would not award any fees attributable to the 727 action.

Note: the creditor had a number of other objections namely that the fees were not reasonable, may have been paid by someone else anyway, included fees for related matters and parties, debtor wasn’t the prevailing party etc.  The BAP agreed with Judge Kaufman’s determinations on these issues.

Judge Kaufman’s published memorandum is here.  It fills in some of the holes.

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