In today’s episode of the podcast Bankruptcy Answers with Reno Fernandez, the Ninth Circuit Bankruptcy Appellate Panel affirms an order denying a request for attorney’s fees incurred in connection with a dischargrability action, finding that the fees were not recoverable under California Civil Code § 1717 or Code of Civil Procedure § 1021 because the proceeding was not an “action on a contract.”
Hello to you lawyers, fiduciaries, students, and bankruptcy fans. Today we are talking about a new opinion by the Ninth Circuit’s Bankruptcy Appellate Panel.
On May 11, 2023, the BAP affirmed an order denying a request for attorney’s fees incurred in connection with a dischargrability action, finding that the fees were not recoverable under California Civil Code § 1717 or Code of Civil Procedure § 1021 because the proceeding was not an “action on a contract.”
Specifically, Spartan Tank Lines, Inc. took an appeal from denial of attorney’s fees in connection with a dischargeability proceeding against chapter 7 debtor Annie Kim Le. It originated from a business relationship between Spartan and American Gas & Oil Corp., a company owned and operated by the debtor.
The debtor had issued a personal guarantee of American’s debts to Spartan, which included an attorney’s fee clause. However, American ceased payments to Spartan for delivered gasoline, and neither American nor the debtor fulfilled the owed debt.
Consequently, Spartan took legal action against American and the debtor in a state court, but proceedings were interrupted by the bankruptcy filing. Spartan countered this by filing an adversary complaint under § 523(a)(2)(A), asserting that its debt was non-dischargeable based on the debtor’s personal guarantee and subsequent fraudulent asset transfers.
The bankruptcy court eventually ruled in favor of Spartan, concluding that the debtor had committed actual fraud. However, when Spartan sought attorney’s fees and costs, the bankruptcy court denied the attorney’s fees request and awarded a diminished amount for costs. Spartan appealed this, arguing that it could recover attorney’s fees under California Civil Code § 1717. The bankruptcy court dismissed this argument, stating that the fraud dischargeability proceeding was not an “action on a contract.” Spartan also tried to recover attorney’s fees under California Code of Civil Procedure § 1021, but the bankruptcy court did not consider this argument. The bankruptcy appellate panel endorsed the bankruptcy court’s decision.
The opinion further delved into the application of California Civil Code § 1717, discussing the three conditions necessary for it to apply. These included that the action must be on a contract, the contract must provide for attorney’s fees, and the party seeking fees must have prevailed. The contention lay in whether the dischargeability proceeding was an “action on a contract.”
The bankruptcy court had concluded that it was not, as it did not have to determine the breach or enforceability of the personal guarantee. Spartan, however, argued that the bankruptcy court did have to adjudicate the existence, enforceability, and breach of the personal guarantee, but the appellate panel disagreed.
The panel’s findings suggested that the bankruptcy court did not “enforce” the contract, did not have to interpret or determine the validity of the personal guarantee, and that the guarantee did not influence the outcome of the summary judgment. The panel drew comparisons between this case and others where California Civil Code § 1717 did or did not apply.
The panel also addressed California Code of Civil Procedure § 1021, which permits attorney’s fees by agreement between parties. They found that the bankruptcy court had erred by not considering Spartan’s request under this provision. However, the error was deemed harmless as the attorney’s fee clauses in the personal guarantee and credit application guarantee were not comprehensive enough to cover tort claims.