Roger L. Efremsky, U.S. Bankruptcy Judge.
On September 15, 2016, the court entered a stipulated judgment in favor of plaintiffs Joseph and Juliana Taburaza. The judgment states that defendants owe a non-dischargeable debt of $831,018.31 to plaintiffs. October 13, 2016, plaintiffs filed this motion for an award of attorney's fees and costs as the prevailing party in the adversary proceeding. Defendants opposed this motion. The matter has been fully briefed and argued. This is the court's findings of fact and conclusions of law as required by Fed. R. Bankr. P. 7052.
In June 2005, the parties entered into an Asset Purchase Agreement (the "APA") by which defendants agreed to sell two skilled nursing facilities (the "Facilities") to plaintiffs. Defendants operated the Facilities through Tru-Care, Inc., a California corporation. Defendants owned a 60% interest, and plaintiffs owned a 40% interest, in the Tru-Care shares and in the two pieces of real property (known as "Milpitas" and "Wisteria") on which the Facilities operated. APA, Recital A.
The transaction contemplated by the APA was a transfer to plaintiffs of defendants' Tru-Care shares or the Tru-Care assets, and of defendants' 60% interest in Milpitas and Wisteria. At closing, plaintiffs were to pay the secured debt on Milpitas and Wisteria and assume certain obligations of the business including certain tax debts. APA, § 2.1-2.4.
Relevant to this dispute, Recital C of the APA described what plaintiffs agreed to pay as the "major obligations" and "estimated balances" related to Milpitas, Wisteria, and Tru-Care: two secured loans on Milpitas totaling $1,275,791; two secured loans on Wisteria totaling $812,188; $28,000 owed under a settlement agreement; $100,000 owed to an individual named Vicki Gaceta Smith; and estimated employment tax obligations of $400,000. APA, Recital C.
The closing was to take place 90 days after execution of the APA. APA, § 6.1. The defendants were to manage the Facilities until plaintiffs obtained the required regulatory approvals to operate the Facilities. APA, § 3.1. Section 3.1 stated that defendants would not incur any new liabilities except in the ordinary course of business during this interim period. Article 4 described defendants' representations and warranties. Defendants represented that
If plaintiffs were unable to obtain the regulatory approvals by the contemplated 90-day closing date, plaintiffs could extend the closing date by 6 months. APA, § 8.1(a)(i). In addition, if the regulatory approvals were not obtained in the extended 6 month period, plaintiffs could either proceed or elect not to proceed with the purchase. APA, § 8.1(a)(ii).
Article 11, entitled Post Closing Covenants, contained the following provision:
Section 11.6(b) provided the same protection to Sellers. Section 11.6(c) described the procedures to be followed "[i]f any legal proceedings shall be instituted or any claim is asserted by any third party in respect of which any Party may be entitled to indemnity hereunder." APA, § 11.6(c).
Article 12, entitled Miscellaneous, contained the following provision:
For reasons that are not entirely clear, the closing did not take place as described in the APA and it may never have taken place. However, in 2009, the parties executed the First Amendment to Purchase Agreement and Assignment and Assumption Agreement (the "2009 Agreement"). The 2009 Agreement incorporated the provisions quoted above. It also stated that the parties had entered into a management agreement and a lease of the Milpitas and Wisteria real properties effective as of April 1, 2009 or the date plaintiffs received regulatory approval.
According to Recital C of the 2009 Agreement, the APA was amended to allow plaintiffs to waive their due diligence closing conditions, amend the closing date, amend certain representations and warranties in connection with the management agreement, and update the outstanding financial obligations relating to Milpitas and Wisteria and the business. 2009 Agreement, Recital C.
Section 6 of the 2009 Agreement, entitled Amended Financial Obligations, provided that Recital C of the APA was replaced with a new listing of the "major obligations" and their "estimated balances" as of April 1, 2009. The new list included the two secured loans on Milpitas with slightly lower balances totaling $1,193,437, and the two secured loans on Wisteria with slightly lower balances totaling $753,080; the same $100,000 owed to the individual named Vicki Gaceta Smith, and the same $400,000 estimated employment tax obligation. 2009 Agreement, § 6.
Plaintiffs later discovered defendants had failed to disclose significant liabilities. This prompted plaintiffs to sue defendants in state court for breach of contract and obtain a $1.34 million default judgment.
Soon after defendants filed their bankruptcy case, plaintiffs initiated this adversary proceeding. AP Docket no. 1. The first claim for relief was based on a theory of fraud in the inducement under § 523(a)(2)(A). The essential allegations were that defendants had, with intent to deceive, "misrepresented facts, concealed and failed to disclose" material facts in order to induce plaintiffs to enter into the 2009 Agreement, resulting in damage of $1.34 million. In the prayer, plaintiffs sought judgment for the amount of this debt plus pre-judgment interest, contractual attorneys fees, costs, and disbursements.
Defendants answered the complaint, generally denying its essential allegations. AP docket no. 8.
In July 2015, plaintiffs filed a motion for summary judgment. AP docket nos. 20-24, 26. In response, defendants admitted they had failed to disclose multiple material obligations and admitted that a debt of some amount was non-dischargeable but that plaintiffs had not established the amount of the damages resulting from the defendants' non-disclosures. AP docket nos. 27-28.
Plaintiffs filed supplemental declarations in an effort to establish the amount of their damages. AP Docket nos. 37, 39. Defendants responded that the plaintiffs had again failed to prove their damages. AP docket no. 38. At the hearing held on January 7, 2016, the court found that plaintiffs had failed to establish their damages with any precision and summary judgment was denied except as to $32,468 for certain unpaid medical insurance premiums.
At this point, the parties agreed to attend judicial mediation. However, this mediation was ultimately unsuccessful and in May 2016, the court set a trial date of August 25, 2016.
At the beginning of the trial on August 25, 2016, the parties announced that they had reached a settlement by which defendants agreed that $831,018.31 was a non-dischargeable debt. On September 15, 2016, the court entered the judgment. AP docket no. 71.
On October 13, 2016, plaintiffs filed this motion for an award of attorney's fees and costs. AP docket nos. 73-75. The motion seeks an award of $316,887.00 in attorney's fees pursuant to Rule 7054, California Code of Civil Procedure § 1021 and § 1032, and California Civil Code § 1717, and $11,748.25 in costs pursuant to 28 U.S.C. § 1920. (Plaintiffs' motion repeatedly refers to "California Code of Civil Procedure § 1717" which is obviously incorrect. The section is California Civil Code § 1717.)
Defendants' opposition argues that the motion is untimely because Civil Rule 54(d)(2)(B), applicable here by Rule 7054(b)(2), requires such a motion to be filed no later than 14 days after the entry of judgment. The opposition also argues that fees are not allowed under California law because this was not an action on a contract; it was a tort action based on a fraud in the inducement theory. Finally, defendants argue that the requested fees and costs are excessive because the request includes fees and costs incurred in the state court litigation. AP docket no. 82.
The court will first dispose of the defendants' timeliness argument. It is true that the motion was not filed within 14 days of entry of the judgment as required by Rule 7054(b)(2) which makes Civil Rule 54(d)(2)(B)(i) applicable here. It is also true, as defendants point out, that neither defendants nor the court agreed to any extension of time. However, the discussion on the record on August 25, 2016, when the parties announced their settlement, may have led plaintiffs to believe that filing this motion within 30 days was acceptable.
The court does not necessarily agree with this interpretation. Nevertheless, if plaintiffs had sought an order extending their time under Rule 9006 and the relevant excusable neglect analysis under
Under the American Rule, the prevailing party is ordinarily not entitled to collect a reasonable attorney's fee from the loser.
California follows the American Rule. California Code of Civil Procedure § 1021 says "[e]xcept as attorney's fees are specifically provided for by statute, the measure and mode of compensation of attorneys... is left to the agreement, express or implied, of the parties." Section 1021 allows the parties to agree that the prevailing party in litigation may recover attorney's fees, whether the litigation sounds in contract or in tort.
Code of Civil Procedure § 1032(b) says "except as otherwise expressly provided by statute, a prevailing party is entitled as a matter of right to recover costs in any action or proceeding." Code of Civil Procedure § 1033.5 lists the items that are allowable as costs under § 1032. Attorney's fees are included in costs "when authorized by contract." Code Civ. Proc. § 1033.5(a)(10)(A).
Under California Civil Code § 1717(a), "in any action on a contract, where the contract specifically provides that attorney's fees and costs which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to other costs."
Against this background, the questions are whether this § 523(a)(2)(A) case was an "action on a contract," and, if not, whether the attorney's fee provisions in the APA are broad enough to cover a tort claim.
The attorney's fee provision in § 12.9 of the APA provided:
The basic goal in contract interpretation is to give effect to the parties' mutual intent at the time of contracting. When a contract is reduced to writing, the parties' intention is determined from the writing alone, if possible. Cal. Civ. Code § 1639. The words of a contract are to be understood in their ordinary and popular sense. Cal. Civ. Code § 1644.
While the case law in this area is not a model of clarity, there are several cases that guide the court in interpreting an attorney's fee provision such as this one. In short, provisions such as § 12.9 — by its terms limited to enforcement of the terms or collection of what is owed — have been held not to extend to fees incurred in litigating tort claims.
Plaintiffs argue that their intention was to have the attorney's fee provision in § 12.9 of the APA cover this litigation. While their subjective intention is not relevant here, if that was in fact their intention, the language they chose — enforce or collect — did not convey that meaning. The court will not rewrite the APA for them at
Plaintiffs argue that their § 523(a)(2)(A) claim was an "action on a contract" because fraudulent misrepresentations or omissions were made in the representations and warranties in the 2009 Agreement which induced plaintiffs to proceed with the transaction. Defendants counter that it was instead a tort case relying on a theory of fraud in the inducement regarding the 2009 Agreement.
The Ninth Circuit instructs this court to look to California law to determine whether this was an action "to enforce or avoid enforcement" of a contract to determine whether Civil Code § 1717 applies.
First, under established California law, a tort claim does not "enforce" a contract.
Second, the dischargeability of a debt under § 523(a)(2)(A) resolves a tort claim.
The court does not find plaintiffs' analysis of this issue persuasive. Plaintiffs cite
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While plaintiffs cite
Here, whether the APA or the 2009 Agreement were enforceable was never a question and the interpretation of these agreements was never an issue. 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.
In § 11.6(a) of the APA, defendants, as sellers, agreed to "defend, indemnify and hold" plaintiffs, as buyers, "harmless from and against any and all loss, damage, liability, action or proceeding, including, without limitation, attorney's fees resulting from or arising out of (i) any inaccuracy in or breach of any representation, warranty, covenant, or obligation made or incurred by sellers" in the APA or related agreements.
Plaintiffs contend that § 11.6(a) entitles them to indemnification from defendants for all loss in this litigation, including attorney's fees. They then claim that § 11.6(c) is a third party indemnification provision that entitles them to indemnification from defendants for all losses, including attorney's fees, if plaintiffs are embroiled in litigation with third parties.
Assuming (only for the sake of argument) that the language of § 11.6(a) is broad enough to cover a tort claim such as this one, the question is whether it applies in litigation between the parties to the APA. For several reasons, the court finds that § 11.6(a) does not operate as plaintiffs contend and § 11.6 is merely a third party indemnity provision.
Indemnity agreements are construed under the same rules governing the interpretation of other contracts.
As the Ninth Circuit has explained:
First, § 12.9 of the APA contains a specific attorney's fee clause. Interpreting § 11.6(a) as another attorney's fee provision that is implicated in a dispute between the parties to the APA renders § 12.9 surplusage. Section 11.6(a) may arguably be a more expansive fee provision because it uses the phrase "resulting from or arising out of any breach of any warranty. However, plaintiffs' interpretation is precluded by the authorities described above; it would make § 12.9 surplusage and is therefore an unreasonable interpretation of the APA.
Second, beyond that threshold point, a significant body of California case law supports a finding that § 11.6, in its entirety, is a third party indemnification provision and does not work as a prevailing party attorney's fee provision. The general rule is that including attorney's fees as an item of loss in a third party indemnity provision does not constitute a provision for the award of attorney's fees in an action on the contract itself which is required to trigger Civil Code § 1717.
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Second, courts examine the context in which the language appears.
A review of all three sub-parts of § 11.6 shows this is a third party indemnity provision. In § 11.6(a), defendants, as sellers, agree to indemnify plaintiffs, as buyers; in § 11.6(b), plaintiffs, as buyers agree to indemnify sellers. In § 11.6(c), the mechanics of addressing a third party indemnity claim are explained. Section 11.6(c) begins by saying if "any legal proceedings shall be instituted or any claim is asserted by any third party in respect of which any Party may be entitled to indemnity," then proceeds to describe the obligation to give notice and the ability to participate in or control such an indemnity action. Read together, these three sub-parts of § 11.6 show that this is a third party indemnification provision and does not, for this additional reason, support an award of attorney's fees here.
Plaintiffs seek an award of $11,748.25 in costs, citing Rule 7054(b) and 28 U.S.C. § 1920 as the basis for awarding costs. Rule 7054(b)(1) provides that the court may allow costs to the prevailing party and costs may be taxed by the clerk on 14 days' notice. Although the request for costs is technically untimely, for the reasons previously discussed, the court will consider it on its merits.
Plaintiffs' request for costs does not provide the documentation required by Civil Local Rule 54-1(a) or comply with substantive limitations in 28 U.S.C. § 1920. Civil Local Rule 54-1(a), applicable here by Bankruptcy Local Rule 1001-2, requires a prevailing party claiming taxable costs to serve and file a bill of costs. The bill of costs must state separately and specifically each item of taxable costs claimed and must be supported by an affidavit pursuant to 28 U.S.C. § 1924 that the costs are correctly stated, were necessarily incurred, and are allowable by law. In addition, appropriate documentation must be attached to the bill of costs.
Plaintiffs did not file a bill of costs, and did not provide any evidentiary support for their costs. In addition, plaintiffs' $11,748 total includes (1) many items that are not within the categories stated in § 1920(1)-(6); (2) many items that pre-date the filing of this bankruptcy case; and (3) many items that appear to involve the defendants' main case rather than this adversary proceeding. At the hearing on this motion, plaintiffs' counsel conceded that the requested costs were not in line with § 1920 and offered no authority for including costs incurred in other proceedings.
For these reasons, the court exercises its discretion to decline to award costs.
For the foregoing reasons, the motion for attorney's fees and costs is denied.
Based on the above, plaintiffs' motion is denied. Each side shall bear their own costs in this adversary proceeding. The clerk's office is directed to close this adversary proceeding following docketing of the Memorandum Decision and Order.
