Opinion
NOT FOR PUBLICATION
Argued and Submitted at Phoenix, Arizona: January 18, 2007
Appeal from the United States Bankruptcy Court for the District of Arizona. Bk. No. 94-06045-PHX-RTB, Adv. No. 04-01226-PHX-RTB. Hon. Redfield T. Baum, Chief Bankruptcy Judge, Presiding.
Before: DUNN, SMITH and PAPPAS, Bankruptcy Judges.
MEMORANDUM
This Memorandum encompasses five related appeals which were consolidated for purposes of oral argument.
The bankruptcy court granted summary judgment in favor of Finova Capital Corporation (" Finova"), determining that Finova's interest in proceeds (" 8.5 Acres Proceeds") from the sale of 8.5 acres of real property (" 8.5 Acres") was superior to that of the Carl C. Jacobson, Sr. Irrevocable Life Insurance Trust (" Jacobson Trust"), which held title at the time the 8.5 Acres were sold, notwithstanding that Finova previously had stipulated to release its deed of trust lien on the 8.5 Acres after its secured claim in a related bankruptcy case had been paid in full. The court held that because Finova, after releasing its deed of trust lien, paid a preference judgment to the bankruptcy trustee in the present case (" JWJ Trustee"), Finova regained its secured rights with respect to the 8.5 Acres Proceeds by operation of § 550 and § § 502(d) and (h) and " for equitable reasons." The Jacobson Trust appealed (AZ-06-1129).
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, as enacted and promulgated prior to the effective date (October 17, 2005) of most of the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, April 20, 2005, 119 Stat. 23 (" BAPCPA").
By virtue of an agreement between the JWJ Trustee and Finova, the JWJ Trustee had derivative rights to a portion of any interest Finova was determined to have in the 8.5 Acres Proceeds. Accordingly, judgment was entered, recognizing the JWJ Trustee's rights in the 8.5 Acres Proceeds. The Jacobson Trust appealed (AZ-06-1330).
Finova also was granted summary judgment on two guaranties of the underlying obligation which formed the basis for the dispute over the 8.5 Acres Proceeds. The guarantors appealed (AZ-06-1130 and AZ-06-1143).
Finally, although summary judgment was entered in Finova's favor, the bankruptcy court denied Finova's motion for an award of attorneys' fees and costs against the Jacobson Trust. Finova appealed (AZ-06-1225).
For the reasons set forth below, we:
1. REVERSE the bankruptcy court's grant of summary judgment to Finova on its claim to the 8.5 Acres Proceeds.
2. REVERSE the derivative judgment entered in favor of the JWJ Trustee.
3. AFFIRM the bankruptcy court's grant of summary judgment against the guarantors.
4. AFFIRM the bankruptcy court's denial of Finova's request for attorneys fees and costs against the Jacobson Trust.
I. FACTS
The factual history behind the seemingly unending litigation regarding this case and the present claims is convoluted. It involves two unsuccessful chapter 11 reorganization cases and several lawsuits in state and federal court. The apparently sole remaining dispute regards conflicting claims to the approximate one million dollars representing the net proceeds from the sale of certain real property, commonly referred to as the '8.5 Acres.'
Minute Entry/Order at 1, Mar. 2, 2006.
Carl C. Jacobson, Jr. and Einar J. Johnson operated two construction companies: International Surfacing, Inc. (" ISI") and JWJ Contracting Co., Inc. (" JWJ"). A financing arrangement for ISI, entered into in 1993, is at the heart of this dispute.
In June 1993, ISI entered into a Loan and Security Agreement (" ISI Loan") with Finova Capital Corporation (" Finova"). The ISI Loan was secured by all of ISI's assets. In addition, Mr. Jacobson and his wife, Marilyn Jacobson (" Jacobsons"), and Mr. Johnson and his wife, Corra Johnson (" Johnsons"), personally guaranteed the ISI Loan.
The lender on the ISI Loan was actually Greyhound Financial Capital Corporation, Finova's predecessor in interest.
In March 1995, the ISI Loan was amended. As a condition to the amendment, Finova required the Jacobsons to pledge additional collateral to secure both the ISI Loan and their guaranties. To meet this requirement, Mr. Jacobson, as trustee of the Jacobson Trust, caused the Jacobson Trust to convey the 8.5 Acres to himself and his wife. The Jacobsons then executed a deed of trust (" Deed of Trust" or " Finova's Deed of Trust") granting Finova a lien on the 8.5 Acres to secure the ISI Loan and the Jacobsons' guaranties of the ISI Loan (" Deed of Trust Lien").
The 8.5 Acres had been the subject of a number of transfers prior to the time the Jacobsons took title to the 8.5 Acres from the Jacobson Trust. As noted by the bankruptcy judge, " [c]learly the 8.5 Acres was used by Jacobson and Johnson to secure the debts of JWJ and ISI as needed." Minute Entry/Order at 7, Mar. 2, 2006.
To illustrate: In January 1994, JWJ deeded the 8.5 Acres to the Johnson & Jacobson Partnership (" JJP"), which in turn transferred the 8.5 Acres to the Jacobson Trust in May 1994, but not before encumbering the property with a deed of trust lien to Tanner Concrete (" Tanner") to secure JWJ's debt to Tanner in the approximate amount of $1.8 million. This deed of trust provided that in the event Tanner made a claim against JWJ's bond and was paid on that bond claim by the bond issuer, Continental Insurance Company (" Continental"), Tanner was to assign the deed of trust to Continental. By August 1994, Continental had received an assignment of the deed of trust (hereinafter " Continental Trust Deed"). Continental then subordinated the priority of the Continental Trust Deed to the Deed of Trust Lien granted Finova by the Jacobsons in 1995.
Both JWJ and ISI ultimately filed for relief under chapter 11 of the Bankruptcy Code: JWJ in July 1994, ISI in May 1996. The cases were neither consolidated nor jointly administered, and each was assigned to a different bankruptcy judge. Unfortunately, throughout the pendency of the cases, the parties did not take into consideration the implications that might arise in one case from the resolution of a particular dispute in the other. The result has been an explosion of litigation that has left at least one of the bankruptcy judges feeling " whip-sawed."
These appeals all arise from final dispositions made by the bankruptcy judge in the JWJ bankruptcy case. However, to address the issues on appeal, it is necessary to discuss the dispositions made by the bankruptcy judge in the ISI bankruptcy case. Throughout this Memorandum, we refer to the court in the JWJ bankruptcy case as the " bankruptcy court" and to the court in the ISI bankruptcy case as the " ISI court."
A. The Finova Deed of Trust Lien
Finova filed a secured claim in the ISI bankruptcy case in the amount of $2,911,911.53, plus interest and fees. ISI moved to sell certain assets free and clear of liens in order to pay its debt to Finova. The order (" Disbursement Order") entered by the ISI court in February 1997 contains the following language requiring a release of Finova's lien in assets:
Effective immediately upon (a) the transfer of the Sale Proceeds to Finova pursuant to the terms of this Order in the amount of Finova's claim and (b) this Order becoming final and non-appealable, but not before, Finova's security interest in the remaining Collateral . . . shall be extinguished. Thereafter, Finova shall execute and deliver to Debtor any and all documents submitted to it for execution which are reasonably necessary so as to effectuate the release of its security interest in the Collateral (and in certain real property [the 8.5 Acres] not owned by Debtor which was provided to Finova as additional security under the Loan Agreement).
Emphasis added.
The provisions of the Disbursement Order were expressly approved by both ISI and Finova, and it fixed the amount of Finova's secured claim at $2,341,710.94. Finova was paid the full amount of its allowed secured claim on the same date, exclusively from the sale of ISI assets (" ISI Sale Proceeds"), not from proceeds from the sale of the 8.5 Acres.
In the meantime, the JWJ Trustee, appointed once the JWJ bankruptcy case converted to chapter 7 in October 1994, was at work pursuing avoidable transfers on behalf of the JWJ bankruptcy estate. At the time the Disbursement Order was entered, the JWJ Trustee already had advised Finova, by letter from his counsel dated November 13, 1996, that he claimed an interest in the ISI Sale Proceeds based on avoidance claims he was asserting against ISI. In response, the Disbursement Order explicitly stated:
The transfer of the Sale Proceeds to FINOVA in the amount necessary to satisfy FINOVA's Claim shall be made free and clear of any and all liens and claims, including, without limitation, any claims which have been or may be asserted against the Sale Proceeds by Joseph J. Janas, as Chapter 7 Trustee in In re JWJ Contracting, Inc., United States Bankruptcy Court for the District of Arizona, Case No. 94-06045-PHX-RTB.
(Italics in original.)
The Disbursement Order was " effective immediately upon entry, but . . . subject to modification prior to becoming final" and would become final in the absence of an objection filed within 20 days after the Disbursement Order was served. The JWJ Trustee timely objected to paragraph 14 of the Disbursement Order; attached to the objection was a copy of an adversary proceeding (" JWJ/Finova Adversary") he had filed the day before in the JWJ Bankruptcy Case, asserting that Finova was the beneficiary of alleged avoidable transfers made from JWJ to ISI in 1993 and 1994 in the approximate total amount of $1.4 million. In his objection, the JWJ Trustee asserted that the Disbursement Order improperly impaired his ability to pursue the JWJ/Finova Adversary. The ISI court overruled the objection on the basis that, even if successful in his adversary proceeding against Finova, the JWJ Trustee would not have an interest in the ISI Sale Proceeds as a result.
Despite being on notice of the JWJ Trustee's avoidance claims against it, Finova did not request modification of the Disbursement Order to preserve the Deed of Trust Lien.
By November 1997, Finova was requesting that the Disbursement Order be modified with respect to the ISI Sale Proceeds and any remaining ISI collateral it previously had released when its agreed secured claim was paid. In its " Motion to Confirm Secured Status, " Finova asserted that when it stipulated to the Disbursement Order, it had no reason to believe the JWJ Trustee could recover any avoided transfers from Finova because he did not allege Finova was an initial transferee. Only after the JWJ bankruptcy court ruled in October 1997 that the JWJ Trustee could amend his complaint in the JWJ/Finova Adversary to allege that Finova was an initial transferee did Finova become concerned that it had given up too much in the Disbursement Order. As noted above, even then, Finova did not address its release of the Deed of Trust Lien.
Notably missing was a request that the Disbursement Order be modified as to the release of the Deed of Trust Lien on the 8.5 Acres.
Ultimately, Finova resolved its concerns about its secured status by entering into an agreement with the ISI Chapter 11 Trustee and Continental (" ISI Settlement"), which divided rights to the $315,191.69 then remaining of the ISI Sale Proceeds. Finova was granted a security interest in $120,000.00 of the ISI Sale Proceeds to secure its contingent claim in the event Finova paid any money (by judgment or settlement) to the JWJ Trustee in connection with the JWJ/Finova Adversary. Under the ISI Settlement, Finova was obligated to " take all reasonably necessary action to pursue all reasonably available guarantees and collateral." The ISI Settlement further provided:
8. Nothing in this Agreement shall in any manner alter, amend, modify or otherwise affect Finova's claims and rights against any guarantor.
9. To the extent necessary, this Agreement shall be deemed to amend the Disbursement Order and the Continental Settlement Agreement. Except as modified by this Agreement, all other terms and conditions of the Disbursement Order and the Continental Settlement Agreement shall remain in full force and effect.
The Continental Settlement Agreement referred to was an agreement between the ISI Trustee and Continental, previously approved by the ISI court, with respect to the remaining ISI Sale Proceeds.
The ISI Settlement was approved by the ISI court in August 1998.
Thereafter, on September 7, 2000, the bankruptcy court entered judgment against Finova in the JWJ/Finova Adversary in the amount of $823,299.69, with interest from June 10, 1997, at 6.241%. Finova paid the judgment on September 27, 2000, by a wire transfer in the amount of $1,005,667.
Throughout the proceedings as summarized above, Finova did nothing to reinstate or revoke the release of the Deed of Trust Lien provided for in the Disbursement Order. When a purchaser for the 8.5 Acres was located, the 8.5 Acres were sold, with the consent of all concerned parties, to an unrelated third party, and the parties' dispute transferred to the proceeds of that sale (" 8.5 Acres Proceeds").
In September 2002, the Jacobson Trust filed a complaint in the United States District Court for the District of Arizona against Finova (" Declaratory Judgment Action"), seeking a determination that its right, title to, and interest in the 8.5 Acres Proceeds were superior to those of Finova and the JWJ Trustee. Finova answered, and filed a third-party complaint against the Jacobsons and against the Johnsons, seeking judgment against them on continuing personal guaranties. The district court referred the Declaratory Judgment Action to the JWJ bankruptcy court in September 2004.
The JWJ Trustee was also a defendant in the Declaratory Judgment Action. The district court granted the JWJ Trustee's motion to dismiss on the basis that the Jacobson Trust had not obtained relief from the automatic stay to sue the JWJ Trustee. After the initial appeals in this dispute were filed, the JWJ Trustee sought leave from the Panel to intervene in Appeal No. AZ-06-1129. That motion was granted; subsequently, the bankruptcy court entered a judgment with respect to the JWJ Trustee, which forms the basis of Appeal No. AZ-06-1330.
First American Title Insurance Company held the 8.5 Acres Proceeds in escrow until granted leave to interplead them into the registry of the bankruptcy court, at which time it was dismissed as a party in the Declaratory Judgment Action.
Obviously concerned at this point about the release language in the Disbursement Order as it related to the 8.5 Acres Proceeds, Finova entered into a settlement agreement (" Clarification Agreement") with the ISI Trustee and the JWJ Trustee which purported to " clarify" that the Disbursement Order did not release Finova's Deed of Trust Lien against the 8.5 Acres. The ISI court denied both the motion to approve the Clarification Agreement and the motion to reconsider that denial. In refusing to approve the Clarification Agreement, the ISI court emphatically stated that the Disbursement Order acted to terminate Finova's Deed of Trust Lien.
In denying the motion for reconsideration, the ISI court stated:
The Court finds this entire dance distasteful. Litigation is supposed to be conducted on the merits, not by stealth. Taken separately, these two settlements seem fair enough. Thus it seems reasonable enough that the parties to a dispute should be able to carve up the spoils in a way that reflects their perceived risks--that's what happened in the JWJ Bankruptcy before Judge Baum. In this case, it seems reasonable enough to resolve a dispute by a stipulated " clarification" of an order previously agreed to by the same parties while insisting that parties who are strangers to the [Disbursement Order], i.e. the Insiders, have no standing to complain. Both of these propositions are reasonable on their face, until it becomes clear that 1) the purpose of the " clarification" is to pre-empt the issue in another adversary proceeding (where the Insiders are plaintiffs and do have standing) so as to be able to state to the other judge, " See, this is what the judge who entered the order thinks the order means; that should be the end of it, " and 2) that the division of the spoils in the one case is what is driving the request for " clarification" in the other.
Under Advisement Decision at 4, Jan. 13, 2005.
Having lost in its attempt to " clarify" in the ISI court that the Disbursement Order did not operate to release its lien as to the 8.5 Acres Proceeds, Finova then sought summary judgment in the Declaratory Judgment Action pending before the bankruptcy court that its claim to the 8.5 Acres Proceeds trumped that of the Jacobson Trust based on the Deed of Trust Lien. In denying this motion, the bankruptcy court stated:
. . . Finova has released any lien claim to the 8.5 [A]cres and the proceeds thereof, which proceeds are now held by this court and the right thereto is the fundamental issue to be resolved in this adversary proceeding. The fact of the release of this lien is aptly set forth by Judge Case in his two rulings of October 21, 2004 and January 13, 2005. . . .
Therefore, if Finova has any rights to the [8.5 Acres Proceeds] . . . it must be a right independent from the deed of trust lien held at a prior time by Finova which lien has been released.
Minute Entry/Order at 1-2, Jun. 2, 2005.
Inspired by these rulings, the Jacobson Trust then filed its own motion for summary judgment. The bankruptcy court denied the Jacobson Trust's motion, holding that, by operation of § § 550, 502(d) and 502(h), when Finova paid the avoidable transfer judgment in the JWJ/Finova Adversary, Finova became a secured creditor in the JWJ bankruptcy case: more specifically, its lien on the 8.5 Acres, and thus the 8.5 Acres Proceeds, was restored by that payment. The bankruptcy court noted no fewer than three times that it would be " fundamentally inequitable" for the Jacobson Trust to have an interest in the 8.5 Acres Proceeds superior to Finova (1) where Finova's Deed of Trust Lien had been granted on a consensual basis by Mr. Jacobson, who in effect, throughout time manipulated the title to the 8.5 Acres, (2) where Finova and the other creditors of JWJ and ISI hold " tens of millions of dollars" in unpaid claims, and (3) where Mr. Jacobson " pled guilty to various felonies" in connection with loans to JWJ. The bankruptcy court entered summary judgment in favor of Finova, and the Jacobson Trust appealed (Appeal No. AZ-06-1129).
B. The JWJ Trustee's Interest in the 8.5 Acres Proceeds
The following facts set forth briefly the state of the JWJ Trustee's interest both in the 8.5 Acres Proceeds and in the Declaratory Judgment Action.
In 1996, the JWJ Trustee filed an adversary proceeding (" JWJ/Jacobson Trust Adversary") through which he obtained partial summary judgment that an aggregate of $412,990.29 constituted avoidable preferential transfers from JWJ to the Jacobson Trust and a related entity. Second Amended Complaint (Adv. Proc. No. 96-492), p. 7, paras. 19(a)-(f). Thereafter, the JWJ Trustee and the Jacobson Trust reached a settlement, approved by the bankruptcy court on July 21, 1999, pursuant to which the Jacobson Trust paid $375,000 to the JWJ Trustee, and in exchange for which the JWJ Trustee
(a) discharges and releases [the Jacobson Trust and its attorneys], from all claims, known or unknown, held by the [JWJ Trustee] and the Bankruptcy Estate regarding the Transfers, (b) agrees not to pursue recovery of any further money or property (including but not limited to the . . . 8.5-acre parcel . . .) from any of the Defendants in connection with any other claims, causes of action, or liabilities with respect to the facts, acts and/or omissions underlying the operations of JWJ and/or the JWJ bankruptcy. . . .
Complaint, p.4, Ex B. Emphasis added.
Subsequent to this agreement not to pursue recovery of the 8.5 Acres, the JWJ Trustee obtained two partial summary judgments in the JWJ/Jacobson Trust Adversary related to the 8.5 Acres. The first, entered in June 2001, was a judgment which declared the transfer of the 8.5 Acres from JWJ to JJP avoidable as a preferential transfer pursuant to § 547. Statement of Facts in Support of Trustee's Fifth Motion for Partial Summary Judgment (Adv. Pro. No. 96-492), Ex B; Judgment (Jun. 29, 2001) (Adv. Proc. No. 96-492). The second, entered in October 2003, was a judgment which declared the following transfers of the 8.5 Acres avoidable as fraudulent transfers pursuant to § 548(b)(1):
(1) from JWJ to JJP on January 7, 1994;
(2) from JJP to the Jacobson Trust on May 27, 1994; and
(3) from the Jacobson Trust to the Jacobsons on April 14, 1995 (the recording date).
Finova's Request for Judicial Notice in Support of Motion for Summary Judgment, Ex. 5. Neither judgment provided for a § 550 recovery of the 8.5 Acres or its value.
In 2004, the bankruptcy court approved a settlement (" JWJ/Finova Settlement") over the objection of the Jacobson Trust, which provided that, to the extent Finova recovers an interest in the 8.5 Acres Proceeds, the JWJ Trustee and Finova will divide those proceeds, 63% to the JWJ Trustee and 37% to Finova. Motion for Approval of Amended Compromise Agreements (ISI and Finova), Ex. 1-A, p. 2; Order Approving Amended Compromises.
As a consequence, the bankruptcy court noted when denying Finova's original motion for summary judgment in the Declaratory Judgment Action:
[T]he JWJ [Trustee] has agreed that the only manner in which the JWJ bankruptcy estate will share in any of these proceeds is if Finova prevails on any claims it may have to those monies. That agreement has been approved by this court.
Minute Entry/Order at 2, Jun. 2, 2005.
When the bankruptcy court entered summary judgment in favor of Finova, it did not enter summary judgment in favor of the JWJ Trustee, although it did recognize the JWJ Trustee's rights in the 8.5 Acres Proceeds: " Counsel for Finova shall serve and lodge an appropriate form of judgment, which shall direct the clerk of this court to release the impound funds to Finova and the JWJ Trustee pursuant to their respective rights therein." Minute Entry/Order at 9, Mar. 2, 2006.
On August 4, 2006, the Panel granted the JWJ Trustee's motion to intervene in Appeal No. AZ-06-1129, noting that the JWJ Trustee was an original defendant in the Declaratory Judgment Action; that once the Declaratory Judgment Action was referred by the district court, the bankruptcy court entered an order joining the JWJ Trustee as a defendant; and that the JWJ Trustee's financial stake in the outcome of the appeal is greater in dollar amount than Finova's. The Panel determined that the absence of an order granting judgment to the JWJ Trustee rendered the judgment in favor of Finova interlocutory since it disposed of the claims of fewer than all parties to the action. In response, the bankruptcy court entered a Judgment for Final Defendant (" JWJ Trustee Judgment") on August 30, 2006, and the Jacobson Trust appealed (Appeal No. AZ-06-1330).
C. Who Owned the 8.5 Acres and When?
In addition to the question as to the present validity of the Finova Deed of Trust Lien, title to the 8.5 Acres is raised as a factor in determining whether Finova or the Jacobson Trust has a superior interest in the 8.5 Acres Proceeds.
As noted earlier, the 8.5 Acres were the subject of numerous Jacobson-related entity transfers beginning, for our purposes, in January 1994, at which time the 8.5 Acres were owned by JWJ. Additional factors impacting the interest of the Jacobson Trust in the 8.5 Acres also were addressed above.
To recap:
1. In January 1994, JWJ deeded the 8.5 Acres to JJP.
2. In May 1994, JJP transferred the 8.5 Acres to the Jacobson Trust, after encumbering the 8.5 Acres with a deed of trust lien to secure JWJ's construction debt to Tanner in the approximate amount of $1.8 million.
3. Pursuant to its terms, Tanner assigned this deed of trust to Continental upon Continental's payment of JWJ's debt to Tanner.
4. In April 1995, the Jacobson Trust transferred the 8.5 Acres to the Jacobsons.
5. The Continental Trust Deed was subordinated to the Finova Deed of Trust Lien granted by the Jacobsons in 1995.
6. In 1999, the JWJ Trustee settled the JWJ/Jacobson Trust Adversary. Pursuant to the terms of the settlement, the JWJ Trustee agreed " not to pursue recovery of any further money or property (including but not limited to the . . . 8.5-acre parcel . . .)."
Again, subsequent to this agreement not to pursue recovery of the 8.5 Acres, the JWJ Trustee obtained two partial summary judgments in the JWJ/Jacobson Trust Adversary related to the 8.5 Acres. One avoided the transfer of the 8.5 Acres from JWJ to JJP as a preference; the other avoided certain transfers of the 8.5 Acres as fraudulent transfers. Neither judgment allowed recovery of the 8.5 Acres or its value.
Thereafter, in September 1999, in separate litigation in the United States District Court for the District of Arizona (" Continental Litigation"), Continental, the Johnsons, the Jacobsons, and the Jacobson Trust entered into a settlement agreement which settled Continental's claims against the other parties for their liability to Continental for losses incurred in conjunction with the insolvency of JWJ and ISI. Upon payment of $1,250,000, plus interest at 8% per annum from June 1, 1999, to Continental pursuant to the agreement, Continental assigned the Continental Trust Deed to the Jacobson Trust. Settlement Agreement and Release Dated May 18, 1999, p. 5, para. 8; Minute Entry/Order at 3-4, Mar. 2, 2006.
In August 2000, at the direction of the Jacobson Trust, the title company conducted a trustee's sale under the Continental Trust Deed and recorded a trustee's deed conveying title to the 8.5 Acres to the Jacobson Trust.
Finally, in September 2000, the Jacobson Trust sold the 8.5 Acres to an unrelated third party with the consent of Finova, subject to the parties retaining their respective claims to the 8.5 Acres Proceeds. Request for Judicial Notice and Supplemental Statement of Undisputed Facts in Support of Jacobson Trust's Summary Judgment Motion, Ex. G.
D. The Enforceability of Finova's Guaranties
In June 1993, Finova required that the Jacobsons and the Johnsons personally guaranty payment of the ISI Loan (" Guaranties"). Finova's secured debt on the ISI Loan was paid in full in February 1997, pursuant to the entry and implementation of the Disbursement Order. Thus, after February 1997, the Jacobsons and the Johnsons owed nothing on account of the Guaranties. However, in the Declaratory Judgment Action, Finova filed third-party complaints against the Jacobsons and the Johnsons, seeking to enforce the Guaranties as a source of repayment to Finova for its payment of the 2000 JWJ/Finova Judgment in the amount of $1,005,667, together with interest from September 27, 2000, and attorneys' fees and costs. Finova relied on a " clawback" provision in the Guaranties as the basis for the third-party claims. That provision states:
If any payments of money or transfers of property made to [Finova] by [ISI] . . . [or any Guarantor] . . . should for any reason subsequently be declared to be . . . fraudulent . .., preferential or otherwise voidable or recoverable in whole or in part for any reason (hereinafter collectively called " voidable transfers") under the Bankruptcy Code . . . and [Finova] is required to repay or restore . . . any such voidable transfer, . . . then as to any such voidable transfer or the amount repaid or restored and all costs and expenses (including attorneys' fees) of [Finova] related thereto, the undersigned's liability hereunder shall automatically be revived, reinstated and restored and shall exist as though such voidable transfer had never been made to [Finova].
Contrary to the assertions of counsel for Finova at oral argument, the Deed of Trust granted to Finova on the 8.5 Acres in conjunction with the amendment of the ISI Loan in 1995 does not contain a comparable provision, as found by the ISI court. " [T]here is no clawback provision in the deed of trust; even in the lengthy motion for reconsideration that proposition was not challenged." Request for Judicial Notice in Support of Response to Finova Capital Corporation's Motion for Summary Judgment, Ex. 6, p. 4.
In addition to challenging the fairness of the clawback provision, the Jacobsons and the Johnsons asserted that the Guaranties were unconscionable, in particular because they contain the following broad waiver of defenses:
The undersigned waives any defense arising by reason of any disability or other defense of Borrower or by reason of the cessation from any cause whatsoever of the liability of Borrower or by reason of any act or omission of Lender or others which directly or indirectly results in or aids the discharge or release of Borrower or any Indebtedness or any security in respect thereof by operation of law or otherwise. The undersigned waives any and all suretyship defenses and defenses in the nature thereof. . . . The obligations hereunder shall be enforceable without regard to the validity, regularity or enforceability of any of the Indebtedness or any of the documents related thereto, any other guaranty of the Indebtedness or any collateral security documents securing any of the Indebtedness or securing any other guaranty of the Indebtedness. No exercise by Lender of, and no omission of Lender to exercise, any power or authority recognized herein and no impairment or suspension of any right or remedy of Lender against Borrower, any other guarantor, maker or endorser or any collateral security shall in any way suspend, discharge, release, exonerate or otherwise affect any of the undersigned's obligations hereunder or any collateral security furnished by the undersigned or give to the undersigned any right of recourse against Lender. The undersigned specifically agrees that the failure of Lender: (a) to perfect any lien on or security interest in any property heretofore or hereafter given by Borrower or any guarantor, maker or endorser to secure payment of the Indebtedness or of any guaranty of the Indebtedness, or to record or file any document relating thereto or (b) to file or enforce a claim against the estate (either in administration, bankruptcy or other proceeding) of Borrower, any guarantor, maker or endorser, shall not in any manner whatsoever terminate, diminish, exonerate or otherwise affect the liability of the undersigned hereunder. The bankruptcy court granted summary judgment to Finova on
the third party claims. The Jacobsons appealed (Appeal No. AZ-06-1130), as did Mr. Johnson (Appeal No. AZ-06-1143).
Mrs. Johnson is deceased.
E. Finova's Right to Attorneys' Fees and Costs Against the Jacobson Trust
After summary judgment was entered in its favor in the Declaratory Judgment Action, Finova moved, as the prevailing party, for an award of attorneys' fees and expenses in the total amount of $140,854.89, against the Jacobson Trust, pursuant to both Rule 54(d)(2) of the Federal Rules of Civil Procedure and § 12-341.01 of the Arizona Revised Statutes (" Fee Motion"). The Jacobson Trust did not oppose the Fee Motion. Notwithstanding the absence of objection, the bankruptcy court denied the Fee Motion. Finova appealed (Appeal No. AZ-06-1225).
II. JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § § 1334 and 157(b)(1) and (b)(2). We have jurisdiction under 28 U.S.C. § 158(c).
III. ISSUES
(A) Whether the bankruptcy court erred in finding that Finova had a secured interest in and a right superior to the interest and right of the Jacobson Trust in the 8.5 Acres Proceeds.
(B) Whether the bankruptcy court erred in finding that the Jacobsons and the Johnsons were personally liable to Finova, through personal guaranties, on the corporate debt of ISI.
(C) Whether the bankruptcy court erred in denying Finova's unopposed motion for attorneys' fees and costs against the Jacobson Trust.
IV. STANDARDS OF REVIEW
We review summary judgment orders de novo. Tobin v. San Souci Ltd. P'ship (In re Tobin), 258 B.R. 199, 202 (9th Cir. BAP 2001). Viewing the evidence in the light most favorable to the non-moving party, we must determine " whether there are any genuine issues of material fact and whether the trial court correctly applied relevant substantive law." Id.
We review interpretations of state law de novo. In re Kirkland, 915 F.2d 1236, 1238 (9th Cir. 1990). Unless the Code provides otherwise, we must apply state law when adjudicating a dispute arising from a contract claim. Rubenstein v. Ball Bros., Inc. (In re New England Fish Co.), 749 F.2d 1277, 1280 (9th Cir. 1984). We apply the law that a court of the forum state would apply in deciding questions of state law. Id. at 1281. When interpreting state law, we are bound by the decisions of the highest state court. Kirkland, 915 F.2d at 1239. In the absence of such a decision, we use intermediate appellate court decisions and related statutes, treaties, and restatements as guidance to predict how the highest state court would decide the issue. Id. If we do not have convincing evidence that the highest court of the state would decide differently, we must follow the decisions of the state's intermediate courts. Id.
An award of attorneys' fees under A.R.S. § 12-341.01 is discretionary with the court; we review an order denying such fees for an abuse of discretion. Newbery Corp. v. Fireman's Fund Ins. Co., 95 F.3d 1392, 1405 (9th Cir. 1996).
V. DISCUSSION
A. Appeal of the Bankruptcy Court's Rulings Regarding the Parties' Interests in and Rights to the 8.5 Acres Proceeds (Appeal Nos. AZ-06-1129 and AZ-06-1330)
1. The bankruptcy court erred in finding that Finova held an interest in and right to the 8.5 Acres Proceeds superior to the Jacobson Trust.
Like the bankruptcy court, we have the unenviable task of unraveling the factual, procedural and legal tangles created by the parties and their counsel with respect to the parties' interests in and rights to the 8.5 Acres Proceeds. It has not been, as the record and the briefs indicate, easy.
As the bankruptcy court noted, the dispute before us centers on competing interests in and rights to the 8.5 Acres Proceeds. Finova and the Jacobson Trust each contends that it holds the superior interest in and right to the 8.5 Acres Proceeds. Guided by equitable concerns, the bankruptcy court crafted a unique resolution. Applying § § 550, 502(d) and 502(h) to the facts, the bankruptcy court determined that Finova regained its secured interest in the 8.5 Acres Proceeds because it held such a secured interest in the 8.5 Acres prior to the petition dates of the ISI and JWJ bankruptcies, thereby trumping the interest and rights of the Jacobson Trust with respect to the 8.5 Acres Proceeds.
We acknowledge that neither the JWJ Trustee nor Finova is blameless in the machinations in the ISI and JWJ bankruptcy cases with regard to the 8.5 Acres. Nor are we completely sympathetic to the beneficiaries of the Jacobson Trust, in light of their passivity with respect to Mr. Jacobson's transfers of the 8.5 Acres as his needs dictated. We recognize that we must apply the law to the facts before us, mindful that bankruptcy courts are bound to apply a code of law and do not have a roving mandate to do equity. Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206-07, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988). Given the facts of the case and the applicable law, we determine that Finova does not have an interest in and right superior to the rights of the Jacobson Trust to the 8.5 Acres Proceeds.
When a trustee recovers an avoidable transfer of property from a creditor pursuant to § 550, that creditor is entitled, under § 502(h), to assert a claim against the estate, the same as if such claim had arisen prior to the petition date. Verco Indus. v. Spartan Plastics (In re Verco Indus.), 704 F.2d 1134, 1139 (9th Cir. 1983); Cohen v. Eiler (In re Cohen), 305 B.R. 886, 898 (9th Cir. BAP 2004); Southmark Corp. v. Schulte, Roth & Zabel, L.L.P., 242 B.R. 330, 341 (N.D. Tex. 1999), aff'd in part, 239 F.3d 365 (5th Cir. 2000). Specifically, § 502(h) provides that:
[a] claim arising from the recovery of property under . . . [§ 550] of this title shall be determined, and shall be allowed under subsection (a), (b), or (c) of this section, or disallowed under subsection (d) or (e) of this section, the same as if such claim had arisen before the date of the filing of the petition.
Emphasis added.
In other words, a creditor gains the right to assert a § 502(h) claim if the trustee requires the creditor to repay or return a payment received during the preference or fraudulent conveyance period. Verco, 704 F.2d at 1138 (quoting Misty Mgmt. Corp. v. Lockwood, 539 F.2d 1205, 1214 (9th Cir. 1976)); Cohen, 305 B.R. at 898; In re Gurley, 311 B.R. 910, 918-19 (Bankr. M.D. Fla. 2001). Because the creditor loses the value of the payment or property received, the obligation previously satisfied by the payment is revived. Gurley, 311 B.R. at 918; see also Verco, 704 F.2d at 1138 (quoting Misty Mgmt. Corp. v. Lockwood, 539 F.2d at 1214, that " a transferee guilty of fraudulent behavior may nevertheless prove a claim against a bankruptcy estate, once he returns the fraudulently conveyed property to the estate . . . [as a] rule to the contrary would allow the estate to recover the voidable conveyance and to retain whatever consideration it had paid therefor . . . [thereby creating] a result [that] would clearly be inequitable.").
The creditor does not have an automatically allowable claim against the estate, however. Under § 502(d), unless the creditor returns the avoided transfer to the estate, the court will disallow the claim. 11 U.S.C. § 502(d); Verco, 704 F.2d at 1139 (stating that " [a] claim is not allowable under 11 U.S.C. § 502(d) until after the property has been surrendered to the estate.").
Where such a claim is allowable, the creditor holds a claim as if it existed at the time the debtor filed its bankruptcy petition, even if the trustee moves to avoid and recover the transfer after the filing of the petition. Verco, 704 F.2d at 1139 (quoting 3 Collier on Bankruptcy ¶ 502.08 n.6 (15th ed. 1982), that " 'where a claim is allowable as provided in [§ 502], its status is as a claim in existence on the date of the filing of the petition regardless of when, after the petition, the trustee has taken the necessary action and recovered.'"); see also Fleet Nat'l Bank v. Gray (In re Bankvest Capital Corp.), 375 F.3d 51, 69 (1st Cir. 2004)(the avoidance and recovery of the transfer " restores the original claim, with the transferee's status becoming that of the holder of a prepetition claim existing at the time of the filing of the debtor's petition."); In re Toronto, 165 B.R. 746, 754 (Bankr. D. Conn. 1994)(when the trustee recovers property pursuant to § 550, the " transferee receiving a prohibited transfer is returned to its pre-transfer status"); Aargus Polybag Co. v. Commonwealth Edison Co. (In re Aargus Polybag Co. ), 172 B.R. 586, 589 (Bankr. N.D.Ill. 1994)(" The effect of § 502(h) is to restore the creditor to the status it would have had if the avoided payment had not been made."); Allied Cos., Inc. v. Broughton Foods Co. ( In re Allied Cos., Inc.), 155 B.R. 739, 744 (Bankr. S.D. Ind. 1992) (" [A]lthough a creditor did not have a claim at the time of bankruptcy because its claim had been satisfied by a preferential payment, subsequent avoidance of the payment relates back to the time before bankruptcy, so the claim is deemed to have been unpaid at the time the petition was filed.") The claim takes on the characteristics of the original claim, including its secured status. Bankvest, 375 F.3d at 67.
Both Finova and the JWJ Trustee ask us to uphold the bankruptcy court's application of § 502(h) to the facts of this case. This we cannot do, as the bankruptcy court erroneously applied § 502(h) to the facts at hand.
We must interpret § 502(h) according to its terms. Busseto Foods, Inc. v. Laizure (In re Laizure), 349 B.R. 604, 607 (9th Cir. BAP 2006)(quoting Lamie v. U.S. Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004)). Section 502(h), by its terms, only allows the creditor's claim to take on its original characteristics as of the petition date. Verco, 704 F.2d at 1139.
Finova does not hold a right superior to that held by the Jacobson Trust in the 8.5 Acres Proceeds because, contrary to the bankruptcy court's finding, Finova did not obtain its Deed of Trust Lien on the 8.5 Acres until after JWJ filed its bankruptcy petition. The bankruptcy court mistakenly determined that Finova was a creditor secured by the 8.5 Acres prior to the filing of both the JWJ and ISI bankruptcies. However, when ISI entered into the ISI Loan with Finova, the assets securing the ISI Loan did not include the 8.5 Acres. Finova did not obtain its security interest in the 8.5 Acres until a year after JWJ filed its chapter 11 bankruptcy petition; JWJ filed for chapter 11 bankruptcy protection in July 1994, and Finova obtained its Deed of Trust Lien in the 8.5 Acres, through the amendment to the ISI Loan, in March 1995. Thus, Finova's secured status does not relate back to the date of filing of the JWJ bankruptcy petition; at the time JWJ filed for bankruptcy protection, Finova did not have a security interest in the 8.5 Acres.
This is not to say that Finova does not have an unsecured claim under § 502(h) against the JWJ estate. See Laizure, 349 B.R. at 607. In fact, it appears Finova did file an unsecured claim, which was resolved in an overall settlement with the JWJ Trustee that included the JWJ/Finova Settlement approved by the bankruptcy court. Motion for Approval of Amended Compromise Agreements (ISI and Finova), pp. 4-5.
In addition, Finova gave up its security interest in the 8.5 Acres. In the Disbursement Order, Finova explicitly relinquished and agreed to release its security interest in the 8.5 Acres in exchange for full payment on its claim against ISI. Specifically, the Disbursement Order stated that, effective immediately upon the payment of Finova's claim by ISI,
In its October 21, 2004, decision on the motion to approve the proposed settlement agreement among ISI, JWJ and Finova, the ISI court pointed out that Finova did not execute the documents releasing its lien as required under the Disbursement Order.
Finova's security interest in the remaining collateral . . . shall be released and extinguished . . . [and that] Finova shall execute and deliver to [ISI] any and all documents submitted to it for execution which are reasonably necessary so as to effectuate the release of its security interest in the Collateral (and in certain real property [the 8.5 Acres] not owned by [ISI] which was provided to Finova as additional security under the Loan Agreement).
Emphasis added.
Under the ISI Settlement, Finova further failed to assert or even mention its alleged security interest in the 8.5 Acres. Finova merely claimed a security interest in the remaining ISI Sale Proceeds to secure its contingent claim should the JWJ Trustee be successful in his avoidance and recovery action against Finova. In fact, the ISI Settlement expressly provided that, except for the modifications contained therein, " all other terms and conditions of the Disbursement Order . . . shall remain in full force and effect."
All of these circumstances demonstrate that Finova never held a secured interest in the 8.5 Acres as of the date of the filing of the JWJ bankruptcy petition, entitling it to a right superior to that of the Jacobson Trust in the 8.5 Acres Proceeds. The later Deed of Trust Lien that Finova did hold was relinquished under the terms of the Disbursement Order.
At oral argument, Finova argued that any ownership interest in the 8.5 Acres that the Jacobson Trust acquired through foreclosure of the Continental Trust Deed should be subordinated to Finova's interest in the 8.5 Acres Proceeds, based on Continental's 1995 agreement to subordinate the priority of the Continental Trust Deed to the Deed of Trust Lien. This argument fails because we have determined, consistent with the bankruptcy court's decision denying Finova's motion for summary judgment in the Declaratory Judgment Action, that Finova released the Deed of Trust Lien. It would not be appropriate to subordinate the Jacobson Trust's interest in the 8.5 Acres Proceeds to a nonexistent lien.
2. The bankruptcy court erred in entering the JWJ Trustee Judgment.
As Finova does not have an interest in or right to the 8.5 Acres Proceeds, so the JWJ Trustee does not have an interest in or right to the 8.5 Acres Proceeds. The JWJ Trustee relinquished the estate's interest in and right to the 8.5 Acres when he entered into the Jacobson Trust/JWJ Trustee Settlement whereby he relinquished the estate's claims against the Jacobson Trust in exchange for a $375,000 payment from the Jacobson Trust.
Whatever rights the JWJ Trustee may have are derivative of Finova's interest in and right to the 8.5 Acres Proceeds, which we have determined do not exist. The JWJ Trustee attempted to recapture the estate's stake in the 8.5 Acres Proceeds through the JWJ/Finova Settlement in which Finova agreed to share a percentage of its recovery in the 8.5 Acres Proceeds. As Finova has failed to establish its interest in and right to the 8.5 Acres Proceeds and thereby recover any of the 8.5 Acres Proceeds, the JWJ Trustee has no corresponding interest or right.
3. The bankruptcy court did not provide adequate factual findings or analysis to support its ruling on equitable grounds.
Both Finova and the JWJ Trustee argue that we should uphold the bankruptcy court's rulings on their interests in and rights to the 8.5 Acres Proceeds on equitable grounds. We decline to do so.
An equitable lien is " the right to have a fund or specific property applied to the payment of a particular debt." United States v. Adamant Co., 197 F.2d 1, 10 (9th Cir. 1952). A court of equity may imply and declare a lien based on " the fundamental maxims of equity . . . out of general considerations of right and justice as applied to the relationship of the parties and the circumstances of their dealing." Id., (quoting Cleveland Clinic Found. v. Humphrys, 97 F.2d 849, 856 (6th Cir. 1938)).
A court looks to state law in determining whether a party has a valid equitable lien in property. Trust Corp. of Mont. v. Patterson (In re Copper King Inn, Inc.), 918 F.2d 1404, 1407 (9th Cir. 1990)(" State law controls the validity and effect of liens in the bankruptcy context."); In re Dean & Jean Fashions, Inc., 329 F.Supp. 663, 666 (W.D. Okla. 1971)(" Whether an equitable lien exists at all is a question to be determined in accordance with state law."). In Arizona,
[a]n equitable lien is a right over real property constituting an encumbrance, so that the real property itself may be proceeded against in an equitable action and either sold or sequestered upon proof of a contract out of which the lien could grow or of a duty on the part of the holder so as to give the other party a charge or a lien on it.
Coventry Homes, Inc. v. Scottscom P'ship, 155 Ariz. 215, 745 P.2d 962, 965 (Ariz.Ct.App. 1987).
An equitable lien may arise when a party can, in an equity proceeding, reach the property of another for a claim on the ground that the latter would be unjustly enriched. Byers v. Wik, 169 Ariz. 215, 818 P.2d 200, 209 (Ariz.Ct.App. 1991)(quoting Restatement (First) of Restitution § 161 (1937)); Coventry, 745 P.2d at 965 (" An equitable lien, when imposed to prevent unjust enrichment, is a form of constructive trust."). Alternatively, " [a]n equitable lien may arise from express contract where the parties indicate an intent to charge or appropriate particular property as security for an obligation." Kalmanoff v. Weitz, 8 Ariz.App. 171, 444 P.2d 728, 729 (Ariz.Ct.App. 1968). In such a case, the parties' intentions, not the form of the contract, control. Id.; City of Glendale v. Arizona Sav. & Loan Ass'n, 2 Ariz.App. 379, 409 P.2d 299, 301 (Ariz.Ct.App. 1965)(stating that, in Arizona, " the existence of an equitable lien is determined by the intention of the contracting parties as manifested in the contract taken as a whole.").
There is no evidence in the record of a contract between Finova and the Jacobson Trust through which the Jacobson Trust intended to grant Finova a security interest in the 8.5 Acres. There likewise is no evidence in the record of any intent by the Jacobson Trust to grant Finova a security interest in the 8.5 Acres.
The bankruptcy court apparently felt that it would be inequitable to prefer the rights of the Jacobson Trust over Finova to the 8.5 Acres Proceeds, based on the bankruptcy court's concerns over the manipulations of ownership of the 8.5 Acres engineered by Mr. Jacobson and Mr. Johnson, and Mr. Jacobson's felonious conduct. However, the bankruptcy court's summary judgment findings set forth neither sufficient facts, nor an analysis of such facts, adequate to justify the imposition of an equitable lien for Finova's benefit on the 8.5 Acres Proceeds at the expense of the Jacobson Trust and its beneficiaries.
The Jacobson Trust paid $375,000 to the JWJ Trustee to settle JWJ estate claims with respect to the Jacobson Trust and the 8.5 Acres, and the Jacobson Trust was assigned the interest it foreclosed in the Continental Trust Deed only after Continental was paid $1,125,000, plus accrued interest at 8%. The assertion by Finova and the JWJ Trustee at oral argument that the Jacobson Trust paid nothing for its interest in the 8.5 Acres is not supported by the record.
At oral argument, Finova asserted that the Deed of Trust, like the Guaranties, included a " clawback" provision that reinstated the Deed of Trust Lien after its release, when Finova paid the JWJ/Finova Adversary judgment to the JWJ Trustee. As discussed above, the " clawback" provision of the Guaranties clearly provides that if a payment received by Finova is required to be repaid to a bankruptcy trustee, the obligations of the guarantors are revived and continue as if such payment had not been received by Finova. There is no comparable language in the Deed of Trust. The Deed of Trust language cited by Finova in support of its " clawback" argument comes primarily from section 4.4 of the Deed of Trust (" Rights, Powers and Remedies Cumulative; Waiver"). Section 4.4(c) specifically provides that the obligations under the Deed of Trust will continue " unless expressly released and discharged in writing by" Finova. Declaration of Jeffrey D. Weiss in Support of Finova's Motion for Summary Judgment, Ex A, p. 30.
Such express written release was provided by Finova when it stipulated to the terms of the Disbursement Order. Accordingly, we agree with the ISI court and the bankruptcy court that Finova released the Deed of Trust Lien, and we agree with the ISI court that there is no " clawback" provision in the Deed of Trust comparable to the explicit " clawback" provision contained in the Guaranties. The language of the Deed of Trust cited by Finova does not support the imposition of an equitable lien on the 8.5 Acres Proceeds.
B. Appeals of Summary Judgments in Favor of Finova as to the Personal Liability of the Jacobsons and the Johnsons on the Corporate Debts of ISI
The Jacobsons and the Johnsons advance nearly identical arguments against the enforceability of the Guaranties as to their personal liability. They contend, in essence, that, because the terms of the Guaranties - specifically, the waiver of defenses, in addition to the " clawback" provision - are unconscionable, the Guaranties are unenforceable, thereby extinguishing their liability on the corporate debt of ISI.
The Jacobsons and the Johnsons characterize the Guaranties as adhesion contracts, which involve inequalities in bargaining power, resulting in unfair pressure on the alleged oppressed parties to agree to the terms of a contract without an opportunity to negotiate them. See Broemmer v. Abortion Servs. of Phoenix, Ltd., 173 Ariz. 148, 840 P.2d 1013, 1015 (Ariz. 1992). The Jacobsons and the Johnsons argue that because they had no chance to negotiate the terms, nor understood the terms of the Guaranties that waived all of their remedies against Finova, and because Finova was in a position of superior bargaining power due to its sophistication in business, the Guaranties are both unreasonable and unconscionable. As such, they assert, the Guaranties cannot be enforced.
Mr. Johnson additionally argues that Finova must first seek recovery against ISI or foreclose on the 8.5 Acres before seeking recovery against him. As Finova points out, it actually first tried to recover from ISI, but could not recover in full, before turning to the Johnsons.
The Jacobsons and the Johnsons largely ground their arguments in contract concepts used in consumer, not commercial, contexts. There is no basis in the record to determine that the ISI Loan represented anything other than a substantial commercial business transaction rather than a consumer transaction. Stanley v. Klopp, Inc., 510 F.Supp. 807, 810 (E.D. Pa. 1981)(" Although commercial contracts can be unenforceable in whole or in part for unconscionability, it would be improper to borrow, without differentiation, concepts developed to protect consumers and employ them in favor of one commercial party over another."). Commercial contracts rarely are found to be unconscionable, though they could be deemed so. Id.
We find that neither the terms of the Guaranties nor the dealings surrounding the Guaranties render the Guaranties so unconscionable as to make them unenforceable for the following reasons.
First, under Arizona law, a party can agree to waive its guaranty defense rights by contract. Data Sales Co. v. Diamond Z Mfg., 205 Ariz. 594, 74 P.3d 268, 272 (Ariz.Ct.App. 2004). The appellate court in Data found that there is no Arizona case law addressing this issue. Id. Thus, the appellate court in Data reviewed and applied the Restatement (Third) of Suretyship & Guaranty (1996) (" Restatement") in its analysis. Data, 74 P.3d at 272 (stating that Arizona courts will follow the Restatement of the Law when applicable, where there are no relevant Arizona decisions); accord First Nat'l Bank of Ariz. v. Bennett Venture, Ltd., 130 Ariz. 562, 637 P.2d 1065, 1067 (Ariz.Ct.App. 1981). In Data, the appellant had executed a continuing guaranty, guaranteeing payments under a lease assumed by another company, but argued that it could not consent, in advance, to modifications to the lease. The Data court looked to Restatement § 48, which stated that the guarantor could consent in advance to a waiver of its rights to a discharge of the subject obligation. Data, 74 P.3d at 272. Under Restatement § 48, consent may be express or implied from the circumstances. Id. at 272-73. If express, the waiver may be effectuated by either specific or general language indicating that the guarantor waives defenses in the guaranty. Id. A comment to the Restatement also states that a guarantor can waive any defenses as stated in the guaranty. Id. at 273. Applying the Restatement, the Data court found that the appellant could and did expressly waive its defenses to the guaranty. Id. at 274.
Here, the Guaranties explicitly state that the signatories to the loan agreement " [waive] any and all suretyship defenses and defenses in the nature thereof" and that the " obligations [therein] shall be enforceable without regard to the validity, regularity or enforceability of any of the Indebtedness or any of the documents relating thereto." Answer to Complaint and Third-Party Claims, Ex B, pp. 3-4 and Ex C, pp. 3-4. The Guaranties even contain a provision that states that the signatories warrant and agree " that the waivers set forth in this Continuing Guaranty are made with full knowledge of their significance and consequences, and that under the circumstances the waivers are reasonable and not contrary to public policy or law." Emphasis added. Thus, by signing the Guaranties, the Jacobsons and the Johnsons expressly waived their guaranty defenses. Answer to Complaint and Third-Party Claims, Ex B, p. 6 and Ex C, p. 6.
Second, the Guaranties clearly and unambiguously provide for a waiver of defenses. " Agreements which are clear and unambiguous will be enforced according to their terms, and words used will be given their normal meaning." Horizon Resources Bethany Ltd. v. Cutco Industries, Inc., 180 Ariz. 72, 881 P.2d 1177, 1182 (Ariz.Ct.App. 1994). The waiver language in the Guaranties clearly states that the signatories " [waive] any and all suretyship defenses and defenses in the nature thereof." There is nothing confusing or unclear in that language. At oral argument, counsel for the Jacobsons agreed that the language of the Guaranties is clear.
Third, contrary to assertions of the Johnsons and the Jacobsons, they had opportunities to negotiate the terms of the Guaranties. As Finova points out, changes had been made to the ISI Loan, at the request of the Borrower, which evidences that the Johnsons and the Jacobsons had the opportunity to negotiate terms. There is no evidence in the record tending to indicate that the Johnsons or the Jacobsons ever attempted to negotiate changes to the clear provisions of the Guaranties, as conceded by counsel for the Jacobsons at oral argument. The Johnsons and Jacobsons even ratified the ISI Loan by pledging additional collateral, i.e., the 8.5 Acres, in the amendment to the ISI Loan. We do not find the terms of the Guaranties unreasonable or unconscionable in the context of the ISI Loan transaction.
C. The Bankruptcy Court's Denial of Finova's Request for Attorneys' Fees and Expenses Against the Jacobson Trust
1. Finova is no longer the prevailing party in its dispute against the Jacobson Trust.
Following entry of summary judgment in its favor and against the Jacobson Trust on the issue of which entity had the superior interest in and claim to the 8.5 Acres Proceeds, Finova filed its Fee Motion seeking to recover its attorneys' fees and expenses against the Jacobson Trust. Because we have reversed the summary judgment with respect to which the attorneys' fees were requested, Finova no longer has a claim to attorneys' fees against the Jacobson Trust as a prevailing party.
2. The bankruptcy court did not err in denying Finova's request for attorneys' fees and expenses against the Jacobson Trust.
Finova asserted the right to attorneys' fees and expenses pursuant to Rule 54(d)(2) of the Federal Rules of Civil Procedure and § 12-341.01 of the Arizona Revised Statutes.
Finova asserts that the bankruptcy court erred when it denied the Fee Motion in the absence of an objection by the Jacobson Trust. Fed.R.Civ.P. 54(d)(2) merely states the procedure for bringing an attorneys' fee claim to the court's attention. It does not confer a substantive right to attorneys' fees.
Arizona Revised Statutes § 12-341.01 provides in relevant part: " In any contested action arising out of a contract, express or implied, the court may award the successful party reasonable attorney fees." Emphasis added. However, the bankruptcy court did not grant Finova summary judgment against the Jacobson Trust based on any contract.
The basis of the bankruptcy court's summary judgment ruling was a remedy crafted by the court pursuant to the Bankruptcy Code, i.e., recognition of Finova's claim in the JWJ case which arose pursuant to the interplay of § 550 and § § 502(d) and (h), when Finova paid the JWJ Trustee the full amount of the judgment in the JWJ/Finova Adversary, and in light of equitable considerations.
Even had the bankruptcy court found a contractual basis for awarding Finova the superior interest in the 8.5 Acres Proceeds, no contract existed between Finova and the Jacobson Trust. The deed of trust under which Finova asserted its right to the 8.5 Acres Proceeds was granted by the Jacobsons personally.
Finally, despite Finova's contentions otherwise, the bankruptcy court adequately articulated its reasons for denying the Fee Motion. The appropriate factors to be considered in an award of attorneys' fees under A.R.S. § 12-341.01 are found in Newbery Corp. v. Fireman's Fund Ins. Co., 95 F.3d 1392, 1405-06 (9th Cir. 1996):
The Arizona Supreme Court has outlined six factors which courts should use in determining whether to grant attorneys' fees and costs. The factors are (1) whether the unsuccessful party's claim or defense was meritorious; (2) whether the litigation could have been avoided or settled and the successful party's efforts were completely superfluous in achieving that result; (3) whether assessing fees against the unsuccessful party would cause an extreme hardship; (4) whether the successful party prevailed with respect to all the relief sought; (5) whether the legal question was novel and whether such claim or defense has previously been adjudicated in this jurisdiction; and (6) whether the award would discourage other parties with tenable claims or defenses from litigating or defending legitimate contract issues for fear of incurring liability for substantial amounts of attorneys' fees.
Citing Associated Indemnity Corp. v. Warner, 143 Ariz. 567, 694 P.2d 1181, 1184 (1985).
An award of attorneys' fees under A.R.S. § 12-341.01 is discretionary based upon an application of the above factors. It is clear from the record that the bankruptcy judge did consider at least some of the required factors. Of particular import, the bankruptcy court expressed its concerns over the second and third factors.
As to whether the litigation could have been avoided or settled and the successful party's efforts were superfluous in achieving the result, the bankruptcy court stated:
. . . I'm trying to be diplomatic here, but I guess I'll have to be blunt. I'll put it this way; I think Finova might have avoided a lot of the litigation that they've brought into this Court...had they been a little more thoughtful sometime in the past.
. . .
. . . But I guess in a simple sense, I'm saying to some extent, at least preliminarily, I think Finova has to bear some of the burden here, and then maybe that I don't award 'em any fees.
Hearing Transcript (May 16, 2006), pp. 20-21.
The bankruptcy court also noted that Finova did not prevail against the Jacobson Trust on any theory it put forward:
Let me - let me ask a blunt question. I'll apologize for it because it may be perceived as a little rude. You know, to some extent the ruling came out and is somewhat independent of anything that anybody argued, and so should I award fees to Finova for something that, in a simple sense, I kind of had to spade out myself . . . without any help from - your law firm?
Id. at p. 17.
As to whether assessing fees against the Jacobson Trust would cause an extreme hardship, the bankruptcy court pointed out that the impact of a fee award would be on the beneficiaries of the Jacobson Trust: " [I]f I award Finova fees, technically that comes from the beneficiaries, not from the parties that Finova contracted with." Id. at p. 19. The bankruptcy court articulated that imposing the award on the beneficiaries of the Jacobson Trust would be punitive under the facts of this case. Clearly, a punitive award would constitute an extreme hardship, even without reference to or evaluation of the relative financial positions of the parties.
Based on the foregoing, the bankruptcy court did not abuse its discretion in denying Finova the right to collect attorneys' fees against the Jacobson Trust pursuant to A.R.S. § 12-341.01.
VI. CONCLUSION
The bankruptcy court erred in granting summary judgment in favor of Finova and against the Jacobson Trust on the issue of which entity had the superior interest in the 8.5 Acres Proceeds. Because Finova is not entitled to summary judgment, the bankruptcy court also erred when it entered the judgment in favor of the JWJ Trustee on its derivative interest in the 8.5 Acres Proceeds. In addition, to the extent the bankruptcy court granted Finova or the JWJ Trustee summary judgment on equitable grounds, the court did not provide adequate factual findings to support its ruling. We therefore REVERSE and REMAND as to AZ-06-1129 and AZ-06-1330.
The bankruptcy court did not err in granting summary judgment in favor of Finova on its third party guaranty claims against the Jacobsons and the Johnsons. We therefore AFFIRM as to AZ-06-1130 and AZ 06-1143.
Finally, the bankruptcy court did not err in denying Finova's Fee Motion. We AFFIRM as to AZ-06-1225.