In re: Francisco Tinajero, Jr. and Jacqueline Sanchez ( 2020 )

FILED
AUG 4 2020
NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. CC-19-1328-TaFS
FRANCISCO TINAJERO, JR. and Bk. No. 2:17-bk-15755-BR
JACQUELINE SANCHEZ,
Adv. No. 2:17-ap-01355-BR
Debtors.
FRANCISCO TINAJERO, JR.,
Appellant,
v. MEMORANDUM*
JOSE M. ZAVALA; BLANCA AGUIRRE,
Appellees.
Argued and Submitted on May 20, 2020
Filed – August 4, 2020
Appeal from the United States Bankruptcy Court
for the Central District of California
*
This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
Honorable Barry Russell, Bankruptcy Judge, Presiding
Appearances: Glenn Ward Calsada argued for appellant; Steve Lopez
argued for appellees.
Before: TAYLOR, FARIS, and SPRAKER, Bankruptcy Judges.
Memorandum by Judge Taylor
Concurrence in Part and Dissent in Part by Judge Faris
INTRODUCTION
After Francisco Tinajero, Jr. and Jacqueline Sanchez filed their
chapter 71 bankruptcy case, Blanca Aguirre and Jose M. Zavala
(“Creditors”) filed a complaint against Tinajero to declare a judgment
consisting entirely of an attorneys’ fee award nondischargeable under
§ 523(a)(2)(A). Creditors moved for summary judgment, which the
bankruptcy court granted. Tinajero appealed. We reversed and remanded
for further proceedings.
After remand, the bankruptcy court granted judgment for Tinajero.
Tinajero then moved for an award of his post-judgment attorneys’ fees and
costs, which the bankruptcy court denied. Tinajero appealed.
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101–1532, all “CCC” references are to the California Civil
Code, and all “CCP” references are to the California Civil Procedure Code.
2
We AFFIRM.
FACTS2
The Sale Contract
Prepetition, Creditors entered into a standard form residential
purchase agreement (“Contract”)—promulgated by the California
Association of Realtors and commonly used in sales of residential property
in California—to purchase a residence owned by Tinajero. There is no
indication in the record that the parties negotiated, amended, modified,
altered, or changed any of the standard language in the form Contract,
including paragraphs concerning attorneys’ fees and costs in the event of a
dispute between the parties.
Specifically, ¶ 21 of the Contract provided, in relevant part, that “[i]n
any action[ or] proceeding . . . between Buyer and Seller arising out of this
Agreement, the prevailing Buyer or Seller shall be entitled to reasonable
attorney fees and costs from the non-prevailing Buyer or Seller . . . .”
The State Court Proceedings
Creditors fully performed under the Contract, Tinajero refused to
close the sale, and Creditors responded with a civil action seeking specific
performance of the Contract. In the alternative, their complaint requested
2
We borrow heavily from our earlier decision in this matter, Tinajero v. Aguirre
(In re Tinajero), BAP Nos. CC-18-1012-SFL, CC-18-1031-SFL, 2018 WL 4939467 (9th Cir.
BAP Oct. 11, 2018) (“Tinajero I”).
3
damages.
Sanchez filed a complaint in intervention, asserting that the residence
was community property. Her complaint provided Creditors’ first notice
that Tinajero was married. At this time, they also learned that a temporary
restraining order barred Tinajero from selling the residence when he
signed the Contract. Creditors responded by filing a cross-complaint in
intervention against Tinajero and Sanchez seeking damages for fraud,
negligent misrepresentation, and negligent infliction of emotional distress.
After a bench trial, the state court entered a judgment in favor of
Creditors for specific performance, a common remedy for breach of a land
sale contract, Real Estate Analytics, LLC v. Vallas, 160 Cal. App. 4th 463, 473-
74 (2008). The state court concurrently issued a statement of decision that
repeatedly referenced Tinajero’s fraudulent conduct and stated that he
knowingly misled Creditors. But it made clear that Creditors waived tort
damages in favor of the specific performance judgment.
The statement of decision also concluded without discussion that
Creditors were entitled to recover their attorneys’ fees and costs. It left the
amount for later determination.
Thereafter, a different state court judge granted Creditors’ motion for
attorneys’ fees and costs, citing CCC § 1717 and CCP § 1032. The judge
wrestled with the fact that neither the statement of decision nor the specific
performance judgment specified the legal basis for the fee award. And he
4
was troubled that the Contract required mediation as a prerequisite to any
entitlement to fees, yet Creditors never mediated the dispute. He
concluded, however, that he had no power to disturb the prior judge’s
conclusion that a fee award was appropriate and awarded Creditors
$52,477.20 in attorneys’ fees and costs.
Tinajero did not appeal these rulings and, as required by the specific
performance judgment, conveyed fee title to the residence to Creditors.
Tinajero and Sanchez then filed a chapter 7 petition.
The § 523(a)(2)(A) Adversary Proceeding
Creditors filed a nondischargeability complaint against Tinajero,
seeking to have the judgment debt for attorneys’ fees and costs declared
nondischargeable under § 523(a)(2)(A). After hearing Creditors’ summary
judgment motion, the bankruptcy court concluded that, based on the state
court’s findings in the statement of decision, Tinajero was precluded from
re-litigating the fraud claim and granted Creditors summary judgment on
their § 523(a)(2)(A) claim. Tinajero appealed.
We reversed the bankruptcy court and remanded for further
proceedings (Tinajero I). We reasoned that while the state court made
numerous findings of fraudulent conduct by Tinajero, it granted specific
performance and awarded Creditors their fees based solely on Tinajero’s
breach of the Contract. Thus, the fraud determinations were not essential to
the state court judgments and were not entitled to preclusive effect.
5
At hearing on remand, the bankruptcy court did not try the issues of
fraud and, instead, in a summary fashion, determined that the fee award
was dischargeable. Creditors have not appealed this decision.
After the judgment became final, Tinajero moved for his attorneys’
fees and costs: (1) pursuant to ¶ 21 of the Contract and in accordance with
CCC § 1717 and CCP §§ 1021 and 1032; and (2) pursuant to § 523(d).
Creditors opposed the motion.
At the hearing on the motion, the bankruptcy court stated that
CCC § 1717 was not applicable to the adversary proceeding because a
§ 523(a)(2)(A) action was not an “action on a contract” and the proceeding
did not involve contract interpretation or enforcement.
Tinajero countered that his fees were nevertheless recoverable under
CCP § 1021 and pursuant to the broad language of the Contract providing
for fees in an action “arising out of” the Contract. Without addressing this
argument, the bankruptcy court repeated that fees were not recoverable
under California law.
The bankruptcy court determined that it also could not award fees
and costs under § 523(d) because Tinajero failed to prove that the debt he
owed Creditors was a consumer debt; he presented no evidence regarding
his intended use of the proceeds from the sale of his residence. And even if
it was a consumer debt, the bankruptcy court determined that Creditors
were substantially justified in prosecuting the § 523(a)(2)(A) action up until
6
we issued our Tinajero I decision. While the bankruptcy court determined
they were not justified in continuing litigation after Tinajero I, it also found
that special circumstances would make an award of fees and costs unjust.
Thus, the bankruptcy court entered an order denying Tinajero’s
motion. Tinajero timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(1) and (b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Did the bankruptcy court abuse its discretion in denying attorneys’
fees and costs?
STANDARDS OF REVIEW
We review the bankruptcy court’s decision regarding an award of
attorneys’ fees and costs for an abuse of discretion. Lionetti v. Law Offices of
Steven H. Marcus (In re Lionetti), 613 B.R. 13, 18 (9th Cir. BAP 2020) (review
of a denial of § 523(d) fees); Redwood Theaters, Inc. v. Davison (In re Davison),
289 B.R. 716, 720 (9th Cir. BAP 2003) (review of fees awarded under state
law). Under the abuse of discretion standard, we first “determine de novo
whether the [bankruptcy] court identified the correct legal rule to apply to
the relief requested.” United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir.
2009) (en banc). Then we determine whether its factual findings and its
application of the law were illogical, implausible, or without support in the
7
record. Id.However, “[t]o the extent the issue is whether California law allows
the award of attorneys’ fees, our review is de novo.” Saccheri v. St. Lawrence
Valley Dairy (In re Saccheri), BAP No. EC-12-1269-JuKiD, 2012 WL 5359512,
at *5 (9th Cir. BAP Nov. 1, 2012), aff’d, 599 F. App’x 687 (9th Cir. 2015).
“De novo review requires that we consider a matter anew, as if no decision
had been made previously.” Francis v. Wallace (In re Francis), 505 B.R. 914,
917 (9th Cir. BAP 2014) (citations omitted).
We may affirm on any basis supported by the record. Shanks v.
Dressel, 540 F.3d 1082, 1086 (9th Cir. 2008).
DISCUSSION
Tinajero argues the bankruptcy court erred in denying him attorneys’
fees and costs: (1) pursuant to the terms of the Contract in accordance with
CCP §§ 1021 and 1032;3 and (2) pursuant to § 523(d). We disagree.
A. Creditors are not judicially estopped from contesting Tinajero’s
contractual entitlement to attorneys’ fees and costs.
As an initial matter, we address Tinajero’s argument that Creditors’
requests for attorneys’ fees and costs in their nondischargeability complaint
and in a withdrawn motion for attorneys’ fees and costs judicially estopped
them from contesting Tinajero’s entitlement to fees and costs under the
Contract. We reject his argument for three reasons.
3
Tinajero does not challenge the denial of fees under CCC § 1717 on appeal.
8
First, if a plaintiff alleges an entitlement for fees and loses, “the
plaintiff’s bare allegation that he is entitled to receive attorney’s fees is not
sufficient [to entitle the defendant to fees]; [the plaintiff] also had to have
established [an actual entitlement] . . . to recover fees.” Bear Creek Planning
Comm. v. Ferwerda, 193 Cal. App. 4th 1178, 1188 (2011) (citations and
internal quotation marks omitted). Here, Creditors never established an
entitlement to fees incurred in the adversary proceeding.
Second, “[j]udicial estoppel . . . precludes a party from gaining an
advantage by taking one position, and then seeking a second advantage by
taking an incompatible position.” Rissetto v. Plumbers & Steamfitters
Local 343, 94 F.3d 597, 600 (9th Cir. 1996) (citations omitted). We find no
evidence in the record that Creditors obtained an advantage by taking the
initial position that fees were recoverable; the bankruptcy court made no
rulings in their favor, or against Tinajero, based on their initial position.
Further, their withdrawn fee motion did not request fees under CCP
§§ 1021 and 1032.
And finally, as explained infra, there is a fundamental difference
between a judgment creditor’s entitlement to fees under CCP § 685.040,
which allows recovery of post-judgment fees under certain circumstances,
and the claim of a judgment debtor for post-judgment fees based on an
isolated victory in the collection process. See Globalist Internet Techs., Inc. v.
Reda, 167 Cal. App. 4th 1267, 1274-75 (2008). Thus, Creditors’ initial
9
assertion of their right to fees and costs is harmonious with their later
assertion that Tinajero is not entitled to fees and costs.
B. CCP §§ 1021 and 1032 are inapplicable.
In adversary proceedings and contested matters in bankruptcy, there
is no general right to attorneys’ fees. See Travelers Cas. & Sur. Co. of Am. v.
Pac. Gas & Elec. Co., 549 U.S. 443, 447-48 (2007); Heritage Ford v. Baroff (In re
Baroff), 105 F.3d 439, 441 (9th Cir. 1997). Bankruptcy courts, however, may
award fees in § 523 actions where authorized by state law. See Travelers Cas.
& Sur. Co. of Am., 549 U.S. at 451-52; Cohen v. de la Cruz, 523 U.S. 213, 223
(1998). On appeal, Tinajero cites CCP §§ 1021 and 1032 as the operative
state statutes.
Under CCP § 1032, “a prevailing party is entitled as a matter of right
to recover costs in any action or proceeding.” Santisas v. Goodin, 17 Cal. 4th
599, 606 (1998) (quoting CCP § 1032). But CCP § 1033.5 limits the allowance
of attorneys’ fees as “costs” under CCP § 1032 to situations where fees are
authorized by contract, statute, or other law. See id.; see also Chase Manhattan
Bank v. Deuel (In re Deuel), 482 B.R. 323, 327 (Bankr. S.D. Cal. 2012).
Tinajero relies on CCP § 1021, which authorizes an attorneys’ fees
award as agreed by the parties, as the independent basis for his CCP § 1032
fee request. This statute provides, in relevant part, that “[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
10
implied, of the parties . . . .” CCP § 1021. CCP § 1021 allows the parties to
agree that the prevailing party in litigation may recover attorneys’ fees,
whether the litigation sounds in contract or in tort. 3250 Wilshire Boulevard
Bldg. v. W.R. Grace & Co., 990 F.2d 487, 489 (9th Cir. 1993); Xuereb v. Marcus
& Millichap, Inc., 3 Cal. App. 4th 1338, 1341 (1992).
Tinajero asserts that the Contract’s fee provision, which provides for
fee-shifting “[i]n any action[ or] proceeding . . . between Buyer and Seller
arising out of [the Contract] . . .” covers attorneys’ fees and costs for
defending against the § 523(a)(2)(A) claim. But he has failed to meet his
burden of establishing entitlement to an award of fees under this provision.
See Hensley v. Eckerhart, 461 U.S. 424, 437 (1983) (“[T]he fee applicant bears
the burden of establishing entitlement to an award . . . .”).
We conclude that the record fails to support that parties to this
“form” contract in general or the parties to the Contract in particular
mutually intended to provide contractually for the losing party in a breach
of contract action to retain contractual rights to attorneys’ fees in the
judgment collection process. See CCC § 1636 (“A contract must be so
interpreted as to give effect to the mutual intention of the parties as it
existed at the time of contracting, so far as the same is ascertainable and
lawful.”). If possible, such intent is to be derived solely from the written
provisions of the contract. CCC § 1639. And, the clear and explicit meaning
of contractual provisions, interpreted in their ordinary and popular sense,
11
absent usage by the parties in a technical sense or a special meaning
attributed to them by usage, governs our interpretation. CCC §§ 1638 and
1644. Important in this appeal, a contract must be understood with
reference to the circumstances under which it was made and the matter to
which it relates. CCC § 1647.
Here, the Contract was the standard residential purchase agreement
used annually by thousands of California home-buyers. Neither party
modified the standard form attorneys’ fee language, and the record
evidences no specific understanding between the parties as to this clause.
Thus, it is reasonable to assume that the clause allowed fee recovery in a
case of breach of contract or tortious breach. But there is nothing to suggest
that the parties intended to give the breaching party a never-ending right
to recover fees if he prevailed at some isolated point in the post-judgment
collection process. Absent evidence of such an understanding, the fee
provision is appropriately understood not to apply to fees and costs of the
judgment debtor in a remote postjudgment collection action.
This must be so because, as explained immediately below, Tinajero
seeks a result at odds with California post-judgment collection law, yet he
fails to present evidence of an intent to deviate from the normal legal rule.
“Under well-established principles of California law . . . because it is
[Tinajero] rather than [Creditors] whose interpretation deviates from the
normal operation of law, it is [Tinajero] who must pay the price for failing
12
to specify what the contract meant.” United Commercial Ins. Serv., Inc. v.
Paymaster Corp., 962 F.2d 853, 857 (9th Cir. 1992) (internal citation omitted). 4
While CCP §§ 1021 and 1032 generally entitle a prevailing party to
recover attorneys’ fees as a cost of litigation as provided under a contract,
such statutes do not apply in postjudgment enforcement proceedings.
Under California law,
when a judgment is rendered on a case involving a contract that
includes an attorney fees and costs provision, the “judgment
extinguishes all further contractual rights, including the
contractual attorney fees clause. Thus, in the absence of express
statutory authorization, . . . postjudgment attorney fees cannot
be recovered.”
Jaffe v. Pacelli, 165 Cal. App. 4th 927, 934 (2008) (quoting Berti v. Santa
Barbara Beach Props., 145 Cal. App. 4th 70, 77 (2006)); see also Globalist
Internet Techs., Inc., 167 Cal. App. 4th at 1274.
CCP § 685.040 addresses the “problem unique to a claim for
postjudgment fees in actions based on contract.” Jaffe, 165 Cal. App. 4th at
4
For this reason, the dissent’s argument that “the very broad language of the
contractual provision easily captures such proceedings” misses the mark. We
acknowledge that courts have held that broadly worded fee provisions may encompass
both contract and tort actions. See e.g., Asphalt Prof’ls, Inc. v. Davis (In re Davis), BAP No.
CC-18-1326-FLKu, 2019 WL 2931668 (9th Cir. BAP July 3, 2019) (“Davis”) (holding
phrase “action arising out of” covered § 523(a)(2)(A) claim), aff'd, 809 F. App’x 415 (9th
Cir. 2020). But the dissent cites no authority, nor have we located any authority, holding
that a broadly worded attorneys’ fee provision that does not by its express terms
survive judgment entitles a California judgment debtor to fees in a post-judgment
collection action.
13
934 (quoting Berti, 145 Cal. App. 4th at 77). It entitles a judgment creditor to
postjudgment attorneys’ fees incurred in enforcing the judgment “if the
underlying judgment includes an award of attorney’s fees to the judgment
creditor pursuant to subparagraph (A) of paragraph (10) of subdivision (a)
of Section 1033.5.” CCP § 685.040. CCP § 1033.5(a)(10)(A) qualifies
attorneys’ fees provided under a contract as “costs” for purposes of CCP
§ 1032. Thus, a postjudgment fee award under CCP § 685.040 is “not based
on the survival of the contract, but is instead based on the award of
attorney fees and costs in the trial judgment.”Jaffe, 165 Cal. App. 4th at 935.
CCP § 685.040, therefore, does not revive a contractual right to
attorneys’ fees for either party; it instead creates an independent right
under California law to attorneys’ fees for a judgment creditor. Rodarte v.
Cohen (In re Rodarte), No. SACV 11–553 SVW, 2012 WL 11980860, at *4 (C.D.
Cal. Aug. 24, 2012). Any right to postjudgment attorneys’ fees is not
pursuant to the contract, but rather is provided for by operation of
California statutory law. Id.Actions taken in bankruptcy proceedings may qualify as enforcement
proceedings contemplated by, and subject to, CCP § 685.040. See, e.g., Jaffe,
165 Cal. App. 4th at 938; Chinese Yellow Pages Co. v. Chinese Overseas Mktg.
Serv. Corp., 170 Cal. App. 4th 868, 888 (2008), as modified (Jan. 26, 2009), as
modified on denial of reh’g (Jan. 29, 2009). In Jaffe, a state court entered a
judgment against a debtor that included an award of attorneys’ fees. The
14
debtor responded with a chapter 7 bankruptcy. The creditor initiated an
adversary proceeding for a determination that the debtor was not entitled
to have the judgment debt discharged, and the creditor eventually
succeeded in having the bankruptcy dismissed. Jaffe, 165 Cal. App. 4th at
931. The creditor then sought his attorneys’ fees and costs related to
litigating the bankruptcy proceedings pursuant to CCP § 685.040 as fees
incurred to enforce the underlying judgment. The Court of Appeal noted
that the judgment extinguished all contractual rights, including the
contractual attorneys’ fees clause. But it held that the creditor could recover
fees incurred in bankruptcy to enforce the judgment as a matter of
statutory right as conferred by CCP § 685.040.
Relying on Jaffe, the Court of Appeal in Globalist Internet Techs., Inc.
held that the trial court abused its discretion in denying a judgment
creditor its attorneys’ fees and costs incurred in defending against a
subsequent action brought by the judgment debtors to enforce an alleged
settlement of the judgment for a lesser sum. 167 Cal. App. 4th at 1274-75.
The Court of Appeal noted that
[t]he sole purpose of the specific performance action filed by
[judgment debtors] was to significantly decrease their
unsatisfied judgment debtor obligations in this action. . . . Had
[judgment creditor] not defended against the specific
performance action, it would have lost substantial rights under
the judgment in this case. Accordingly, the attorney fees it
incurred in defense of the companion action were incurred in
15
enforcing the judgment.
Id. at 1276.
In that regard, California law may entitle a judgment creditor to
attorneys’ fees and costs incurred in a subsequent § 523(a)(2)(A) action to
except a prepetition judgment debt from discharge; the purpose of the
action is to enforce the judgment. But the same cannot be said for a
judgment debtor who successfully defends such an action. There is no
comparable California statute providing for its recovery of attorneys’ fees
and costs.5 The debtor must seek recovery under § 523(d) or a contract
5
The dissent dismisses Berti, Jaffe and Globalist as distinguishable because they
dealt with the rights of a successful judgment creditor—as opposed to a successful
judgment debtor—to recover attorneys’ fees for post-judgment litigation. But the
dissent cites no authority providing for a judgment debtor’s recovery of contractual
attorneys’ fees in collection proceedings, presumably because none exist; a collection
proceeding arises out of a judgment, not out of a contract.
And in that regard, while the dissent correctly articulates the substantive law on
claim preclusion, it is applying the law in the wrong context. Creditors’
nondischargeability action is a collection proceeding on a judgment utilizing a federal
statute. It is not necessary to reference the Contract in any fashion, as the dissent even
acknowledges. In a different case, where the debt a creditor seeks to except from
discharge is unliquidated, the action may arise out of the contract. After all, as the
dissent points out, a contract claim may merge with a judgment while other contract
claims are preserved as unliquidated. See Gietzen v. Covenant RE Management, Inc., 40
Cal. App. 5th 331 (2019), review denied (Jan. 2, 2020). But where, as here, the contract is
utterly in the rear-view mirror, the action does not arise out of the contract.
We further note that the dissent’s view of California law as entitling a judgment
debtor to contractual attorneys’ fees in post-judgment collection proceedings, if
adopted, would render CCP § 685.040 a nullity in a material respect—a result that
should be avoided. See Thornburg v. Super. Ct., 138 Cal. App. 4th 43, 49 (2006), as modified
(continued...)
16
provision that so provides.
For the foregoing reasons, the bankruptcy court did not err in
denying Tinajero his fees and costs under California law.6
C. Section 523(d) fees are unavailable.
Neither did the bankruptcy court err in denying fees and costs under
§ 523(d). Section 523(d) provides that
5
(...continued)
on denial of reh’g (Apr. 20, 2006) (“[C]anons generally preclude judicial construction that
renders part of the statute ‘meaningless or inoperative.’”). Specifically, CCC § 1717
provides that if one party to a contract has a right to fees, so does the other. So, while
under the dissent’s view claim preclusion would deprive the judgment creditor of the
right to fees on the one hand, CCC § 1717 would give the right back with the other
because the judgment debtor retained its right to contractual fees post-judgment. And if
that were the case, then CCP § 685.040 would not serve one of its intended purposes. See
Jaffe, 165 Cal. App. 4th at 935 (“In 1992, the Legislature amended Section 685.040 to
provide that if the underlying judgment included an award of contractually-based
attorney fees, the party seeking to enforce the judgment may obtain post-trial attorney
fees incurred to enforce the judgment.”).
6
And finally, we make a practical point. Once a judgment is rendered on a
contract, all claims related to the judgment and the causes of action that support it are
finally determined, and the contract and its attorneys’ fee provisions are no longer
operative as to the claims underlying the judgment and the judgment itself, absent
contractual language not present here. The right to attorneys’ fees flows from statute.
But if the Contract and its attorneys’ fee clause remain operative, we would not simply
award fees to Tinajero. The parties’ respective contractual attorneys’ fees arose from the
same prepetition Contract. Tinajero’s fees would appear to be subject to the doctrine of
recoupment. See Newbery Corp. v. Fireman’s Fund Ins. Co., 95 F.3d 1392 (9th Cir. 1996).
The prepetition award to Creditors cannot otherwise be collected, but it may be
sufficiently mutual such that it would offset any fee award to Tinajero to the extent of
any principal and appropriately considered interest accrual. At best, for Tinajero, we
would remand for consideration of this point.
17
[i]f a creditor requests a determination of dischargeability of a
consumer debt under subsection (a)(2) of this section, and such
debt is discharged, the court shall grant judgment in favor of
the debtor for the costs of, and a reasonable attorney’s fee for,
the proceeding if the court finds that the position of the creditor
was not substantially justified, except that the court shall not
award such costs and fees if special circumstances would make
the award unjust.
To recover fees under § 523(d), a debtor must prove that: (1) the creditor
requested a determination of the dischargeability of the debt under
§ 523(a)(2); (2) the debt is a consumer debt; and (3) the debt was
discharged. Am. Sav. Bank v. Harvey (In re Harvey), 172 B.R. 314, 317-18
(9th Cir. BAP 1994). If the debtor demonstrates these elements, then the
burden shifts to the creditor to demonstrate that its position was
substantially justified or special circumstances would make an award
unjust. Id.Although Creditors filed a complaint alleging actual fraud under
§ 523(a)(2) and the bankruptcy court entered a judgment discharging the
underlying debt, Tinajero failed to establish that the debt he owed
Creditors was a consumer debt. And, even if the debt was a consumer debt,
he would not be entitled to fees and costs because (1) Creditors were
substantially justified at all times in prosecuting their § 523(a)(2) claim; and
(2) special circumstances would make an award of fees unjust. Therefore,
the bankruptcy court did not abuse its discretion in denying fees and costs.
18
1. The debt was not a consumer debt.
The phrase “consumer debt” is defined in § 101(8) as a “debt incurred
by an individual primarily for a personal, family or household purpose.”
“It is settled in this circuit that the purpose for which the debt was incurred
affects whether it falls within the statutory definition of ‘consumer debt’
and that debt incurred for business ventures or other profit-seeking
activities does not qualify.” Meyer v. Hill (In re Hill), 268 B.R. 548, 552 (9th
Cir. BAP 2001) (citation omitted) (interpreting § 101(8) “consumer debt” in
the context of § 1322(b)(1)). However, “[a]n inability to classify a particular
debt as a business debt does not automatically relegate it to the status of a
consumer debt.” In re Marshalek, 158 B.R. 704, 708 (Bankr. N.D. Ohio 1993)
(citation omitted). Tort liability judgments, for example, “do not fit within
either category of § 101(8)’s definition of a consumer debt.” Id. at 707.
Tinajero argues that the attorneys’ fees and costs debt at issue is
necessarily a consumer debt because it was on account of his refusal to sell
his residence. We disagree; the debt arose because Tinajero entered into the
sale contract in violation of a state court restraining order, breached the
contract, engaged in actions that the state court labeled as fraud, and then
lost in state court litigation. It is unclear what he intended to do if the sale
closed or whether he intended to defraud his then estranged wife or the
Creditors or both, but this was not a consumer debt within any commonly,
or even uncommonly, understood meaning of the term. The purpose of the
19
debt was to compensate Creditors for their litigation costs in seeking
remedies for Tinajero’s breach of contract; the causal connection between
the debt and the fact that the property was Tinajero’s residence is too
remote to describe the debt as one “primarily for a personal, family, or
household purpose.”
Moreover, on appeal Tinajero neither argues nor points to any
evidence that the purpose of either the sale of his residence or his breach of
the Contract leading to the litigation debt was consumer in nature. Cf.
Aspen Skiing Co. v. Cherrett (In re Cherrett), 873 F.3d 1060, 1067 (9th Cir.
2017) (“We have never . . . held that debts used to purchase homes are
consumer debts as a matter of law . . . .”). In Cherrett, the Ninth Circuit held
that, even though the debtor obtained a loan to buy a personal residence,
which is generally considered a consumer debt, and he did in fact use those
funds to buy it, the debt was not a consumer debt because the loan had a
business purpose. Id. at 1067-68; see also Bushkin v. Singer (In re Bushkin),
BAP No. CC–15–1285–KiKuF, 2016 WL 4040679, at *8 (9th Cir. BAP July 22,
2016). Thus, the purpose behind Tinajero’s actions that gave rise to the
attorneys’ fees and cost debt at issue is determinative of whether the debt is
a consumer debt.
Here, the state court’s findings reveal that Tinajero entered into the
Contract as part of a fraudulent scheme. His breach of the Contract was a
natural consequence of his scheme. Specifically, the state court found that a
20
temporary restraining order issued in marital dissolution proceedings
prohibited him from selling the residence. Moreover, the state court found
that Tinajero neither consulted with Sanchez in listing the residence for sale
nor cooperated with her when she requested an accounting of the sale
proceeds. In fact, the state court found that Tinajero intended to sell the
residence and pocket all of the sale proceeds without informing Sanchez of
the sale. Further, as to Tinajero’s intent to defraud Creditors, the state court
determined that he knowingly misled Creditors to induce them to enter
into the Contract.
Even though the state court’s attorneys’ fees and costs judgment was
not based on fraud so as to establish § 523(a)(2)(A) liability, there is no
question from the state court’s statement of decision that fraud was at the
essence of the sale transaction. There were no facts in the record for the
bankruptcy court to have reasonably inferred otherwise. Accordingly, we
find no error in the bankruptcy court’s determination that the debt was not
a consumer debt.
2. Creditors were substantially justified in prosecuting the action.
We also determine that Creditors were substantially justified in
prosecuting the action. A creditor is “substantially justified” in bringing a
§ 523(a)(2) claim if the claim has a “reasonable basis both in law and in
fact.” First Card v. Hunt (In re Hunt), 238 F.3d 1098, 1103 (9th Cir. 2001)
(citation omitted). The bankruptcy court held that Creditors were
21
substantially justified in prosecuting their § 523(a)(2)(A) claim only up until
we issued our Tinajero I decision, at which point their continued
prosecution became unjustified. The bankruptcy court reasoned that
Creditors were initially justified because the state court clearly found fraud,
and it was only “pure happenstance and luck of the debtor” that the
judgment debt was dischargeable because the trial judge who entered the
statement of decision finding fraud did not also enter the judgment
awarding Creditors’ attorneys’ fees and costs. The bankruptcy court
suspected that, had the same judge handled the statement of decision and
judgment, then the judgment would likely have clarified that the debt was
due to the fraud; collateral estoppel would have applied. We agree with the
bankruptcy court’s assessment of substantial justification here. Creditors
had a reasonable basis in fact and law to bring their claim.
But we disagree with the bankruptcy court’s conclusion that
Creditors lost their justification after Tinajero I merely because we held that
collateral estoppel was unavailable. We remanded to allow the bankruptcy
court to conduct further proceedings in the case, and we clarified that
[o]ur holding that the bankruptcy court incorrectly applied
issue preclusion in favor of Aguirre and Zavala is not meant to
suggest that Tinajero is entitled to judgment as matter of law on
Aguirre’s and Zavala’s nondischargeability claim. We express
no opinion regarding whether and how Aguirre and Zavala can
prove on remand that their claim for fees and costs arose from
Tinajero’s fraud for purposes of their claim under
22
§ 523(a)(2)(A).
Tinajero I, 2018 WL 4939467 at *7 n.8. Thus, on remand, the bankruptcy
court was free to conduct a trial and independently find the requisite
fraudulent basis for the judgment debt to be deemed nondischargeable.
Had we concluded that Tinajero I disposed of a groundless § 523(a)(2)(A)
claim, we would have issued a tightly focused remand requiring the
bankruptcy court to enter judgment in Tinajero’s favor. Creditors’
§ 523(a)(2)(A) claim was not dead by virtue of the unavailability of
collateral estoppel. The bankruptcy court erred in determining that they
were not substantially justified in prosecuting their claim after Tinajero I.
Such error was harmless, however, because the bankruptcy court denied
Tinajero § 523(d) fees and costs on other grounds.
3. Special circumstances would make a fee award unjust.
We also discern no reversible error in the bankruptcy court’s
determination that special circumstances would make an award of fees and
costs to Tinajero unjust. The “special circumstances” exception in § 523(d)
“should be interpreted with reference to traditional equitable principles.”
In re Hunt, 238 F.3d at 1104 (quoting In re Hingson, 954 F.2d 428, 429-30 (7th
Cir. 1992)). “For example, ‘if a debtor could somehow be found to have
procured the creditor’s groundless claim of fraud, the exception for special
circumstances would justify the denial of the debtor’s application for
attorney’s fees.’” Id. (quoting In re Hingson, 954 F.2d at 430). Given the
23
egregious state court findings of fraud and Tinajero’s failure to advance
any plausible alternative theory for the judgment debt, we agree with the
bankruptcy court that an award would be unjust.
CONCLUSION
Based on the foregoing, we AFFIRM.
Concurrence in Part and Dissent in Part begins on next page.
24
FARIS, Bankruptcy Judge, concurring in part and dissenting in part.
Although I agree with much of the majority’s reasoning, I disagree on
a key point, and as a result, I believe that we should vacate the bankruptcy
court’s decision and remand. Therefore, I respectfully concur in part and
dissent in part.
After a brief trial, the bankruptcy court ruled that Creditors’ claim
against Tinajero for attorneys’ fees was dischargeable. Creditors have not
appealed that decision, so the die is cast: Creditors filed a
nondischargeability action and lost.
The bankruptcy court held that Tinajero could not recover his
attorneys’ fees from Creditors. That is the only decision before us.
I agree with the majority that Tinajero was not entitled to his fees
under § 523(d). It is implicit in the majority’s decision, and I agree, that
§ 523(d) is not the exclusive basis on which a debtor might recover
attorneys’ fees in a nondischargeability proceeding. Debtors who prevail in
such a proceeding should also be able to recover fees if and to the extent
permitted by applicable nonbankruptcy law. I also agree that judicial
estoppel does not apply.
CCC § 1717(a) and CCP §§ 1021 and 1032 are the only nonbankruptcy
statutes that potentially allow an award of attorneys’ fees in a case like this
one.
The bankruptcy court correctly ruled, and Tinajero wisely concedes,
1
that CCC § 1717(a) does not apply. A proceeding under § 523 is not an
“action on a contract” unless the bankruptcy court needed to determine
whether the contract was enforceable. Bos v. Bd. of Trs., 818 F.3d 486, 489-90
(9th Cir. 2016).
The bankruptcy court overlooked CCP §§ 1021 and 1032. Regardless,
we can and should affirm on any basis supported by the record. See Caviata
Attached Homes, LLC v. U.S. Bank, N.A. (In re Caviata Attached Homes, LLC),
481 B.R. 34, 44 (9th Cir. BAP 2012). If those sections would not support an
award of fees, we should affirm. Conversely, if those sections could
support an award of fees, we must vacate the bankruptcy court’s decision
and remand so that court can apply the correct law. Thus, we must
examine those sections.
As the majority states in more detail, CCP §§ 1021 and 1032, taken
together, mean that contractual attorneys’ fees provisions are generally
enforceable.
In this case, paragraph 21 of the agreement between Tinajero and
Creditors provides that, “In any action, proceedings, or arbitration between
Buyer and Seller arising out of this Agreement, the prevailing Buyer or
Seller shall be entitled to reasonable attorney fees and costs from the non-
prevailing Buyer or Seller,” with an exception that no one argues is
2
applicable.1
The majority holds that Tinajero was not entitled to fees under these
statutes and this contract for two reasons. I cannot subscribe to either of
those reasons.
First, the majority holds that the parties did not intend to permit an
award of fees incurred in a post-judgment dischargeability proceeding. I
disagree; the very broad language of the contractual provision easily
captures such proceedings. An adversary proceeding to determine the
dischargeability of a debt incurred in a transaction governed by a contract
“arises out of” that contract, in the ordinary sense that if there were no
contract, there would be no debt to discharge.
In the majority’s view, “there is nothing to suggest that the parties
intended to give the breaching party a never-ending right to recover fees if
he prevailed at some isolated point in the post-judgment collection
process.” But in my view, the broad, simple terms of the contract suggest
exactly that. Even under California’s relaxed version of the parol evidence
rule, the plain language of the contract is at least the starting point, and
usually the ending point, for contract interpretation. See Clarendon Am. Ins.
Co. v. N. Am. Capacity Ins. Co., 186 Cal. App. 4th 556, 566 (2010) (“Under
1
Paragraph 26A obligates the parties to mediate “any dispute or claim arising
between them out of this Agreement, or any resulting transaction” and provides that
any party who fails to mediate cannot recover any otherwise recoverable attorneys’
fees.
3
statutory rules of contract interpretation, the mutual intention of the parties
at the time the contract is formed governs interpretation. Such intent is to
be inferred, if possible, solely from the written provisions of the contract. . .
. [I]f the meaning a layperson would ascribe to contract language is not
ambiguous, we apply that meaning.” (citations and quotation marks
omitted)). Neither party argued, or offered evidence, that the provision
suffered from a latent or patent ambiguity. See Wolf v. Super. Ct., 114 Cal.
App. 4th 1343, 1351 (2004), as modified on denial of reh'g (Feb. 19, 2004)
(“Even if a contract appears unambiguous on its face, a latent ambiguity
may be exposed by extrinsic evidence which reveals more than one
possible meaning to which the language of the contract is yet reasonably
susceptible.” (citations omitted)). Similarly, neither party argued, or offered
evidence, that the circumstances and subject matter of the contract would
support a deviation from its plain language. See Am. Alt. Ins. Corp. v. Super.
Ct., 135 Cal. App. 4th 1239, 1245 (2006) (“We ascertain that intention solely
from the written contract if possible, but also consider the circumstances
under which the contract was made and the matter to which it relates.”);
CCC § 1639 (“When a contract is reduced to writing, the intention of the
parties is to be ascertained from the writing alone, if possible; subject,
however, to the other provisions of this Title.”); CCC § 1647 (“A contract
may be explained by reference to the circumstances under which it was
made, and the matter to which it relates.”).
4
Second, the majority holds that the entry of judgment on a contract
destroys the parties’ rights under a contractual attorneys’ fee provision, the
only basis for recovery of post-judgment fees in a contract case is CCP
§ 685.040, and that section only permits the judgment creditor, not the
judgment debtor, to recover fees.
The majority relies on California decisions broadly stating that,
“Generally, when a judgment is rendered on a case involving a contract
that includes an attorney fees and costs provision, the judgment
extinguishes all further contractual rights, including the contractual
attorney fees clause. Thus, in the absence of express statutory
authorization, . . . postjudgment attorney fees cannot be recovered.” Jaffe v.
Pacelli, 165 Cal. App. 4th 927, 934 (2008) (citations and quotation marks
omitted) (citing and quoting Berti v. Santa Barbara Beach Props., 145 Cal.
App. 4th 70, 77 (2006)).2 The majority correctly observes that CCP § 685.040
2
Not all California decisions hew to this broad statement. For example, in Gietzen
v. Covenant RE Management, Inc., 40 Cal. App. 5th 331 (2019), review denied (Jan. 2, 2020),
the tenant successfully sued for breach of a commercial lease. She then attempted to
collect from the landlord’s (asserted) alter ego, but was stymied by a lease provision
that prohibited collection from anyone other than the landlord. She argued that the
lease provision was no longer enforceable because the entire lease had merged into the
earlier judgment on the breach of contract. The court of appeal disagreed, stating that
“the rule would be better stated that the particular cause or causes of action on the
contract are merged into the judgment, not the contract itself. Thus, a judgment
favorable to plaintiff does not bar a different cause of action brought by plaintiff on the
same contract.” 40 Cal. App. 5th at 337 (citation omitted) (emphasis added). In other
words, only the causes of action that were litigated, and not the entire contract, merge
(continued...)
5
reverses this rule and allows the judgment creditor to recover post-
judgment fees if the judgment includes a fee award.
All of those decisions are distinguishable, however, because they all
dealt with the rights of a successful plaintiff to recover contractual
attorneys’ fees for post-judgment litigation. None of them addressed the
question whether a defendant who suffers an adverse judgment, but who
prevails in post-judgment litigation, can recover attorneys’ fees under the
contract. To answer this question, we must look further.
The rule of Jaffe and Berti rests on the doctrines of merger and bar. “A
judgment does not act as a merger and a bar to statutory fees.” Berti, 145
Cal. App. 4th at 77.
The doctrines of merger and bar are forms of claim preclusion. Taylor
v. Sturgell, 553 U.S. 880, 892 n.5 (2008) (“Claim preclusion describes the
rules formerly known as ‘merger’ and ‘bar,’ while issue preclusion
encompasses the doctrines once known as ‘collateral estoppel’ and ‘direct
estoppel.’” (citation omitted)). The California Court of Appeal explained
the interplay between claim preclusion, merger, and bar:
[C]laim preclusion applies not just to what was litigated, but
(...continued)
with the judgment. The Ninth Circuit recently cited Gietzen with approval in Asphalt
Professionals, Inc. v. Davis (In re Davis), 809 F. App’x 415, 416 (9th Cir. 2020). See also
Schafer v. Wholesale Frozen Foods, Inc., 242 Cal. App. 2d 451 (1966) (holding that a
judgment for unpaid rent for certain periods under a lease did not extinguish the lease,
such that the tenant remained liable for rent for subsequent periods).
6
more broadly to what could have been litigated. Here, under
what is sometimes known as the rule against ‘claim splitting,’
the doctrines of bar and merger do the work. ‘Merger’
expresses the idea that, for a winning plaintiff, all claims the
plaintiff did raise or could have raised merge into the judgment
in his favor. If the plaintiff attempts to litigate any of those
claims again, the judgment itself serves as a defense. ‘Bar,’ on
the other hand, refers to the related idea that a judgment for a
winning defendant bars the plaintiff from litigating any claims
he brought or could have brought in the prior suit.
Guerrero v. Dep't of Corr. & Rehab., 28 Cal. App. 5th 1091, 1098 (2018)
(citations omitted) (emphasis added).
When the plaintiff recovers a judgment against the defendant, claim
preclusion (i.e., merger and bar) affects the rights of the plaintiff and the
defendant in different ways. Restatement (Second) of Judgments § 18 3
provides:
When a valid and final personal judgment is rendered in favor
of the plaintiff:
(1) The plaintiff cannot thereafter maintain an action on
the original claim or any part thereof, although he may be
able to maintain an action upon the judgment; and
(2) In an action upon the judgment, the defendant cannot
avail himself of defenses he might have interposed, or did
3
California courts generally rely on the Restatements, see DKN Holdings LLC v.
Faerber, 61 Cal. 4th 813, 821-22 (2015) (citing the Restatement (Second) of Contracts and
Restatement (Second) of Judgments), and in particular have cited Restatement (Second)
of Judgments § 18 when discussing merger, see Guerrero, 28 Cal. App. 5th at 1098.
7
interpose, in the first action.
Restatement (Second) of Judgments § 18 (emphases added). Claim
preclusion (i.e., merger and bar) does not prevent a defendant from
exercising its contractual rights to attorneys’ fees in post-judgment
litigation, because the right to attorneys’ fees is not a “defense” to the
plaintiff’s claims.
This adheres closely to the policies that support all preclusion
doctrines. American law generally precludes relitigation of claims and
issues in order to protect the parties and the court system from wasteful
repetition and to avoid inconsistent results. “The idea is straightforward:
Once a court has decided an issue, it is ‘forever settled as between the
parties,’ thereby ‘protect[ing]’ against ‘the expense and vexation attending
multiple lawsuits, conserv[ing] judicial resources, and foster[ing] reliance
on judicial action by minimizing the possibility of inconsistent verdicts.’” B
& B Hardware, Inc. v. Hargis Indus., Inc., 575 U.S. 138, 147 (2015) (citations
omitted); see also Pedrina v. Chun, 906 F. Supp. 1377, 1398 (D. Haw. 1995),
aff’d, 97 F.3d 1296 (9th Cir. 1996) (Preclusion “protects the integrity of the
courts and promotes reliance upon judicial pronouncements by requiring
that the decisions and findings of the courts be accepted as undeniable
legal truths. Res Judicata furthers the finality of legal disputes and
eliminates the time and expense of relitigation by requiring that parties
bring all claims arising out of a transaction, or series of connected
8
transactions, in one action.”). Forbidding a plaintiff from suing and
recovering more than once for the same breach of a contract furthers these
policies. See B & B Hardware, Inc., 575 U.S. 138 at 147 (“In short, ‘a losing
litigant deserves no rematch after a defeat fairly suffered.’” (quoting Astoria
Fed. Sav. & Loan Ass’n v. Solimino, 501 U.S. 104, 107 (1991))). But preventing
a defendant from recovering attorneys’ fees for post-judgment litigation,
where the underlying contract entitled the defendant to those fees and the
defendant prevailed in that litigation, does not.
For these reasons, I think that the bankruptcy court’s decision rests
on an erroneous view of the law and that it must be vacated. If the matter
were remanded, I would emphasize that an award of attorneys’ fees is
always subject to the trial court’s sound discretion. See Film Ventures Int’l,
Inc. v. Asher (In re Film Ventures Int’l, Inc.), 75 B.R. 250, 253 (9th Cir. BAP
1987) (“[I]t has long been held that the trial court is in the best position to
resolve disputes over legal fees. Thus, the standard of review is whether
the court abused its discretion.” (citations omitted)). I would state that the
court should carefully consider whether the amount of fees is reasonable
under all of the relevant circumstances, including (among many other
things) the extent to which the defendant was successful in both legal and
practical terms.4
4
In this regard, it may be relevant that the judgment creditor in a case like this
(continued...)
9
(...continued)
one could likely offset the defendant’s attorneys’ fees against the creditor’s claims,
rather than pay them in cash.
10