Victoria S. Kaufman, United State Bankruptcy Judge.
In 2005, plaintiff Asphalt Professionals, Inc. ("API") sued defendant Darin Davis ("Davis") and T.O. IX, LLC ("T.O."), among others, for breach of a subcontract agreement and fraud, among other claims, in state court. The subcontract agreement included a reciprocal attorneys' fees provision; Davis was not a signatory to the agreement, but the agreement provided for T.O. to enforce all provisions of the agreement. At all times, API alleged that T.O. is an alter ego of Davis.
After splitting the action into three phases, the state court ruled in API's favor on API's breach of contract claim and API's alter ego allegations, holding that T.O. is an alter ego of Davis. Based on the subcontract agreement, the state court also awarded API attorneys' fees in connection with litigating the breach of contract claim, for which Davis was held liable.
During the parties' state court litigation, Davis filed a chapter 7 petition. Subsequently, API filed a complaint to establish nondischargeability of its debt and denial of Davis's discharge. API's claim under 11 U.S.C. § 523(a)(2)(A) mirrored API's claim of fraud in state court; before the state court reached the fraud phase, this Court adjudicated API's claim under 11 U.S.C. § 523(a)(2)(A). The Court entered judgment in favor of Davis on API's claims under 11 U.S.C. §§ 523 and 727. Davis's motion for an award of attorneys' fees followed.
Davis asserts he is entitled to an award of attorneys' fees pursuant to the subcontract agreement and in accordance with California Civil Code § 1717 and/or California Code of Civil Procedure §§ 1021 and 1032. API contends it is not liable for Davis's attorneys' fees because: (A) the action is not an "action on a contract" for purposes of California Civil Code § 1717; (B) the language of the subcontract agreement
On June 2, 2004, API, as the subcontractor, and an unidentified contractor (the "Contractor") entered into the subcontract agreement (the "Agreement"). In the Agreement, T.O. was identified as the "Owner" and as a third-party beneficiary. Id. In relevant part, the Agreement (¶¶ 1, 23) provides:
On September 29, 2005, after T.O. did not pay API for all of API's work on a project, API sued T.O., Davis and others in state court (the "State Court Action"). In the State Court Action, API asserted claims of breach of contract, foreclosure of a mechanic's lien, quantum meruit and fraud. Throughout its fourth amended complaint filed in the state court (the "FAC"), API alleged that, at all times, T.O. was the alter ego of Davis, among others. API also alleged that on "June 2, 2004, [API] entered into a written contract with defendants T.O., D and S, D & S Development, [Davis]" and others. API alleged that all of these named defendants had breached the Agreement.
The trial court trifurcated the State Court Action into three trial phases, with the first phase involving API's causes of
On January 18, 2011, after entry of the Phase One Judgment, the state court entered an order against T.O. awarding API attorneys' fees (the "Fees Order"). The state court based its award on the attorneys' fees provision in the Agreement ("The attorney fee clause and only the attorney fees clause can ultimately render the aggrieved party whole. . . .").
The second phase of the State Court Action involved API's alter ego claims. On December 23, 2011, after trial, the state court issued a statement of decision on alter ego liability (the "Alter Ego Judgment"). In relevant part, after making extensive findings, the state court held:
(Emphasis added). The Alter Ego Judgment was affirmed on appeal (the "Alter Ego Appellate Decision"). In the Alter Ego Appellate Decision, the appellate court noted that:
On June 15, 2010, Davis filed a voluntary chapter 7 petition. On August 16, 2010, API filed a complaint against Davis (the "Adversary Complaint"), objecting to Davis's discharge pursuant to 11 U.S.C. § 727(a)(2) and (a)(4) and requesting non-dischargeability of any debt owed to it pursuant to 11 U.S.C. § 523(a)(2)(A). In the Adversary Complaint, API alleged:
Aside from these allegations, the Adversary Complaint also included allegations that Davis did not accurately complete his bankruptcy schedules and statements and that, as a result, Davis should be denied a discharge pursuant to 11 U.S.C. § 727(a)(2) and (a)(4).
API also continued to allege that Davis was a party to the Agreement. See, e.g. ("During 2004, defendant and entities he owned and controlled, knowingly entered into a sub-contract agreement with plaintiff . . . .") (emphasis added). In its prayer for relief, API requested attorneys' fees incurred by API during the course of the adversary proceeding. On September 17, 2010, Davis filed an answer to the Complaint (the "Answer") [doc. 3].
On June 26, 2013, API filed an Acknowledgment of Satisfaction of Judgment (the "Satisfaction of Judgment") in state court. Through the Satisfaction of Judgment and the stipulation attached thereto, API acknowledged that the Phase One Judgment and any attorneys' fees awarded to date had been paid in full.
The Court bifurcated this proceeding, such that the Court first heard API's claims under 11 U.S.C. § 727. On December 23, 2014, the Court entered judgment in favor of Davis on API's claims under 11 U.S.C. § 727 [doc. 113]. The Court initially stayed the 11 U.S.C. § 523 portion of this adversary proceeding to await conclusion of the State Court Action. On April 19, 2017, nearly seven years after Davis filed his chapter 7 petition, API and Davis appeared for a status conference. At that time, the Court informed the parties that
On August 31, 2017, the parties filed a joint pretrial stipulation (the "JPS") [doc. 140]. In the JPS, the parties agreed that the Court would try the following issues of law, among others:
API also asserted that Davis was a party to the Agreement in both the JPS and a prior pretrial stipulation filed in this adversary proceeding [docs. 69, p.4, 140, p.4]. In both pretrial stipulations, API also continued to assert that T.O. and other entities were alter egos of Davis [docs. 69, pp. 6-7, 140, pp. 6-7].
On April 23 and 24, 2018, the Court held trial on API's claim under 11 U.S.C. § 523(a)(2)(A). At trial, the Court made several findings regarding the Agreement, including findings regarding how T.O. was characterized in the Agreement, how certain terms were defined, which contractor's license number was included in the Agreement, the nature of oral communications between the parties regarding licensure at the time the parties entered into the Agreement and the review of the as-built survey provided with the Agreement.
On June 13, 2018, the Court issued a decision after trial (the "Court's Decision") [doc. 219]. In the Court's Decision, the Court held that API did not establish that Davis made oral or written representations to API regarding T.O.'s license status or the age of the as-built survey before the parties entered into the Agreement. The Court also held that any omission by Davis regarding the license status of T.O. or the age of the as-built survey was not fraudulent. Id. On June 18, 2018, the Court entered judgment in favor of Davis [doc. 221].
On June 29, 2018, Davis filed a motion requesting attorneys' fees and costs pursuant to Cal. Civ. Code § 1717 and/or Cal. Code of Civ. Proc. ("CCP") §§ 1021 and 1032 (the "Motion") [doc. 228]. On September 17, 2018, the Court held a hearing on the Motion. At that time, the Court continued the hearing to provide API an opportunity to brief issues API raised for the first time at the hearing on the Motion. On October 3, 2018, API filed its supplemental brief [doc. 244]. API argued, for the first time over the course of the eight years of litigation between the parties in this Court, that Davis is not a party to the Agreement. API also asserted that B & P § 7031 bars Davis's recovery of attorneys' fees.
On October 17, 2018, the Court held a continued hearing on the Motion. Although the Court issued a ruling on Davis's entitlement
The Court has jurisdiction over the above-captioned adversary proceeding and the 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 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 Motion. See Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).
In federal courts, there is generally no right to attorneys' fees unless authorized by contract or by statute. See Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 257, 95 S.Ct. 1612, 1621, 44 L.Ed.2d 141 (1975) ("Other recent cases have also reaffirmed the general rule that, absent statute or enforceable contract, litigants pay their own attorneys' fees."). In Cohen v. de la Cruz, 523 U.S. 213, 218-20, 118 S.Ct. 1212, 1216-17, 140 L.Ed.2d 341 (1998), the Supreme Court of the United States interpreted the discharge exceptions under 11 U.S.C. § 523(a)(2)(A), (a)(4), (a)(6), and (a)(9) to encompass all liability arising on account of a debtor's fraudulent conduct, including attorneys' fees and costs to which the creditors were entitled under state law. As such, "the determinative question for awarding attorney's fees is whether the creditor would be able to recover the fee outside of bankruptcy under state or federal law." In re Hung Tan Pham, 250 B.R. 93, 99 (9th Cir. BAP 2000). Here, Davis cites Cal. Civ. Code § 1717 and CCP §§ 1021 and 1032 as the operative state statutes.
Pursuant to Cal. Civ. Code § 1717(a)—
"Civil Code § 1717 makes an otherwise unilateral contractual obligation to pay attorney's fees into a reciprocal one in an action on the contract but Civil Code § 1717 is not applicable in a tort action." In re Bic Pho, 2016 WL 1620375, at *3 (Bankr. N.D. Cal. Apr. 20, 2016); see also In re Deuel, 482 B.R. 323, 328 (Bankr. S.D. Cal. 2012) (holding that § 1717 applies only to fees incurred to litigate contract claims); and Santisas v. Goodin, 17 Cal.4th 599, 615, 71 Cal.Rptr.2d 830, 951 P.2d 399 (1998) (same). To obtain fees pursuant to Cal. Civ. Code § 1717(a), "[t]hree conditions must be met." In re Penrod, 802 F.3d 1084, 1087 (9th Cir. 2015).
Id., at 1087-88 (internal citation omitted). "Under California law, an action is `on a contract' when a party seeks to enforce, or avoid enforcement of, the provisions of the contract." Id., at 1088.
Two recent decisions by the Ninth Circuit Court of Appeals shed light on which disputes fall within the purview of Cal. Civ. Code § 1717(a). In Penrod, prepetition, the debtor and a lender entered into an installment sale contract when the debtor purchased a vehicle. Penrod, 802 F.3d at 1086. The contract granted the lender a security interest in the vehicle. Id. The debtor then filed a chapter 13 petition and, in her proposed chapter 13 plan, bifurcated the lender's claim into a secured claim in the amount of $16,000 and an unsecured claim in the amount of $10,000. Id. The lender objected to the proposed chapter 13 plan, arguing that its entire claim should be treated as secured in accordance with the "hanging paragraph" below 11 U.S.C. § 1325(a)(9). Id. The bankruptcy court decided that the lender was entitled to a $19,000 secured claim and a $7,000 unsecured claim. Id., at 1087. The Bankruptcy Appellate Panel of the Ninth Circuit (the "BAP") affirmed the bankruptcy court's ruling. Id.
The debtor then filed a motion to recover attorneys' fees she incurred opposing the lender's objection to confirmation of her chapter 13 plan. Id. The debtor relied on a provision in the installment sale contract which read, "You will pay our reasonable costs to collect what you owe, including attorney fees, court costs, collection agency fees, and fees paid for other reasonable collection efforts." Id. Pursuant to this language, the debtor argued she was entitled to attorneys' fees under Cal. Civ. Code § 1717(a). Id. The bankruptcy court disagreed, holding that the action was not an action "on a contract" because the action at issue in Penrod turned on a question of federal bankruptcy law. Id. The district court affirmed the bankruptcy court. Id. The Ninth Circuit Court of Appeals disagreed, explaining that:
Id., at 1088. On this analysis, the Court of Appeals held the objection to the debtor's
The Court of Appeals decided that the bankruptcy court's and district court's interpretation of Cal. Civ. Code § 1717(a) was too narrow. Id. Those courts had concluded that Cal. Civ. Code § 1717(a) "applies only if the party defeats enforcement under non-bankruptcy law" and, because the debtor had prevailed under bankruptcy law, Cal. Civ. Code § 1717(a) did not apply. Id. The Court of Appeals held that California law did not prescribe any such limitation to Cal. Civ. Code § 1717(a). Id., at 1089.
After Penrod, the Ninth Circuit Court of Appeals issued a decision further clarifying the boundaries of Cal. Civ. Code § 1717(a). Bos v. Bd. of Trustees, 818 F.3d 486 (9th Cir. 2016). In Bos, the debtor was an employer obligated to make payments to certain employee pension funds administered by the Board of Trustees in accordance with trust agreements. Id., at 488. The debtor failed to make the requirement payments and, as a result, signed a promissory note agreeing to make monthly contributions to the funds and personally guaranteeing the payments. Id. The debtor was unable to make these payments. Id. An arbitrator ruled the debtor had violated the agreements, and the arbitration award was confirmed in a judgment. Id.
The debtor filed a chapter 7 petition. Id. The Board of Trustees filed an adversary proceeding requesting nondischargeability of the judgment pursuant to 11 U.S.C. § 523(a)(4). Id. The bankruptcy court held that the judgment was nondischargeable under 11 U.S.C. § 523(a)(4) because the debtor was a fiduciary under the Employee Retirement Income Security Act ("ERISA"). Id., at 489. The district court affirmed. Id. On appeal, the Court of Appeals reversed, holding that the debtor was not a fiduciary under ERISA and that 11 U.S.C. § 523(a)(4) did not apply to the debtor. Id. The debtor then moved to recover attorneys' fees pursuant to Cal. Civ. Code § 1717 and, alternatively, under ERISA. Id.
The Court of Appeals first referenced several prior decisions by the BAP and California courts:
Id. The Court of Appeals then adopted the BAP's interpretation of Cal. Civ. Code § 1717, noting that the construction "accords with the common sense meaning of the phrase `on a contract' and finds ample support in our precedents." Id., at 490. The Bos court then cited three prior decisions
First, the Court of Appeals cited In re Johnson, 756 F.2d 738 (9th Cir. 1985), for the proposition that an action is not an action "on a contract" if "the action neither litigated the validity of the contract nor required the bankruptcy court to consider `the state law governing contractual relationships.'" Bos, 818 F.3d at 490 (citing Johnson, 756 F.2d at 740). "More broadly, [the Court of Appeals] instructed that when federal and not state law governs the substantive issues involved in the adversary proceeding, [the court] may not award attorney's fees pursuant to a state statute." Id. (citing Johnson, 756 F.2d at 741).
Next, the Court of Appeals cited In re Fulwiler, 624 F.2d 908 (9th Cir. 1980), in which the Court of Appeals held that a nondischargeability action in bankruptcy was not "on a contract" under an Oregon fee-shifting statute identical to Cal. Civ. Code § 1717. "The reason, we later explained, was that `the bankruptcy court did not adjudicate the validity of the note in determining whether the debt was dischargeable,' and so the note was merely `collateral to the non-dischargeability proceeding.'" Bos, 818 F.3d at 490 (citing Baroff, 105 F.3d at 442 (citing Fulwiler, 624 F.2d at 909-10)).
Finally, the Court of Appeals referenced In re Hashemi, 104 F.3d 1122 (9th Cir. 1996), in which the Court of Appeals held that "a creditor's `dischargeability claim [was] not an action on the contract,' within the meaning of the contract itself, because `the bankruptcy court did not need to determine the enforceability of the . . . agreement to determine dischargeability.'" Bos, 818 F.3d at 490 (quoting Hashemi, 104 F.3d at 1126).
Based on these authorities, the Bos court explained:
Id. The Bos court distinguished Penrod on the basis that, in Penrod, the central question presented to the court was whether the court should enforce a provision in the parties' agreement or whether the debtor could avoid enforcement in accordance with the Bankruptcy Code. Id., at 490-91. In Bos, the nondischargeability issue did not present any issues regarding the validity or enforceability of the subject agreement. Id., at 491.
After Bos, a bankruptcy court within the Ninth Circuit addressed the issue of whether a nondischargeability action under 11 U.S.C. § 523(a)(2)(A) may be considered an action "on a contract" for
The Zarate court first noted that "under established California law, a tort claim does not `enforce' a contract." Id., at 184 (citing Stout v. Turney, 22 Cal.3d 718, 730, 150 Cal.Rptr. 637, 586 P.2d 1228 (1978); and Santisas, 17 Cal.4th at 615, 71 Cal.Rptr.2d 830, 951 P.2d 399). Next, the court held that "the dischargeability of a debt under § 523(a)(2)(A) resolves a tort claim." Id. (citing In re Candland, 90 F.3d 1466, 1470 (9th Cir. 1996)). The court held that, unlike Penrod, the court did not have to assess the enforceability of the subject agreement in Zarate:
Based on the above, this was not an action on a contract. The APA and the 2009 Agreement provided the context out of which this dispute arose, but this was not an action on a contract. Civil Code § 1717 does not provide a basis to award attorney's fees.
Id., at 185. See also Fulwiler, 624 F.2d at 909-10 (holding that the action was not "on the contract" where the bankruptcy court "did not adjudicate the validity of the note in determining whether the debt was dischargeable" and instead determined "that the debtors obtained the loan evidenced by the note through fraud"); cf. Baroff, 105 F.3d at 442 (holding an action was "on a contract" where "the bankruptcy court needed to determine the enforceability of the settlement agreement to determine dischargeability").
Here, as in Bos, the contract issues were previously decided by the state court, as set forth in the Phase One Judgment. This Court was presented with one issue: whether Davis committed fraud in connection with the execution of the Agreement. To adjudicate this issue, the Court did not need to assess the validity or enforceability of any provision in the Agreement. Neither API nor Davis disputed any provision in the Agreement during the course of this adversary proceeding; the Complaint focused on representations and omissions allegedly made by Davis in connection with entering into the Agreement. The Answer also did not raise any affirmative defenses that called into question any provision in the Agreement. As such, this case is more similar to Bos, Zarate and Fulwiler, and is readily distinguishable from the contract enforcement issues presented to the Baroff court.
Although Davis is not entitled to attorneys' fees pursuant to Cal. Civ. Code
Under CCP § 1033.5(a), the following items are allowable as costs pursuant to § 1032:
CCP "§ 1032(b) entitles a `prevailing party' to `recover costs' as a matter of right `in any action or proceeding.' Costs may include attorney's fees when authorized by contract, even when the action is not `on a contract.'" In re Mac-Go Corp., 541 B.R. 706, 715 (Bankr. N.D. Cal. 2015) (citing CCP § 1033.5(a)(10)).
Here, the relevant provision in the Agreement (¶ 23) states: "In the event that Contractor prevails in any reference proceeding or court action arising out of this Agreement or the enforcement or breach thereof . . . whether the same proceeds to judgment or not, Subcontractor agrees to pay to Contractor reasonable attorneys' fees." (Emphasis added). If this language encompasses tort actions as well as contract actions, then Davis, as the prevailing party (discussed below), is entitled to collect reasonable attorneys' fees from API.
Several California courts have held that the phrase "arising out of" is broad enough to encompass both tort and contract actions. In Xuereb v. Marcus & Millichap, Inc., 3 Cal.App.4th 1338, 1341, 5 Cal.Rptr.2d 154 (Ct. App. 1992), the plaintiffs filed suit against the defendants, alleging negligence, products liability, fraud and misrepresentation and breach of contract. Xuereb, 3 Cal.App.4th at 1341, 5 Cal.Rptr.2d 154. The allegations in the complaint involved a real estate purchase agreement through which the defendants, a real estate broker and real estate agent, sold real estate to the plaintiffs. Id., at 1340, 5 Cal.Rptr.2d 154. In relevant part, the plaintiffs alleged that the defendants omitted information or made misstatements prior to the execution of the purchase agreement. Id., at 1343, 5 Cal.Rptr.2d 154. The purchase agreement included the following attorneys' fees provision: "Attorneys' Fees: If this Agreement gives rise to a lawsuit or other legal proceeding between any of the parties hereto, including Agent, the prevailing party shall be entitled to recover actual court costs and reasonable attorneys' fees in addition to any other relief to which such party may be entitled." Id.
The action went to trial on the theories of negligence, breach of fiduciary duty, concealment and misrepresentation, but not on breach of contract. Id., at 1341, 5 Cal.Rptr.2d 154. The jury returned a verdict in favor of the plaintiffs, who then moved for an award of attorneys' fees pursuant to the purchase agreement. Id. The trial court denied the plaintiffs' motion, holding that the plaintiffs were not entitled to attorneys' fees under Cal. Civ. Code § 1717. Id. The plaintiffs appealed. Id.
Id. The court held that the action could properly be regarded "as having arisen from" the purchase agreement even under the defendants' narrower interpretation of the language, because the purchase agreement provided for certain inspections after the signing of the agreement, which inspections were allegedly deficient and partly formed the basis of the plaintiffs' lawsuit against the defendants. Id., at 1343-44, 5 Cal.Rptr.2d 154. However, the court held that the plaintiffs' broader interpretation of the language was accurate:
Id., at 1344. The Xuereb court further explained:
Id.
Post-Xuereb, several courts have afforded the same broad interpretation to comparable attorneys' fees provisions. For instance, in Lerner v. Ward, 13 Cal.App.4th 155, 16 Cal.Rptr.2d 486 (Ct. App. 1993), the plaintiffs sued the defendants for falsely representing that the real property they purchased from the defendants could be subdivided. Lerner, 13 Cal.App.4th at 157, 16 Cal.Rptr.2d 486. The purchase agreement included an attorneys' fees provision awarding attorneys' fees to the prevailing party on any action "arising out of the agreement." Id., at 160, 16 Cal.Rptr.2d 486. Although the complaint included causes of action for breach of contract and reformation, the court held trial only on the plaintiffs' fraud cause of action. Id. The jury returned a verdict in favor of the defendants, who then moved for an award of attorneys' fees. Id. The trial court denied the motion, holding that the fees were not recoverable in a tort action under Cal. Civ. Code § 1717. Id., at 158, 16 Cal.Rptr.2d 486. The defendants appealed the ruling. Id.
The appellate court agreed that the defendants were not entitled to attorneys' fees under Cal. Civ. Code § 1717, because the fraud action was not "on a contract." Id., at 159, 16 Cal.Rptr.2d 486. However, the appellate court held that the defendants were entitled to fees pursuant to CCP § 1021. Citing the reasoning in Xuereb, the court held:
Id., at 160.
Notably, the California Supreme Court cited approvingly to Xuereb and Lerner in another action involving a real estate purchase agreement containing the following attorneys' fees provision: "In the event legal action is instituted by the Broker(s), or any party to this agreement, or arising out of the execution of this agreement or the sale, or to collect commissions, the prevailing party shall be entitled to receive from the other party a reasonable attorney fee to be determined by the court in which such action is brought." Santisas, 17 Cal.4th at 603, 71 Cal.Rptr.2d 830, 951 P.2d 399 (emphasis added). The California Supreme Court, referencing Xuereb and Lerner, noted that the language in the agreement was broad enough to cover both contract and tort actions:
Id., at 405. See also Zarate, 567 B.R. at 183 (holding that provisions that limit collection of fees to actions to "enforce" or "interpret" an agreement do not give rise to tort actions, but "provisions with broader language — suits arising from or with respect to the subject matter or enforcement of a contract — have been held to extend to fees incurred in litigating tort claims") (emphasis added); Maynard v. BTI Grp., Inc., 216 Cal.App.4th 984, 993, 157 Cal.Rptr.3d 148 (Ct. App. 2013) ("Like provisions referring to any claim `in connection with' a particular agreement, or to any action `arising out of' an agreement, an attorney fee provision awarding fees based on the outcome of `any dispute' encompasses all claims, whether in contract, tort or otherwise.") (emphasis added); and Childers v. Edwards, 48 Cal.App.4th 1544, 56 Cal.Rptr.2d 328 (1996) (holding that the phrase "any legal action, proceeding or arbitration arising out of this agreement" entitles the prevailing party to reasonable attorneys' fees because the phrase covers tort actions) (emphasis added).
Here, like in Lerner, this Court adjudicated API's fraud claim under 11 U.S.C. § 523(a)(2)(A). As in Xuereb and Lerner, the language in the Agreement is broad enough to encompass this action. The Agreement (¶ 23) provides for attorneys' fees in "any reference proceeding or court action arising out of this Agreement." (Emphasis added). The "arising out of" language in the Agreement mirrors the language in the attorneys' fees provision in Lerner and is the same phrase held by several courts to be broad enough to encompass tort actions.
The crux of API's claim under 11 U.S.C. § 523(a)(2)(A) was that Davis made material misrepresentations and omissions on which API relied prior to execution of the Agreement. A necessary element of API's fraud theory was that API would not have entered into the Agreement had API been aware of certain facts prior to execution of the Agreement. Both Xuereb and Lerner held that the fraudulent inducement allegations at issue in their cases arose out of the subject agreements. The same is true here; API's tort action against Davis rested on the premise that API would not have entered into the Agreement had Davis disclosed certain facts, such as T.O.'s license status and the age of the as-built survey. API asserted that Davis had a duty to disclose these facts.
It is unclear if Davis is requesting attorneys' fees related to litigation of API's claim under 11 U.S.C. § 727. In the Motion, Davis appears to except fees and costs incurred during the 11 U.S.C. § 727 trial from his request. However, in his attached itemization of attorneys' fees, Davis includes attorneys' fees incurred litigating API's claim under 11 U.S.C. § 727.
To the extent Davis is requesting attorneys' fees incurred defending the denial of discharge claims, API's claims under § 727 were based on the omission of assets from Davis's bankruptcy schedules and statements. These allegations were unrelated to the Agreement, and API could have brought the claims under 11 U.S.C. § 727 notwithstanding the Agreement. In other words, the denial of discharge claims
API argues that Davis cannot be a prevailing party because API prevailed in state court. Pursuant to CCP § 1032(a)(4)—
"Where a party falls squarely within one of these four definitions, a trial court has little discretion in determining the prevailing party, particularly when there is a party with a `net monetary recovery.'" Mac-Go Corp., 541 B.R. at 715 (citing Goodman v. Lozano, 47 Cal.4th 1327, 104 Cal.Rptr.3d 219, 223 P.3d 77 (2010)). Otherwise, the statute "leaves the determination of the prevailing party to the trial court's discretion." Heimlich v. Shivji, 12 Cal.App.5th 152, 160, 218 Cal.Rptr.3d 576 (Ct. App. 2017).
"[S]ection 1032(a)(4) defines the party with a `net monetary recovery' as the `prevailing party.' The word `recover' means `to gain by legal process' or `to obtain a final legal judgment in one's favor.'" deSaulles v. Cmty. Hosp. of Monterey Peninsula, 62 Cal.4th 1140, 1153, 202 Cal.Rptr.3d 429, 370 P.3d 996 (2016) (citing Goodman, 47 Cal.4th at 1334, 104 Cal.Rptr.3d 219, 223 P.3d 77).
API asserts that Davis cannot be the prevailing party because API was the prevailing party on the breach of contract action in state court. However, API has cited no authority providing that where one party prevails in one action and recovers attorneys' fees based on the parties' contract, the other party is barred from recovering attorneys' fees based on the contract in all future actions. API did prevail on its breach of contract action in state court, and the state court awarded API attorneys' fees as a result.
However, this nondischargeability action is distinct from the state court action. The state court did not adjudicate the issues of fraud or nondischargeability. In this action, Davis is the prevailing party because Davis "falls squarely" within one of the "prevailing party" definitions under CCP § 1032(a)(4): Davis is "a defendant as against those plaintiffs who do not recover any relief against that defendant." Where a party fits a definition provided by CCP § 1032(a)(4), the court "has little discretion" in deeming that party the prevailing party. Mac-Go Corp., 541 B.R. at 715.
Even if Davis did not neatly fall into one of the categories under CCP § 1032(a)(4), the court is given discretion to determine the prevailing party and allow costs as the court sees fit. CCP § 1032(a)(4); Heimlich, 12 Cal.App.5th at 160, 218 Cal.Rptr.3d 576. To the extent API views the state court action and this action as one action, where API prevailed on the breach of contract claims and Davis
API asserts that the state trial and appellate courts found that Davis was not a party to the Agreement. To support its argument, API refers to the appellate court's comment that the Agreement was between API and "a `Contractor' that is not identified." Although the appellate court did note that the Agreement did not identify the "Contractor," neither the appellate court nor the trial court held that Davis was not a party to the Agreement.
In fact, the trial court implicitly found that Davis is a party to the Agreement. In its Fees Order, the state trial court awarded API attorneys' fees based on the attorneys' fees provision in the Agreement. Subsequently, in its Alter Ego Judgment, the trial court held that Davis, among others, was liable for the attorneys' fees because Davis was an alter ego of multiple other entities, including T.O. Given that the state court held that Davis, among others, is liable for API's attorneys' fees pursuant to the Agreement, the state court necessarily found that Davis, among other entities, qualifies as a party for purposes of the Agreement.
This conclusion is bolstered by the state trial court's entry of the Alter Ego Judgment. API argued for, and the state court found, alter ego liability for the purpose of holding Davis, among others, liable for breach of the Agreement although Davis, as an individual, is not a signatory to the Agreement.
"In cases involving nonsignatories to a contract with an attorney fee provision, the following rule may be distilled from the applicable cases: A party is entitled to recover its attorney fees pursuant to a contractual provision only when the party would have been liable for the fees of the opposing party if the opposing party had prevailed." Dell Merk, Inc. v. Franzia, 132 Cal.App.4th 443, 451, 33 Cal.Rptr.3d 694 (Ct. App. 2005).
The line of cases allowing recovery of attorneys' fees by nonsignatory defendants has been developed under Cal. Civ. Code § 1717(a). In Reynolds Metals Co. v. Alperson, 25 Cal.3d 124, 158 Cal.Rptr. 1, 599 P.2d 83 (1979), the Supreme Court of California held that the mandate of reciprocity set forth in Cal. Civ. Code § 1717(a) ensured that, where a plaintiff sued a nonsignatory defendant to hold the defendant liable on the contract, and the defendant prevailed, the nonsignatory defendant could use an attorneys' fees provision from the contract to recover the defendant's attorneys' fees. Based on Reynolds, non-signatory defendants have been allowed to recover attorneys' fees in accordance with Cal. Civ. Code § 1717(a). See, e.g. Burkhalter Kessler Clement & George LLP v. Hamilton, 19 Cal.App.5th 38, 228 Cal.Rptr.3d 154 (Ct. App. 2018).
The Agreement's attorneys' fees provision (¶ 23) states:
Based on this language, API contracted for reciprocity as to liability for attorneys' fees. Had API prevailed on its nondischargeability claim, because of the Alter Ego Judgment, API would have been able to collect its award of attorneys' fees from Davis. In fact, in the Adversary Complaint, API requested an award of attorneys' fees; for a nondischargeability claim under § 523(a)(2)(A), API's bases to obtain an award of attorneys' fees are the Agreement's attorneys' fees provision
Although API now argues that the term "Contractor" is too vague to allow for Davis's recovery of attorneys' fees, the Agreement (¶ 1) explicitly provides T.O. the right to enforce any provision in the Agreement, including the attorneys' fees provision:
(Emphasis added). In light of this provision, API agreed that T.O. would have the right to enforce any provision of the Agreement. Because the state court held that T.O. is an alter ego of Davis, Davis also has a right to enforce any provision of the Agreement. As such, Davis is entitled to an award of attorneys' fees because: (A) API contracted for reciprocity; (B) API agreed that T.O. has the ability to enforce any provision in the Agreement; (C) the state trial court held, and the state appellate court affirmed, that T.O. is an alter ego of Davis; and (D) had API prevailed, API would have been able to recover its attorneys' fees from Davis.
Because the state court determined that Davis would be properly treated as an alter ego of T.O., API became entitled to recover its breach of contract damages, and related attorneys' fees, from Davis. As this Court previously noted, API's judgment for breach of contract damages and attorneys' fees against Davis (and others) has been paid in full. Moreover, during the course of this adversary proceeding, API continued to refer to Davis as a party to the Agreement.
Reynolds and its progeny, under comparable circumstances, allow nonsignatory defendants to collect attorneys' fees. See, e.g. Burkhalter Kessler, 19 Cal.App.5th at 46 n.2 ("This case raises an interesting tactical issue: whether a plaintiff should plead an alter ego defendant in the initial complaint (and risk a dismissal with prejudice and possible payment of attorney fees); or should a plaintiff hold off and later seek to amend a prevailing judgment. We take no position on the tactical choice,
The Court concludes that there is no equitable basis to bar Davis's recovery of attorneys' fees, under the Agreement. API has recovered its breach of contract damages, including attorneys' fees incurred during the state court litigation. Following the payment in full of that award, API pursued a claim of nondischargeability under 11 U.S.C. § 523(a)(2)(A). To defend against API's § 523(a)(2)(A) claim, Davis incurred his own attorneys' fees and costs. Consequently, when assessing Davis's right to payment of his attorneys' fees, the Court will take into account the Alter Ego Judgment, which treats Davis as a party to the Agreement.
According to the Supreme Court of the United States—
New Hampshire v. Maine, 532 U.S. 742, 749-50, 121 S.Ct. 1808, 1814, 149 L.Ed.2d 968 (2001) (internal quotations omitted). "The doctrine extends to incompatible statements and positions in different cases." In re Associated Vintage Grp., Inc., 283 B.R. 549, 566 (9th Cir. BAP 2002) (citing Rissetto v. Plumbers & Steamfitters Local 343, 94 F.3d 597, 605 (9th Cir. 1996)). Courts consider the following factors when applying the doctrine of judicial estoppel:
New Hampshire, 532 U.S. at 750-51 (internal quotations omitted).
Here, API repeatedly contended that Davis is a party to the Agreement and that Davis is an alter ego of several entities, including T.O. API succeeded in persuading the state court of its position: consequently, the state court held Davis
Finally, API would derive an unfair advantage if API were allowed to maintain its inconsistent position. API, having obtained a holding that Davis is liable for breach of the Agreement and for the payment of API's attorneys' fees (in accordance with the Agreement), may not avoid the consequences of the same contractual provisions when Davis constitutes the prevailing party. As a result, API is judicially estopped from arguing that Davis cannot avail himself of the attorneys' fee provision in the Agreement.
Pursuant to B & P § 7031—
B & P § 7031(a), (b) (emphases added). B & P § 7031 plainly is not applicable to the facts here. Davis is not attempting to recover compensation for work he performed as a contractor. Davis is attempting to recover attorneys' fees he has incurred in defending API's claim of nondischargeability against Davis. Moreover, Davis himself is a licensed contractor.
The single case cited by API does not state otherwise. In MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., 36 Cal.4th 412, 30 Cal.Rptr.3d 755, 115 P.3d 41 (2005), a subcontractor sued a contractor for breach of contract for work the subcontractor performed for the contractor, and the contractor used B & P § 7031 as a defense by asserting that the subcontractor was not properly licensed when the subcontractor performed the work. See also Hydrotech Sys., Ltd. v. Oasis Waterpark, 52 Cal.3d 988, 992, 277 Cal.Rptr. 517, 803 P.2d 370 (1991) (holding that unlicensed contractor cannot receive compensation for its services under B & P § 7031). Here, neither T.O. nor Davis is attempting to recover compensation for work performed as a contractor. As such, MW Erectors and Hydrotech are inapplicable to this case.
Davis is entitled to an award of attorneys' fees pursuant to the Agreement and CCP §§ 1021 and 1032. As such, for the reasons stated on the docket [docs. 248,
