While the general rule in American courts is that each party pays their own attorney’s fees, parties in bankruptcy adversaries and contested matters in California may be entitled to file a motion for attorney’s fees if a contract provides for such a recovery under California Code of Civil Procedure 1021. This pertains to prevailing parties in various matters in California bankruptcy courts, including nondischargeability for fraud.
The American Rule: Each Party Must Pay Their Own Attorney’s Fees Except Where a Statute or Contract Provides Otherwise
Known as the American Rule, the law in California is that “[e]ach party to a lawsuit must pay its own attorney fees except where a statute or contract provides otherwise. (Code Civ. Proc. § 1021.)” Dell Merk, Inc. v. Franzia, 132 Cal.App. 4th 443, 450 (Cal. 2005). Indeed, California Code of Civil Procedure Section 1021 [CCP 1021] provides that: “Except as attorney’s fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied, of the parties; but parties to actions or proceedings are entitled to their costs, as hereinafter provided.” California Code of Civil Procedure Section 1032(b) provides the opposite rule for costs: “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.”
Motion for Attorney’s Fees in Bankruptcy Adversary Proceedings and Contested Matters Under California Code of Civil Procedure 1021
Bankruptcy disputes fall into two categories: adversary proceedings, such as fraudulent transfer actions, nondischargeability complaints, and preferential transfers in Chapter 7 bankruptcy, as well as contested matters, such as motions to dismiss, automatic stay violations, and objections to a homestead exemption in California. When those matters are over, there may be a prevailing party. In the context of adversary proceedings, attorney’s fee motions are governed by Federal Rule of Bankruptcy Procedure, Rule 7054 (FRBP 7054), which in turns refers in large part to Federal Rules of Civil Procedure, Rule 54 (FRCP 54).
The law is that “a prevailing party in a bankruptcy proceeding may be entitled to an award of attorney fees in accordance with applicable state law if state law governs the substantive issues raised in the proceedings.” In re Bertola, 317 B.R. 95, 99 (B.A.P. 9th Cir. 2004). California law also provides for recovery under California Code of Civil Procedure § 1021. In re Davison, 289 B.R. 716, 724 (B.A.P. 9th Cir. 2003). Specifically: “Section 1021 permits recovery of attorney’s fees by agreement between the parties, and does not limit recovery of attorney’s fees to actions on the contract.” In re Chen, 345 B.R. 197, 200 (N.D. Cal. 2006).
As a bankruptcy court in California recently explained: “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.” In re Zarate, 567 B.R. 176, 182 (Bankr. N.D. Cal. 2017) (citing 3250 Wilshire Blvd. Bldg. v. W.R. Grace & Co., 990 F.2d 487, 489 (9th Cir. 1993). Indeed, the California Supreme Court also explained that “[p]arties may validly agree that the prevailing party will be awarded attorney fees incurred in any litigation between themselves, whether such litigation sounds in tort or in contract.” Santisas v. Goodin, 17 Cal. 4th 599, 608 (Cal. 1998).
As such, the prevailing party in bankruptcy litigation can file a motion for attorney’s fees so long as the prevailing party has a contract with the non-prevailing party that covers the the issue in the bankruptcy litigation.
“To determine whether a prevailing party may recover attorney’s fees for non-contractual claims under Section 1021, a court must look to the language of the agreement.” In re Chen, 345 B.R. 197, 201 (N.D. Cal. 2006) (citing 3250 Wilshire Blvd. Bldg. v. W.R. Grace & Co., 990 F.2d 487, 489 (9th Cir. 1993)). “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.” In re Zarate, 567 B.R. 176, 183 (Bankr. N.D. Cal. 2017).
The examples below explain how courts have determined whether certain contractual attorney’s fee provisions apply to bankruptcy matters.
Motion for Attorney’s Fees as the Prevailing Party in Nondischargeability Adversary Complaint for Fraud under 11 U.S.C. 523(a)(2)(A)
While some bankruptcy creditors allege nondischargeability under Section 523(a)(6) for willful and malicious injury, the most commonly alleged basis for nondischargeability is fraudulent misrepresentation under Section 523(a)(2)(A).
“In cases under § 523(a)(2) . . . ‘the determinative question . . . is whether the successful [party] could recover attorney’s fees in a non-bankruptcy court.’” In re Bertola, 317 B.R. 95, 99-100 (B.A.P. 9th Cir. 2004). As a bankruptcy court explained: “California law also permits recovery of attorneys’ fee by agreement for tort claims such as a § 523 action.” In re Tran, 301 B.R. 576, 584 (Bankr. N.D. Cal. 2003). The Tran court found that: “Pursuant to the agreements and California law, [the prevailing party on the § 523(a)(2)(A) claim] is also entitled to recover its reasonable attorneys’ fees for litigating both the contract and the dischargeability claims.” In re Tran, 301 B.R. 576, 585 (Bankr. N.D. Cal. 2003).
Addressing a fraud nondischargeability complaint, another bankruptcy court in California recently ruled in favor of a prevailing defendant’s right to attorney’s fees in noting that: “The Settlement Agreement clearly provides that ‘[i]n the event any action is necessary to enforce any of the terms, covenants or conditions of this release, the prevailing party shall, in addition to any other recovery, recover his, its, or their reasonable attorneys’ fees and costs.’” Soares v. Lorono, No. 12-CV-05979-WHO, 2015 WL 151705, at *21 (N.D. Cal., Jan. 12, 2015).
In 2020, the Ninth Circuit Bankruptcy Appellate Panel affirmed an award of attorney’s fees to the debtor, as the owner of a contractor company, who defeated a subcontractor’s § 523(a)(2)(A) claim, on the basis that the subcontract provided that: “In the event that Contractor prevails in any reference proceeding or court action . . . brought against Subcontractor by third parties in which Contractor is joined as a party or interpleads . . . Subcontractor agrees to pay Contractor reasonable attorneys’ fees.” In re Davis, No. 1:10-AP-01354-VK, 2019 WL 2931668, at *1 (B.A.P. 9th Cir. July 3, 2019), aff’d, 809 F. App’x 415 (9th Cir. 2020).
The California Civil Code 1717 Limitation that the Action Must be “On the Contract” Does Not Bar Attorney’s Fees in Bankruptcy
The most commonly cited basis for attorney’s fees in California is California Civil Code 1717, which provides for attorney’s fees to a prevailing party in litigation “on the contract.” However, this limitation does not bar a motion for attorney’s fees in bankruptcy in an action that is not on the contract, such as a tort (fraud) claim, under the separate California Code of Civil Procedure 1021. In re Davison, 289 B.R. 716, 724 (B.A.P. 9th Cir. 2003).
As one court explained:
There is no independent right to attorney’s fees in an adversary bankruptcy proceeding. In re Baroff, 105 F.3d 439, 441 (9th Cir.1997). A prevailing party may be awarded attorney’s fees, however, if attorney’s fees would have been awarded under substantive state law. Ibid. (citing In re Johnson, 756 F.2d 738, 741 (9th Cir.1985)). California law permits recovery for attorney’s fees under two separate provisions. Section 1717 allows a party to recover attorney’s fees incurred in the litigation of a contract claim. See In re Davison, 289 B.R. at 726 (citing Santisas v. Goodin, 17 Cal.4th 599, 615, 71 Cal.Rptr.2d 830, 951 P.2d 399 (1998)). Section 1021 permits recovery of attorney’s fees by agreement between the parties, and does not limit recovery of attorney’s fees to actions on the contract. Id. at 724. Attorney’s fees for fraud claims may be recovered if the contract so provides.
In re Chen, 345 B.R. 197, 200 (N.D. Cal. 2006).
For example, the Ninth Circuit Bankruptcy Appellate Panel (BAP) decided a motion for attorneys fees under “CCC § 1717 and approved attorney’s fees only if the action involves a contract claim. See Santisas v. Goodin (1998) 17 Cal.4th [599,] 615. Here, the Complaint did not contain a breach of contract claim. Rather, the only claim asserted was a nondischargeability claim based on fraud. Therefore, CCP § 1717 is not applicable. See Santisas, 17 Cal.4th at 615.” In re Davison, 289 B.R. 716, 724 (B.A.P. 9th Cir. 2003).
Contact an Experienced Bankruptcy Litigation Attorney in California
Prevailing parties should consider whether they are entitled to a motion for attorney’s fees in bankruptcy nondischargeability actions in consultation with an experienced bankruptcy litigation attorney in California. For a free consultation, contact Talkov Law online or at (844) 4-TALKOV (825568).