Opinion
Case No.: 1:19-bk-12102-MT
2021-02-19
IN RE: HAWKEYE ENTERTAINMENT, LLC Debtor(s).
Sandford L. Frey, Leech Tishman Fuscaldo & Lampl Inc, Pasadena, CA, for Debtor(s).
Sandford L. Frey, Leech Tishman Fuscaldo & Lampl Inc, Pasadena, CA, for Debtor(s).
NOTICE OF MEMORANDUM DECISION ON DEBTOR'S MOTION FOR AN AWARD OF ATTORNEY'S FEES (Dkt. No. 232)
Maureen A. Tighe, United States Bankruptcy Judge
On July 17, 2009, Hawkeye Entertainment, LLC (the "Debtor") entered into a lease agreement ("Lease Agreement") with Pax America Development, LLC ("PAX"). Pursuant to the terms of the Lease, the Debtor was entitled to use the first four floors and the basement of a building located at 618 South Spring Street, Los Angeles, California, more commonly referred to as the Pacific Stock Exchange Building (the "Property").
On September 30, 2013, the Debtor filed its first Chapter 11 petition, 1:13-bk-16307-MT ("Prior Bankruptcy Case"), where it sought to assume the Lease Agreement. The landlord at the time was New Vision Horizon, LLC ("New Vision.) The motion to assume the lease was ultimately resolved through a settlement agreement ("Settlement Agreement").
The Property is now owned by Smart Capital, LLC ("Landlord" or "Smart Capital"). There have been ongoing disputes between Smart Capital and Debtor for years. This culminated in Smart Capital's service of a Notice of Default and Three-Day Notice on Debtor. The Debtor responded by filing this second chapter 11 case followed by a motion to assume ("Assumption Motion") the Lease Agreement and Sublease, to deem the Debtor and W.E.R.M. Investment, LLC ("W.E.R.M." or "Sublessor") not to be in breach or default and authorizing the Debtor to enter into a revised sublease with W.E.R.M. (Docket #21)("Assumption Motion"). The Landlord opposed the Assumption Motion, alleging defaults under the Lease Agreement, an inability to provide adequate assurance of future performance and seeking denial of any modification of the sublease. After a lengthy period of discovery, the Court conducted a trial, found that the Debtor was not in default of the Lease, and granted the Assumption Motion.
Before the trial was held on the Assumption Motion, the Debtor brought several motions that were contested: (1) Motion Authorizing the Debtor to Hold Rent Payments in Trust and Excusing or Deeming the Debtor in Compliance with § 365(d)(3) (Dkt. No. 59), (2) Motion Authorizing the Use of the Leased Premises for Religious Service Events Pursuant to § 363 (Dkt. No 81), (3) Motion Authorizing Post-Petition Financing Pursuant to § 364(c) (Dkt. No. 126), and (4) Motion Authorizing the Use of the Leased Premises for Virtual Music Events and Film Shoots Pursuant to § 363 (Dkt. 130) (collectively referred to as "Motions"). All were granted over the Landlord's opposition
Debtor's Counsel now moves for an award of $813,531.97 in fees and costs against the Landlord which the Landlord opposes. The order granting the Assumption Motion in favor of the Debtor was entered on October 27, 2020 (docket # 230.) The motion for fees was then filed on November 6, 2020 (docket #232.) The motion is controlled by Rule 54(d) of the Federal Rules of Civil Procedure, as applied through Federal Rule of Bankruptcy Procedure 7054(a). The parties have submitted numerous exhibits, briefs and declarations and have not requested an evidentiary hearing. The issue will be resolved based on the parties’ written submissions and oral argument.
Basis for Attorney Fees
The general rule is that the prevailing party is not entitled to collect attorney's fees from the losing party. Travelers Cas. & Sur. Co. of Am. v. PG&E, 549 U.S. 443, 448, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007). This default rule can be overcome by an applicable statute or enforceable contract. Id. An otherwise enforceable contract allocating attorney's fees (i.e., one that is enforceable under substantive, non-bankruptcy law) is allowable in bankruptcy except where the Bankruptcy Code provides otherwise. Id.
Does California Law Authorize Fees Here?
Parties may agree to attorney fees and costs through California Code of Civil Procedure §§ 1021 and 1032. CCP § 1021 states in relevant part: "[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; but parties to actions or proceedings are entitled to their costs, as hereinafter provided." Section 1032 (b) then provides that "a prevailing party is entitled as a matter of right to recover costs in any action or proceeding." Costs are then defined in CCP § 1033.5(a) as including "[a]ttorney's fees, when authorized by" contract or statute. Costs may include attorney's fees when authorized by contract, even when the action is not ‘on a contract.’ " In re Mac-Go Corp., 541 B.R. 706, 715 (Bankr. N.D. Cal. 2015) ; see also Asphalt Prof'ls Inc. v. Davis (In re Davis ), 595 B.R. 818, 832 (Bankr. C.D. Cal. 2019).
California Civil Code § 1717 then authorizes attorney's fees and costs 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." While one of the functions of § 1717 is to make uni March 30 at 10 amlateral attorney fee provisions reciprocal, Associated Convalescent Enterprises v. Carl Marks & Co., Inc., 33 Cal. App. 3d 116, 108 Cal.Rptr. 782 (1973), courts also apply § 1717 where attorney fee provisions are allowed for either party to recover. See e.g. Sunnyside Dev. Co., LLC v. Opsys Ltd., 2007 WL 2462141 *1, 2007 U.S. Dist. LEXIS 63865 *2-3 (N.D. Cal. 2007) (the Court applied a § 1717 to a lease agreement that read: "If any Party or Broker brings an action or proceeding involving the Premises to enforce the terms hereof or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. ..."); Turner v. Schultz, 175 Cal. App. 4th 974, 979, 96 Cal.Rptr.3d 659 (2009) ( the Court applied § 1717 "In the event any legal action or arbitration is commenced of any kind or character, to enforce the provisions of this Agreement or to obtain damages for breach thereof, the prevailing party in such action shall be entitled to all costs and reasonable attorney's fees incurred in connection with such action Whether § 1717 applies is based on whether the action or proceeding was "on a contract," not whether the attorney fee provision provides for unilateral or mutual fees. The Ninth Circuit, in Penrod v. AmeriCredit Financial Services, Inc., 802 F.3d 1084 (9th Cir. 2015) detailed the three conditions that must be met before § 1717 applies. First, the action generating the fees must have been an action "on a contract." Second, the contract must provide that attorney's fees incurred to enforce it shall be awarded either to one of the parties or to the prevailing party. Id. And third, the party seeking fees must have prevailed in the underlying action. Id. at 1087-88. Penrod also reaffirmed that even in a bankruptcy proceeding, "under California law, an action is ‘on a contract' when a party seeks to enforce, or avoid enforcement of, the provisions of the contract." Id. at 1088.
Do the Governing Contracts Provide for Attorney Fees?
There are several provisions of the governing contracts that provide some basis for attorney fees in some situations. Section 22.11(q) of the 2009 Lease provides:
In the event that ... either Landlord or Tenant shall institute any action or proceeding against the other relating to the provisions of this Lease or any default hereunder , the party not prevailing in such action or proceeding shall reimburse the prevailing party for its actual attorneys' fees, and all fees, costs and expenses incurred in connection with such action or proceeding, including, without limitation, any post-judgment fees, costs or expenses incurred on any appeal or in collection of any judgment. [emphasis added]
Similarly, Section 17 of the Settlement Agreement provides:
Attorneys’ Fees. Each Party hereto shall bear its own attorneys' fees and costs incurred in connection with the Bankruptcy Proceeding, the State Court Actions and this Agreement and the exhibits entered into in connection with this Agreement. In the event that any Party files or prosecutes any action to enforce or interpret the Agreement, or any action arising out of this Agreement , the prevailing Party in any such action shall be entitled to recover from the non-prevailing Party all reasonable costs and attorneys' fees incurred therein, including, without limitation, the costs and expenses of any expert witnesses.[emphasis added]
The First Amendment to the Lease Agreement entered into in connection with the Settlement Agreement, provides, among other things, as follows:
24. Ratification. Landlord and Tenant hereby ratify and confirm all of the terms and conditions of the [2009] Lease as modified by the First Amendment.
26. Remainder Of Lease Unmodified. Except as set forth in this First Amendment, the parties agree that the [2009] Lease is unmodified and is in full force and effect.
The issues in this bankruptcy case so far have focused on the Lease Agreement and the enforcement of its terms. The Landlord is correct that the Settlement Agreement has not been directly at issue. One important issue is the definition of the phrase "institute any action or proceeding against the other ..." as stated in the Lease Agreement. The second significant interpretation issue is the meaning of "relating to the provisions of this Lease or any default hereunder."
" Action or Proceeding"
There are several "actions or proceedings" that are relevant here, and the parties dispute whether this language applies to them. The first is the notice of default and three-day notice. Then there was the filing of the Debtor's bankruptcy petition and all of the administrative and bankruptcy specific tasks that come with filing bankruptcy. Then there were the four Motions that were brought separately and adjudicated prior to the trial on the Assumption Motion. Most significantly, there was a contested Assumption Motion.
Application of this provision is subject to the "ordinary rules of contract interpretation," which is governed by "the mutual intention of the parties at the time the contract is formed ...." Exxess Electronixx v. Heger Realty Corp., 64 Cal. App. 4th 698, 709, 75 Cal.Rptr.2d 376 (1998) ; Cal. Civ. Code § 1636 ; Bank of the West v. Superior Court, 2 Cal.4th 1254, 1264, 10 Cal.Rptr.2d 538, 833 P.2d 545 (1992). When a contract is reduced to writing, the parties' intention is determined from the writing alone, if possible. Civ. Code, § 1639. The words of a contract are to be understood in their ordinary and popular sense" unless "used by the parties in a technical sense or a special meaning is given to them by usage." Cal. Civ. Code § 1644 ; Lloyd's Underwriters v. Craig & Rush, Inc., 26 Cal.App.4th 1194, 1197–1198, 32 Cal.Rptr.2d 144 (1994) ("We interpret the intent and scope of the agreement by focusing on the usual and ordinary meaning of the language used and the circumstances under which the agreement was made").
California Code of Civil Procedure § 22 defines "action" as an "ordinary proceeding in a court of justice by which one party prosecutes another for the declaration, enforcement, or protection of a right, the redress or prevention of a wrong, or the punishment of a public offense." Federal Rules of Bankruptcy Procedure Rule 9002 defines "action" similarly as "an adversary proceeding or, when appropriate, a contested petition, or proceedings to vacate an order for relief or to determine any other contested matter."
"Proceeding" has different meanings in different contexts. Narrowly, proceeding means an action or remedy before a court. Zellerino v. Brown, 235 Cal. App. 3d 1097, 1105, 1 Cal.Rptr.2d 222 (1991) ; see e.g., People v. Gutierrez, 177 Cal. App. 3d 92, 99-100, 222 Cal.Rptr. 699 (1986) ( Cal. Const., art. I, § 14 gives a right to an interpreter during proceedings "held before a judicial tribunal."); Gibson v. County of Sacramento (1918) 37 Cal. App. 523, 526, 174 P. 935 (1918) ("criminal proceeding" in former Pol. Code, § 4307 "means some authorized step taken before a judicial tribunal against some person" charged with a crime). A broad interpretation of proceeding means "[a]ll the steps or measures adopted in the prosecution or defense of an action." Black's Law Dictionary. A proceeding may also refer to a mere procedural step that is part of the larger action or special proceeding." Lister v. Superior Court, 98 Cal. App. 3d 64, 70, 159 Cal.Rptr. 280 (1979) ; Aldrich v. San Fernando Valley Lumber Co. (1985) 170 Cal. App. 3d 725, 742, 216 Cal.Rptr. 300 (1985) (citing Larkin v. Superior Court, 171 Cal. 719, 154 P. 841 (1916) ) ("A motion in the superior court to dismiss an action for want of prosecution is "[a] good illustration of what is meant by the term ‘proceedings.’ ").
While the meaning of the phrase "proceeding" is traditionally broader than "action," there is several limitations that is explicitly enumerated in the Lease Agreement. First, the words "any action or proceeding" are followed by the words "against the other." This means that not every legal proceeding would fall under this section of the agreement, rather, this section of the Lease Agreement is only applicable to those legal proceedings brought between the parties to this agreement. The provision also indicates that it applies only to a two-party dispute between these parties and not generally to a greater universe of entities. The next limitation is that the proceeding must relate "to the provisions of this Lease or any default" under the lease agreement. If a proceeding between the parties is not based on the terms of the Lease Agreement, then the neither party can recover attorney's fees and costs.
To the extent that the meaning of "proceeding" is similar to "action," this does not render either term superfluous. "Where general words follow specific words in a [contractual provision,] the general words are construed to embrace only objects similar in nature to those objects enumerated by the preceding specific words. Where the opposite sequence is found, i.e., specific words following general ones, the doctrine is equally applicable, and restricts application of the general terms to things that are similar to those enumerated.’ " Barrett v. Superior Court, 222 Cal.App.3d 1176, 1190, 272 Cal.Rptr. 304 (1990) (ejusdem generis doctrine is "an attempt to reconcile an incompatibility between specific and general words" so all words may be "construed together, and no words will be superfluous.") Since the general word "proceeding" follows the more specific term "action," the Court finds that the definition of "proceeding" is akin in nature to contested matters.
Applying the generally accepted definition of "action or proceeding," combined with the California and Federal Rule definitions indicates that a tribunal of some sort must be involved for an event to rise to the level of an action or proceeding under the Lease Agreement.
Notice of Default & Three-day Notice
Here, the Landlord served the Debtor with a notice of default and a three-day notice. This three-day notice is the precursor to an unlawful detainer action. See Code Civ. Proc., § 1161(2) No unlawful detainer claim was ever commenced because the Debtor filed bankruptcy shortly after the three-day notice was served.
Debtor seeks to characterize the three-day notice as the commencement of an action or proceeding especially because it specifically sought a forfeiture of the lease, relying on In re Windmill Farms, Inc., 841 F.2d 1467, 1470 (9th Cir. 1988). It details the efforts it made to respond to the Landlord's default notice and then to convince the Landlord to withdraw the three-day notice or to defer the filing of an unlawful detainer action, concluding that it had no option other than Chapter 11 once it failed in those efforts. The Landlord argues that Debtor could have waited for the unlawful detainer action to be filed and litigated the dispute in the Superior Court. By strategically choosing Chapter 11, it argues that the Debtor lost the ability to characterize this dispute as one permitting fee shifting under the terms of the Lease.
While Windmill Farms prohibited the assumption of a lease under § 365 if the lease had been terminated under non-bankruptcy law prior to the order for relief, it also specifically permitted a determination of whether the termination can be reversed under California's anti-forfeiture provisions. Id. at 1472. This "permits the [trustee] the same opportunities to avoid forfeiture of a lease ... that it would have received under state law absent the bankruptcy proceedings." Id. (citing Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) ). Windmill Farms ordered the bankruptcy court on remand to determine whether the lease, if validly terminated by the landlord, could have been saved from forfeiture by application of California Code of Civil Procedure § 1179, or any other anti-forfeiture provision of California law. The Court specifically stated that if pre-petition forfeiture had been improper, the trustee's assumption of the lease would be proper. Windmill Farms, at 1471 (citing City of Valdez v. Waterkist Corp. (In re Waterkist Corp.) 775 F.2d 1089, 1091 (9th Cir. 1985) ). Thus, Debtor's theory that the bankruptcy filing was its only viable option to respond to the three-day notice is not so. Whether the Debtor defended an unlawful detainer action in the Superior Court or the right to assume the lease in this court, it was entitled to a determination of whether the landlord's forfeiture was valid or not. If the Landlord's assertion of a default and forfeiture claim were found to be invalid, the other considerations of a lease assumption motion under § 365 would proceed. The bankruptcy filing was a strategic choice to which the Debtor was entitled, but not its only choice.
Debtor also argues that the three-day notice should be treated differently than general notices of defaults because it is a necessary part of an unlawful detainer action. The notice of default and three-day notice are required in order to bring an unlawful detainer action. This would likely be considered a proceeding under the broad interpretation; however, the general term follows the specific term. The term "proceeding" in this section of the Lease Agreement must be construed similarly to the definition of the specific term "action" – meaning "proceeding" must be similar in nature to a lawsuit. As the few cases on point discuss, notice of defaults are generally not considered "actions" by themselves.
Generally, courts have not considered notice, by itself, to be considered an "action" or a "proceeding," See e.g. Action Apartment Assn., Inc. v. City of Santa Monica, 41 Cal. 4th 1232, 1250, 63 Cal.Rptr.3d 398, 163 P.3d 89 (2007) (a "notice of eviction is a communication regarding prospective litigation, and, as such, it is not necessarily part of a judicial proceeding"); Wallace v. Busch Entm't Corp., 2012 WL 7005733 *2, 2013 U.S. Dist. LEXIS 11975 * 4 (S.D. Cal. 2013) ("Plaintiff contends that filing a Notice of Change of Address (Doc. 59) should be remove this action from the reach of Rule 41.1.... Plaintiff's notice is not a proceeding."); Chase Manhattan Bank v. Grasso, CV990173244 , 2001 WL 92295, 2001 Conn. Super. LEXIS 111 (Conn. Super. Ct.2001) (The sending of the notice, however, is not a "judicial, administrative, or other action or proceeding against the debtor.").
The California Supreme Court in Lacrabere v. Wise, 141 Cal. 554, 75 P. 185 (1904) found that the service of a three days’ notice to make such payment or deliver possession of the premises is a "condition precedent to the right to commence the [unlawful detainer] proceeding." The California Supreme Court did not refer to this three-day notice as a proceeding; rather, it is merely a prerequisite for commencing an unlawful detainer action. Moreover, "[t]he notice's purpose is to inform the tenant of the breach so the tenant can rationally choose whether to cure the breach and retain possession, quit the property, or contest the allegations." Lee v. Kotyluk, 59 Cal. App. 5th 719, 731, 274 Cal.Rptr.3d 29 (2021). The primary concern being providing the tenant with the opportunity to cure and retain possession. See Fifth & Broadway Partnership v. Kimny, Inc., 102 Cal.App.3d 195, 202, 162 Cal.Rptr. 271 (1980). Similarly, the Second Circuit Court of Appeals found under New York's version of an unlawful detainer action "a § 711 notice is a prerequisite to, rather than a part of, an Article 7 proceeding." Romea v. Heiberger & Assocs., 163 F.3d 111, 117 (2nd Cir. 1998) (citing J.D. Realty Assocs. v. Jorrin, 166 Misc.2d 175, 632 N.Y.S.2d 441, 444 (Civ. Ct. 1995) ("The three-day notice is not a pleading; rather, it is a notice to the tenant of what must be done to forestall a summary proceeding.")
The three-day notice is merely a predicate to an unlawful detainer action. This notice was intended to allow the tenant an opportunity to cure defaults prior to having to defend an unlawful detainer action. If a tenant cures the default within three-days, an unlawful detainer action is likely never filed; thus, there is no underlying action or proceeding to this condition precedent. For the Court to find that a three-day notice constitutes an "action or proceeding" under the Lease Agreement goes against how Courts, from coast to coast, have traditionally viewed similar notices; thereby, making the Debtor's interpretation anything but the "ordinary and popular" meaning. The Court finds that the notice of default and three-day notice cannot be considered an "action or proceeding" according to the terms of the Lease Agreement.
The Commencement of the Bankruptcy Case
The next act following the notice of default was the Debtor's bankruptcy filing. While a bankruptcy case is an "action or a proceeding" the scope of what is "against the other relating to the provisions of this Lease or any default" becomes the issue. The Debtor contends that it was left no other choice but to file bankruptcy in order to protect the Lease Agreement. While there might be benefits provided in the bankruptcy court that are not available in the state court (most notably the automatic stay), the Debtor could have protected its interests in the Lease adequately in the state court.
A bankruptcy proceeding in itself is not a proceeding or action against anyone and the law does not support generalizing all bankruptcy proceedings as arising out of a contract dispute where there has been a contract between the debtor and a creditor, even where that dispute is the precipitating factor for the bankruptcy. The administration of a bankruptcy case is different than "an action or proceeding" because of the variety of the parties involved, their differing objectives, and the various administrative requirements of Chapter 11. In the Debtor's current bankruptcy case, there have been seven proofs of claim filed against the estate which total approximately $2.2 Million. The Landlord asserts that these claims were largely included in the Debtor's first bankruptcy. The Debtor acknowledged that many of these debts are holdover claims from the previous claims but suggest that they were not cured in large part due to litigation that occurred in the first bankruptcy case eating away at what could be paid out to claim holders. An issue in the current case is how the Debtor is going to resolve these debts.
The Debtor has listed numerous other creditors and will need to confirm a plan dealing with all creditors, not just Smart Capital. Additionally, the bankruptcy case would not in and of itself be considered "on the contract" as required by § 1717 because the bankruptcy case could have proceeded without the Court ever addressing the contents of the Lease Agreement, and confirming a Chapter 11 plan would not necessarily require interpreting the Lease Agreement. The Court finds that the filing of a bankruptcy petition itself and the ensuing general activities do not satisfy the requirements laid out in the Lease Agreement to be entitled attorney fees.
Assumption Motion
The central event that does qualify as an "action or event" is the Assumption Motion._A legal proceeding is any proceeding in which a law requires the proceeding in order to alter or protect a right, interest, duty, status, or obligation of legal significance"); Zellerino v. Brown, 235 Cal. App. 3d 1097, 1105, 1 Cal.Rptr.2d 222 (1991) ("an action or remedy before a court"). According to this definition, and the definitions previously articulated, a motion within the larger confines of a bankruptcy case would constitute a proceeding even if the Court applied the narrow definition to this term.
Penrod v. AmeriCredit Financial Services, Inc., 802 F.3d 1084 (9th Cir. 2015), provides substantial guidance on the applicability of these Lease provisions in bankruptcy cases. In Penrod, a creditor argued that a proposed chapter 13 plan was not consistent with the creditor's contractual rights and therefore could not be confirmed. The debtor ultimately prevailed, and then sought reimbursement of attorneys' fees under the parties' contract. The Ninth Circuit held that the underlying litigation was indeed an "action on a contract" because the creditor had sought to enforce a claimed contractual right when it objected to confirmation of the chapter 13 plan. Id. at 1088. Since "[t]he only possible source of [AmeriCredit's] asserted right was the contract," and since the only issue in the litigation was whether the relevant contract provision was in fact enforceable under its own terms or was made partially inapplicable in bankruptcy, the debtor had prevailed on a claim "on a contract" for the purposes of § 1717. Id.
In Bos v. Bd. ofTrustees, 818 F. 3d 486, 488 (9th Cir. 2016), a debtor who prevailed in a nondischargeability action brought under 11 U.S.C. § 523(a)(4) for "fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny," sought to recover attorney's fees under a contract against the moving creditor. Id. The Ninth Circuit distinguished its ruling in Penrod where the bankruptcy court was required to determine the enforceability of the agreement and found that the § 523 action against Bos "in no way required the bankruptcy court to determine whether or to what extent the Trust Agreements or the Note were enforceable against Bos, or whether Bos had violated their terms." Id. at 490-91. Rather, the litigation only addressed whether the standard under § 523(a)(4) forbade the debtor from discharging the debts everyone agreed he owed. Id.
Redwood Theaters, Inc. v. Davison (In re Davison), 289 B.R. 716, 724 (B.A.P. 9th Cir. 2003), similarly emphasized the need for an action to concern the enforceability of a contract. The Davison, the Court held that § 1717 was not applicable because the complaint did not contain a breach of contract claim, and the only claim asserted was a nondischargeability claim based on fraud. Id. (relying on Santisas v. Goodin, 17 Cal. 4th 599, 615, 71 Cal.Rptr.2d 830, 951 P.2d 399 (1998).) The distinguishing factor is not the specific relief sought in the bankruptcy action but to what extent contract enforceability determines the outcome of the issue under the Bankruptcy Code.
In re Relativity Fashion, LLC, 565 B.R. 50 (Bankr. S.D.N.Y. 2017) is instructive on distinguishing between actions on a contract and matters unique to bankruptcy in a Chapter 11 context. In Relativity Fashion, a party sought reimbursement of attorney fees and expenses pursuant to a licensing agreement containing a fee shifting clause which they incurred during litigation against a creditor. This litigation took place in the context of a motion to enforce implementation of a plan under 11 U.S.C § 1142. The Court found that the dispute between the parties was "on a contract" for purposes of § 1717 and granted an award for attorney's fees. The court reasoned that although Debtor's motion was brought under § 1142, the sole basis for opposing the motion were the creditor's contractual claims.
The Assumption Motion was anything but a routine motion to assume a lease. After the Landlord filed an opposition to the Assumption Motion, the Court treated this as a contested matter, allowing parties to conduct extensive discovery, and set the matter for a five-day bench trial. Additionally, at the heart of the Assumption Motion are the same substantive issues that would have been addressed at any state court unlawful detainer action – which would have been considered an "action or proceeding." Penrod, Relativity, Redwood, and Bos all illustrate an important principle -- substance should prevail over form. Even if the proceeding is under the rubric of a bankruptcy procedure, the critical question may be to consider how to enforce a contract rather than considerations unique to bankruptcy.
Was the Action or Proceeding On a Contract?
The question of whether an action is "on a contract" is liberally construed by the California courts. Turner v. Schultz, 175 Cal. App. 4th 974, 979, 96 Cal.Rptr.3d 659 (2009). So long as a dispute "involves" a contract, or "arises out of, is based upon, or relates to an agreement by seeking to define or interpret its terms or to determine or enforce a party's rights or duties under the agreement," the dispute is an action "on a contract" for purposes of § 1717. Douglas E. Barnhart, Inc. v. CMC Fabricators, Inc, 211 Cal. App. 4th 230, 241-42, 149 Cal.Rptr.3d 440 (2012). The California Supreme Court has explained that "[s]ection 1717 applies only to actions that contain at least one contract claim," and that "[i]f an action asserts both contract and tort or other noncontract claims, section 1717 applies only to attorney fees incurred to litigate the contract claims." Santisas v. Goodin, 17 Cal. 4th 599, 615, 71 Cal.Rptr.2d 830, 951 P.2d 399 (1998).
While a motion to assume a lease under § 365 inevitably involves a contract, it does not necessarily follow that a motion to assume a lease would inevitably be considered "on a contract" for purposes of § 1717. There are two questions presented in motions to assume leases: 1) was there a default and 2) if there was a default, does the debtor provide the creditor adequate assurance? Determining whether there is a default pursuant to a lease requires courts to decide matters based on the language in a contract between parties while a determination of whether a debtor provided adequate assurance is based largely on bankruptcy law. Thus, cases where a debtor is clearly in default and the only real issue litigated in the motion to assume a lease is whether the debtor provided sufficient adequate assurance may not necessarily be considered a proceeding "on a contract." That is not the case here.
As in Penrod, the Landlord asserted its rights under the controlling contract at issue, the Lease Agreement, the only possible source of its rights. The Court addressed only issues arising from the Lease Agreement, and it did not need to address the issue of adequate assurance because of the conclusion about the Lease. The terms and rights of the parties under the Lease Agreement were central to every aspect of the Assumption Motion. If the Court had been required to address the issue of adequate assurance under § 365(b)(1), there might be more room for disagreement that this motion to assume the lease was solely "on a contract." The Bankruptcy Code was simply a vehicle to resolve what can only be described as a contract dispute. The disputes in the Assumption Motion are more specific and individualized as compared to the more global issues involved in the Debtor's bankruptcy case. These disputes more typically reflect a traditional cause of action whose primary purpose is to resolve claims between parties.
The Landlord seeks to distinguish Penrod stating that how the Lease Agreement was at issue in the Assumption Motion differed from how the contract in Penrod controlled. However, the law surrounding what constitutes "on a contract" is unambiguously broad. "An action is more likely to be found ‘on a contract’ for purposes of [ § 1717 ] if the agreement is broad in scope or if the main thrust of the litigation is based on the contract." Orozco v. WPV San Jose, LLC, 36 Cal. App. 5th 375, 409, 248 Cal.Rptr.3d 623 (2019). "An action (or cause of action) is ‘on a contract’ for purposes of section 1717 if (1) the action (or cause of action) "involves" an agreement, in the sense that the action (or cause of action) arises out of, is based upon, or relates to an agreement by seeking to define or interpret its terms or to determine or enforce a party's rights or duties under the agreement, and (2) the agreement contains an attorney fees clause." Douglas E. Barnhart, Inc. v. CMC Fabricators, Inc, 211 Cal. App. 4th 230, 241-42, 149 Cal.Rptr.3d 440 (2012).
No matter how one characterizes the Assumption Motion, the terms of the Lease Agreement were at the core of this dispute. The entirety of the five-day trial focused on whether the Debtor was in default according to specific terms of the Lease Agreement. The Court never reached the issue of adequate assurance. Even though the remedy here, assuming a lease, is different than it would have been under an unlawful detainer action, the Court still dealt with, at its core, a contractual dispute. See Kachlon v. Markowitz, 168 Cal.App.4th 316, 347, 85 Cal.Rptr.3d 532 (2012) ("In determining whether an action is ‘on the contract’ under section 1717, the proper focus is not on the nature of the remedy, but on the basis of the cause of action.").
Motions Brought Pursuant to 11 U.S.C. §§ 363, 364 & 365
A final point is how the Court should characterize the Motions brought so far in the case. Debtor brought two motions under 11 U.S.C. § 363 to use the Property to host religious services and to allow filming to take place for virtual events as well as a motion to authorize post-petition financing under 11 U.S.C. § 364. Additionally, the Debtor brought a motion pursuant to § 365(d)(3) and § 105 authorizing the Debtor to hold rent payments in trust and excuse or deem the Debtor in compliance with § 365(d)(3). The Landlord unsuccessfully objected to these Motions.
There is no question that there was some overlap between the issues in the § 363 motions and the Assumption Motion; however, there are some important differences. Most notably, the relief sought in the § 363 motions were based solely on bankruptcy law – the Debtor would not have been able to seek or need to seek the relief sought in those motions but for the Bankruptcy Code. The Debtor argues that the § 363 motions would be similar to seeking declaratory relief in a state or federal district court. As the Landlord argued in its objections to these motions, pursuant to Federal Rule of Bankruptcy Procedure 7001, a party seeking declaratory relief must do so through an adversary proceeding, which was never brought here. In the Court's rulings for both § 363 motions, the Court overruled the Landlord's objection on this point because it found that the Debtor did not need to commence an adversary proceeding where the relief sought was solely a determination of ordinary use under § 363(b). The Court went on to apply law as it relates to § 363. While the terms of the lease certainly were consulted, there was no evidentiary hearing and issues of the Debtor's need to use the space for alternative activities during the pandemic were also in play. The Court did not grant declaratory relief here for the Debtor in either of these motions. Any reference to the Lease Agreement was only incidental in order to determine whether relief was appropriate under § 363. The Court was not adjudicating the rights of the parties pursuant to the Lease Agreement at that time.
Similarly, the motion pursuant to § 365(d)(3) and § 105, authorizing the Debtor to hold rent payments in trust and excuse or deem the Debtor in compliance with § 365(d)(3), involved the Lease Agreement; however, any involvement of the terms of the Lease Agreement was minimal. In this motion the Debtor sought to extend time for performance under the timeframe enumerated in the Bankruptcy Code. The Court did not adjudicate the rights of the parties under the Lease Agreement; rather, the Court applied bankruptcy law.
Finally, without the Bankruptcy Code, the Debtor would not have needed to seek relief under 11 U.S.C. § 364 for the Court to approve post-petition financing. It had nothing to do with the Lease Agreement.
The Motions relate more to the global concerns of administering the bankruptcy estate rather than the individualized contractual disputes that were addressed in Assumption Motion. The Court finds that these Motions are not "on a contract" nor do they relate enough to the Lease Agreement to warrant attorney's fees and costs. Accordingly, all fees and costs associated with bringing these Motions are denied. The attorney's fees and costs relating to other discovery motions or motions directly relating to the Assumption Motion are allowable.
Prevailing Party
The final requirement is the Debtor must be the prevailing party to have its fees paid. The determination of "prevailing party" for the purpose of reciprocal attorney's fees in California is guided by the California Supreme Court's decision in Hsu v. Abbara, 9 Cal. 4th 863, 876, 39 Cal.Rptr.2d 824, 891 P.2d 804 (1995) holding "the trial court is to compare the relief awarded on the contract claim or claims with the parties' demands on those same claims. ..." The prevailing party determination is to be made only upon final resolution of the contract claims and only by "a comparison of the extent to which each party has succeeded and failed to succeed in its contentions."
"[T]he party prevailing on the contract shall be the party who recovered a greater relief in the action on the contract." Cal. Civ. Code § 1717(b)(2). Under § 1717 a party "prevails" on a contract claim if the party successfully resists an assertion of contract rights, even if the party does so by arguing "the inapplicability, invalidity, unenforceability, or nonexistence of the same contract." N. Associates v. Bell, 184 Cal.App.3d 860, 865, 229 Cal.Rptr. 305, (1986). Prevailing in a dispute over the claimed application of a contract, where such contract contains a fee provision, is sufficient. This is because the party who unsuccessfully asserted contract rights would have been entitled to fees if it had prevailed in establishing such rights, and under § 1717 that right must be mutual. Santisas v. Goodin, 17 Cal. 4th 599, 611, 71 Cal.Rptr.2d 830, 951 P.2d 399 (1998).
Here the Court found that the Landlord failed to show there was any material default by the Debtor under the terms of the lease and granted the Debtor's motion to assume the lease. Even though the Court did not enter an order at the time stating the Debtor was the prevailing party, there simply is no other way to categorize the prevailing party other than who prevailed on the question of whether the lease was violated. The Debtor successfully refuted each allegation of default under the terms of the Lease Agreement. This requirement has been satisfied for purposes of the trial court proceeding. Accordingly, the Court finds that the Debtor is entitled to an award of attorney fees and costs pursuant to the Lease Agreement.
The Award of Attorney's Fees and Costs
Here the Debtor seeks $813,531.97 in attorney's fees and costs. This amount reflects not only the attorney's fees and costs associated with the Assumption Motion but also the fees and costs it incurred with the administration of the bankruptcy estate. As previously discussed, the Debtor's bankruptcy case itself is not an "action or proceeding" that would allow for the Debtor to recover an award of attorney's fees and costs. Smart Capital accurately states that it was generally cooperative in stipulations, motions to extend time, or routine bankruptcy administrative issues. Its focus was mainly on the operation of the premises and lease assumption issues. To allow the Debtor to recover the fees and costs associated with legal proceedings not placing the Lease Agreement directly at issue exceeds the scope of recovery that the Lease Agreement contemplates. Accordingly, and the Court will reduce the fee amount to reflect that the attorney's fees and costs associated with the Assumption Motion under CCC § 1717 are allowed. Attorney's fees and costs incurred in the course of administering the bankruptcy estate are disallowed.
The calculation of a reasonable attorney fees award begins with the lodestar figure, "the number of hours reasonably expended on the litigation multiplied by a reasonable hourly rate." Miller v. Los Angeles County Bd. of Educ., 827 F.2d 617, 621 (9th Cir 1987) (quoting Pennsylvania v. Delaware Valley Citizens' Council for Clean Air, 478 U.S. 546, 564, 106 S.Ct. 3088, 92 L.Ed.2d 439 (1986). There is a strong presumption that the lodestar amount is reasonable. Jordan v. Multnomah County, 815 F.2d 1258, 1262 (9th Cir 1987).
After making the computation, the district court then must assess whether it is necessary to adjust the presumptively reasonable lodestar figure based on the Kerr factors ( Kerr v. Screen Guild Extras, Inc., 526 F.2d 67, 70 (9th Cir. 1975) ) that are not already subsumed in the initial lodestar calculation. Morales v. City of San Rafael, 96 F.3d 359, 363-4 (9th Cir. 1996). The twelve Kerr factors are: 1) the time and labor required; 2) the novelty and difficulty of the questions involved; 3) the skill requisite to perform the legal service properly; 4) the preclusion of other employment by the attorney due to acceptance of the case; 5) the customary fee; 6) whether the fee is fixed or contingent; 7) time limitations imposed by the client or the circumstances; 8) the amount involved and the results obtained; 9) the experience, reputation, and ability of the attorneys; 10) the "undesirability" of the case; 11) the nature and length of the professional relationship with the client; and 12) the awards in similar cases. Kerr, 526 F.2d at 70 (9th Cir. 1975).
The time sheets provided for in Debtor's original motion go up only to the end of September 2020. (Docket No. 232 Ex. 4) The Debtor has since submitted its October time sheets in its supplemental briefing. (Dkt. No. 278 Ex. C). The Debtor seeks a total of $813,513.97 in attorney's fees and costs that it incurred through October 31, 2020. As previously discussed, the Debtor is only entitled to attorney fees and costs related to the Assumption Motion and not the other categories requested in the motion. The Court has performed an independent line by line review of the Debtor's timesheets and took out attorney's fees and costs that were related to the bankruptcy case and entries that the Court deems too vague as to properly characterize as either a part of the bankruptcy case or the Assumption Motion. The specific entries that have been disallowed are detailed in the attached addendum.
The attorney's fees and the time spent are reasonable when the Court considers the difficulty of the questions being presented, the skill of counsel, and the amount of time that was needed in order to adequately prepare for this proceeding. The Court sees no further reason for reducing the Debtor's fee and cost award. The Court approves $605,937.40. in total for attorney's fees and costs that are to be paid by the Landlord.
The Debtor requested November fees at oral argument and is engaged in an appeal of the Assumption Motion Order. Neither party has been given an opportunity to discuss the fee application in any greater detail following the court's ruling on the applicable law. Either party can file a supplemental motion after the appeal is completed addressing specific time entries or additional work, and specific entries can be addressed then if the court has misunderstood any entries.
Staying Judgment
This ruling is final, subject to any change on appeal. Should Smart Capital seek to stay the payment of these fees, a separate motion should be brought within 30 days of the order being entered on this motion. The issues concerning a stay require a more extensive factual development and discussion than was provided at oral arguments on the motion.
Conclusion
For the reasons previously stated, the Court finds that the Debtor is entitled to be compensated by the Landlord for attorney fees and costs solely associated with the Assumption Motion. Attorney fees and costs associated with the filing and maintaining of the bankruptcy case, including the motions brought pursuant to 11 U.S.C. §§ 363, 364, and 365(d)(3) are denied. The rates and hours associated with the lease assumption motion are reasonable and the Court grants the Debtor an award of $605,937.40 in total for attorney's fees and costs that are to be paid by the Landlord. Debtor shall submit an order consistent with this ruling.
Attachment