KIMBERLY J. MUELLER, District Judge.

On April 6, 2011, the court heard argument on appellant Spiller • McProud's1 appeal from the decision of the Bankruptcy Court denying its motion for summary judgment. Walter Dahl, Dahl & Dahl, and Steven Spiller appeared for appellant; Brad Benbrook, Stevens, O'Connell & Jacobs LLP,2 appeared for the Chapter 11 Trustee, David Flemmer; and Andrea Porter appeared telephonically for appellees Charles Siller and CWS Enterprises, Inc.

The court's jurisdiction to hear this interlocutory appeal is addressed in a separate order, filed concurrently with this one. 28 U.S.C. § 158(a); Fed. R. Bankr. P. 8001(b).

The issue presented by the appeal is whether and to what extent a state court judgment affirming an arbitrator's award of attorneys' fees is entitled to preclusive effect in bankruptcy proceedings in light of 11 U.S.C. § 502(b)(4), which provides that a bankruptcy court may allow a claim for attorneys' fees except to the extent that it exceeds the reasonable value of those services. The bankruptcy court concluded that the fact of the judgment was entitled to full faith and credit but that the amount of that judgment was subject to the bankruptcy court's determination of the reasonableness of those fees. This court reverses and remands this case for further proceedings, as explained below.

I. Background

A. Initial State Litigation By Appellee

In 1994, appellee Siller engaged the Friedburg Law Corporation to pursue litigation against Siller Brothers, Inc., a company owned by Siller and his brothers. Eventually Siller substituted attorneys Randy E. Thomas and Dennis Hauser. In 2000, Hauser and Thomas filed an unsuccessful shareholder derivative suit on Siller's behalf. In 2001, Hauser and Thomas filed an action to dissolve Siller Brothers. Excerpt of Record (ER) 202-203. In addition, in 2001, Siller filed a malpractice action against the Friedburg Law Corporation.

In December 2001, Siller entered into a contingent fee contract with Cotchett, Pitre & McCarthy (CPM) to pursue litigation concerning the corporate dissolution action against his brothers and against the Friedburg Law Corporation and "to resolve any monies due Thomas or Hauser." ER3 202-215. At that time, there were outstanding judgments of approximately $10 million against Siller. ER 205. The contract between Siller and CPM contained an arbitration clause, nominating as arbiter the Judicial Arbitration Mediation Services (JAMS). ER 213-214.

In May 2004, Siller entered into a contingent fee contract with Spiller • McProud (Spiller) "to act as [Siller's] general counsel to communicate to the Cotchett firm your ideas, suggestions, and requests concerning trial strategy, trial preparation and conduct of the trial [against Siller Brothers, Inc.] itself." ER 217. Spiller agreed to represent Siller "for a contingency fee of eight percent (8%) of the `Net Amounts' recovered by settlement, compromise or trial under the same definition you have agreed with the Cotchett firm. . . ." The parties also agreed "to incorporate the terms of the Cotchett fee agreement into this agreement except that the legal services that I have agreed to provide are as described in this letter agreement." ER 218.

In July 2004, CPM and Spiller filed an ultimately unsuccessful action in Sutter County Superior Court seeking to enforce a buy/sell agreement so that Siller could purchase his deceased brother's shares in Siller Brothers. ER 238.

In addition, CPM and Spiller negotiated a settlement of Siller's fee dispute with attorneys Hauser and Thomas and undertook a defense of appellee when he failed to pay the negotiated settlement. ER 239. They were terminated before the motion for summary judgment was filed in the Hauser/Thomas case. ER 239.

Finally, CPM and Spiller represented Siller during pretrial proceedings and a two week trial on the dissolution action. When Siller Brothers filed a notice of appeal, CPM and Spiller filed a cross-appeal and finally settled the case during mediation in the Court of Appeal. The settlement provided for $10 million in cash plus $20.5 million in real estate in exchange for Siller's shares in the corporation. ER 188, 237. Siller created the entity CWS Enterprises, Inc. (CWS) based on the tax-related provisions of the settlement. ER 238.

B. Arbitration

After Siller refused to pay the attorneys' fees, CPM and Spiller initiated arbitration with JAMS. Declaration of Ara Jabagchorian, ER 264 ¶ 2. During an initial telephonic conference call with the JAMS arbitrator, Siller and CWS, through counsel George Wass, contended that the matter was not properly before JAMS. ER 265 ¶ 3. In May, Siller filed a motion in Sutter County Superior Court to enjoin the arbitration. ER 186-193 (opposition to motion). The Sutter County Superior Court denied the motion. ER 265 ¶ 4.

The arbitration hearing began on May 29, 2008. Attorney George Wass again appeared on behalf of Siller and CWS. Wass submitted several motions in limine and cross-examined Frank Pitre of CPM. ER 265 ¶¶ 5-6.

The arbitrator held a second session on July 7, 2008. ER 265 ¶ 7. Siller and CWS were again represented by George Wass, with the assistance at that point of Lawrence Ecoff. The arbitrator took additional testimony from Frank Pitre, Steven Spiller and Charles Siller and heard further arguments on the motions in limine. ER 265 ¶¶ 7-8. After the close of the evidence, the parties submitted closing briefs. ER 265 ¶ 9.

On January 15, 2009, the arbitrator issued a lengthy written ruling. Before turning to the merits of the action, the arbitrator addressed the objections of Siller and CWS to the arbitration, the joining of CWS as a party to the arbitration and the arbitrability of the claims. ER 222-233.

As a backdrop to his ultimate conclusion, the arbitrator reviewed the course of the litigation undertaken by the CPM and Spiller firms on Siller's behalf. After reviewing this litigation history, the arbitrator noted that "[t]he matter having settled as contemplated in Agreement ¶ IV, D, the Arbitrator must resolve a dispute which exists over the fair market value or present value of the assets upon which the attorneys' percentage fees shall be computed." ER 240. He outlined the parties' contentions and noted that Siller's estimate that the settlement was worth only $10 million was not supported by any appraisals or other evidence apart from Siller's testimony. The arbitrator then observed:

ER 241. He continued:

ER 242. The arbitrator calculated the fee due to Spiller as $2,284,519.16 with prejudgment interest of $212,118.01, for a total of $2,497,325.07. He added:

ER 242-243.

Spiller filed a petition in San Francisco County Superior Court to confirm the arbitration award; Siller did not appear. ER 256. On February 13, 2009, the Superior Court confirmed the arbitration award and entered judgment in Spiller's favor in the amount of $2,497,325.07 plus $800.00 in costs, plus 10% interest from November 25, 2008 until paid. ER 263.

C. Bankruptcy Proceedings

Appellees Charles Siller and CWS (debtors) filed Chapter 11 bankruptcy petitions in this district in April 2009. In re CWS Enterprises, Inc., No. 09-26849-C-11 (CWS Docket), ECF No. 1; In re Charles W. Siller, No. 09-26167-C-11 (Siller Docket), ECF No. 1.4 On Schedule D in each action, appellees listed Spiller • McProud's judgment liens in the amounts of $2,582,621.00 and $11,965,608.95, respectively. CWS Docket, ECF No. 20; Siller Docket, ECF No. 26. David Flemmer was appointed Trustee in the CWS case on June 23, 2009. Siller is debtor-in-possession in his case.

On June 8, 2009, appellant Spiller and CPM filed a joint creditors' claim in the total amount of $12,126,302.80, with $11,690,704.32 listed as principal and $435,598.48 in interest as of April 10, 2009. ER 363-377. Objections to the claims were apparently filed in both cases. The Excerpt of Record does not include copies of the objections to the claims and the objection is not apparent on the Siller Docket. Siller, as the equity holder in the CWS case, filed an objection to the proof of claim. CWS Docket, ECF Nos. 205-206. This objection is three pages long, provides a rough calculation of the hourly fee based on the figures provided to the arbitrator, and adds that "additional information about this objection can be obtained by contacting the undersigned counsel." Id., ECF No. 205 at 3. It is supported by several pages from the arbitrator's decision and was set for hearing on January 13, 2010. Id., ECF Nos. 206-208. Appellant and CPM apparently filed a response to this objection, though the CWS docket entry for Siller's response notes that appellant's opposition is "not on file." CWS Docket, ECF No. 237 (docket text). The hearing on the objection was continued from January 13, 2010 until February 3, 2010. CWS Docket, ECF No. 253.

On February 2, 2010, appellant filed a motion for summary judgment in the bankruptcy actions, seeking an order dismissing appellees' objection to their claim or, in the alternative, to allow the claim as a final, non-contestable judgment and set the hearing on the motion for March 10, 2010. Siller Docket, ECF Nos. 191-192; CWS Docket, ECF Nos. 294-296. The court continued the hearing on Siller's objection to March 10, 2010. CWS Docket, ECF No. 303.

On February 3, 2010, the CWS Trustee filed a motion to continue the hearing on the CPM/Spiller claim. CWS Docket, ECF Nos. 309-311.

On February 10, 2010, Siller filed an opposition to the Cotchett/Spiller motion for summary adjudication or to allow the claim and a counter-motion for partial summary judgment. CWS Docket, ECF No. 312; Siller Docket, ECF No. 199.

On February 21, 2010, the CWS trustee filed an opposition/objection to the Cotchett/Spiller motion. CWS Docket, ECF No. 334.

On March 22, 2010, the bankruptcy judge denied the Cotchett/Spiller claimaints' motions and granted Siller's cross-motion. CWS Docket, ECF No. 355; Siller Docket, ECF No. 212. The written order was issued on April 9, 2010. Siller Docket, ECF No. 226-227; CWS Docket, ECF Nos. 408-409.

II. Standard Of Review

A district court may "affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings." FED. R. BANKR. P. 8013. The court reviews "`the bankruptcy court's findings of fact under the clearly erroneous standard[,] . . . its conclusions of law de novo'" (Clinton v. Acequia, Inc. (In re Acequia, Inc.), 787 F.2d 1352, 1357 (9th Cir. 1986) (quoting Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir. 1986)) and "[m]ixed questions of law and fact . . . de novo." Beaupied v. Chang (In re Chang), 163 F.3d 1138, 1140 (9th Cir. 1998). "`A finding is "clearly erroneous" when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.'" Anderson v. City of Bessemer, 470 U.S. 564, 573 (1985) (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948)); see also Savage v. Greene (In re Greene), 583 F.3d 614, 618 (9th Cir. 2009).

III. Analysis

A. Procedural Posture And Burdens Of Proof

To resolve the issues on this appeal, this court must delineate the relationship between the doctrines of full faith and credit and issue preclusion on the one hand and the generally sui generis nature of bankruptcy procedures.

Under the provisions of the Bankruptcy Code, a creditor "may file a proof of claim;" the statute does not provide different provisions for claims reduced to judgment. 11 U.S.C. §§ 101(4), 501(a). An executed proof of claim is prima facie evidence of its validity and amount. Bitters v. Networks Electronics (In re Networks Electronic Corp.), 195 B.R. 92, 96 (9th Cir. BAP 1996). Under 11 U.S.C. § 502(a), "a claim . . ., proof of which is filed under section 501 . . ., is deemed allowed, unless a party in interest . . ., objects."

11 U.S.C. § 502(b). The "relevant time for determining one's status as an insider . . . is the time the services were rendered and when the compensation contracts for such services were formed." In re Allegheny Intl., Inc., 158 B.R. 332, 339 (W.D. Penn. 1992).5 The purpose of the provision is "`to prevent[] overreaching by the debtor's attorneys and [the] concealing of assets by debtors.'" Matter of 268 Ltd., 789 F.2d 674, 677 (9th Cir. 1986) (quoting 1978 U.S. Code Cong. & Ad. News at 5849). Courts that have applied the reasonableness cap on claims for prepetition attorneys' fees have not, however, considered whether the "reasonable value" cap applies when the fees have been reduced to a judgment. See, e.g., Landsing Diversified Properties v. First Nat. Bank and Trust Co. (In Re Western Real Estate Fund, Inc.), 922 F.2d 592, 597 (10th Cir. 1990); In re 268 Limited, 85 B.R. 101 (9th Cir. 1988); see Welzel v. Advocate Realty Inv. LLC (In re Welzel), 275 F.3d 1308 (11th Cir. 2001) (when considering oversecured creditor under § 506(b), attorneys' fees must be evaluated for reasonableness).

Before turning to the merits of the proceedings in this case, the bankruptcy court observed that "the path to the answer winds through questions of procedure. . .," leading through a "procedural swamp." In re Siller, 427 B.R. 872, 878 (Bankr. E.D. Cal. 2010). It further observed that claim objection proceedings are contested matters under Federal Rule of Bankruptcy Procedure 9014, and that summary judgment may be appropriate in contested matters under Federal Rules of Bankruptcy Procedure 7056 and 9014. The court then determined that "the objection to the claim is what initiates the Rule 9014 contest and must be served in the manner of a summons and complaint, but because "[u]nder Rule 9014(a), no response is required . . . unless the court orders an answer," it is unclear "what constitutes the answer." It concluded that the

Id. at 879; see also In re Coates, 292 B.R. 894, 902 n.10 (Bankr. C.D. Ill. 2003) (concluding that objection to claim "commences the litigation. It joins the issue and nothing more."); but see Patrick A. Jackson, Conceptualizing Claim Objections, Part I: The FED. R. CIV. P. Analogy, 25 AM. BANKR. INST. J. 42 (2006) (a properly supported proof of claim is like a summary judgment motion, satisfying claimant's initial burden of going forward; burden then shifts to objector to go forward).

It is unclear to this court why the bankruptcy court took a detour into any procedural morass. The requirement that a motion in a contested matter be served like a summons and not answered unless directed by the court applies "in a contested matter not otherwise governed by these rules." FED. R. BANKR. P. 9014(a). The process for allowance and disallowance of claims is governed by Rule 3007 of the Federal Rules of Bankruptcy Procedure, which provides only that "[a]n objection to the allowance of a claim shall be in writing and filed. A copy of the objection with notice of the hearing thereon shall be mailed or otherwise delivered to the claimant, the debtor or debtor in possession, and the trustee at least 30 days prior to the hearing." The bankruptcy court's local rules expand on this procedure:

BANKR. E.D. CAL. R. 3007-1. The creditors in this case called their pleading a "Motion for Summary Judgment, or in the Alternative Summary Adjudication To Dismiss The Objections . . . To The Claim; or Alternatively To Allow The Claim . . . As A Final Non-Contestable Judgment." See CWS Docket, ECF No. 294. This pleading fits within the process provided for by the bankruptcy court's local rules. See Jacks v. Wells Fargo Bank, N.A. (In re Jacks), 642 F.3d 1323, 1332-33 (11th Cir. 2011) (discussing summary judgment as part of the objection process when claimant filed a motion in response to objection to the claim); Owens v. Murray, Inc., 365 B.R. 835, 840 (Bankr. M.D. Tenn 2007) (focus on Rule 56 during part of claims process is "within the permissible bounds of the Bankruptcy Court's claims determination discretion"); but see Jasco Tools v. Dana Corp. (In re Dana Corp.), 574 F.3d 129 (2d Cir. 2009) (considering whether the bankruptcy court erred in treating a debtor's objection to the claim as a motion for summary judgment because the objection was structured like a summary judgment motion).

The Ninth Circuit has described the claim allowance process as follows:

Lundell v. Anchor Construction Specialists (In re Lundell), 223 F.3d 1035, 1039 (9th Cir. 2000).

Because the bankruptcy court here appears to have created its own procedure rather than consider whether the cross-motions for summary judgment fit within the established claims allowance procedure, it did not consider whether the objector had borne its burden. Instead, the court placed the burden of demonstrating reasonableness on appellants without apparently acknowledging that the objectors had any burden with respect to either the application of preclusion or reasonableness.

After outlining the procedural process it deemed applied, the bankruptcy court determined that appellants bore the burden of establishing reasonableness under 11 U.S.C. § 502(b)(4), which it characterized as "a federal question that is independent of state law requiring attorney's fees to be reasonable." Siller, 427 B.R. at 880. The court came to this conclusion in part because of the Supreme Court's admonition that insider dealings are subject to rigorous scrutiny. Id. at 881 (citing Pepper v. Litton, 308 U.S. 295, 306 (1939)).

As noted above, claimants have the ultimate burden of proof on the claim. Whether they must ultimately prove the claim by a preponderance of the evidence depends on the contents of the objection. Lundell, 223 F.3d at 239; see also Emmerson v. Regis (In re Emmerson), 2011 WL 3299852, *4 (9th Cir. BAP Mar. 25, 2011) (party asserting issue preclusion has burden of establishing threshold requirements). Some courts have determined that when the objection is insufficient to shift the burden back to the claimant, the court need not engage in Pepper's "rigorous scrutiny" of reasonableness. See McGee v. O'Connor (In re O'Connor), 153 F.3d 258, 260-61 (5th Cir. 1998) ("If the Trustee objects, it is his burden to present enough evidence to overcome the prima facie effect of the claim. [citation omitted]. If the Trustee succeeds, the creditor must prove the validity of the claim. [citation omitted]. In All-American Auxiliary, the court applied the heightened scrutiny [of an insider's claim] only because the Trustee satisfied his burden . . . Here, the Trustee did not satisfy his burden."); In re Russell Cave Company, Inc., 253 B.R. 815, 819 (E.D. Ky. 2000) (applying the McGee approach); In re Delta Smelting & Refining, 53 B.R. 877, 884 (D. Alaska 1985) (objection to insider's claim rejected because of failure of proof by objecting party); see also In re Taylor, 2007 WL 7140157 (Bankr. N.D. Ga. 2007) (evidentiary presumption of Rule 3001 limited to validity and amount; where the claim is for fees that must be reasonable "the claimant must provide evidence from which the Court can determine reasonableness, or the evidentiary presumption will not arise"); In re Lani Bird, 129 B.R. 203, 205 (Bankr. D. Haw. 1991) (objecting party must come forward with "sufficient evidence" to put insider's claim at issue). A relative minority of other courts finds the burden never shifts. See In re Coates, 292 B.R. at 905 (evidentiary presumption of Rule 3001 is limited to validity and amount; reasonableness of fees and costs is a separate issue entirely and the burden "rests squarely on the claimant"); In re Ellipso, Inc., 2011 WL 482725, at *4 (Bankr. D. Colo. Feb. 7 2011) (recognizing split in law whether 3001(f) presumption of validity applies to reasonableness determinations). Because the bankruptcy court here ignored the impact of its own claims procedures and the related burdens of proof on the instant proceedings, it did not determine whether the claim itself, based on a judgment, was sufficient under § 502(b)(4) to allow the claim in the amount submitted, or whether the objection was sufficient to put the claimant to further proof. This may also have led the court to resolve the issue without referring to the transcript of the arbitration proceedings.

Moreover, as discussed below, the court determined that the state court judgment could never be conclusive on the question of reasonableness because, in its view, "§ 502(b)(4) preempts state law to the extent that state law permits claims on account of prepetition services rendered by an insider or attorney for a debtor to exceed the reasonable value of services." Siller, 427 B.R. at 883. This court, then, considers the impact of the state judgment.

B. The Impact Of The State Judgment

In resolving the parties' cross-motions, the bankruptcy court determined that the state arbitration award, reduced to judgment, fixed the amount of the debtor's liability and rendered the fees that were the subject of the arbitration award incontestable on state law grounds. It then applied California's rules on issue preclusion in determining the preclusive impact of the judgment, but determined that the award was not conclusive of the reasonable value of the fees under 11 U.S.C. § 502(b)(4).6 The court concluded that appellant has a claim for the amount of the judgment, which appellees cannot contest, but "the open question—which was not and could not have been resolved in prebankruptcy proceedings—is how much of that claim is allowable under the `reasonable value' of services restriction on the allowance of claims." Siller, 427 B.R. at 885. The court determined that the primary right in the arbitration was the enforcement of the fee contract subject to state law, while the primary right in enforcing the § 502(b)(4) fee cap is the federal interest of assuring equitable distribution of assets in a collective proceeding. Id.

Appellant argues, and the trustee does not strenuously contest, that the state court's judgment is entitled to full faith and credit under 28 U.S.C. § 1738. The parties part ways over the question whether the judgment is conclusive of the amount of the claim. The trustee argues, as the bankruptcy court concluded, that it cannot be, because the reasonableness of the fees was not litigated in the arbitration and could not have been given the limitation on attorneys' fees contained in § 502(b)(4). The trustee also says that the judgment is afforded full faith and credit because the bankruptcy court uses it to establish the baseline claims. On the other hand, appellant contends the arbitrator did address the reasonableness of the fees, but even if he did not, California's primary rights doctrine bars relitigation of anything subsumed in the primary right asserted.

As noted above, in this case the claim has been reduced to a judgment. Appellant argues that under the Full Faith and Credit statute, the fact that this claim is embodied in the Superior Court's judgment removes it from the operation of § 502(b)(4). A bankruptcy court may go behind a judgment and ignore its preclusive effect, appellant continues, only if the court rendering the judgment lacked subject matter or personal jurisdiction or if the judgment was the product of fraud or collusion. Brief for Appellant, ECF No. 14 at 9.

There is no dispute that the Full Faith and Credit statute, 28 U.S.C. § 1738, applies in bankruptcy proceedings. Khaligh v. Hadaegh (In re Khaligh), 338 B.R. 817, 824 (9th Cir. B.A.P. 2006), aff'd, 506 F.3d 956 (9th Cir. 2007). Under that statute, a federal court must "give the same preclusive effect to state court judgments [that] would be given in the courts of the State from which the judgments emerged." Kremer v. Chemical Construction, 456 U.S. 461, 466 (1982). In Matsushita Electric Industrial Co., Ltd. v. Epstein, 516 U.S. 367 (1996), the Court considered the question whether a state court judgment could be preclusive with respect to issues that are exclusively federal:

Id. at 375 (quoting Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 381-82 (1985)). The Court determined that giving preclusive effect to a judgment that disposed of exclusively federal claims did not undermine the federal courts' exclusive jurisdiction over securities actions; it observed that in an earlier case,

Matsushita, 516 U.S. at 384.

Appellant relies on the earlier Supreme Court case of Pepper v. Litton, cited above, for his argument that the bankruptcy court may ignore a state court judgment only when it was the product of fraud or jurisdictional defects. Pepper does not mention Full Faith and Credit at all, but rather relies on the bankruptcy court's equitable power over the allowance or disallowance of claims. 308 U.S. at 303-07.

This court follows instead the Supreme Court's clearly-expressed discussion of the relationship between state judgments and preclusion under the Full Faith and Credit statute as set forth in Kremer and Matsushita. See also Heiser v. Woodruff, 327 U.S. 726, 734 (1946) ("to the extent that the issue of fraud raised by the objections to petitioner's claim . . . has been litigated and decided before the bankruptcy court . . . that issue is now res judicata and may not further be litigated in the bankruptcy proceeding.").

If state law would give a judgment preclusive effect, then a court must determine whether Congress has created an exception to 28 U.S.C. § 1738. In re Genesys Data Technologies, Inc., 204 F.3d 124, 128 (4th Cir. 2000). Courts have "seldom, if ever, held that a federal statute impliedly repealed [28 U.S.C.] § 1738." Matsushita, 516 U.S. at 380; Kremer, 456 U.S. at 477 (Congress must clearly manifest its intent to depart from 28 U.S.C. § 1738).

The bankruptcy court in this case did not analyze whether the bankruptcy laws worked a repeal of 28 U.S.C. § 1738, but rather determined that, in light of the Supremacy Clause, it must consider the cap in § 502(b)(4). Siller, 427 B.R. at 883. This approach has some support in case law. See Sasson v. Sokoloff (In re Sasson), 424 F.3d 864, 872 (9th Cir. 2005) ("final judgments in state courts are not necessarily preclusive in United States bankruptcy courts"); Browning v. Navarro, 887 F.2d 553, 561 (5th Cir. 1989) ("bankruptcy courts have a job to do and sometimes they must ignore res judicata in order to carry out Congress' mandate"). For example, in In re Networks Electronics, the court considered the relationship between a state court judgment and the cap on claims stemming from the breach of an employment contract contained in § 502(b)(7):

195 B.R. at 97. And in Kohn v. Leavitt-Berner Tanning Corp., 157 B.R. 523 (Bankr. N.D.N.Y. 1993), the court considered the cap on claims stemming from the breach of a lease agreement:

Id. at 527 (footnote omitted); see also In re Kmart Corp., 362 B.R. 361, 387 (N.D. Ill. 2007) ("creditors' entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the debtor's obligation, subject to any qualifying or contrary provisions of the Bankruptcy Code").

Appellant argues that these cases cannot be controlling because in judgments based on lease and employment issues, the creditors may have secured future damages which, if accepted, would harm other creditors. What appellant seeks, it continues, has nothing to do with future damages, but rather payment for services rendered. ECF No. 14 at 11-12. While this argument has logical appeal, it does not translate into a finding that the state court judgment is necessarily entitled to preclusive effect in bankruptcy court.

However, even if this court does not accept the two part test of Networks Electronics and Kohn, the court would not give res judicata effect to the Superior Court's judgment. As noted, this court must apply California's rules of preclusion. See, e.g., Kremer, 456 U.S. at 466. "In California, res judicata precludes a plaintiff from litigating a claim if: the claim relates to the same `primary right' as a claim in a prior action, the prior judgment was final and on the merits, and the plaintiff was a party or in privity with a party in the prior action." Trujillo v. County of Santa Clara, 775 F.2d 1359, 1366 (9th Cir. 1985). Under California's primary rights theory:

Brodheim v. Cry, 584 F.3d 1262, 1268 (9th Cir. 2009) (internal citations, quotations omitted). The primary right is "plaintiff's right to be free from the particular injury suffered." Mycogen Corporation v. Monsanto, Co., 28 Cal.4th 888, 904 (2002) (internal quotation, citation omitted). In bankruptcy claim proceedings, it is not at all clear that the debtor/defendant's "primary duty" has anything to do with the breach of contract: the claim allowance process in bankruptcy focuses less on the harm and more on the equities in the administration of the bankruptcy estate. See Pepper, 308 U.S. at 302-03; compare Brown v. Felsen, 442 U.S. 127, 133 (1979) (res judicata did not control proceedings on dischargeability of debt when debtor claimed the creditor should be unable to offer material outside the state record to prove fraud); Genesys Data Technologies, 204 F.3d at 128 (when no special bankruptcy defense is available, res judicata applies as it ordinarily would); In re Dronebarger, 2011 WL 350479, at *7 (Bankr. W.D. Tex. 2011) (§ 502(b)(6), similar in structure to (b)(4), is a defense to the proof of claim).

As the Court in Brown recognized, "[i]f in the course of adjudicating a state-law question, a state court should determine factual issues using standards identical to § 17, then collateral estoppel, in the absence of countervailing statutory policy, would bar relitigation of those issues in the bankruptcy court." Brown, 442 U.S. at 139 n.10. In California, "collateral estoppel precludes relitigation of issues argued and decided in prior proceedings." Lucido v. Superior Court, 51 Cal.3d 335, 341 (1990). There are five requirements that must be met before an issue is collaterally estopped:

Id.; see also In re Harmon, 250 F.3d 1240, 1245 (9th Cir. 2001) (applying collateral estoppel in discharge proceedings). These principles apply to private arbitration upon which judgment has been entered so long as the application of the doctrine is fair and consistent with public policy. Vandenberg v. Superior Court, 21 Cal.4th 815, 829 (1999); In re Baldwin, 249 F.3d 912, 919-20 (9th Cir. 2001).

Here, the bankruptcy court rejected the application of collateral estoppel, finding the prior arbitration case did not satisfy the "necessarily decided" or "actually litigated" requirements. ER 79. This court finds, however, that the court's analysis was not searching enough. First, the court determined that "case law has not yet resolved the respective parameters of the § 502(b)(4) `reasonable value' of services in comparison to state law." Siller, 427 B.R. at 885. It cited no law in support of this conclusion, even though there are cases to offer guidance. Specifically, in California, a court evaluates the unconscionability of a contingent fee contract by considering a number of factors: (1) the amount of the fee in proportion to the value of the services performed; (2) the relative sophistication of the lawyer and the client; (3) the novelty and difficulty of the questions in the litigation and the level of skill necessary to present the client's position; (4) the likelihood that the lawyer's acceptance of the contract will preclude other employment; (5) the amount involved and the results obtained; (6) any time limitations imposed; (7) the nature and length of the professional relationship; (8) the lawyer's experience and reputation; (9) whether the fee is fixed or contingent; (10) the time and labor involved; and (11) the client's informed consent. Cotchett, Pitre & McCarthy v. Universal Paragon Corp., 187 Cal.App.4th 1405, 1419 (2010). Even though the California Supreme Court has noted that a contingent fee may be higher than what would be reasonable in an hourly-fee case, "[a] contingent fee must be higher than a fee for the same legal services paid as they are performed. The contingent fee compensates the lawyer not only for the legal services he renders, but for the loan of those services." Ketchum v. Moses, 24 Cal.4th 1122, 1132-33 (2001). California courts recognize the different measure of a contingent fee contract: "the lawyer runs the risk that even if successful, the amount recovered will yield a percentage fee which does not provide adequate compensation" and "agrees to delay receiving his fee until the conclusion of the case, which is often years in the future. The lawyer in effect finances the case for the client during the pendency of the lawsuit. If a lawyer was forced to borrow against the legal services already performed on a case which took five years to complete, the cost of such a financing arrangement could be significant." Cazares v. Saenz, 208 Cal.App.3d 279, 288 (1989). These differences do not render a contingent fee contract automatically unreasonable. Finally, California law recognizes the relationship between a contingent fee contract and an otherwise "reasonable" fee for services. See Villa v. Hudgins, 151 Cal.App.3d 515 (1984) (in determining whether a fee is reasonable under Cal. Civ. Code § 1717, court may consider a contingency fee arrangement as evidence of the value of the attorney's services); see also Comerica v. Smith (In re Magna Cum Latte, Inc.), No. 07-31814, 2008 WL 2047937, at *10 (Bankr. S.D. Tex. May 9, 2008) (relying on California law to give "significant weight" to contingent fee agreement because the agreement relied on relevant lodestar adjustment factors).

Under § 502(b)(4), "the term `value' . . . is synonymous with the concept of `market value' or `price' such that an attorney is entitled to fees up to the reasonable market value of his services." In re Food Management Group, 2008 WL 2788738, at *5 (Bankr. S.D.N.Y. 2008). In determining fees under § 502(b)(4), a bankruptcy court considers:

In re Nelson, 206 B.R. 869 (Bankr. N.D. Ohio 1997); see also In re Ellipso, 2011 WL 482725, at *4-7 (using general factors, not specifically tailored for bankruptcy court, in determining whether salary of insider was reasonable). The contingent nature of services cannot be ignored:

In re Western Real Estate Fund, 922 F.2d at 597-98.

The similarity between the standard for determining the unconscionability of a contingent fee agreement, which was before the arbitrator, and the bankruptcy court's standard for determining the reasonable value of the fees suggests that the issue of an appropriate fee for appellant's work was necessarily determined and actually litigated in the formal arbitration that took place here. As noted above, the similarity between the considerations of "reasonable value" and the unconscionability of a contingent fee contract in California also suggests the question was necessarily decided. See In re SNTL Corp., 571 F.3d 826, 845 n.20 (9th Cir. 2009) (recognizing that California's attorney's fees provisions "impose requirements in the nature of reasonableness").

Secondly, the bankruptcy court also determined that the issue of an appropriate fee was not actually litigated because appellant "successfully resisted Siller's effort to defend the arbitration on the ground that the fees were not `reasonable.'" ER 80. Although it is not entirely clear, the court appears to have relied on the arbitrator's citation to Ketchum, 24 Cal.4th at 1132. However, as noted above, Ketchum does not hold that fees paid under a contingency fee contract are unreasonable; rather, it recognizes that the measure of reasonableness may be different in a contingency case: "`[a] lawyer who bears both the risk of not being paid and provides legal services is not receiving the fair market value of his work if he is paid only for the second of these functions.'" Id. at 1133 (quoting Leubsdorf, The Contingency Factor in Attorney Fee Awards, 90 YALE L.J. 473, 480 (1981)).7 Here, the bankruptcy judge did not consider the transcript of the arbitration proceedings in determining what was before the arbitrator. This court directed the parties to lodge the transcript and takes judicial notice of it in resolving the estoppel issue. See Mack v. South Bay Beer Distributors, Inc., 798 F.2d 1279, 1282-83 (9th Cir. 1986), overruled on other grounds by Astoria Federal Savings & Loan Ass'n v. Solimino, 501 U.S. 104 (1991).

During the arbitration, appellant's lawyer argued that the only issue was the breach of contract. Appellee's lawyer argued that "even in a contract case, the contract claims are not absolute," because "the case law says that even if you have a contract that says I'm going to get X percent, you still have to show you put forth reasonable effort in which you did for it to justify the fee." ART 201. Through the course of the arbitration, both appellant's and appellee's lawyers explored all of the following: the undertaking by both Pitre and Spiller, focusing on Siller's litigation history, the length of the relationship, the results of the litigation, the risks involved with the dissolution litigation, the difficulties attendant on the malpractice action against Friedburg; the difficulties in seeking to enforce the buy/sell agreement; Spiller's decision to associate with Pitre in order to pursue litigation on the buy/sell agreement and to participate in the dissolution and Friedburg malpractice actions; and counsels' hourly rates for themselves, their associates and their paralegals. ART8 74-77 (over the course of five years, Pitre represented Siller on the corporation dissolution, the buy/sell agreement, the Friedburg malpractice action and a lawsuit filed by lawyers Hauser and Thomas); ART 82 (strategic considerations in dissolution case); ART 121-122 (Spiller associated with Pitre to litigation the buy/sell case, which Pitre described as a "very difficult case" and to join in the remainder of the litigation); ART 101-102 (impact of taped conversations on Friedburg malpractice action); ART 121 (buy/sell challenge "very difficult case" and so Pitre not included to pursue it); ART 122-123 & 376-377 (Spiller's association, from 2004 to 2007); ART 177-179 & 393 (hourly rates for both firms); ART 244-248 (Spiller's efforts on the buy/sell litigation & novelty of the approach); ART 377-378, 393, 440-442 (Spiller's work on the case, including the development of theories for the buy/sell case, participation in the dissolution case and the malpractice claim against Friedburg; from the day Spiller associated with Pitre he "did the same thing" and "came in full bore," participating in both the dissolution and buy/sell trials); see also ART Ex. 3 (case status update noting the risk of dismissal of the dissolution case, in part because of the "litigious history of Chuck Siller and the antics of his prior counsel has incurred the wrath of both trial and appellate courts," describing the cases as "a Pandora's Box of legal issues and a client who is difficult to deal with").

Before the arbitration, Siller brought several motions in limine. They chiefly challenged the validity of the two fee contracts and sought to present experts about the valuation of the properties that Siller accepted in settlement of the dissolution case and which formed the basis for calculation of the contingencies; these motions were denied. ART 201, 260 (motions in limine denied), 270 (arbitrator disinclined to take testimony regarding the valuation of the property); see also ER 223-227 (arbitrator's description of the motions in limine). In addition, the arbitrator allowed Siller's lawyer to pursue questions about the number of hours appellants spent on portions of the litigation and their attitude toward it, even over appellants' objections. ART 224-225. When appellants' counsel continued to object to questions about the time appellants spent on the litigation and the success or failure of those efforts, Siller's counsel argued that the questions were "completely relevant as to conscionability, whether or not this is an unconscionable fee based upon what they promised to do at the beginning and what they failed to do at the end." ART 296. The arbitrator let the questioning proceed, subject to a motion to strike. ART 299. There is no indication that appellants later sought to strike the information thus developed.

In reaching his ultimate determination, the arbitrator reviewed the nature of the work and the risk that appellant would not be paid, reflecting the evidence developed about the reasonable value of the contingent fee contract. ER 235-240. The arbitrator noted that appellee's counsel, Mr. Wass, cross-examined about the work performed over objection, but as described above, the examination was allowed. Finally, the arbitrator rejected appellee's claim that the contingency fee contracts in this case were unconscionable. ER 241. By considering both the reasonable nature of the contingent fee contracts and rejecting the claim that the contracts were unconscionable, and applying California's tests for both determinations, the arbitrator necessarily decided that the fees were reasonable within the contemplation of § 502(b)(4).

The order of the bankruptcy court is REVERSED. This case is remanded for further proceedings consistent with this order.