Opinion
This opinion is intended only to resolve the dispute between these parties.
MEMORANDUM DECISION ON DEBTOR'S MOTION TO RECOVER COSTS AND ATTORNEY'S FEES
LAURA S. TAYLOR JUDGE.
On November 3, 2011, the Court entered its Memorandum Decision in this adversary proceeding concluding that plaintiff Jeffrey Marshall's claims against debtor and defendant Ryan Moeller can be discharged ("Memorandum Decision", Dkt. #69). On December 5, 2011, Debtor filed a Motion to Recover Costs and Attorney's Fees ("Fees Motion", Dkt. #73). The Court held a hearing on the Fees Motion on January 12, 2012 and issued a scheduling order for further briefing. The parties timely filed their supplemental briefs, and the Court took the matter under submission. Now, after careful consideration of the papers filed in connection with the Fees Motion and in light of the Memorandum Decision, the Court determines that Debtor is not entitled to attorney's fees under any theory appropriately considered by the Court.
The Court's findings set forth in the Memorandum Decision are hereby incorporated herein.
DISCUSSION
Debtor seeks recovery of attorney's fees based on two legal theories. First, he argues that as the prevailing party he is entitled to recover costs and attorney's fees incurred based on an attorney's fees provision contained in two promissory notes ("Notes"). He characterizes the Notes as the "underlying contract" in the nondischargeability action and relies on California Civil Code section 1717. Second, he argues that he is equitably entitled to recover his costs to defend the nondischargeability action. Debtor cites section 105 of the Bankruptcy Code as authority for the Court's exercise of its discretion to award Debtor his attorney's fees as an equitable remedy because, as he argues, Plaintiffs action denied Debtor his fresh start, was substantially meritless, and was no more than an attempt to force Debtor to reaffirm the debt.
Standards.
No independent right to attorney's fees exists under the Bankruptcy Code, however, i prevailing party may be awarded attorney's fees in a nondischargeability action if such fees are recoverable outside of bankruptcy under state or federal law. Fry v. Dinan (In re Dinan), 448 B.R. 775, 785 (9th Cir. BAP 2011) ("the determinative question for awarding attorney's fees is whether the creditor would be able to recover the fee outside of bankruptcy under state or federal law."); see also Kilborn v. Haun (In re Haun), 396 B.R. 522, 528 (Bankr. D. Idaho 2008) (determining that the critical question more precisely must be: ".....whether the creditor plaintiff would be entitled to fees in state court for establishing those elements of the claim which the bankruptcy court finds support a conclusion of nondischargeability.") Likewise, recovery of attorney's fees by a prevailing defendant-debtor in a section 523(a)(2)(A) action not involving consumer debt is governed by state law. See Redwood Theaters, Inc. v. Davison (In re Davison), 289 B.R. 716, 722-23 (9th Cir. BAP 2003).
Debtor concedes the inapplicability of section 523(d) of the Bankruptcy Code here, as that section allows a debtor to recover attorney's fees as the prevailing party only in a section 523(a)(2) action related to a "consumer debt." The underlying facts here dealt with funds invested by Plaintiff in a speculative real estate project.
In California, Code of Civil Procedure section 1032 ("CCP § 1032") governs whether a party to litigation is entitled to recover costs. Santisas v. Goodin, 17 Cal.4th 599, 606 (1998). In particular, subdivision (b) of CCP § 1032 provides that: "[e]xcept as otherwise expressly provided by statute, a prevailing party is entitled as a matter of right to recover costs in any action or proceeding." Cal. Code Civ. Proc. § 1032(b). Whether such costs include attorney's fees, however, is governed by California Code of Civil Procedure section 1033.5 ("CCP § 1033.5"). Subdivision (a)(10) of CCP § 1033.5 provides that attorney fees are allowable as costs under CCP § 1032 when they are authorized by contract, statute, or law. As a result, under California law, recoverable litigation costs do not include attorney fees, unless the party entitled to costs has a legal basis, independent of the cost statutes and grounded in an agreement, statute, or other law, upon which to claim recovery of attorney fees. Santisas, 17 Cal.4th at 606.
Debtor's Contract-Based Grounds For Fee Recovery Fail.
Where a party claims a right to recover attorney's fees based on a contract, the claiming party must first establish the existence of a valid enforceable agreement that contains an attorney's fee provision and then must establish that the provision entitles recovery of attorney's fees under the particular circumstances of the litigation. See Id. at 607.
Debtor seeks recovery based on a contract provision contained in the Notes. Neither party disputed the validity or enforceability of the Notes. The attorney's fees recovery provision reads identically in each Note and is as follows: "If Lender prevails in a lawsuit to collect on this note, Borrower will pay Lender's costs and lawyer's fees in an amount the court finds to be reasonable." See Tr. Exs. 4 and 7. Debtor cites California Civil Code section 1717 ("CC § 1717") in support of his alleged right, as the prevailing party, to recover his attorney's fees under the attorney's fees provision in the Notes. CC §1717 provides, in relevant part, that:
In any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney's fees in addition to other costs.
The primary purpose of CC § 1717 is to ensure mutuality of remedy for attorney's fees claims under contractual attorney's fees provisions. Santisas, 17 Cal.4th at 611. CC § 1717, thus, applies only to actions that contain at least one contract claim. Id. at 615 (citation omitted). Where an action asserts both contract and tort or other noncontract claims, CC § 1717 applies only to the attorney's fees incurred in litigating the contract claims. Id. (citation omitted).
Obviously, the parties could contract to allow fee shifting based on tort claims related to the contract. Thus, Santisas speaks in terms of the typical contractual attorney's fee claims. Such a provision is before the Court here. The Notes make no mention of tort claims.
Here, Debtor accurately states that he was the prevailing party in the adversary proceeding. Debtor then argues that the adversary proceeding causes of action were "substantially based on the Notes." Alternatively, he argues that the adversary proceeding was a defacto action to collect on the Notes. Either conclusion, he argues is supportive of his recovery of attorney's fees. The Court disagrees with both arguments.
Plaintiff Sought Nondischargeabilitv Based On Fraud, Not Based On Breach Of Contract.
As set forth in detail in the Memorandum Decision, at trial Plaintiff asserted a claim based on fraud. Plaintiff sought a nondischargeable judgment pursuant to section 523(a)(2)(A) and based on fraudulent inducement. Plaintiff alleged that Debtor intentionally misled him and that, as a result, he sustained damages when he provided Debtor with funds obtained from his home equity line of credit ("HELOC"). Plaintiff never sought recovery under the Notes containing the attorney's fees recovery provisions. In fact, the Notes were not even mentioned in the complaint. Where a complaint does not contain a breach of contract claim, but is based solely on fraud, CC § 1717 is not applicable. Davison, 289 B.R. at 724.
Plaintiffs complaint also sought recovery on other tort theories.
In Davison, the debtor prevailed in a non-dischargeability action based solely on fraud and, thereafter, sought recovery of attorney's fees based on CC § 1717 and CCP § 1021 and pursuant to a provision in an agreement between the debtor and the complaining creditor that allowed attorney's fees to the prevailing party in: "any action at law or in equity" if it was "to enforce or to interpret" the terms of the agreement. Id. at 725. On appeal, the Panel determined that the bankruptcy court was not "enforcing or interpreting the terms of the Agreement, " and therefore, that the debtor was not entitled to attorney's fees under the agreement. Id.; see also Terra Nova Industries, Inc. v. Chen (In re Chen), 345 B.R. 197 (N.D. Cal. 2006) (debtor was not entitled to attorney's fees under CC § 1717 based on a contract provision allowing fees to the prevailing party "to enforce the rights under the agreement", where the court did not interpret or enforce any particular provision of the contract in the underlying tort judgment).
In his supplemental briefing, Debtor concedes that the Court was not required to interpret the Notes in connection with the Court's determinations that Debtor neither made fraudulent misrepresentations in his solicitation of loans nor omitted information that he had a duty to disclose. Debtor argues, however, that the Court was required to interpret the Notes when the Court determined that Debtor had not misused loan proceeds. The Court disagrees.
In the Memorandum Decision, the Court very briefly addressed Plaintiffs argument that Debtor misappropriated the investment funds by not using the money solely in connection with the Del Mar Property (as defined therein). This allegation appeared to pertain to Plaintiffs abandoned breach of fiduciary duty claim, rather than the fraudulent inducement claim. Nonetheless, the Court considered the argument and ruled thereon. The Court evaluated the evidence regarding use of funds in connection with its determination of elements of the fraud claim, Debtor's conduct and intent and causation of Plaintiff s alleged injuries. The Court's one-sentence reference to the provision in the Notes tying the maturity of the Notes to the close of escrow, merely provided context, and does not convert the Court's analysis of the fraudulent inducement claim into an analysis of a contract claim. Plaintiffs complaint was based solely on fraud and on abandoned tort claims, and CC § 1717 provides no basis for recovery of fees.
Plaintiff Would Not Have Been Entitled To Recover Attorney's Fees If He Had Prevailed On His Complaint.
An action for fraud seeking damages sounds in tort, and is not a claim on a contract for purposes of an attorney fee award, even though the underlying transaction in which the fraud occurred involved a contract containing an attorney fee clause. Super 7 Motel Assocs. v. Wang, 16 Cal.App.4th 541, 549 (1993). Plaintiff here sought recovery of his HELOC borrowings and interest accrued thereon as the damages he suffered from the Debtor's alleged fraudulent inducement. He did not seek to recover the much higher amounts stated to be due under the Notes; the Notes included a 20% return on his investment. If Plaintiff had prevailed on his fraud claim, he would not have been entitled to an award for attorney's fees. Therefore, the reciprocity provision of CC § 1717 is wholly inapplicable.
Debtor's Request For Attorney's Fees Based On Equity Fails As A Matter Of Law.
Section 105 authority allows the Court to exercise its discretion to: "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions [of the Bankruptcy Code.]" 11 U.S.C. § 105(a). This Court may not, however: "in the name of its equitable powers, ignore specific statutory mandates." Hamilton v. Lumsden (In re Geothermal Resources International, Inc.), 93 F.3d 648, 651 (9th Cir. 1996). Nor may the Court use its authority under section 105(a) to accomplish what the Bankruptcy Code does not otherwise allow.
In effect, the Debtor asks the Court to punish the Plaintiff. This is not an appropriate basis for fee recovery. There was never a request for a determination that the Plaintiffs adversary proceeding was frivolous. It was not. This Court's sanctioning authority is limited to specific sanctions under the Bankruptcy Code and its inherent contempt powers. Neither provides authority under the circumstances here for the Court's discretionary award of attorney's fees to the Debtor.
CONCLUSION
The Court denies Debtor's request for attorney's fees. The Plaintiff must submit an order consistent with this determination within 14 days.