MARTIN R. BARASH, Bankruptcy Judge.
In April 2013, individual debtor Allana Baroni obtained confirmation of her second amended chapter 11 plan (the "Plan"). Case Dkt. 423. Seven months after the entry of the confirmation order, Allana
Shortly thereafter, OneWest filed a motion seeking attorneys' fees of $498,113 (the "Fee Motion"). Adv. Dkt. 345, 364, 367. OneWest's attorneys' fee entitlement arises under the terms of the promissory note and deed of trust on which its secured claim is based — prepetition contracts, but all of the fees requested were incurred postconfirmation.
For the reasons set forth below, the court concludes that OneWest's attorneys' fee award should be treated as part of its prepetition claim against Allana, subject to treatment and discharge under the Plan. In SNTL Corp. v. Ctr. Ins. Co. (In re SNTL Corp.), 571 F.3d 826 (9th Cir. 2009), the Ninth Circuit established general principles applicable to an attorneys' fee award arising out of prepetition agreements, holding that it is properly treated as a prepetition claim, even when the attorneys' fees were incurred litigating after confirmation of the debtor's chapter 11 plan. Id. at 843-44. The court relied in part on the Ninth Circuit's "fair contemplation" test to determine that the claim for attorneys' fees arose prior to the petition date, even though the claim was then unliquidated and contingent. Although Siegel and In re Ybarra represent an exception to these general principles, the exception recognized in those cases does not apply to the facts and circumstances presented here. As explained below, this conclusion is further supported by the Ninth Circuit's decision in Picerne Const. Corp. v. Castellino Villas, A.K.F. LLC (In re Castellino Villas, A.K.F. LLC), 836 F.3d 1028 (9th Cir. 2016) [hereinafter "In re Castellino Villas"].
The court has jurisdiction over this case, the above-captioned adversary proceeding and the Fee Motion pursuant to 28 U.S.C. § 1334(b). These matters have been referred to this court pursuant to 28 U.S.C. § 157. This adversary proceeding and the Fee Motion are core matters pursuant to 28 U.S.C. § 157(b)(2)(A),(B),(O). The Court finds that it has constitutional authority to enter final judgment on the instant motion. See Stern v. Marshall, 131 S.Ct. 2594 (2011).
In 2004, Allana and James refinanced their real property located at 3339 Via Verde Court, Calabasas, California (the "Property"), executing a promissory note in the approximate amount of $1.6 million (the "Note") and a deed of trust ("DOT") securing repayment of the Note. In 2011, Allana and James defaulted on the Note and, by 2012, were facing foreclosure. Allana and James filed an action against OneWest in Los Angeles Superior Court challenging that OneWest owned the Note. When the state court denied their request to enjoin the foreclosure sale, Allana commenced this bankruptcy case on February 1, 2012.
On March 27, 2012, OneWest filed its Proof of Claim in this matter, in the amount of $1,860,964.23 (Claim 3-1, the "Claim"), to which OneWest attached the Note and DOT. On April 15, 2013, the Court confirmed the chapter 11 plan proposed by Allana (the "Plan"), over the objection of OneWest. The Plan contemplates, inter alia, that Allana would file a post-confirmation adversary proceeding disputing the OneWest claim and, pending a final adjudication of that dispute, make plan payments into a reserve account. Allana discloses and preserves potential causes of action regarding the OneWest Claim in Exhibit 2 to her Plan, expressly disclosing that she has potential claims for [a] Violations of the Real Estate Settlement and Procedures Act (RESPA); 12 U.S.C. § 2601 et seq., [b] Violations of the Truth-in-Lending Act (TILA) 15 U.S.C. § 1638, [c] Violations of the Fair Debt Collection Practices Act (FDCPA); 15 U.S.C. § 1692 et seq., [d] Violations of Fair Business and Profession Code, [e] Fraudulent Inducement, [f] Negligence, [g] Intentional Infliction of Emotional Distress, [h] Breach of Fiduciary Duties, [i] Wrongful Foreclosure, [j] Slander of Title, [k] Common Law Fraud and [l] Unjust Enrichment.
Allana objected to the Claim by way of an adversary Complaint, which she filed on November 15, 2013. In her Complaint, Allana alleged that OneWest lacked the authority to enforce the Note and DOT. On January 17, 2014, OneWest filed an answer to the Complaint (the "Answer") and a counterclaim (the "Counterclaim") seeking a declaratory judgment that OneWest (i) may enforce the Note and (ii) holds an allowed secured claim under the Bankruptcy Code based on the Note and DOT. On December 4, 2014, the court granted the motion for summary judgment filed by OneWest with respect to each and every claim in the Complaint, leaving only the Counterclaim to be adjudicated. The court held that "OneWest has shown that it is in possession of the Note, thus OneWest may file a proof of claim in this bankruptcy and enforce the Note" and also held that the "Deed of Trust was validly assigned by the FDIC to OneWest." Adv. Dkt. 129. On January 19, 2016, the court granted OneWest's motion for summary judgment with respect to all of the remaining counterclaims and, on that same date, entered judgment in favor of OneWest. Adv. Dkt. 296, 298, 299. The court once again held that OneWest is entitled to enforce the DOT. Adv. Dkt. 299.
During the course of this adversary, Allana filed three appeals of interlocutory orders, all of which were dismissed by the District Court (case numbers 2:14-cv-07842, 2:14-cv-08035, and 2:15-cv-00235). Allana also appealed from the order granting OneWest summary judgment on its Counterclaim, and the final judgment, which the District Court affirmed on October 3, 2016 (case number 2:16-cv-00829). Allana's appeal from the judgment is currently pending before the Ninth Circuit Court of Appeals (case number 16-56618).
On December 31, 2014, after the court entered summary judgment on the Complaint but prior to adjudication of the Counterclaim, OneWest filed a motion for attorneys' fees based on an attorneys' fee provision in the DOT.
In opposition to the Fee Motion, as supplemented by OneWest, Allana argues that any attorneys' fees incurred to enforce the Note or DOT must be added to the balance of the loan rather than stated in a separate and immediately payable order. Adv. Dkt. 354, 366. Allana also contends the amount of the fees is unreasonable. Adv. Dkt. 366. OneWest contends that its fees were reasonable in light of a series of frivolous appeals and frivolous motion practice pursued by Allana during the course of this adversary proceeding. Adv. Dkt. 367.
The provisions of a confirmed chapter 11 plan generally bind the debtor and all of the debtor's creditors, regardless of whether the creditors' claims are impaired under the plan or whether or not the creditors have accepted the plan. See 11 U.S.C. § 1141(a). Except as otherwise set forth in the plan or order confirming the plan, the confirmation order generally vests in the debtor all of the property of the estate free and clear of all claims, see 11 U.S.C. § 1141(b), (c),
11 U.S.C. § 1141(d)(1)(A).
In a chapter 11 case for an individual, subject to certain exceptions not applicable here,
The discharge in a chapter 7 case operates differently. See generally 11 U.S.C. § 727. First, the discharge in a chapter 7 case generally applies only to debts that arise before the entry of an order for relief or are determined under Bankruptcy Code section 502. 11 U.S.C. § 727(b).
Second, the court is required in a chapter 7 case to issue a discharge upon the expiration of the time fixed for objecting to the debtor's discharge or for filing a motion to dismiss the case under Federal Rule of Bankruptcy Procedure 1017(e), unless one of several prerequisites has not been satisfied. See Fed. R. Bankr. P. 4004(c)(1). Thus, issuance of the discharge in chapter 7 is not tied to the confirmation or implementation of any plan — nor is the distribution of any assets. To the extent there are estate assets to distribute in a chapter 7 case, they are distributed pursuant to the priority scheme set forth in Bankruptcy Code section 726, not pursuant to a plan. 11 U.S.C. § 726.
Under both chapter 7 and chapter 11, the term "debt" means "liability on a claim." 11 U.S.C. § 101(12). The term "claim" is broadly defined to mean "a right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secure, or unsecured. . . ." 11 U.S.C. § 101(5)(A). "A claim is `contingent' when `the debtor will be called upon to pay [it] only upon the occurrence or happening of an extrinsic event which will trigger the liability of the debtor to the alleged creditor.'" In re Castellino Villas, 836 F.3d at 1033 (quoting In re Fostvedt, 823 F.2d 305, 306 (9th Cir. 1987)). "A claim is `unliquidated' when it is not `subject to ready determination and precision in computation of the amount due.'" Id.
Whether a claim exists generally is determined as of the date of the filing of the bankruptcy petition, irrespective of whether the claim is contingent or unmatured at the time. See 11 U.S.C. § 502(b)(1); In re SNTL Corp., 571 F.3d at 838. "[T]he Bankruptcy Code utilizes [the] `broadest possible definition' of claim to ensure that `all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case." In re SNTL Corp., 571 F.3d at 838 (quoting Cal. Dep't of Health Servs. v. Jensen (In re Jensen), 995 F.2d 925, 929-30 (9th Cir. 1993)).
Accordingly, "contingent claims [existing as of the petition date] cannot be disallowed simply because the contingency occurred postpetition." Id. Absent some other basis to disallow a claim under section 502(b), the court "must allow it." Id. (quoting Wells Fargo Fin. Acceptance v. Rodriguez (In re Rodriguez), 375 B.R. 535, 545 (9th Cir. B.A.P. 2007) and citing Travelers Cas & Sur. Co. of Am. V. Pacific Gas & Elec. Co., 549 U.S. 443 (2007)).
The determination of when a claim arises is central to determining whether it is subject to discharge and entitled to treatment under a chapter 11 plan. To make this determination, the Court must look to federal law. ZiLOG, Inc. v. Corning (In re ZiLOG, Inc.), 450 F.3d 996, 1000 (9th Cir. 2006). "It is well-established that a claim is ripe as an allowable claim in a bankruptcy proceeding even if it is a cause of action that has not yet accrued." Cool Fuel v. Board of Equalization (In re Cool Fuel, Inc.), 210 F.3d 999, 1006 (9th Cir. 2000) (citing In re Jensen, 995 F.2d 925, 929 (9th Cir. 1993) and other authorities). Thus, a contingent claim may be discharged in bankruptcy, even if a right to payment on that claim does not ripen until after commencement of the bankruptcy case. See In re Jensen, 995 F.2d at 928, 931.
In In re Jensen, the Ninth Circuit Court of Appeals held that once the California Department of Health Services ("Department") had discovered a serious environmental hazard on the debtors' property, its claim against the debtors was ripe for filing under the Bankruptcy Code as a prepetition, contingent claim, even though its CERCLA cause of action had not yet accrued. Id. After the Jensens' bankruptcy case was closed, the Department filed a claim. The court held it was too late. The court found that because the Department's right to payment under CERCLA originated from the Jensens' "prepetition conduct," of which the Department had knowledge before the petition was filed, it could be "fairly contemplate[]" that it would result in a CERCLA claim. Id. at 930-31.
In In re SNTL Corp., the Ninth Circuit (adopting the opinion of the Bankruptcy Appellate Panel verbatim) applied the principles of In re Jensen to a claim for attorneys' fees incurred postpetition that arose from a prepetition guarantee agreement between the debtor and a creditor. 571 F.3d at 830. Pursuant to a confirmed chapter 11 joint plan of reorganization, the debtors appointed a litigation trustee to prosecute certain claims, rights and causes of action, and to initiate and oversee actions pertaining to the allowance and payment of claims, including objections to proofs of claim filed in the case. Id. One of the proofs of claim filed in the case was that of an insurance company asserting (i) a debt under a prepetition guarantee agreement, and (ii) a contractual claim for attorneys' fees related to the enforcement of that debt (including fee amounts that would be incurred postpetition). Id. at 830, 832.
The litigation trustee objected to the proof of claim—both as to the guarantee debt and the related claim for attorneys' fees. With respect to the attorneys' fees specifically, the litigation trustee argued (i) that the insurance company could not have an allowed claim for attorneys' fees because the underlying guarantee claim was not a secured claim within the meaning of the Bankruptcy Code, and (ii) that the insurance company could not recover attorneys' fees incurred at any time after the petition date because the amount of such fees could not be determined or calculated "as of the petition date," as contemplated by Bankruptcy Code section 502(b). The bankruptcy court sustained the objections of the litigation trustee and disallowed the insurance company's claims. Id. at 829-833.
The Ninth Circuit reversed, holding that both the guarantee claim and the attorneys' fee claim should be allowed. The court's conclusions with respect to the attorneys' fee issue are particularly significant here. First, the court of appeals rejected the argument of the litigation trustee that a claim for contractual (or statutory) attorneys' fees may be allowed in bankruptcy only if the claim arises in connection with a secured claim. In re SNTL Corp., 571 F.3d at 839-43, 844-45.
Second, and most important to the present matter, the court rejected the proposition that a prepetition claim for attorneys' fees incurred postpetition cannot be allowed. Id. at 843-44. The court held that this would be inconsistent with the broad definition of "claim," which includes a right to payment that is, as of the petition date, contingent and unliquidated. Id. (citing 11 U.S.C. § 101(5)(A)). Thus, the court held that a prepetition right to attorneys' fees may be an allowed prepetition claim, even if the fees are incurred postpetition. Id. The court specifically found that this conclusion was "consistent with the Ninth Circuit's `fair contemplation' test . . .:"
Id. at 844 (citations omitted).
The Ninth Circuit has held on two occasions that a prepetition right to attorneys' fees incurred postpetition should not be treated as a prepetition claim. See In re Ybarra, 424 F.3d 1018; Siegel v. Fed. Home Loan Mortg. Corp., 143 F.3d 525 (9th Cir. 1998). These decisions precede the decision in In re SNTL Corp. and do not specifically refer to the fair contemplation test. Nevertheless, as discussed in Section C infra, the Ninth Circuit has since harmonized these decisions with its fair contemplation test. See In re Castellino Villas, 836 F.3d, at 1036-37. See also Baroni v. Wells Fargo Bank, N.A. (In re Baroni), 2017 WL 3014268, *5-7 (9th Cir. B.A.P. July 14, 2017).
In Siegel, the debtor defaulted on two real estate loans and thereafter filed a chapter 7 liquidation case. 143 F.3d at 528. Freddie Mac, the lender, filed two proofs of claim, as to which no objections were filed. Id. As a result, each of those claims was deemed allowed. Id. at 525; 11 U.S.C. § 501(a). The debtor received a discharge of those claims, but the debtor subsequently brought a state court suit (later removed to federal district court) against the lender, arguing that the lender breached the deed of trust. See 143 F.3d at 527-28. The district court granted the lender summary judgment, finding that determination of the rights of the parties under the loan documents was res judicata, and awarding attorneys' fees to the lenders pursuant to those agreements.
On appeal, the debtor argued that the attorneys' fee claim had been discharged in his chapter 7 case because (i) the lender's right to collect attorneys' fees (albeit contingent and unliquidated) existed prior to the commencement of that case, under the prepetition loan documents, and (ii) the discharge granted in his case applied to "all debts that arose before the order for relief" in that case. Id. at 531-32; see also 11 U.S.C. § 727(b). The court of appeals rejected this argument.
The court concluded it would be unfair to treat the attorneys' fee claim under the prepetition loan documents as a prepetition claim (and therefore subject to the chapter 7 discharge), when the debtor sought to use the very same loan documents post-discharge to pursue litigation against the lender:
Id. at 533-34.
In In re Ybarra, the Ninth Circuit addressed a similar situation. There, the debtor commenced an employment discrimination suit against her employer in state court, eight months before the debtor filed her chapter 7 case. 424 F.3d at 1020. The chapter 7 trustee for the debtor's estate negotiated a settlement with the employer, which was approved by the bankruptcy court, resulting in dismissal of the state court lawsuit. Id. Notwithstanding that dismissal, the debtor took affirmative actions "to revive the state suit." Id. at 1020, 1027. The debtor claimed her cause of action against the employer was exempt property, litigated the issue in bankruptcy court, and (after prevailing on appeal) rejected the settlement agreement and "successfully persuaded the state court to set aside the dismissal." Id. at 1020. The debtor lost in state court and the employer was awarded attorneys' fees and costs. Id. at 1020-21. The employer sought leave to enforce the fee and cost award notwithstanding the debtor's chapter 7 discharge, and the debtor opposed. The bankruptcy court ruled in favor of the employer, but the BAP reversed.
Following its decision in Siegel, the Ninth Circuit reversed the BAP, holding that postpetition attorneys' fees are not discharged when "the debtor voluntarily commences litigation or otherwise voluntarily `returns to the fray.'" Id. at 1026. The court explained that "whether attorney fees and costs incurred through the continued prosecution of litigation initiated pre-petition may be discharged depends on whether the debtor has taken affirmative post-petition action to litigate a prepetition claim and has thereby risked the liability for these litigation expenses." Id. The court of appeals concluded that by actively reviving the state suit, Ybarra "returned to the fray," such that the employer's claim for attorneys' fees and costs should not be treated as a prepetition debt subject to discharge.
In In re Castellino Villas, the Ninth Circuit harmonized the fair contemplation test and its decision in In re SNTL Corp., on the one hand, with its decisions in Siegel and In re Ybarra, on the other hand. See In re Castellino Villas, A.K.F. LLC, 836 F.3d at 1033-37. Although neither Siegel nor In re Ybarra specifically mention the fair contemplation test, the court in In re Castellino Villas describes those cases as instances in which the attorneys' fee award was simply not within the "fair contemplation" of the parties. Id. at 1034.
In re Castellino Villas, 836 F.3d at 1035-36.
The facts of In re Castellino Villas are straightforward. At the time the debtor ("Castellino") filed its chapter 11 case, its creditor ("Picerne") was in the process of foreclosing on a mechanic's lien against Castellino's property. Id. at 1031-32. Picerne was granted relief from the automatic stay to continue prosecuting that action, in which Castellino disputed the validity, priority, and amount of Picerne's lien. Id. at 1031. In connection with a chapter 11 plan, Castellino and Picerne entered into a settlement agreement. Id. at 1032. Among other things, the settlement agreement provided that (i) if Picerne was successful in the state court litigation, it would receive certain payments from a trust account that Castellino would fund, and (ii) the parties would mutually release one another from any and all existing claims. Id. The settlement did not address attorneys' fees. Id. The settlement was approved, the plan modified to include the agreed-upon terms, the plan confirmed, and Picerne's prepetition claims discharged under the plan. Id.
The parties thereafter completed the state court litigation, and Picerne won. Id. Based on its victory, Picerne sought an attorneys' fee award under its prepetition agreement with Castellino, but the bankruptcy court denied its request. Id. The bankruptcy court held that Picerne's claim for attorneys' fees (i) existed on the petition date as a contingent and unliquidated claim and was discharged or (ii) was released under the parties' settlement agreement. Picerne appealed.
Relying on In re Ybarra, Picerne argued on appeal that by litigating the state court action after obtaining a discharge, Castellino "returned to the fray" and opened itself up to liability for attorneys' fees incurred after the discharge. Id. at 1033. Specifically, Picerne argued that where a debtor continues to litigate a prepetition claim after discharge, and takes any affirmative steps beyond what is necessary to extricate itself from the litigation, the debtor has chosen to "return to the fray." Id. at 1036. Picerne cited the fact that more than seeking to extricate itself from the state court litigation, Castellino brought a motion for summary judgment, opposed Picerne's motion for summary judgment, took party and nonparty discovery, and made a request for attorneys' fees.
The Ninth Circuit rejected Picerne's argument. The court of appeals found that because Picerne was relying on an attorneys' fee provision in a prepetition agreement, and because Picerne had commenced the litigation prepetition, Picerne's contingent claim for attorneys' fees arose before both the filing of Castellino's bankruptcy case and confirmation of Castellino's chapter 11 plan. Id. "Further, the preconfirmation settlement agreement between Picerne and Castellino required the parties to complete the state court litigation. Under these circumstances, Picerne could fairly and reasonably contemplate that it would incur attorneys' fees associated with the state court litigation and would have a claim for attorneys' fees under the agreement if it prevailed." Id.
The court of appeals expressly "decline[d] to adopt Picerne's expanded reading of Ybarra and Siegel, which is inconsistent with our fair contemplation test." Id.
Id. As the court explained further, "[T]he pertinent question is whether the right to obtain attorneys' fees in the litigation is within the fair contemplation of the parties, and Picerne provides no reason why it would not have fairly contemplated that the parties would proceed with litigation that had not been resolved in bankruptcy." Id. at 1037.
The outcome of the present dispute is controlled by In re SNTL Corp. and In re Castellino. As in those cases, OneWest held a contingent and unliquidated claim for attorneys' fees under its prepetition loan documents with Allana, at the time she filed her chapter 11 petition. OneWest's claim for attorneys' fees became liquidated and non-contingent following confirmation of her Plan, which is when the attorneys' fees were incurred and a fee award granted. But this does not alter the fact that the claim arose from a prepetition agreement and existed before confirmation of the Plan (albeit contingent and unliquidated). See In re Castellino Villas, 836 F.3d at 1033-36; In re SNTL Corp., 571 F.3d at 843-44. As such, OneWest's claim for attorneys' fees is a claim subject to discharge under the Plan, pursuant to Bankruptcy Code section 1141(d)(1)(A).
That Allana's objection to the OneWest proof of claim was litigated after entry of the order confirming the Plan is of no moment. The Plan (which was integrated with the disclosure statement) put OneWest on notice that Allana objected to the OneWest claim, indicated that the claim would be litigated after confirmation of the Plan, and specifically provided for alternative treatment under the Plan, depending on the outcome of the litigation. Under the Plan, Allana must make payments into a trust account in amounts specified in the Plan. If the Court sustained Allana's objection, and disallowed the OneWest claim, the Plan provides that the money would be returned to Allana. If the Court denied the objection, and allowed the OneWest claim, the money would go to OneWest, as would future payments in accordance with the terms of the Plan.
In other words, OneWest could fairly and reasonably contemplate that it would incur attorneys' fees associated with the enforcement of its claim in Allana's case, and that it would have a claim for such attorneys' fees under its prepetition loan documents, at the time the case was commenced. Further, OneWest could fairly and reasonably contemplate prior to plan confirmation that it would incur such fees after plan confirmation because the Plan: (i) advised of Allana's objection to the OneWest claim, (ii) contemplated that the allowance of the claim would be litigated after plan confirmation, and (iii) provided for alternative treatment depending on the outcome of that litigation.
These facts and circumstances are similar to those in In re SNTL Corp. and In re Castellino. In In re SNTL Corp., the plan contemplated that a plan trustee could prosecute claims objections and other causes of action after confirmation of the plan. In re SNTL Corp., 571 F.3d at 830, 832. Although the litigation giving rise to the fees occurred after plan confirmation—and after the debtor was discharged under the plan—the court of appeals found that the claim for attorneys' fees was a prepetition claim because it arose (i) under the parties' prepetition agreement and (ii) therefore existed as of the debtor's petition date as a contingent and unliquidated claim. Id. at 843-44.
Similarly, in In re Castellino Villas, the plan contemplated that the parties would litigate the priority of the creditor's lien in a state court action and provided for alternative treatment depending on the outcome of the litigation. In re Castellino Villas, 836 F.3d at 1032. Although the plan in that case did not address the issue of attorneys' fees—as is true here—the Ninth Circuit concluded that prior to plan confirmation, the creditor "could fairly and reasonably contemplate that it would incur attorneys' fees associated with the state court litigation and would have a claim for attorneys' fees under the agreement if it prevailed." Id. at 1036. The same result should obtain here, where the plan put OneWest on notice that the litigation over claim allowance would occur post-confirmation.
Unlike in In re Castellino Villas, there is no settlement agreement here under which the parties agreed that the claims litigation would occur post-confirmation. The procedure for litigating allowance of the claim is simply baked into the Plan. But this difference is not significant to the analysis. First, it is well-established that a chapter 11 plan is itself a contract between a debtor and its creditors. See Hillis Motors v. Hawaii Auto. Dealers' Ass'n (In re Hillis Motors), 997 F.2d 581, 588 (9th Cir. 1993); Knupfer v. Wolfberg (In re Wolfberg), 255 B.R. 879 (9th Cir. B.A.P. 2000). Second, the plan is deemed binding on all creditors, regardless of whether they are impaired under the plan or accept the plan. See 11 U.S.C. § 1141(a). Third, irrespective of the foregoing, the Plan undeniably put OneWest on notice that allowance of its claim would be adjudicated after confirmation of the Plan.
OneWest (and the similarly situated lender, Wells Fargo) have argued that Allana "returned to the fray" within the meaning of Siegel and In re Ybarra, by pursuing litigation against OneWest post-confirmation. But as the court of appeals concluded in In re Castellino, this Court concludes those cases "are not implicated here." 836 F.3d at 1036. The court in Siegel held that the debtor "returned to the fray" after (i) the debtor failed to object to the lender's claim during his chapter 7 case, (ii) the claim was deemed allowed, (iii) the debtor obtained a discharge of all liabilities under his agreements with the lender, but (iv) then "returned to the fray" by initiating new litigation against the lender based on those documents. 143 F.3d at 533. Here, the litigation generating attorneys' fees was not initiated after the claims of the creditor were allowed and thereafter discharged in the bankruptcy case. The litigation generating the fees is over the very allowance of the creditor's claim in the bankruptcy case and, as a result, the treatment to which it is entitled under Allana's confirmed chapter 11 plan. Moreover, because this is an individual chapter 11 case, there was no discharge upon confirmation and a discharge has yet to issue. See 11 U.S.C. § 1141(d)(5). These circumstances do not raise the sort of fairness concerns raised in Siegel.
The facts of the instant case are even farther afield of In re Ybarra. In that case the debtor took affirmative steps postpetition to revive a prepetition cause of action against her employer, after (i) the chapter 7 trustee for her estate had negotiated a settlement of it, (ii) the court had approved the settlement, and (iii) the state court had dismissed the debtor's prepetition lawsuit. 424 F.3d at 1020. Under those circumstances, the postpetition attorneys' fees incurred by the employer defending the suit were simply not within the fair contemplation of the parties at the time the case was filed (i.e., the cleavage point for claims subject to discharge under chapter 7), In re Castellino Villas, 836 F.3d at 1034, and permitting the discharge of those fees would have been unfair. Nothing approaching those circumstances is present in the instant case. Prior to pursuing her litigation against OneWest, Allana did nothing (nor allowed anything to happen) amounting to a resolution or adjudication of OneWest's claims.
The allowance and disallowance of claims is a core bankruptcy matter. See 28 U.S.C. §157(b)(2). That OneWest's claim would be challenged in the bankruptcy case, and would generate attorneys' fees, for which it might have a claim under its loan documents, was well within the fair contemplation of the parties both (i) at the petition date and (ii) prior to confirmation of the Plan (i.e., the cleavage point for claims subject to discharge under chapter 11). Moreover, nothing in the circumstances presented suggests that it otherwise would be unfair to permit OneWest's pre-confirmation contingent and unliquidated claim for attorneys' fees be treated and discharged under the Plan. Indeed, because these fees were foreseeable, it was incumbent on OneWest to raise any concerns it had about the treatment and discharge of that claim under the Plan at the time the Plan was confirmed.
It appears that OneWest would have this Court conclude that literally any litigation commenced postpetition and continued post-confirmation is a "whole new course of litigation," where it pertains to a claim that will be discharged under a plan. But the argument ignores the particular meaning given those terms in Siegel and In re Ybarra, and the particular circumstances of those cases. Perhaps most importantly, such a conclusion would eviscerate the fair contemplation test, as that test has been applied to contractual and statutory attorneys' fees by the Ninth Circuit. If such an argument were correct, then no attorneys' fee claim that becomes liquidated and non-contingent postpetition or post-confirmation in a chapter 11 case would ever be discharged—a result clearly at odds with the Ninth Circuit's holdings in In re SNTL Corp. and In re Castellino Villas.
In its initial Fee Motion, OneWest requested attorneys' fees in the amount of $662,937. This amount included fees incurred in the main bankruptcy case as well as fees incurred in this adversary proceeding. Allana opposed the Fee Motion, principally rearguing the merits of her claims, but also asserting that OneWest was required to submit detailed billing statements to establish the reasonableness of its fees. Adv. Dkt. 354. At the initial hearing on the Fee Motion, the court determined that OneWest was not required as a matter of law to submit detailed billing invoices but was required to remove the attorneys' fees incurred in the main bankruptcy case from the fees sought in this adversary proceeding. OneWest filed its supplemental brief in support of the Fee Motion (the "Supplemental Brief") seeking attorneys' fees of $498,113 for the two and one-half years this adversary proceeding has been pending. Adv. Dkt. 364. OneWest included a detailed declaration of Brian H. Newman (the "Newman Declaration") breaking these fees into ten categories of services provided, and offered a detailed narrative for each category and a subtotal of fees expended in each category, as well as biographical narratives and billing rates for the professionals billing in these categories. Allana filed a supplemental opposition (the "Supplemental Opposition"), again arguing that OneWest was required to submit detail billing invoices and that OneWest had failed to prove its fees were reasonable. Adv. Dkt. 366. At a preliminary hearing, the court determined that OneWest was not required as a matter of law to submit detailed billing invoices. See Winterrowd v. Am. Gen. Annuity Ins. Co., 556 F.3d 815, 827 (9th Cir. 2009) quoting Martino v. Denevi, 182 Cal.App.3d 553, 558 (1986). While OneWest is not barred as a matter of law from recovering its attorneys' fees simply because it did not provide detailed billing invoices in support of its fees, the court concluded that a review of those invoices would assist the court in determining the reasonableness of those fees. Additionally, in an opinion issued after that interim hearing on the Fee Motion, the Ninth Circuit held that "the Due Process Clause requires that opposing counsel have access to . . . timesheets relied on to support [a] fee order." Yamada v. Nobel Biocare Holding AG, 825 F.3d 536, 545 (9th Cir. 2016). Therefore, the court required OneWest to submit under seal detailed billing invoices, redacted only to the extent absolutely necessary to protect information covered by the attorney-client privilege or the work product doctrine (the "Billing Records"). OneWest filed and served Billing Records on Allana and increased the amount of fees requested to $567,260 to include fees incurred in the adversary and on appeal since the filing of the Fee Motion. Adv. Dkt. 388. Allana renewed her objections to the original amount requested and asserted objections to the newly requested fees and requested additional time to retain an expert to analyze the fees. Adv. Dkt. 390. OneWest submitted a second supplemental reply in response to those arguments. Adv. Dkt. 391.
The terms of the parties' prepetition deed of trust as well as California law and federal law all require that OneWest's attorneys' fees be reasonable as a condition of being recoverable.
Dalessio v. Pauchon (In re Dalessio), 74 B.R. 721, 723 (9th Cir. B.A.P. 1987).
OneWest provides evidence that the normal billing rates for the four attorneys principally responsible for this adversary proceeding are $490 - $690 per hour but that they billed at discounted rates of $380 - $545 per hour. Adv. Dkt. 364. The court notes that the attorney who has routinely appeared on these matters over the last eighteen months, Brian Newman, has the billing rate of $380, that this court routinely approves fee applications in which counsel in this district have billing rates higher than $380 - $545 per hour and that Allana's counsel in both the bankruptcy case and this adversary proceeding have billing rates of at least $500 per hour. Case Dkt. 247 and Adv. Dkt. 739. OneWest's counsel billed 1,428.9 hours in the adversary for which it seeks $567,260 for a blended rate of $396 per hour. Adv. Dkt. 388 and Billing Records attached thereto. The hourly rates charged by OneWest's counsel, and the blended rate for fees incurred in this proceeding, thus are reasonable in comparison with the prevailing market rates in this forum. See Stine v. Flynn (In re Stine), 254 B.R. 244, 252 (9th Cir. B.A.P. 2000) citing Blum v. Stenson, 465 U.S. 886, 895 (1984) ("reasonable fees are to be calculated according to prevailing market rates"); PLCM Grp., 22 Cal. 4th at 1095 ("The reasonable hourly rate is that prevailing in the community for similar work").
In her Supplemental Opposition, Allana argues that OneWest's counsel performed in excess of a 1000 hours of work in this adversary proceeding which she contends is unreasonable. Adv. Dkt. 366. In response, OneWest argues that much of its fees can be attributed to the litigation tactics pursued by Allana. Adv. Dkt. 367. As a threshold matter, OneWest's fees are all attributable to defending against Allana's affirmative challenges to whether OneWest has standing to enforce the note and deed of trust and whether it had any interest at all in the Property. Under the confirmed Plan, unless OneWest prevails in this adversary proceeding it will not receive any of the Plan distributions made into the Class Four Reserve Account. Case Dkt. 376 at 19, 24. This is not a case in which an over-secured creditor "harasses and opposes the debtor at every stage of the bankruptcy proceeding" knowing that its over-secured status essentially gives it "a blank check to incur fees and costs which will automatically be reimbursed out of its collateral" — the type of overreaching the reasonableness requirement of section 506(b) is designed to prevent. Dalessio, 74 B.R. at 723.
OneWest incurred $34,600 in connection with three appeals by Allana from interlocutory orders. The District Court dismissed each of these three appeals as interlocutory orders that are not immediately appealable as a matter of right and admonished Allana "that if she repeats this procedure a fourth time, the [District] Court will be inclined to entertain a motion for sanctions." Adv. Dkt. 174, 217. The Newman Declaration details that in connection with these frivolous appeals OneWest was required to file two motions to dismiss, an appellate brief, an opposition to Allana's motion for reconsideration and to appear at a hearing. Adv. Dkt. 364 at 6. Allana complains that these filings "were routine and relied on established case law" such that the number of hours expended was unreasonable. Adv. Dkt. 366 at 4. Allana's objection misses the point: her appeals from interlocutory orders, without seeking leave to appeal, were frivolous and represent an ill-considered, scorched earth litigation tactic which necessarily caused OneWest to incur fees in response to Allana's decision to appeal from interlocutory orders without seeking leave to do so.
Each of Allana's appeals from interlocutory orders was accompanied by a barrage of motions in the bankruptcy court seeking reconsideration of the orders appealed from, motions for stays pending appeal, motions for relief from orders (and even motions to reconsider orders denying motions for relief from orders) and applications for orders shortening time on some of those motions. Adv. Dkt. 75, 76, 176, 178, 264, 268, 320. Each of these motions caused OneWest to incur attorneys' fees and it was not unreasonable for OneWest to do so.
Allana also responded to OneWest's motion for summary judgment on the Complaint by filing a First Amended Complaint (the "FAC") (purporting to add two new defendants and two new causes of action) without leave of court or OneWest's consent. Adv. Dkt. 106. In his order granting OneWest's motion for summary judgment, Judge Ahart expressly found that the FAC was not authorized under Rule 15(a)(2) of the Federal Rules of Civil Procedure. Adv. Dkt. 129, ¶12. In contravention of this ruling, Allana requested and obtained entry of defaults against OneWest and the two new defendants named in the FAC. Adv. Dkt. 135-137, 140-142, 146-148. OneWest incurred unnecessary legal fees to object to the request for entry of default and to move to set aside the default entered against it, which Allana opposed. Adv. Dkt. 139, 152, 163, 164, 165. Judge Tighe granted OneWest's motion and noted in her ruling that Allana's efforts to obtain entry of default was "contrary to both the spirit and specific language of [Judge Ahart's] MSJ Order" and that Allana would "not be prejudiced by this adversary being determined on its merits, rather than by the game of `gotcha' that the Debtor is trying to play." Adv. Dkt. 168. Undeterred by adverse rulings regarding the FAC by Judge Ahart and Judge Tighe, and with a third judicial officer now assigned to this adversary proceeding, Allana continued to prosecute her FAC, seeking a default judgment against the two improperly named defendants, relief which OneWest chose to oppose. Adv. Dkt. 200, 208. This court denied Allana's ill-considered motion for default judgment, set aside the defaults entered against the new defendants and ordered Allana's improper FAC stricken. Adv. Dkt. 236. The Newman Declaration details that OneWest incurred $16,543 in fees in connection with Allana's improper FAC which are not unreasonable in light of Allana's insistence on prosecuting an improper amended complaint despite adverse rulings from three different judicial officers regarding the filing of that complaint.
The Newman Declaration also details that OneWest incurred $46,665 to resolve its Counterclaim, which includes its successful motion for summary judgment on that Counterclaim. OneWest contends, and Allana presents no evidence in contravention of these contentions, that OneWest asked Allana to stipulate to dismissal of the Counterclaim against her, that she refused causing OneWest to file a motion to dismiss its own Counterclaim, which Allana opposed on the grounds that resolution of the Counterclaim (the only remaining claim in this proceeding at that point) would be premature. Adv. Dkt. 364, 186, 190, 192, 193. Because Allana fought dismissal of the Counterclaim, OneWest was left with little choice but to file a motion for summary judgment on that Counterclaim, which Allana opposed by filing both a motion to strike the motion for summary judgment and an opposition. Adv. Dkt. 201, 251. OneWest's fees incurred to prevail on its Counterclaim are not unreasonable, especially where the uncontroverted evidence establishes that Allana refused to consent to the dismissal of the Counterclaim.
Not all of the fees prayed for are compensable, however. In its Fee Motion (which includes fees incurred in the main bankruptcy case as well as this adversary proceeding), OneWest describes $53,069 in fees it incurred in connection with "Plan Compliance" — OneWest's efforts to determine whether Allana was making the requisite Plan payments into a Class Four reserve account for the secured claim of OneWest. Adv. Dkt. 345, at 7-8. After OneWest supposedly limited its fees to those incurred in the adversary, as opposed to the main bankruptcy case, some portion of the fees it incurred in connection with "Plan Compliance" remained, described as follows:
Adv. Dkt. 364, at 3:16-21.
Discovery to determine whether Allana was in default under the Plan should have been conducted in the main case as Allana's compliance with the Plan is unrelated to the issues in the adversary proceeding. Additionally, based on the detailed time entries in the Billing Records, much of this discovery was sought under Federal Rule of Bankruptcy Procedure 2004 yet billed in the adversary proceeding. Once an adversary proceeding is pending, the use of Rule 2004 as a discovery mechanism related to the issues in the adversary proceeding is improper. In re Dinubilo, 177 B.R. 932, 941 (E.D. Cal. 1993); In re Enron Corp., 281 B.R. 836, 840-41 (Bankr. S.D.N.Y. 2002) ("Courts have imposed limits on the use of Rule 2004 examinations . . . under the well recognized rule that once an adversary proceeding or contested matter is commenced, discovery should be pursued under the Federal Rules of Civil Procedure and not by Rule 2004"). To the extent OneWest sought information regarding "Plan Compliance" through Rule 2004 motions, those services related to the main case and are not compensable in this adversary proceeding. To the extent OneWest employed Rule 2004 to discover information related to the adversary, it employed a prohibited procedural mechanism and therefore those fees are not compensable. The court's review of the Billing Records filed under seal indicates OneWest incurred $27,654.50 in fees in connection with "Plan Compliance" discovery and Rule 2004 discovery. These fees will be disallowed. Additionally, OneWest includes $1,282.50 in fees incurred to prepare a motion to dismiss the underlying bankruptcy case. As these fees do not relate to the adversary proceeding, they will be disallowed. A chart detailing the specific fees disallowed is attached as an addendum to this decision.
It is apparent that during the two and one-half years that this adversary proceeding has been pending OneWest has suffered considerable legal expense as a result of Allana's aggressive litigation tactics, ultimately prevailing on both Allana's Complaint and OneWest's Counterclaim and on three frivolous appeals. Except as noted above and in the attached addendum, the Newman Declaration and the Billing Records filed under seal are sufficiently detailed to establish the reasonableness of the services rendered. The billing rates charged by OneWest's counsel, as well as the blended rate, are well within the reasonable prevailing market rates. As such, OneWest is entitled to fees in the amount of $538,323.
For all of the foregoing reasons, the Court holds that the attorneys' fee award in favor of OneWest in this adversary proceeding, in the amount of $538,323, shall be treated as a prepetition claim, subject to treatment and discharge under Allana's confirmed chapter 11 plan.
