Finn v. SVP ( 2020 )

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 FINN, et al., Case No. 3:20-cv-01475-WHO Appellants, 8 v. 9 10 SVP, Appellee. 11 12 FINN, et al., Case No. 3:20-cv-03132-WHO 13 Appellants, 14 ORDER ON BANKRUPTCY APPEALS v. 15 SVC, 16 Appellee. 17 18 These related appeals arise from the same bankruptcy proceeding and concern the same 19 narrow issue. In two orders, the Bankruptcy Court disallowed four claims by the appellants on the 20 basis of a settlement agreement between the parties here and others. For the reasons explained 21 below, I affirm the Bankruptcy Court’s orders.1 22 BACKGROUND 23 This Order discusses only the facts relevant to this discrete issue. The appellants in both 24 cases are Stephen Finn and Winery Rehabilitation, LLC (“WR”). The appellees are SVP and 25 26 27 1 Oral argument is unnecessary because the facts and legal arguments are adequately presented in 1 SVC, the successors-in-interest to the Chapter 11 trustees of those entities’ bankruptcy estates. 2 On May 17, 2012, the parties entered into two loan instruments. The first was a Loan and 3 Security Agreement (the “Loan Agreement”) under which Silicon Valley Bank would give loans 4 to the appellees secured by liens on and security interests in their property. See Opening Brief 5 (“Op. Br.”) [Dkt. No. 8] Ex. A [Dkt. No. 8-2] at 5–6.2 WR is Silicon Valley Bank’s successor-in- 6 interest on the Loan Agreement. Id. at 5. Under the Loan Agreement, WR claims it is “entitled to 7 reimbursement of attorneys’ fees and expenses in connection with claims asserted against [WR] 8 arising from or relating to the Loan Agreement.” Id. Ex. B [Dkt. No. 8-3] at 7. The second 9 instrument, subordinated to the first, was a Subordinated Secured Grid Promissory Note (the “Grid 10 Note”), under which Finn gave loans to the appellees secured by “all right, title and interest” to 11 and in their assets. Id. Ex. C [Dkt. No. 8-4] at 10. The Grid Note provided that the appellees 12 would reimburse its holder for “any and all costs and expenses (including, without limitation, 13 court costs, legal expenses and reasonable attorneys’ fees, whether or not suit is instituted, and, if 14 suit is instituted whether at the trial court level, appellate level, any bankruptcy, probate or 15 administrative proceeding or otherwise) incurred in collecting or attempting to collect on this 16 Note.” Id. Additionally, Finn claimed that he and SVC are parties to an agreement (the 17 “Indemnity Agreement”), which provided that SVC would indemnify Finn against expenses 18 incurred in defending himself for actions taken on behalf of SVC. See 3132 Op. Br. Ex. E [3132 19 Dkt. No. 7-6] at 7. Finn argues that the Indemnity Agreement would apply to his attorney fees and 20 expenses in this proceeding and related ones discussed below. Id. 21 SVP and SVC entered bankruptcy proceedings in February 2017. See Case Nos. 17- 22 10067-RLE, 17-10065-RLE. In April 2017, Finn and WR filed four claims in the bankruptcy that 23 they now appeal (Claims 11, 12, 13, and 14, collectively the “Finn Party Claims”). Dkt. Nos. 8-2, 24 8-4; 3132 Dkt. Nos. 7-2, 7-4. Those claims were for the principal and interest owed on the Loan 25 Agreement and Grid Note. 26 In July 2017, SVP and SVC commenced an adversary proceeding in the Bankruptcy Court 27 1 (the “Adversary Proceeding”) against Finn and another party. Dkt. No. 8-7. They sought, among 2 other things, disallowance of Finn’s claims (Claims 13 and 14). Id. In October 2017, Ross and 3 Kelleen Sullivan (“the Sullivans”), equity holders and former debtors-in-possession of the SVP 4 and SVC estates, see Op. Br. Ex. X (“Hearing Trans.”) [Dkt. No. 8-24] at 18–19, brought an 5 action in this Court against Finn and another entity (the “District Court Action”). See No. 3:17- 6 cv-05799. 7 With the Bankruptcy Court’s approval, the trustee of SVP and SVC’s estates carried out a 8 sale of the appellee’s property and, in January 2018, paid Finn and WR for the principal and 9 interest (and post-petition fees and expenses) on the Loan Agreement and Grid Note. See Dkt. 10 Nos. 8-8 at 3 (authorizing sale and payments); 8-20 at 21 (finding that payment occurred). 11 In May 2018, the Sullivans objected to WR’s claims (Claims 11 and 12). Dkt. No. 8-9. 12 The Bankruptcy Court sustained the objection because the claims had been paid by the sale 13 proceeds, except to the extent that WR had “a contingent claim for a possible right to recover 14 attorneys fees, at a minimum, incurred in protecting it [sic] interests.” Dkt. No. 8-12 at 3. At that 15 point, the appellants had not claimed attorney fees or expenses. 16 In September 2018, Finn and WR amended their claims to include reimbursement, under 17 the Loan Agreement, Grid Note, and Indemnity Agreement, of attorney fees and expenses in 18 connection with litigating the bankruptcy claims, the Adversary Proceeding, and the District Court 19 Action. Dkt. Nos. 8-3, 8-6; 3132 Dkt. Nos. 7-3, 7-6. 20 On May 8, 2019, the trustee applied to the Bankruptcy Court for authorization to enter into 21 a compromise with Finn, WR, and a group of other creditors. Op. Br. Ex. N (“Compromise 22 Application”) [Dkt. No. 8-14]. Much of the Settlement Agreement concerned creditors other than 23 Finn and WR and a related civil state court action. See Settlement Agreement at 22.3 As relevant 24 here, the trustee agreed to dismiss the Adversary Proceeding with prejudice while Finn and WR 25 agreed to subordinate the Finn Party Claims to other debt in the proceeding. Id. 26 27 3 The Settlement Agreement is in the record before me as part of the appellants’ Exhibit N, the 1 This appeal arises from a dispute over two paragraphs of the Settlement Agreement. 2 Paragraph 2 subordinates the Finn Party Claims to other debt and also provides in relevant part 3 that “[n]either the Finn Party Claims nor [another claim not relevant here] are being liquidated or 4 otherwise resolved by this Agreement. Except as set forth in this Agreement, the Parties reserve 5 all rights as to the Finn Party Claims and [the other claim].” Id. Paragraph 6 of the Settlement 6 Agreement provides, “The Settling Creditors and the Trustee shall bear their own costs, expenses 7 and attorneys’ fees incurred in connection with the [state civil] Action, Adversary Proceeding, 8 District Court Action and the Bankruptcy Cases, and the negotiation, preparation, and application 9 for Bankruptcy Court approval of this Agreement.” Id. The Bankruptcy Court granted the 10 trustee’s application and authorized him to enter into the Settlement Agreement. Op. Br. Ex. P 11 (“Compromise Order”) [Dkt. No. 8-16]. The Court’s Compromise Order then carried out those 12 settlement terms within its power, including the subordination of the Finn Party Claims 13 “[c]onsistent with paragraph 2 of the Settlement Agreement.” Id. at 3. 14 SVC and SVP’s bankruptcy estates were eventually given separate trustees; both objected 15 to the Finn Party Claims. Dkt. No. 8-19; 3132 Dkt. No. 7-20. Among other arguments, the 16 trustees contended that the principal and interest due on both the Loan Agreement and the Grid 17 Note had been paid to WR and Finn from the asset sale, leaving only attorney fees and expenses 18 arising from the claim process, the Adversary Proceeding, and the District Court Action. Those 19 attorney fees and expenses, the trustees argued, had been extinguished by Paragraph 6 of the 20 Settlement Agreement. The Bankruptcy Court agreed with that interpretation of the Settlement 21 Agreement, explaining its reasoning at length orally at a hearing on one of the motions. Hearing 22 Trans. at 18–33. It also made clear that its Compromise Order “simply approves the terms and 23 conditions of the Settlement Agreement. It doesn’t add to or take away from anything from that 24 agreement.” Id. at 16. The Court entered written orders disallowing all Finn Party Claims. Dkt. 25 No. 8-22; 3132 Dkt. No. 7-23. The appellants now appeal both Orders. 26 LEGAL STANDARD 27 District courts have jurisdiction to hear appeals from bankruptcy courts under 28 U.S.C. § 1 of contracts, including settlement agreements, is a question of law reviewed de novo. 2 Congregation ETZ Chaim v. City of Los Angeles, 371 F.3d 1122, 1124 (9th Cir. 2004). Factual 3 findings, including about extrinsic evidence, are reviewed for clear error. Lundell v. Anchor 4 Const. Specialists, Inc., 223 F.3d 1035, 1039 (9th Cir. 2000); DP Aviation v. Smiths Indus. 5 Aerospace & Def. Sys. Ltd., 268 F.3d 829, 836 (9th Cir. 2001). 6 DISCUSSION 7 The Bankruptcy Court’s Compromise Order and Orders disallowing the Finn Party Claims 8 make clear that they interpret and approve the Settlement Agreement. See Compromise Order at 2 9 (“The Application is approved.”); Hearing Trans. at 17 (“Well, let me clear about the 10 [Compromise Order] that I entered. The order I entered with the language in it simply approves 11 the terms and conditions of the Settlement Agreement. It doesn’t add to or take away from 12 anything from that agreement. So I want to be clear on the record that that is the order that was 13 entered approving the Settlement Agreement.”); Dkt. No. 8-22 at 1 (order is issued “for the 14 reasons stated on the record”); 3132 Dkt. No. 7-23 (same). The parties agree that California 15 contract law dictates interpretation of the Settlement Agreement. Op. Br. 8; Answering Brief 16 [Dkt. No. 10] 8. 17 “The fundamental goal of contractual interpretation is to give effect to the mutual intention 18 of the parties.” Bank of the W. v. Superior Court, 2 Cal. 4th 1254, 1264 (1992); see CAL. CIV. 19 CODE § 1636. To determine the parties’ intent, California courts “look first to the language of the 20 contract in order to ascertain its plain meaning.” Hartford Cas. Ins. Co. v. Swift Distribution, Inc., 21 59 Cal. 4th 277, 288 (2014) (internal quotations and citation omitted). If the language of the 22 contract is “clear and explicit, it governs.” Bank of the W., 2 Cal. 4th at 1264; see CAL. CIV. CODE 23 § 1638. “The whole of a contract is to be taken together, so as to give effect to every part, if 24 reasonably practicable, each clause helping to interpret the other.” CAL. CIV. CODE § 1641. 25 “Particular clauses of a contract are subordinate to its general intent.” Id. § 1650. If provisions of 26 a contract are contradictory, they must be “reconciled, if possible, by such an interpretation as will 27 give some effect to” both provisions, always “subordinate to the general intent and purpose of the 1 “When a contract is reduced to writing, the intention of the parties is to be ascertained from 2 the writing alone, if possible.” CAL. CIV. CODE § 1639. In general, if a written contract “was 3 intended to be the complete and final expression of the parties’ intent,” extrinsic evidence cannot 4 be used to interpret it. In re Bennett, 298 F.3d 1059, 1064 (9th Cir. 2002). In other words, if the 5 contracted is “fully integrated,” the parol evidence rule prohibits consideration of evidence of 6 meaning beyond the contract itself. See id. Extrinsic evidence can be used, however, to interpret 7 ambiguous terms, provided they are “reasonably susceptible to the proffered meaning before parol 8 evidence is permitted.” Id. 9 I. Integration 10 The Settlement Agreement contains an integration clause: “This Agreement contains the 11 entire agreement between the Settling Creditors and the Trustee regarding its subject matter. This 12 Agreement cannot be modified or amended, except in writing executed by the party to be charged. 13 Except as expressly set forth herein, there have been no representations or promises made by any 14 party and relied upon by the other in entering into this Agreement.” Settlement Agreement at 24. 15 Consequently, the parol evidence rule bars consideration of extrinsic evidence unless the contract 16 is ambiguous. 17 II. Interpretation 18 These appeals concern the interplay between two provisions of the Settlement Agreement. 19 Paragraph 2 provides that the Finn Party Claims are not “being liquidated or otherwise resolved by 20 this Agreement” and that “[e]xcept as set forth in this Agreement, the Parties reserve all rights as 21 to the” Finn Party Claims. Id. at 22. Paragraph 6 provides that the settling parties, including 22 appellants, “shall bear all their own costs, expenses and attorneys’ fees incurred in connection with 23 the [state civil] Action, Adversary Proceeding, District Court Action and the Bankruptcy Cases, 24 and the negotiation, preparation and application for Bankruptcy Court approval of this 25 Agreement.” Id. The Bankruptcy Court found that the principal and interest from the loans that 26 formed the basis of the Claims were paid in full and that, as a result, the Finn Party Claims were 27 only unsatisfied as to attorney fees and expenses. The question on appeal is whether Paragraph 2 1 means they cannot. 2 They cannot, and I affirm the Bankruptcy Court’s interpretation. As I explain, that 3 interpretation gives each provision its plain meaning and ensures that both provisions work in 4 concert. The appellants’ interpretation, in contrast, would require ignoring or rewriting Paragraph 5 6 and lead to a strained reading of the Settlement Agreement as a whole.4 6 Paragraph 6 is clear and explicit: The appellants must “bear all their own costs, expenses 7 and attorneys’ fees in connection with,” among other things, the Adversary Proceeding, District 8 Court Action, and bankruptcy proceeding. Id. If Paragraph 2 did not exist, Paragraph 6 would 9 end this appeal. The appellants could not reasonably argue that their claims for attorney fees and 10 expenses survived Paragraph 6 standing alone. 11 The only issue, therefore, is whether Paragraph 2 contradicts Paragraph 6. There are two 12 relevant sentences in Paragraph 2. The second sentence—the last in the paragraph—plainly does 13 not clash with Paragraph 6. It states that the parties reserve all rights to the Claims “[e]xcept as set 14 forth in this Agreement.” Id. Paragraph 6 then “set[s] forth” that the appellants shall bear their 15 own attorneys’ fees in connection with the relevant proceedings.5 16 Appellants must, consequently, rely on the first sentence. That sentence gives them 17 slightly more purchase because it does not include a similar “except for” clause; it states that, 18 while the Finn Party Claims are subordinated to trade debt, they are not “liquidated” or “otherwise 19 resolved” by the Settlement Agreement. For several reasons, however, this sentence cannot be 20 read in the absolute way appellants urge and still cohere with the remainder of the Settlement 21 Agreement. See CAL. CIV. CODE § 1641 (“The whole of a contract is to be taken together, so as to 22 4 This interpretation applies regardless of whether the payment of attorney fees and expenses is 23 based on the Loan Agreement, Grid Note, or Indemnification Agreement because all preceded the Settlement Agreement. 24 5 In their Reply, the appellants argue that the phrase “except as set forth in this Agreement” means 25 only “except as set forth in Paragraph 2.” See Reply [Dkt. No. 11] 4. That reading contradicts both the provision’s plain meaning and the consistent usage of “agreement” across the Settlement 26 Agreement. That interpretation would also undermine the appellants’ own case because the other sentence they rely on states that the Finn Party Claims are not being liquidated or resolved “by this 27 Agreement.” Under the appellants’ new interpretation, either these two consecutive sentences 1 give effect to every part, if reasonably practicable, each clause helping to interpret the other.”). 2 First, when read in context, the purpose of the sentence is to clarify that the Finn Party 3 Claims are not being treated in the same way as the other creditors’ claims—that is, terminated in 4 exchange for the settlement. The preceding paragraph states that the other settling parties’ claims 5 are being withdrawn with prejudice. Settlement Agreement at 22. Paragraph 2 then states that the 6 Finn Party Claims are being subordinated. Id. Accordingly, the sentence at issue serves primarily 7 to clarify that the Finn Party Claims are not being withdrawn or disallowed as part of the 8 Settlement Agreement like the other parties’ claims were. 9 Second, adopting appellants’ reading would require distorting the plain meaning of 10 Paragraph 6. See Hartford, 59 Cal. 4th at 288. Paragraph 6 explicitly states that the “Settling 11 Creditors” shall bear their own fees and costs, not that the Settling Creditors except for Finn and 12 WR shall do so. If the parties intended to depart so starkly from the plain meaning of Paragraph 6, 13 they would not have done so in as subtle a way as a sentence that simply makes clear that the 14 pending Claims were not being liquidated or resolved as consideration for the settlement. The 15 Settlement Agreement, moreover, is careful to differentiate when it speaks about Finn and WR and 16 when it speaks about the other creditors—which it consistently does as a group with the label 17 “Former Employees.” See, e.g., Settlement Agreement at 21; see also id. at 22 (contrasting 18 “Former Employee Claims” with “Finn Party Claims”). Indeed, it expressly defines “Settling 19 Creditors” to mean “Finn, WR and the Former Employees.” Id. at 21.6 This consistent pattern 20 indicates that, when Paragraph 6 says that the “Settling Creditors” must bear their own fees and 21 expenses, it means it. See ML Direct, Inc. v. TIG Specialty Ins. Co., 79 Cal. App. 4th 137, 142 22 (2000) (explaining that words are presumptively used in the “same sense” throughout a contract). 23 The appellants offer no explanation for why Paragraph 6 would not, on their interpretation, simply 24 have said that the “Former Employees” shall bear their own fees and expenses. 25 Third, appellants’ interpretation would require an unnatural reading of Paragraph 2. The 26 6 The appellants argue in their Reply that “Paragraph 6 does not include any language referencing 27 [Finn and WR’s] Claims.” Reply 3. But that paragraph states that all settling parties will bear 1 last sentence would not explicitly reserve all rights “except as provided” in the Settlement 2 Agreement only for the sentence before it to stealthily preserve the right to collect attorney fees in 3 violation of Paragraph 6. The Bankruptcy Court’s interpretation, in contrast, does not require 4 twisting the plain language of either provision. 5 The appellants have several responses. They argue that, under the Bankruptcy Court’s 6 interpretation, Paragraph 2 would mean nothing in practical terms because, at the time of 7 settlement, the Finn Party Claims had been compensated except for attorney fees and expenses. 8 Op. Br. 9–10. The appellants argue, in other words, that the Finn Party Claims were at that point 9 only for attorney fees and expenses and that, as a result, the Settlement Agreement would be 10 resolving them in practice. I disagree. The Settlement Agreement itself did not “liquidate[]” or 11 “resolve[]” the claims in the way those words must be understood in context. The claims would 12 not be withdrawn by the Settlement Agreement and were not being disallowed as consideration for 13 settling. It is true that, by the time of the settlement, the asset sale had already given payments to 14 Finn and WR on their loans and that the attorney fees and expenses were still outstanding. But 15 that reality does not mean that the Settlement Agreement itself liquidated or resolved the claims— 16 as it did for the other creditors’ claims. To the contrary, the appellants would, for instance, still be 17 able to enforce those claims if the principal or interest payments on them were inadequate. If the 18 claims were liquidated or resolved as part of the agreement, the appellants would not be able to 19 enforce them. At most, the Settlement Agreement means that the appellants could no longer 20 request a specific type of compensation in their claims. 21 Next, the appellants argue that any inconsistency between the two paragraphs should be 22 resolved in favor of their interpretation because, when provisions conflict, (1) the more specific 23 takes precedence over the more general and (2) the earlier takes precedence over the later. Op. Br. 24 9–10 (citing Hobson v. Mut. Ben. Health & Acc. Ass’n, 99 Cal. App. 2d 330, 335 (1950)). 25 Parenthetically, the authority they rely on for their specificity argument applies to statutory 26 interpretation. See CAL. CODE CIV. P. § 1859. And it is not obvious that Paragraph 2 is the more 27 specific. More importantly, the two paragraphs, properly construed, are entirely consistent. 1 if possible, by such an interpretation as will give some effect to” both. CAL. CIV. CODE § 1652. 2 The appellants also assert that the Bankruptcy Court’s Compromise Order contradicts this 3 interpretation when it states that, “[c]onsistent with paragraph 2 of the Settlement Agreement, 4 nothing in this order allows or disallows” the Claims. Op. Br. 10. As I explained above, the 5 Bankruptcy Court made clear that its Compromise Order merely applied the Settlement 6 Agreement without alteration. It did not allow or disallow any claims as part of the agreement. 7 In their Reply, the appellants argue for the first time that the Settlement Agreement’s 8 interpretation “really hinges on a single word: bear.” Reply 3. They contend that Paragraph 6’s 9 use of the word “bear” instead of “waive,” “withdraw,” or “forego” supports their interpretation. 10 Id. But they have pointed to no evidence that each party “bear[ing]” its own attorney fees means 11 anything other than the ordinary meaning of that phrase in this context. See, e.g., Astrue v. Ratliff, 12 560 U.S. 586, 591 (2010) (describing the “American Rule that each litigant bear his own 13 attorney’s fees”) (internal alterations and quotations omitted). Moreover, they do not indicate 14 what Paragraph 6 could plausibly mean if not that each party would pay for its own attorney fees 15 and expenses in the named proceedings. They suggest it might mean that the Settlement 16 Agreement merely put off disputes over fees and costs “for another day.” Id. That is simply not 17 what Paragraph 6 says. 18 The appellants’ final argument—and the primary argument in their briefs—is that I should 19 consider extrinsic evidence, namely three statements of the trustee related to the Settlement 20 Agreement. Id. 7–8. The trustee stated in his notice about the Settlement Agreement that the 21 Claims “are not being liquidated or otherwise resolved”; he said in a status conference statement 22 that “[i]n light of still pending litigation in the District Court . . . it does not appear possible to 23 liquidate the [Claims] until that litigation is resolved”; and he stated at a hearing that the Claims 24 “are not being liquidated.” Id. As an initial matter, the extrinsic evidence cannot alter the 25 meaning of the contract because I have found that the contract is unambiguous. If I were to 26 nonetheless consider the extrinsic evidence, it does not overcome the provisions’ plain meaning. 27 The first and third statements parrot the Settlement Agreement’s terms, rather than adding 1 to liquidate the claims because separate litigation was pending. It is not an admission that what 2 || the parties truly meant in the Settlement Agreement was that Paragraph 6 silently exempts Finn 3 and WR. 4 CONCLUSION 5 Accordingly, the Orders of the Bankruptcy Court in both appeals are AFFIRMED. 6 || Judgments shall be entered accordingly. 7 IT IS SO ORDERED. 8 Dated: October 21, 2020 10 . William H. Orrick 11 United States District Judge 12 © 15 16 = 17 Z 18 19 20 21 22 23 24 25 26 27 28