In re: Tea Station Investment, Inc. Tea Station, Inc. Tea Creations, Inc. Tea City, Inc. Tea Hut, Inc. Tea Station Operation, Inc.

FILED
OCT 18 2022
NOT FOR PUBLICATION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-22-1031-SGT
TEA STATION INVESTMENT, INC.;
TEA STATION, INC.; TEA CREATIONS, Bk. No. 2:20-bk-14175-NB
INC.; TEA CITY, INC.; TEA HUT, INC.;
TEA STATION OPERATION, INC.; TEA
ISLAND, INC.; TEA PROFESSOR, INC.,
Debtors.
TEA STATION INVESTMENT, INC.;
TEA STATION, INC.; TEA CREATIONS,
INC.; TEA CITY, INC.; TEA HUT, INC.;
TEA STATION OPERATION, INC.; TEA
ISLAND, INC.; TEA PROFESSOR, INC.,
Appellants,
v. MEMORANDUM*
BAODI ZHOU,
Appellee.
Appeal from the United States Bankruptcy Court
for the Central District of California
Neil W. Bason, Bankruptcy Judge, Presiding
Before: SPRAKER, GAN, and TAYLOR, Bankruptcy Judges.
*
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.
INTRODUCTION
After years of litigation, chapter 111 debtors Tea Station Investment,
Inc; Tea Station, Inc; Tea Creations, Inc.; Tea City, Inc., Tea Hut, Inc., Tea
Station Operation, Inc.; Tea Island, Inc.; and Tea Professor, Inc.
(collectively, “Debtors”) defeated creditor Baodi Zhou’s efforts to certify a
class action within the bankruptcy case seeking over $7,000,000 for wage
and hour violations under California’s Labor Code. The bankruptcy court
disallowed Zhou’s class claims because it concluded that she had failed to
satisfy the applicable class certification criteria. At the same time, Zhou
largely succeeded on her relatively small individual wage and hour claims.
The court’s final claim objection order allowed Zhou’s individual claim
against Debtors for $4,674.08 in compensatory damages and $2,865.21 in
prejudgment interest. Debtors have not appealed the damages or interest
awards. Rather, they have appealed the court’s award of $168,766.25 in
statutory attorney’s fees.
Debtors have not established that the court abused its discretion in
granting the attorney’s fees. Accordingly, we AFFIRM.
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101–1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of
Civil Procedure.
2
FACTS2
A. The parties and the state court lawsuit.
Each of the Debtors owned and operated tea stores in Southern
California selling a limited selection of food items and boba tea drinks. One
of the Debtors, Tea Station Investment, Inc. (“TSI”), employed Zhou at its
store in Alhambra, California as kitchen staff between 2008 and 2015.
In September 2017, Zhou commenced her class action lawsuit in the
Los Angeles Superior Court alleging wage and hours violations against
TSI. Zhou later added the other Debtors as additional defendants alleging
that they were part of an integrated business enterprise. The operative state
court complaint was Zhou’s third amended complaint. Zhou proposed a
plaintiff class consisting of all persons who are or were employed in hourly
non-exempt positions within four years of the filing of the complaint
through resolution of the lawsuit. The third amended complaint stated
causes of action for: (1) failure to pay overtime compensation under Cal.
Lab. Code §§ 510 and 1194; (2) failure to pay for all hours worked under
Cal. Lab. Code §§ 1182.12, 1194, 1197, 1197.1, and 1198; (3) failure to
provide meal periods under Cal. Lab. Code §§ 226.7, 512, and 558;
(4) failure to permit rest periods under Cal. Lab. Code §§ 226.7 and 558;
2
We exercise our discretion to take judicial notice of documents electronically
filed in the underlying bankruptcy case. See Atwood v. Chase Manhattan Mortg. Co. (In re
Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
3
(5) failure to maintain accurate and itemized statements of hours worked
and wages paid under Cal. Lab. Code §§ 226, 226.3, and 558, and under
Wage Order Number 5-2001(7); and (6) unfair business practices under Cal.
Bus. & Prof. Code § 17200. With the exception of the unfair business
practices cause of action, Zhou alleged the same causes action based on the
same misconduct against all of the Debtors.
B. Debtors’ bankruptcy filings and their joint subchapter V plan.
Zhou’s class certification motion in the state court lawsuit was
imminent when Debtors filed their bankruptcy petitions. Though TSI’s
bankruptcy was initially filed as a chapter 7 case, it voluntarily converted
the case to chapter 11 (subchapter V), which was jointly administered with
the non-TSI debtors’ cases. Debtors filed their joint subchapter V small
business plan in November 2020. According to the plan, all of the Debtors
had ceased operations in the Spring of 2020 because of the pandemic. The
plan contemplated that only TSI would resume operations in December
2020; the other Debtors had terminated, or were in the process of
terminating, their leases. Yu Liang Huang signed the joint plan on behalf of
the Debtors as their CEO or CFO.
C. Zhou’s proofs of claim and the claim objection proceedings.
Zhou timely filed proofs of claim in the Debtors’ cases. She filed her
claims as proposed class claims and included class allegations similar to
those set forth in Zhou’s third amended state court complaint. Zhou
attached the complaint as an exhibit to each proof of claim along with
4
numerous other exhibits. Many of these exhibits were intended to show
that Debtors were controlled, managed, and operated by Huang and his
associates as a single integrated business enterprise. The contents of each
proof of claim are substantially the same. They contend that each Debtor
owed the putative class members a total of $7,472,819.06 for unpaid wages
and other violations of California’s Labor Code, costs, and attorney’s fees.
Each claim also identified $400,000 in priority wage claims under
§ 507(a)(4), earned within 180 days of the bankruptcy petition.
In March 2021, Debtors objected to Zhou’s claims on a variety of
grounds and challenged Zhou’s suitability as a class representative. They
pointed out that she ceased working for any of the Debtors roughly five
years before their petition filing and hence had no priority wage claim.
They also noted that she had not worked for any Debtor other than TSI and
claimed that she lacked standing to bring wage claims against the non-
employer debtors which were independently owned and operated. Debtors
additionally contended that Zhou could satisfy neither the generic class
certification factors nor those applicable specifically to class claims filed in
bankruptcy cases.
Debtors also informed the court that after Zhou filed the state court
action in 2017, each of the Debtors hired third party payroll processor ADP
Payroll and switched to ADP’s electronic timekeeping system.
Finally, to the extent the court was inclined to permit Zhou to
proceed on behalf of all TSI employees, Debtors asked the court to estimate
5
her claim for both plan voting and distribution purposes.
After holding a hearing on the claim objection, the bankruptcy court
granted in part and continued in part the claim objection proceedings. The
court held that Zhou could not represent the Debtors’ employees who
might hold priority wage claims because her general unsecured claim
inherently conflicted with the priority claims. The court observed that the
cost and time of full-fledged liquidation of Zhou’s claims threatened to
exhaust the small amount of funds available for distribution to all creditors.
To address these concerns, the court held that Zhou’s claims should be
“estimated.” Finally, the court scheduled supplemental briefing on the
issues of: (1) the merits of Zhou’s individual claim; (2) her ability to meet
all of the factors for class certification as to TSI employees only; and (3) an
estimation of the class claim against TSI.
After supplemental briefing and additional oral argument, the court
issued a memorandum decision in October 2021 determining that Zhou
had failed to satisfy the class certification requirements. The court restated
its concerns about the cost and delay inherent in fully litigating Zhou’s
class claims and exercised its discretion to limit discovery and utilize the
claims estimation process under § 502(c) to fix the allowed amount of
Zhou’s claims.
As to the class certification standards, the court found that Zhou
sufficiently met the bankruptcy-specific factors but failed to satisfy the
class certification factors of Civil Rule 23. It found that she worked the
6
night shift and often was the sole cook in the Alhambra store’s kitchen. As
the court explained, this made Zhou’s work experience unique as
compared to TSI’s other store employees who typically did not work in the
kitchen, did not work the night shift, were employed part time and for a
very short duration, and did not work by themselves in their respective
duties. The court also found significant Zhou’s lack of personal knowledge
of how other, non-kitchen employees of TSI were treated in terms of taking
breaks. And the court was troubled by Zhou’s failure to explain the
methodology behind the allegedly random sampling of TSI’s pay records
she relied on in support of her assertion that the wage and hour violations
she experienced were representative of other employees. The court
concluded that any number of explanations could account for Zhou’s
statistical findings other than wage and hours violations. Based largely on
these same facts, the court concluded that Zhou failed to establish
typicality, commonality, numerosity, or adequacy of representation.
Based on its Memorandum Decision, the court entered an order on
November 16, 2021, disallowing Zhou’s priority wage claims asserted
against all Debtors. The court also disallowed her class claims against all
Debtors and set supplemental briefing and a continued hearing on Zhou’s
individual claims.
D. Determination of Zhou’s individual claims and her attorney’s fees.
In her supplemental brief, Zhou calculated the value of TSI’s wage
and hour violations based on her analysis of TSI’s time and pay records for
7
Zhou between September 7, 2013 (the extent of the four-year limitations
period) and September 26, 2015 (the date Zhou ceased working for TSI).
She calculated $6,232.10 in damages, $3,820.28 in prejudgment interest, and
requested $15,125.12 in costs. Most importantly for our purposes, Zhou
sought $670,065.00 in attorney’s fees incurred in prosecuting the action.
According to Zhou, she deducted from this amount all time entries
“directly attributable to class certification.” Zhou further posited that fees
granted pursuant to a California fee shifting statute were not required to be
strictly proportional to the damages awarded.
Debtors argued that Zhou presented insufficient evidence of wage
and hour violations based on ill-founded examples and impermissible
extrapolation from those examples. They also specifically challenged
Zhou’s $670,065.00 fee request. Debtors argued that the fees requested were
not proportional and were per se unreasonable at over 100 times the
compensatory individual damages sought, citing Harrington v. Payroll
Entertainment Services., Inc., 160 Cal. App. 4th 589, 594, as modified on
denial of reh’g (Mar. 20, 2008). They also contended that virtually all of
Zhou’s fees and costs were attributable to her ill-conceived class action
attempts and that such fees did not meet the requirements articulated in
Hensley v. Eckerhart, 461 U.S. 424, 440 (1983). Debtors additionally claimed
that some of the time entries were incomprehensible or were for non-
8
compensable administrative services. 3
Zhou countered in her reply that Debtors’ challenges to her claimed
wage and hours damages were specious. She noted her uncontroverted
declaration testimony that she was unable to take uninterrupted meal
breaks. She also pointed to the time and pay records of other employees
showing that Debtors never paid a single meal period or rest period
premium. As for the attorney’s fees, she claimed that California did not
impose a proportionality requirement in determining the reasonable
amount of fees to award under prevailing party fee shifting statutes. She
also posited that California courts generally defer to the reasonable
judgment of the prevailing party’s counsel in determining whether the fees
sought were necessary to prevail. Finally, she pointed out that none of the
fee cases Debtors relied on were analogous to her situation.
Prior to the hearing held on November 30, 2021, the court issued a
tentative ruling prospectively awarding $4,674.08 in compensatory
damages to Zhou.4 The court reasoned that both sides presented some
evidence to support their positions but that the evidence presented by
Debtors in response to Zhou’s prima facie evidence was only sufficient to
3 Debtors also disputed the hourly rates charged by Zhou’s counsel but have not
pressed this issue on appeal. Because it does not affect the matters before us, we do not
discuss it further.
4 The tentative ruling is available on the bankruptcy court’s website at
http://ecf-ciao.cacb.uscourts.gov/kioskPDF/NB_113021.pdf, at pp. 49-52 (last visited Oct.
13, 2022).
9
justify a slight downward adjustment for purposes of estimating the
allowed amount of Zhou’s claim. The court therefore reduced the amount
of the damages and the interest accrued by 25% to arrive at the $4,674.08 in
compensatory damages and $2,865.21 in prejudgment interest.
As for attorney’s fees, the court tentatively ruled that it would reduce
Zhou’s $670,065.00 fee request by two-thirds, and then slightly “round
down” to $215,000 to account for several vague time entries. The court
recognized that Zhou had purportedly removed all time entries
attributable solely to the class action claims but held that it needed to
substantially reduce entries that were hybrid in nature and related to both
her class and individual claims. According to the court, Debtors’
proportionality argument hinged on the benefit of “hindsight” by focusing
on the results achieved rather than the “reasonable range of possible
recoveries” given the information available to Zhou and her counsel at the
time the fees and costs were incurred. According to the court, Debtors had
failed to establish that the amount of fees it proposed to award was
excessive in light of the contemporaneous measure of fees reasonably
incurred.
At the November 30, 2021 hearing, Zhou expressed her willingness to
submit on the tentative. But Debtors were not satisfied. Debtors’ special
litigation counsel explained that they had inadvertently neglected to attach
to their supplemental brief a chart analyzing Zhou’s counsel’s time entries
and color coding those entries based on grounds for disallowance of those
10
fees. Debtors further challenged the court’s tentative ruling giving Zhou
any amount for the hybrid time entries. According to Debtors, the court
could not award fees for any work related to her class claims even if that
work overlapped with that necessary for her individual claims. Debtors
insisted that any such award would be improper because she had not
prevailed on class certification.
The court observed that if there was going to be any effective relief
for wage and hour claimants carried out through attorney representation,
class claims (and a reasonable investigation into such claims) must play a
prominent role because otherwise attorney representation would be cost
prohibitive in most instances. The court also explained that it was not
always possible to unscramble the hybrid services rendered for both class
and individual claims. For these reasons, the court posited that it might be
reasonable to pay some amount on account of hybrid fees incurred.
Notwithstanding this observation, the court asked Debtors to submit their
missing chart breaking down the attorney’s fees sought by Zhou’s counsel
and asked Zhou to submit additional information on her counsel’s hourly
rates.
The parties filed the additional material, and the court permitted
further briefing on Debtors’ color-coded chart and fee analysis. In her
response, Zhou insisted that she already had reduced her fee request to
exclude fees pertaining solely to the class claims. She contended that nearly
all of the remaining fees ($666,240) were hybrid. According to her, much of
11
the work reflected in these time entries was inextricably intertwined with
her individual claims. In essence, Zhou disputed Debtors’ characterization
of the fees, relying on the time entries to speak for themselves.
In their supplemental reply, Debtors offered a detailed discussion of
California case law, focusing on Chavez v. City of Los Angeles, 47 Cal. 4th 970(2010). They advocated for the first time that the court had discretion to
completely deny fees by applying Cal. Civ. Proc. Code § 1033(a). Debtors
then conceded that the court properly expressed concern that the denial of
fees cannot be based on a hindsight analysis of the merits of their
underlying class claims. But they disputed the court’s ability to award fees
in excess of $200,000 when the potential recovery on her individual
claims—the only claims on which she prevailed—never reasonably
exceeded $6,232.10.
Debtors also challenged Zhou’s assertions that she needed to spend
$666,000 on her individual claim as “simply untrue and patently
unreasonable.” As for the time entries coded as tasks exclusively related to
the class action or hybrid, Debtors pointed out that the bulk of these entries
pertained to work on discovery, demurrers, or the bankruptcy case.
Debtors reiterated that only the non-employer parties filed demurrers, so
that work obviously pertained only to the class claims. As for the
discovery, Debtors insisted that Zhou failed to offer any concrete
explanation why her individual claims hinged on either employee
handbooks or what the president of TSI had to say, when he did not
12
exercise direct supervision or control over her. Finally, with respect to
bankruptcy matters, Debtors argued that nothing under California law
authorized the court to award fees for time Zhou spent either preparing
her proofs of claim or defending against Debtors’ claim objections.
After holding another hearing, the court entered its final order on
Zhou’s individual claims. The court allowed those claims jointly and
severally against all of the Debtors in the amount of $4,674.08 in
compensatory damages and $2,865.21 in prejudgment interest. But the
court further reduced its fee award from $215,000 to $168,766.25. This
reduction was the result of the court’s decision to estimate the amount of
allowable fees at 25% of the amount requested as opposed to its prior
tentative decision to allow those fees at 33% of the amount requested. The
court also awarded $7,562.56 in costs, representing 50% of the costs
requested.
The court explained its reasoning at length. It determined that many
factual and legal issues arising in the parties’ litigation concerned both
Zhou’s individual claims and her class claims. According to the court, these
included TSI’s written employment policies, its policies in practice, and its
relationship with its affiliates. The court acknowledged the possibility that
the affiliates could have been alter egos, not just for purposes of collection
“but also for purposes of establishing wage trimming or other issues
through evidence of common practice or common control . . . .” The court
then ruled that Zhou’s individual wage claims for which fees are
13
statutorily available were “closely intertwined factually and legally” with
her putative class claims. The court specified that this was true as to the
discovery and litigation directed against the affiliates as well as TSI. The
court further opined that evidence discovered from TSI’s affiliates was
relevant to Zhou’s attempts to obtain “corroborative evidence” to support
her efforts to pin down TSI’s employment policies and practices.
The court stated that it had carefully reviewed the parties’ arguments
regarding Debtors’ color-coded analysis of Zhou’s counsel’s time entries. It
determined that the entries coded as unintelligible or related to non-
compensable services should be substantially disallowed. As for entries
related to bankruptcy matters, the bankruptcy court rejected Debtors’ claim
that fees on these matters were not permitted by the applicable fee shifting
statute. The court similarly rejected Debtors’ argument that all fees related
to litigation with and discovery from the affiliates should be disallowed.
Though the court recognized that Zhou’s fee request needed to be
substantially reduced to account for Zhou’s very limited level of success, it
held that there was no per se ban on fees concerning the litigation and
discovery regarding the class claims so long as the subject fees pertained to
legal or factual issues closely intertwined with the individual claims on
which Zhou prevailed. On the other hand, the court agreed with Debtors
that fees incurred defending against the affiliates’ demurrers should be
denied.
The court declined to engage in an entry-by-entry analysis of the fees
14
sought and their relationship to Zhou’s individual claims and the class
claims. It remained concerned that the nature and manner of the litigation,
and the continuing interests of the estate in conserving very limited
resources, weighed heavily against requiring such an exercise. It concluded
that it had sufficient factual and legal development to estimate the
allowable amount of fees—as it already had done in estimating
compensatory damages.
Finally, the court recognized that there was an “inherent tension” in
determining the reasonable amount of fees incurred when both the class
claims and the individual claims were at issue and when Zhou only
prevailed on her individual claims for a very modest amount. On the one
hand, the court acknowledged that in the broadest sense, it would not be
“reasonable” to spend a large amount of fees on very small individual
claims. On the other hand, the court again pointed to the “largely
intertwined” nature of Zhou’s individual and class claims, and the public
policies that encourage litigants to bring meritorious actions to vindicate
individual rights. After considering this tension, the court concluded that it
would be inappropriate based on “20/20 hindsight” to limit fees based
strictly on proportionality to the results Zhou achieved.
The court entered its final order on February 15, 2022, and Debtors
timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
15
157(b)(2)(B). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Whether the bankruptcy court abused its discretion when it awarded
Zhou $168,766.25 in statutory attorney’s fees.
STANDARD OF REVIEW
We review for an abuse of discretion the bankruptcy court’s fee
award. See Hensley, 461 U.S. at 436-37. The bankruptcy court abused its
discretion if it applied an incorrect legal rule or its factual findings were
illogical, implausible, or without support in the record. TrafficSchool.com v.
Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011).
DISCUSSION
“[T]he ‘basic federal rule’ in bankruptcy is that state law governs the
substance of claims . . . .” Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec.
Co., 549 U.S. 443, 450 (2007); see also Klein v. City of Laguna Beach, 810 F.3d
693, 702 (9th Cir. 2016) (holding that under Erie R. Co. v. Tompkins, 304 U.S.
64, 78 (1938), “federal courts apply state law for attorneys’ fees to state
claims”). The bankruptcy court relied on Cal. Lab. Code § 1194(a) 5 in its
decision granting fees. This fee shifting statute gives the court discretion to
5
Cal. Lab. Code § 1194(a) provides:
Notwithstanding any agreement to work for a lesser wage, any
employee receiving less than the legal minimum wage or the legal
overtime compensation applicable to the employee is entitled to
recover in a civil action the unpaid balance of the full amount of
this minimum wage or overtime compensation, including interest
thereon, reasonable attorney's fees, and costs of suit.
16
award fees to a prevailing plaintiff based on certain types of employee
wage claims. See Kirby v. Immoos Fire Prot., Inc., 53 Cal. 4th 1244, 1251
(2012).
Debtors have not disputed on appeal the applicability of Cal. Lab.
Code § 1194(a) to Zhou’s wage claims. Nor have Debtors argued that Zhou
did not “prevail” within the meaning of these statutes. See generally Hensley,
461 U.S. at 433 (stating that plaintiffs may be awarded fees as the
“prevailing party” when “they succeed on any significant issue in litigation
which achieves some of the benefit the parties sought in bringing suit”). 6
Instead, they contend that the bankruptcy court did not correctly
determine the amount of fees to award to Zhou. According to Debtors, the
court misapplied the standards for granting fees set forth in Hensley.
Hensley is widely recognized as the seminal case in this area of law.
See, e.g., Costa v. Comm'r of Soc. Sec. Admin., 690 F.3d 1132, 1135 (9th Cir.
2012); Jordan v. City of Cleveland, 464 F.3d 584, 603 (6th Cir. 2006). Moreover,
California courts typically apply Hensley to determine whether and to what
extent a prevailing party is entitled to fees under a fee shifting statue. See,
e.g., Vines v. O'Reilly Auto Enters., LLC, 74 Cal. App. 5th 174, 182-83 (2022)
(fees sought under former Cal. Gov. Code § 12965(b) (now (c)(6)) for
employment discrimination, harassment, and retaliation claims); Gunther v.
6
See also Sharif v. Mehusa, Inc., 241 Cal. App. 4th 185, 192 (2015) (holding that
when the California legislature does not define in a fee shifting statute what it means to
be the “prevailing party,” that determination is subject to the trial court’s discretion).
17
Alaska Airlines, Inc., 72 Cal. App. 5th 334, 356, 360-61 (2021) (fees sought
under Cal. Lab. Code §§ 226(h) and 2699(g)(1) for claims based on unpaid
wages and inadequate wage statements); Espejo v. Copley Press, Inc., 13 Cal.
App. 5th 329, 382 (2017) (fees sought under Cal. Civ. Proc. Code § 1021.5 in
class action to determine status of plaintiffs as employees or independent
contractors).
Hensley sets forth the standards for determining attorney’s fees under
a prevailing party fee shifting statute when plaintiffs achieve only limited
success on the merits of their claims.7 Hensley instructed trial courts to
consider at a minimum three factors in order assess the correct amount of
fees to award when the plaintiff’s success is limited: (1) the “lodestar”
amount; (2) the relatedness (if any) between the successful claims and the
failed claims; and (3) the extent of the party’s success vis a vis the amount
of fees expended. 461 U.S. at 433-37.
As Hensley more specifically put it, the trial court ordinarily should
first determine the “lodestar” amount: the sum of the hours reasonably
expended multiplied by a reasonable hourly rate. Id. at 433-34. Then the
court needs to adjust the lodestar amount to exclude fees incurred on
issues unrelated to the plaintiffs’ successful claims. Id. at 434-35. Even when
all claims are related, the court still must compare the amount of fees
7
The fee shifting provision at issue in Hensley was 42 U.S.C. § 1988(b), which sets
forth in relevant part that in applicable civil rights actions, the court has the discretion
to award the “prevailing party” a reasonable attorney’s fee.
18
reasonably expended to the overall results obtained and make further
reductions to the lodestar amount to the extent the court concludes that
plaintiffs’ limited success in the litigation cannot justifiably or equitably
support a larger fee award. Id. at 433-35. But Hensley emphasized that in
applying these standards, the trial court enjoyed broad discretion and that
there was no precise rule or formula for their consideration. Id. at 436-37.
Even though Hensley declined to articulate a precise rule or formula for
determining the relatedness of claims, it observed that related claims “will
involve a common core of facts or will be based on related legal theories.”
Id. at 435.
On appeal, Debtors challenge application of the second and third
Hensley factors. They argue that no fees can be awarded to Zhou for work
on the class claims because they are unrelated to the individual claims on
which she prevailed. Additionally, they contend that even if some fees are
related to both the individual and class claims, her small recovery on the
individual claims cannot support the amount of attorney’s fees awarded.
A. The bankruptcy court did not abuse its discretion by determining
that Zhou’s class claims and individual claims were related.
Debtors contend that Zhou cannot recover fees for any work
pertaining to her class claims because she did not prevail on those claims,
and they are unrelated to her individual claims. In support of this
argument, they cite to Chavez v. City of Los Angeles 47 Cal. 4th 970 (2010). In
Chavez, the plaintiff police officer brought a series of unsuccessful state,
19
federal, and administrative actions alleging among other things nuisance,
trespass, inverse condemnation, invasion of privacy, federal civil rights
violations, and employment discrimination, harassment, and retaliation in
violation of California’s Fair Employment and Housing Act (“FEHA”). Id.
at 977-80, 990. After years of litigation, the police officer succeeded only on
his FEHA retaliation claim—and was awarded only $1,500 for economic
damages and $10,000 for emotional distress. Id. at 975-76. The police
officer’s counsel then requested a fee award of $436,602.75 under Cal. Gov’t
Code § 12965(b) (now § 12965(c)(6)).8 She later amended her fee request to
add a “2x” multiplier to her “lodestar” calculation to increase her fee
request to $870,935.50. Id. at 981. The trial court denied the fee request in its
totality based on its reading of Cal. Civ. Proc. Code § 1033(a), which applies
where a prevailing party recovers a judgment for less than the $25,000 that
could have been recovered in a limited civil case but was not.9 Id.Looking to federal civil rights law for guidance, the California
Supreme Court acknowledged that a FEHA plaintiff ordinarily should
recover his or her fees unless “special circumstances” justify denial. 47 Cal.
4th at 985-86. Chavez held that Cal. Civ. Proc. Code § 1033(a) qualified as
8 Cal. Gov’t Code § 12965(c)(6) provides: “In civil actions brought under this
section, the court, in its discretion, may award to the prevailing party, including the
department, reasonable attorney’s fees and costs . . . .”
9 Cal. Civ. Proc. Code § 1033(a) provides: “Costs or any portion of claimed costs
shall be as determined by the court in its discretion in a case other than a limited civil
case in accordance with Section 1034 where the prevailing party recovers a judgment
that could have been rendered in a limited civil case.”
20
such a special circumstance. Id. Importantly, however, Chavez also
cautioned that in exercising the discretion to deny fees under Cal. Civ.
Proc. Code § 1033(a), trial courts must avoid hindsight assessments and
instead need to “evaluate the entire case in light of the information that
was known, or should have been known, by the plaintiff’s attorney when
the action was initially filed and as it developed thereafter.” Id. at 986. As
Chavez elaborated:
if . . . the trial court is firmly persuaded that the plaintiff’s attorney
had no reasonable basis to anticipate a FEHA damages award in
excess of the amount recoverable in a limited civil case, and also that
the action could have been fairly and effectively litigated as a limited
civil case, the trial court may deny, in whole or in part, the plaintiff's
claim for attorney fees and other litigation costs.
Id. at 987 (emphasis added).
Chavez ultimately concluded that the trial court properly exercised its
discretion to deny all fees. According to Chavez, the trial court’s exercise of
its discretion was supported by its implicit determination that plaintiff’s
attorney should have realized well before trial that the matter could
effectively have been tried as a limited civil case and that plaintiff’s injury
was far too slight to justify damages in excess of the $25,000 jurisdictional
limit for limited civil cases. Id. at 991.
Chavez also remarked, citing Hensley, that the trial court’s denial of
fees for the plaintiff’s unsuccessful claims additionally was justified
because those claims were not sufficiently related to his sole successful
21
claim. As Chavez put it, “[b]ecause [plaintiff’s] single successful claim
apparently was not closely related to or factually intertwined with
plaintiff’s many unsuccessful claims, the trial court reasonably could and
presumably did conclude that plaintiff was not entitled to attorney fees for
time spent litigating those unsuccessful claims.” Id. at 990.
It is this comment from Chavez on which Debtors primarily focus. In
their appellate reply brief, they pressed this point by citing cases where
trial courts determined that a plaintiff’s unsuccessful class action claims
were not sufficiently related to their successful individual claims to satisfy
Hensley’s relatedness prong. See, e.g., Munger v. First Nat'l Collection Bureau,
Inc., Case No. 15-11276, 2016 WL 3964813, at *4 (E.D. Mich. July 25, 2016);
Cooper v. Sunshine Recoveries, Inc., Case No. 00CIV8898LTSJCF, 2001 WL
740765, at *3 (S.D.N.Y. June 27, 2001).
None of these cases justify reversal. Chavez, Munger, and Cooper all
stand for the basic proposition that a trial court may exercise its broad
discretion to determine that the successful claims and the failed claims are
unrelated. Where such a finding is made, and supported by the record,
Hensley requires denial of a fee award because they arose from failed
claims unrelated to the successful claims. But this does not mean that it was
an abuse of discretion for the bankruptcy court here to reach the opposite
conclusion. See Pincay v. Andrews, 389 F.3d 853, 858 (9th Cir. 2004) (en banc)
(observing that had the district court decided to exercise its discretion to
reach the opposite conclusion, “we would be hard pressed to find any
22
rationale requiring us to reverse.”).
A trial court does not abuse its discretion unless it applies an
incorrect legal rule or its factual findings are clearly erroneous.
TrafficSchool.com, 653 F.3d at 832. Debtors’ opening brief does nothing to
explain how the bankruptcy court’s determination that Zhou’s individual
claims and class claims were intertwined was based on an incorrect
conclusion of law or a clearly erroneous factual finding. As Debtors
themselves have pointed out, it is not our role on appeal to search for error
unaided by arguments that specifically and distinctly raise the pertinent
issues. Christian Legal Soc'y v. Wu, 626 F.3d 483, 485 (9th Cir. 2010);
Greenwood v. FAA, 28 F.3d 971, 977 (9th Cir. 1994).
Even if we were to conclude that Debtors sufficiently challenged the
court’s determination that Zhou’s individual and class claims were closely
intertwined, we perceive no basis for concluding that the court abused its
discretion. The record reflects that the bankruptcy court carefully
considered the individual and class claims and found considerable overlap.
It further found that the fees awarded for such overlapping work were
reasonable and necessary at the time counsel performed the services.
Addressing the time entries Debtors challenged in their color-coded chart,
the court additionally found that Zhou’s discovery and litigation activities
could not readily be parsed between her individual and class claims. These
findings were sufficient to support the bankruptcy court’s determination
that the relatedness prong of Hensley was satisfied.
23
Debtors argue that the fact the class claims involved different
employer entities and different employees than Zhou’s individual claims
somehow undermined the apparent relatedness of the claims. But the
bankruptcy court persuasively explained how the affiliates’ employment
policies and practices were relevant as potential corroborative evidence to
Zhou’s individual claims. It also explained that at the time the fees were
incurred, the common ownership and control of TSI and its affiliates was a
viable and legitimate issue relevant to both her individual and her class
claims.
Effectively, Debtors are seeking a per se rule that class claims and
individual claims are never sufficiently related for purposes of Hensley’s
relatedness requirement when class certification is denied. In light of the
broad discretion Hensley afforded to trial courts and its decision to refrain
from setting concrete rules for determining relatedness, we are
unpersuaded that any per se rule is appropriate. Because Debtors have not
demonstrated that the bankruptcy court’s relatedness determination was
based on either an error of law or clearly erroneous factual findings,
Debtors’ argument challenging the court’s relatedness determination
necessarily fails.
B. The bankruptcy court did not abuse its discretion by awarding
$168,766.25 in fees after comparing the fees Zhou incurred to the
relief she obtained.
Debtors next argue that the bankruptcy court abused its discretion
24
based on the final Hensley prong. According to Debtors, the bankruptcy
court’s fee award was disproportionately large compared to the relief Zhou
obtained. Debtors point out that Zhou’s individual and class claims
combined sought recovery of $7,800,000 but Zhou only recovered $4,674.08,
or .006% of the damages sought. Likewise, Debtors note that Zhou sought
to represent herself and 1399 other class members but only succeeded in
representing herself. Debtors maintain that the 25% of the fees the
bankruptcy court awarded to Zhou was disproportionate to her success
and thus constituted reversible error.
But California law generally rejects a strictly proportional approach
in awarding fees based on prevailing party fee shifting statues. See, e.g.,
Warren v. Kia Motors Am., Inc., 30 Cal. App. 5th 24, 37-39 (2018); Graciano v.
Robinson Ford Sales, Inc., 144 Cal. App. 4th 140, 164 (2006). This proposition
was aptly followed in Heyen v. Safeway Inc., Case No. B243610, 2014 WL
2154676 (Cal. Ct. App. May 23, 2014) (unpublished).10 In Heyen, after nearly
ten years of wage and hour litigation, unsuccessfully brought as a class
action, the plaintiff only recovered individual damages of $26,000. She then
sought to recover fees of $1,512,794.50. The trial court granted her fee
10California courts are prohibited from citing unpublished Court of Appeal
decisions. See Cal. R. Ct. 8.1115. That prohibition does not apply to federal courts to the
extent an unpublished decision indicates how California courts might address a
particular issue. See Magadia v. Wal-Mart Assocs., 999 F.3d 668, 681 n.12 (9th Cir. 2021);
Roberts v. McAfee, Inc., 660 F.3d 1156, 1167 n.6 (9th Cir. 2011); but see United States v.
Martinez-Lopez, 864 F.3d 1034, 1042 (9th Cir. 2017) (en banc) (declining to rely on certain
unpublished California Court of Appeal decisions under the circumstances of that case).
25
request in part, awarding her $603,150. Both plaintiff and defendants filed
cross-appeals Id. at *1. The Court of Appeal affirmed, holding that the
amount of the fee award was, “within the sound discretion of the trial
court, which is the best judge of the value of professional services
rendered.” Id.
The Heyen court specifically rejected the theory that the $603,150 fee
award was impermissible because it was disproportionate to the results
plaintiff achieved. As the Heyen court explained: “[a]lthough the court may
consider the amount at issue in the litigation, as well as counsel’s relative
success in achieving the client’s litigation objectives in adjusting the
lodestar figure, the attorney fee award need not bear any specific
relationship to the dollar amount of the recovery.” Id. at *5 (emphasis
added) (quoting Concepcion v. Amscan Holdings, 223 Cal. App. 4th 1309,
1321 (2014)); see also Harman v. City and Cnty. of San Francisco, 158 Cal. App.
4th 407, 419–421 (2007) (similarly rejecting proportionality requirement in
the context of a civil rights action).
In support of their proportionality argument Debtors again cite to
Hensley, but also to McCown v. City of Fontana, 565 F.3d 1097 (9th Cir. 2009).
Following Hensley, McCown emphasized the importance of the trial court
considering the degree of plaintiff’s success before granting a federal civil
rights plaintiff’s fee request under 42 U.S.C. § 1988. Id. at 1103. But McCown
also specifically eschewed a strict formulaic or proportional approach to
determining the fees of a plaintiff who achieves only limited success. Id. at
26
1104 (citing City of Riverside v. Rivera, 477 U.S. 561, 576 (1986)). Furthermore,
McCown is not particularly apposite. It primarily held that the district court
provided insufficient lodestar calculations and explanations to support a
fee award of $200,000, which reduced the fees plaintiff sought by roughly
33% ($301,551.22 requested). Id. at 1101. McCown also held that the trial
court in awarding fees did not adequately consider that the plaintiff only
succeeded on one of his nine causes of action and only obtained
compensation after settlement of $20,000—less than 10% of the $251,000 he
sought in his settlement demands. Id. at 1103-05. McCowan cited, among
other cases, Farrar v. Hobby, 506 U.S. 103, 114 (1992), another civil rights
case. The plaintiffs in Farrar sought $17 million from six defendants but
only recovered a judgment of $1 from one defendant. The Supreme Court
held that when the principal purpose of a civil rights action is to recover
damages for individual injury and the plaintiffs are unsuccessful in
establishing such injury or are awarded only nominal damages, the trial
court typically can dispense with an analysis of the lodestar amount and
the Hensley factors. In such situation, a court may instead award no fees or
greatly reduced fees based on the stark contrast between the amount of
damages awarded and the amount of damages sought. Id. at 113-15.
McCown and Farrar dealt with fees requested in federal civil rights
actions under 42 U.S.C. § 1988. Unlike Hensley, which California courts
broadly follow, no California decision has followed either McCown or
Farrar outside of the context of fees requested under federal fee shifting
27
statutes, predominantly 42 U.S.C. § 1988.
Citing both Rivera and Farrar, the California Supreme Court in Chavez
stated: “[a]lthough attorney fees need not be strictly proportionate to the
damages recovered, when a plaintiff recovers only nominal damages
because of his failure to prove an essential element of his claim for
monetary relief, the only reasonable fee is usually no fee at all.” Chavez, 47
Cal. 4th at 989 (cleaned up). But Chavez ultimately relied on other grounds
in affirming the trial court’s denial of fees. Furthermore, unlike Farrar,
Zhou established all essential elements to support her individual wage
claims and recovered more than nominal damages.
Here, the bankruptcy court explicitly considered the limited extent of
Zhou’s success and twice reduced the fees requested. Initially, the court
stated that it would reduce the fees by 66%. After additional briefing and
argument on these very topics, the court ordered that the fees sought be
reduced by 75%, from $670,065 to $168,766.25. The bankruptcy court duly
considered the results of the litigation but exercised its discretion to award
fees of $168,766.25, citing the intertwined nature of the work performed,
the reasonableness of the work at the time it was performed, and policy
concerns in encouraging the prosecution of meritorious wage claims.11
11
Debtors also rely on Harrington v. Payroll Ent. Servs., Inc., 160 Cal. App. 4th 589,
as modified on denial of reh'g (Mar. 20, 2008). But Debtors’ reliance is misplaced.
Harrington held that of the $46,000 in attorney’s fees plaintiff requested, the record
could not possibly justify as reasonable a fee award any larger than $500. Id. at 594. As
Harrington explained:
28
As to the policy concerns, the court concluded that the fee statutes at
issue were intended to encourage employees to bring meritorious wage
claims when the expense of prosecuting the claims would be economically
impracticable in the absence of the fee shifting statutes. The bankruptcy
court’s public policy concerns are consistent with California law, which
provides that Cal. Lab. Code § 1194’s overtime provisions “are remedial
and are to be construed so as to promote employee protection.”12 Sav-On
Drug Stores, Inc. v. Super. Ct., 34 Cal. 4th 319, 340 (2004). Sav-On even more
importantly stated that “Labor Code section 1194 confirms a clear public
It is as plain to us as it was to the trial court that, from the outset, this was
a dispute about $44.63 and that it was not viable as a class action. It is equally
plain that Harrington was underpaid as the result of an honest mistake made in
reliance on a formula provided by his union, not based on any willful or
knowingly wrongful conduct by [defendant]. At the risk of understatement,
there is no way on earth this case justified the hours purportedly billed by
Harrington’s lawyers.
Id. (citation omitted). Harrington is inapposite. The record here contains no such
findings, nor have Debtors pointed us to evidence in the record sufficient to support
comparable findings.
12 Debtors informed the bankruptcy court that after Zhou’s action, they switched
to ADP to process payroll. Zhou has argued that this action is evidence that her lawsuit
acted as a catalyst for Debtors’ labor reforms and benefitted current employees. She has
suggested that this can serve as an independent basis for an award of attorney’s fees
under Cal. Civ. Proc. Code § 1021.5. This argument was not presented to the
bankruptcy court and Debtors object to Zhou raising this theory for the first time on
appeal. We do not address the merits of Zhou’s catalyst argument but note that
Debtor’s change to ADP supports the bankruptcy court’s policy concerns in favor of its
fee award despite the limited amount recovered on Zhou’s individual claim.
29
policy that is specifically directed at the enforcement of California’s
minimum wage and overtime laws for the benefit of workers.” Id. (cleaned
up); see also Cruz v. Fusion Buffet, Inc, 57 Cal. App. 5th 221, 242 (2020)
(stating that § 1194(a)’s fee provision affords a “needed disincentive to
violation of minimum wage laws”); Eicher v. Advanced Bus. Integrators, Inc.,
151 Cal. App. 4th 1363, 1383 (2007) (“Public policy favors employees in
their efforts to recover overtime compensation.”); Jones v. Humanscale Corp.,
130 Cal. App. 4th 401, 412 (2005) (identifying the full and prompt payment
of wages “as a fundamental policy which involves a broad public
interest.”). Debtors have failed to challenge the bankruptcy court’s
invocation of policy concerns in any meaningful way, so any challenge that
they might have raised has been forfeited. Christian Legal Soc'y, 626 F.3d at
485; Greenwood, 28 F.3d at 977.
In sum, the bankruptcy court correctly applied the legal standards in
determining the amount of attorney fees to be awarded to Zhou’s counsel
under Cal. Lab. Code § 1194. It was keenly aware of the limited recovery on
Zhou’s individual claims and the total amount of fees requested. The
record amply demonstrates that the court took into consideration Debtors’
arguments, including the limited damages awarded, when reducing the fee
award. Contrary to Debtors’ argument, California law does not support the
total denial of fees sought by plaintiffs where fees have any relation to
unsuccessful claims. Rather, on this record, the bankruptcy court
understandably concluded that there was a subset of hybrid fees relating to
30
both the successful and unsuccessful claims that was reasonable and
necessary when undertaken. It adopted a reasoned decision to reduce these
fees on a percentage basis rather than engage in a line-by-line review to
apportion the billings between the successful individual claims and the
unsuccessful class claims. As established in Hensley, and the California
cases applying it, courts are afforded considerable discretion to determine
appropriate fee awards. The bankruptcy court’s reasonable exercise of that
discretion is not reversible error.
CONCLUSION
For the reasons set forth above, we AFFIRM the bankruptcy court’s
order granting in part and denying in part Debtors’ claim objection.
31