Velocity Press v. Key Bank, NA

FILED
United States Court of Appeals
Tenth Circuit
UNITED STATES COURT OF APPEALS
July 2, 2014
TENTH CIRCUIT
Elisabeth A. Shumaker
Clerk of Court
VELOCITY PRESS, a Utah corporation,
Plaintiff - Appellee,
v. Nos. 12-4172 & 13-4017
(D.C. No. 2:09-CV-00520-TS)
KEY BANK, NA, (D. Utah)
Defendant - Appellant.
ORDER AND JUDGMENT*
Before LUCERO, HOLLOWAY,** and GORSUCH, Circuit Judges.
Velocity Press, Inc. (“Velocity”) was awarded damages and attorneys’ fees
following a bench trial on Velocity’s fraud, breach of contract, and fiduciary duty claims
*
This order and judgment is not binding precedent, except under the doctrines of
law of the case, res judicata, and collateral estoppel. This court generally disfavors the
citation of orders and judgments; nevertheless, an order and judgment may be cited under
the terms and conditions of 10th Cir. R. 32.1.
**
The late Honorable William J. Holloway, Jr., United States Senior Circuit
Judge, participated as a panel member when this case was heard, but passed away before
final disposition. “The practice of this court permits the remaining two panel judges if in
agreement to act as a quorum in resolving the appeal.” United States v. Wiles, 106 F.3d
1516, 1516 n.* (10th Cir. 1997); see also 28 U.S.C. § 46(d) (noting circuit court may
adopt procedure permitting disposition of an appeal where remaining quorum of panel
agrees on the disposition). The remaining panel members have acted as a quorum with
respect to this Order and Judgment.
against KeyBank, N.A. (“Key”). Key appeals. Exercising jurisdiction pursuant to 28
U.S.C. § 1291, we affirm in part and reverse in part.
I
Velocity is a commercial printer in Utah that specializes in web printing.1 In
October 2006, Velocity entered into a contract with Sanden Machines, Ltd. (“Sanden”) to
purchase a new custom printing press that would have substantially increased Velocity’s
printing capacity. Velocity agreed to pay Sanden a total of $1,797,229 in four progress
payments: 30% down, 30% halfway through manufacturing, 35% when the press was
completed and operating on Sanden’s floor, and the final 5% when installation of the
press was completed at Velocity’s facility. The contract stated that Sanden anticipated
delivering the press in six to eight months, but Drew Elkins, the owner and president of
Velocity, testified that Sanden was “going to try and get this press done within three
months.”
Velocity paid Sanden $80,000 toward the down payment as a deposit and planned
to obtain a loan for the remainder of the purchase price. The company received
commitments from two banks to finance the press, and paid a refundable $7,500 down
payment to one bank. Before completing either loan, however, Velocity was approached
by Shelly Christopher, a relationship manager for Key. Christopher and her supervisor,
Brian Van Camp, solicited Velocity’s business. Elkins provided Van Camp with the
details of the press contract and contact information for Sanden personnel so that Key
1
Web printing refers to the technique of continuous printing onto rolls of paper.
See Konstantopoulos v. Westvaco Corp., 893 F. Supp. 1263, 1267 (D. Del. 1994).
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could familiarize itself with Sanden’s business. Elkins also provided Key with a copy of
the Velocity-Sanden contract.
On June 8, 2007, Velocity entered into a loan agreement with Key (the “June
Loan”). The June Loan documents established a revolving line of credit for the express
purpose of “Printing Press Construction,” and allowed Velocity to request advances
either orally or in writing. As part of the transaction, Velocity granted Key a security
interest in all of its assets, and Elkins and his wife provided personal guarantees. Upon
Velocity’s request, Key transferred the remainder of the down payment to Sanden
immediately after the June Loan documents were executed.
In the days prior to the closing of the June Loan, Key attempted to make three
changes to Velocity’s contract with Sanden without Velocity’s knowledge. First, Key
proposed and Sanden agreed that the third progress payment would be paid when the
press was delivered to Velocity, rather than the date it was operating on Sanden’s floor as
provided in the Velocity-Sanden contract. Second, Key obtained a first position security
interest in the initial $250,000 of parts and materials purchased to construct Velocity’s
press, even though Velocity’s contract with Sanden gave Sanden the first position
security interest in that material. Third, Key informed Sanden that it would have to
obtain a letter of credit to secure the second progress payment before that payment would
be advanced. Elkins testified that he would not have signed the June Loan documents
had he been aware of these changes.
On July 6, 2007, Christopher wrote to Sanden, seeking an update on the letter of
credit that Key understood Sanden would have in place before the second progress
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payment was made. Peter Williams, a Sanden employee, responded on July 19, stating
that Sanden thought Key would be issuing a letter of credit. In light of this confusion,
Williams indicated that “funding the [letter of credit] in time to maintain production
would be impossible.” The email concluded that “it was, and is, Sanden’s expectation
that we were to receive the second progress payment as normal, per the terms of the
contract and deviation from this will result in significant production delays as the
production schedule is sold out through January of 2008.” Representatives from the bank
testified that the letter of credit requirement was imposed to protect the bank’s assets
despite knowledge that the requirement would delay production of the press.
After receiving this email, Key decided that rather than requiring Sanden to obtain
a letter of credit to secure the second progress payment, Key would itself issue a letter of
credit in lieu of the second progress payment. This approach would force Sanden to seek
independent funding using the Key letter of credit as collateral. To move forward with
this plan, Key sent Elkins a new loan agreement and a letter of credit application, but
Christopher misrepresented to Elkins that Sanden had imposed this new requirement. On
August 9, 2007, Velocity and Key entered into a modified loan agreement (the “August
Loan”). Elkins was told that he would not receive any additional financing unless he
agreed to sign the letter of credit application. And the loan documents did not indicate
that the letter of credit was being substituted for the second progress payment.
Due to funding issues created by Key’s letter of credit requirement, Sanden
rearranged its production schedule. Using components purchased for Velocity’s press,
Sanden completed a press ordered by a different company, North Star, which had been
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scheduled for manufacture after Velocity’s press. Sanden later began work on a press for
yet another customer, Corporate Express, which had also initially been behind Velocity in
the production schedule. Sanden never submitted an invoice for the second progress
payment to Velocity because Key had communicated that funding would not be
forthcoming.
In September 2008, Sanden filed for bankruptcy without ever resuming work on
Velocity’s press. Sanden did, however, complete construction of the press for Corporate
Express (and had completed the North Star press prior to bankruptcy). Velocity filed a
claim with Sanden’s bankruptcy trustee for the amount of the 30% down payment, but
the bankruptcy trustee denied all but $80,000 of Velocity’s claim because Sanden’s
records indicated that the rest of the money had come from Key. Elkins attempted to
negotiate an assignment of Key’s security interest to Velocity after Velocity obtained
financing and paid Key the full amount owed on the loan. But Elkins refused to sign the
assignment offered by Key because Key required a release of liability.
Velocity eventually filed suit against Key, as well as several other defendants that
were dismissed with prejudice in January 2011 and are not parties to this appeal. The
complaint stated claims against Key for breach of fiduciary duty, breach of contract,
breach of the covenant of good faith and fair dealing, and unjust enrichment. Velocity
also sought punitive damages and an award of attorneys’ fees and costs. After a bench
trial, the district court determined that Key did not repudiate either the June Loan or the
August Loan and thus was not liable for breach of contract. However, the court
concluded that Key violated the implied covenant of good faith and breached a fiduciary
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duty it owed to Velocity. After allowing Velocity to add a fraud claim, the court also
found that Key fraudulently induced Velocity to enter into the loan. It awarded Velocity
$904,576.41 in damages, as well as attorneys’ fees. Key timely appealed.
II
Before addressing Key’s claim-specific contentions, we consider its over-arching
argument that the evidence was insufficient to support a finding that Key’s actions caused
Velocity’s damages. In particular, Key contends that the court replaced the required
proximate cause analysis with a “but for” analysis.
Utah law2 provides that proximate cause is generally an issue reserved for the
finder of fact. Pace v. Swerdlow, 519 F.3d 1067, 1074 (10th Cir. 2008) (citing
Steffensen v. Smith’s Mgmt. Corp., 820 P.2d 482, 486 (Utah Ct. App. 1991)). We thus
review the district court’s determination only for clear error. See Sw. Stainless, LP v.
Sappington, 582 F.3d 1176, 1183 (10th Cir. 2009). “A finding of fact is ‘clearly
erroneous’ if it is without factual support in the record or if, after reviewing all the
evidence, we are left with a definite and firm conviction that a mistake has been made.”
Id. (quotation omitted). This Court reviews the evidence “in the light most favorable to
the district court’s ruling and must uphold any district court finding that is permissible in
light of the evidence.” Id. (quotation omitted).
“Proximate cause is that cause which, in the natural and continuous sequence
(unbroken by an efficient intervening cause), produces the injury and without which the
result would not have occurred. It . . . necessarily sets in operation the factors that
2
The parties agree that Utah substantive law governs this diversity case.
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accomplish the injury.” Mahmood v. Ross, 990 P.2d 933, 938 (Utah 1999) (quotation
and alteration omitted). The district court concluded “that Sanden’s bankruptcy was not
an intervening cause, as it was reasonably foreseeable that requiring Sanden to find
independent financing could lead to financial difficulties and delaying construction of the
press for over a year could lead to the press not being constructed.” The court also
concluded that Sanden would have had the ability to complete Velocity’s press in 2007
had it not been for the letter of credit requirement.
The record amply supports the district court’s findings. In Williams’ July 19,
2007 email to Christopher, he repeatedly warned Christopher that the letter of credit
requirement would jeopardize the “ongoing production of the press” and that it could
“result in significant production delays.” James Watts, one of the salespeople who
worked for Sanden on the Velocity press, testified that it would have taken six to eight
weeks for Sanden to complete Velocity’s press had Sanden received the second progress
payment in July 2008. Watts also stated that, had the payment been made, other presses
would not have been moved in front of Velocity’s in the production schedule. Taking the
evidence “in the light most favorable to the district court’s ruling,” Sw. Stainless, LP, 582
F.3d at 1183, the district court did not clearly err by determining that Key’s actions
“necessarily set[] in operation the factors that accomplish the injury,” Mahmood, 990
P.2d at 938 (quotation omitted).
III
A
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Key argues that the district court erred by allowing Velocity to amend its
pleadings to add a claim for fraud. Federal Rule of Civil Procedure 15(a)(2) provides that
when a party is not amending as a matter of course, amendment is permitted “only with
the opposing party’s written consent or the court’s leave. The court should freely give
leave when justice so requires.” Id.3 A decision granting leave to amend under Rule
15(a)(2) “is within the trial court’s discretion, and will not be disturbed absent an abuse
of that discretion.” Orr v. City of Albuquerque, 417 F.3d 1144, 1153 (10th Cir. 2005)
(citation and quotation omitted). “A district court abuses its discretion if its decision is
arbitrary, capricious, whimsical, or manifestly unreasonable.” Id. (quotation omitted).
The Supreme Court has emphasized that leave to amend should generally be
granted in “the absence of any apparent or declared reason” to the contrary, such as
“undue delay” or “undue prejudice to the opposing party by virtue of allowance of the
amendment.” Foman v. Davis, 371 U.S. 178, 182 (1962). The “most important” factor
in determining whether to grant a motion to amend the pleadings “is whether the
amendment would prejudice the nonmoving party.” Minter v. Prime Equip. Co., 451
F.3d 1196, 1207 (10th Cir. 2006). “Courts typically find prejudice only when the
amendment unfairly affects the defendants in terms of preparing their defense to the
3
The parties disputed below whether the district court should have analyzed
Velocity’s amendment under Rule 15(a) or 15(b). In granting Velocity’s motion to
amend, the district court stated that “amendment [wa]s appropriate under either
standard.” On appeal, Key concedes that “Velocity made the equivalent of a pretrial
motion to amend under Rule 15(a).” Key also argues that amendment was impermissible
under either subsection, however, because Key was unfairly prejudiced by the
amendment. We reject Key’s claim of prejudice, infra, regardless of which subsection is
at issue.
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amendment.” Id. at 1208 (quotation omitted). “Most often, this occurs when the
amended claims arise out of a subject matter different from what was set forth in the
complaint and raise significant new factual issues.” Id. With respect to undue delay, we
focus “primarily on the reasons for the delay.” Id. at 1206.
Velocity first addressed the possibility of amending its complaint to add a fraud
claim in the pretrial order. It stated that, “[i]f the evidence supports a fraud claim,
Velocity intends to file a motion to amend the pleadings to conform to the proof.” On
February 6, 2012, during the trial, Velocity formally moved to add its fraud claim. The
court granted Velocity’s motion after trial, finding that Velocity “made its request in
good faith and did not . . . unduly or inexplicably delay in doing so.” In granting the
motion, the court explained that discovery disputes resulted in “many documents [being]
turned over by Key[] well after the discovery deadline ha[d] passed.” The court also
rejected Key’s arguments that it would be prejudiced by the addition of the claim because
“the allegedly fraudulent statements were made by Key[] employees and witnesses and
were supported at trial by internal Key[] documents.”
We agree with the district court’s analysis. Key’s position is analogous to that of
the appellee in Minter, in that it “offers little explanation as to how it w[as] prejudiced”
given the “significant overlap in the factual underpinnings and defenses” between the
new and existing claims. 451 F.3d at 1208. Aside from any testimony by Elkins, the
relevant witnesses and documents were within the control of Key. Key did not request a
continuance to allow additional discovery, or even note what additional discovery would
be necessary. To the extent that Key argues that the fraud claim was a “moving target,”
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we note that the claim was succinctly laid out in Velocity’s memorandum in support of
its motion to amend, which closely tracked the factual statement set forth in Velocity’s
trial brief.
Nor has Key shown that the amendment was unduly delayed. We have held that
“[l]ateness does not of itself justify the denial of the amendment.” R.E.B., Inc. v. Ralston
Purina Co., 525 F.2d 749, 751 (10th Cir. 1975). Instead, “denial of leave to amend is
appropriate when the party filing the motion has no adequate explanation for the delay.”
Minter, 451 F.3d at 1206 (quotation omitted). The record supports the district court’s
concern with Key’s document production, showing discovery disputes continuing into the
months preceding trial despite Key’s claim that the relevant documents were produced.
We thus conclude that Key has not demonstrated an abuse of discretion.
B
Key also advances two arguments attacking the district court’s disposition of
Velocity’s fraud claim. It contends both that the claim was waived and that Velocity
failed to prove that the alleged fraud caused Velocity to act to its detriment.
According to Key, Velocity waived its fraud claim through its “course of
conduct.” See generally Doctors’ Co. v. Drezga, 218 P.3d 598, 603-04 (Utah 2009).
Specifically, Key asserts that Velocity lost any claim that it was fraudulently induced into
the June Loan when it signed the August Loan. However, the district court found that at
the time of the August Loan, Velocity continued to believe that Sanden (rather than Key)
required a letter of credit based on misrepresentations by Christopher. And nothing in the
August Loan documents would have disabused Velocity of this notion.
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Under Utah law, a fraud claim is waived “only when there is a new agreement
between the parties, after discovery of the fraud.” Dugan v. Jones, 615 P.2d 1239, 1247
(Utah 1980) (emphasis added), superseded by rule on other grounds as stated in Arnold v.
Curtis, 846 P.2d 1307 (Utah 1993). This rule defeats Key’s waiver assertion. As Key
notes, “[t]here may be situations where a person would voluntarily choose to waive
existing fraud claims or even waive unknown claims of fraud,” Ong Int’l (U.S.A.) Inc. v.
11th Ave. Corp., 850 P.2d 447, 453 n.18 (Utah 1993). But the record in this case does
not suggest that Velocity voluntarily chose to waive any claims of fraud.
Key also challenges the district court’s conclusion that Velocity was induced to
enter the June Loan to its detriment. As discussed supra, however, the district court’s
causation findings are fully supported by the record. And Key’s particularized arguments
about the fraud claim fare no better than its general causation assertions. The district
court found that Key withheld from Elkins the fact that it did not intend to provide a
second progress payment unless a letter of credit was in place and did so to induce
Velocity to enter into the June Loan. The court also concluded that Key’s actions with
respect to the letter of credit and the second progress payment caused delays in
construction of Velocity’s press, additional interest payments, and Sanden’s ultimate
failure to manufacture the press prior to its bankruptcy. Because those findings are
supported by the record, we affirm the court’s conclusions on Velocity’s fraud claim.
IV
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We next consider Key’s contention that it did not breach the implied covenant of
good faith and fair dealing. The covenant of good faith and fair dealing exists in every
contract in Utah, see Young Living Essential Oils, LC v. Marin, 266 P.3d 814, 819 (Utah
2011), creating an “implied duty that contracting parties refrain from actions that will
intentionally destroy or injure the other party’s right to receive the fruits of the contract,”
id. at 816 (quotation omitted). Breach of the covenant should be analyzed as an objective
question, without regard to a party’s subjective state of mind. Markham v. Bradley, 173
P.3d 865, 871 (Utah Ct. App. 2007). Although the covenant is implied into all contracts,
it is subject to several limitations:
First, this covenant cannot be read to establish new, independent rights or
duties to which the parties did not agree ex ante. Second, this covenant
cannot create rights and duties inconsistent with express contractual terms.
Third, this covenant cannot compel a contractual party to exercise a
contractual right to its own detriment for the purpose of benefitting another
party to the contract. Finally, we will not use this covenant to achieve an
outcome in harmony with the court’s sense of justice but inconsistent with
the express terms of the applicable contract.
Oakwood Vill. LLC v. Albertsons, Inc., 104 P.3d 1226, 1240 (Utah 2004) (quotation and
citations omitted).
The district court determined that Key breached the covenant of good faith and
fair dealing by renegotiating the Velocity-Sanden Contract without Velocity’s knowledge
and telling Sanden, after the June Loan was executed, that a letter of credit needed to be
in place before Key would make the second progress payment. These actions, the court
found, were inconsistent with the agreed purpose of the loan agreements, which was to
provide periodic financing for Sanden’s construction of Velocity’s press. Under Utah
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law, “whether there has been a breach of good faith and fair dealing is a factual issue,
generally inappropriate for decision as a matter of law.” Cook v. Zions First Nat’l Bank,
919 P.2d 56, 60-61 (Utah Ct. App. 1996) (quotation omitted). Accordingly, we review
the district court’s factual findings on this issue for clear error.
Key argues that because it informed Sanden that it would not adhere to the terms
of the June Loan agreement before the execution of that agreement, its actions cannot
have breached the implied covenant. We doubt that Key’s notification of a third party of
its intent not to honor a contract can insulate it from implied covenant claims given that
Velocity was unaware of Key’s plans. Even assuming, however, that this argument has a
basis in law, there is sufficient evidence in the record to support the district court’s
conclusion that Key continued to prevent Velocity from receiving the fruits of its
contracts even after they were executed. See Young Living, 266 P.3d at 816.
Key also contends that actions occurring prior to execution of the August Loan
cannot support the covenant claim because Velocity agreed that Key would issue a letter
of credit in that document. The district court, however, correctly explained that the
August Loan documents did not require a letter of credit and certainly did not indicate
that loan disbursements would be replaced by a letter of credit. Instead, the court found
that Elkins was not aware of the delay caused by the letter of credit requirement until
October 2007. And we have no reason to declare this finding clearly erroneous. Finally,
to the extent that Key reiterates its causation arguments regarding its breach of the
implied covenant of good faith and fair dealing, as we have addressed supra, the district
court’s findings were not clearly erroneous.
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V
Key claims that the district court erred in ruling that it owed a fiduciary duty to
Velocity. “[T]he existence of a fiduciary relationship in Utah is a question of fact where
the evidence or inferences to be drawn therefrom conflict.” United States v. Welch, 327
F.3d 1081, 1102 (10th Cir. 2003). However, “[w]e review de novo the district court’s
rulings with respect to state law.” Henrie v. Northrop Grumman Corp., 502 F.3d 1228,
1231 (10th Cir. 2007). “Courts have generally refrained from definitively listing the
instances of fiduciary relationships in such a way as to risk excluding the penumbra of
unknown or unraised relevant cases.” First Sec. Bank of Utah N.A. v. Banberry Dev.
Corp., 786 P.2d 1326, 1332 (Utah 1990). A bank typically does not owe a fiduciary duty
to its customers, but a fiduciary relationship may arise if a customer “place[s] particular
confidence in” the bank, if the bank was “in a position to have and exercise influence
over” the customer, if the customer placed property in the bank’s charge, if there was
“overmastering influence, dependence, or trust justifiably (and with mutual
understanding) reposed” or “weakness of age, mental strength, business experience, or
intelligence” on the part of the customer. Id. at 1333.
The district court found that a fiduciary relationship existed because Key was “in a
condition of superiority” and “acted as if Velocity had placed peculiar confidence in
Key[] and as if Velocity’s interest and authority had been placed in Key[]’s charge when
it attempted to modify the Velocity-Sanden contract and impose additional conditions
before disbursements would be made.” It further concluded that Key “breached its
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fiduciary duties to Velocity . . . by leading Sanden to believe that a letter of credit needed
to be in place before the second draw could be made under the loan.”
There can be no doubt that if Key owed Velocity a fiduciary duty, it was breached.
However, we must reverse the district court’s conclusion that Key owed Velocity a
fiduciary duty on these facts. Although Key may have acted as if Velocity placed
“particular confidence” in Key, we see no evidence that Velocity actually did so such that
Key would be a fiduciary under Utah law. See First Sec. Bank, 786 P.2d at 1333.
Rather, Velocity complains that Key acted beyond the scope of its authority by making
misleading comments to Sanden without Velocity’s knowledge. Although these actions
make out claims for fraud and breach of the implied covenant of good faith and fair
dealing, Velocity does not direct us to any Utah cases finding a fiduciary relationship
under similar circumstances.
Nor does the fact that Key was aware of its own fraud give rise to fiduciary status.
A party will always have superior knowledge of its own actions; courts in Utah have
looked to superiority of “age, mental strength, business experience, or intelligence” in
finding a fiduciary relationship. See id. The record suggests that Velocity and Elkins
were sophisticated actors. We accordingly reverse the district court’s decision in favor of
Velocity on its fiduciary duty claim.
VI
Although the district court did not directly address this contention, Key argues that
Velocity released its claims by signing a Letter of Credit Reimbursement and Security
Agreement. The district court’s failure to explicitly decide this issue does not require
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remand, however, given that we would review it de novo in any event. See Flood v.
ClearOne Commc’ns, Inc., 618 F.3d 1110, 1117-18 (10th Cir. 2010); see also United
States v. Zeigler, 105 F.3d 670, No. 96-5043, 1997 WL 4281, at *1 (10th Cir. 1997)
(unpublished) (finding “no reason to remand the matter to the district court for decision in
the first instance” where review would be de novo and “the record is sufficient”).
The agreement cited by Key provides that Key is not responsible “for any breach
of contract between any person and” Velocity. It also holds Key harmless
for any and all costs, liabilities and expenses (including reasonable attorney
fees) incurred by [Key] and arising out of or in any way relating to (1) any
underlying investments, transaction, and/or contracts between [Velocity]
and [Sanden] under the [Letter of Credit] or any of its agents and (2) any
proper payment in accordance with the terms of the [Letter of Credit], any
refusal to pay or honor the [Letter of Credit], or any other action or
omission by [Key], or [Key]’s correspondents or agents.
Elkins’ signature on the agreement was dated July 27, 2007.
Key’s argument that this clause relieves it of liability is foreclosed by precedent
from the Utah Supreme Court as it applies to the claims of fraud and breach of the
implied covenant of good faith and fair dealing. “The law does not permit a covenant of
immunity which will protect a person against his own fraud on the ground of public
policy. A contract limitation on damages or remedies is valid only in the absence of
allegations or proof of fraud.” Lamb v. Bangart, 525 P.2d 602, 608 (Utah 1974). Having
affirmed Velocity’s success on its fraud claim, this release cannot be given effect.
Moreover, the case at bar is reminiscent of Ong International (U.S.A.) Inc. In that
case, the court refused to enforce a liability release contained in a second agreement
because the initial contract was induced by fraud and the misrepresentations continued at
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the time that the second document was executed. 850 P.2d at 453. Because the release
was a “continuing part of defendants’ willful misrepresentations and omissions,” the
court held it “cannot be separated from the fraudulently induced contract.” Id. Similarly,
in the present matter, the district court permissibly concluded that Velocity was
fraudulently induced into signing the June Loan and that Elkins did not discover Key’s
fraud until after the release was executed. We thus conclude that the release does not bar
Velocity’s claims.
VII
Finally, Key appeals from the district court’s judgment regarding attorneys’ fees
and costs. In that order, the district court awarded Velocity attorneys’ fees pursuant to
Utah’s reciprocal fee statute on the basis of the following paragraph, which was included
in the promissory notes for both the June Loan and the August Loan:
ATTORNEYS’ FEES; EXPENSES. Lender may hire or pay someone else
to help collect this Note if Borrower does not pay. Borrower will pay
Lender that amount. This includes, subject to any limits under applicable
law, Lender’s reasonable attorney’s fees and Lender’s legal expenses,
whether or not there is a lawsuit, including without limitation all reasonable
attorneys’ fees and legal expenses for bankruptcy proceedings (including
efforts to modify or vacate any automatic stay or injunction), and appeals.
If not prohibited by applicable law, Borrower also will pay any court costs,
in addition to all other sums provided by law.
The Utah reciprocal fee statute provides that “[a] court may award costs and
attorney fees to either party that prevails in a civil action based upon any promissory
note, written contract, or other writing . . . when the provisions of the promissory note,
written contract, or other writing allow at least one party to recover attorney fees.” Utah
Code § 78B-5-826. This court reviews the award of attorneys’ fees for abuse of
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discretion, but reviews the underlying legal determinations de novo. D.A. Osguthorpe
Family P’ship v. ASC Utah, Inc., 705 F.3d 1223, 1236 (10th Cir. 2013).
“Attorney fees are generally recoverable in Utah only when authorized by statute
or contract.” Reighard v. Yates, 285 P.3d 1168, 1182 (Utah 2012). The Utah Supreme
Court recently reiterated that the reciprocal fee statute
consists of a conditional if/then statement: (a) If the provisions of a written
contract allow at least one party to recover attorney fees in a civil action
based upon the contract, (b) then a court may award attorney fees to either
party that prevails. An action is based upon a contract under the statute if a
party to the litigation asserts the writing’s enforceability as basis for
recovery.
Insight Assets, Inc. v. Farias, 321 P.3d 1021, 1027 (Utah 2013) (quotations, footnote, and
alterations omitted). The statute “is triggered only when the provisions of the contract
would allow at least one party to recover fees if that party had prevailed under its theory
of the case.” Bushnell v. Barker, 274 P.3d 968, 971 (Utah 2012). It “was designed to
create a level playing field for parties to a contractual dispute . . . by allowing both parties
to recover fees where only one party may assert such a right under contract, remedying
the unequal allocation of litigation risks built into many contracts of adhesion.”
Bilanzich v. Lonetti, 160 P.3d 1041, 1046 (Utah 2007) (quotation and alteration omitted).
Thus, courts may award fees to either party in cases “where pursuing or defending an
action results in an unequal exposure to the risk of contractual liability for attorney fees.”
Id.
Key argues that the district court erred because the language of the promissory
note allowed it to recover fees only in limited circumstances, none of which were present
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in this case. We agree. The attorneys’ fee provision allowed Key to recover only if it
“hire[d] or pa[id] someone else to help collect this Note if [Velocity] does not pay.” It is
undisputed that Velocity paid Key all sums owed pursuant to the parties’ agreement, and
there is no suggestion that Key expended resources to obtain payment. As the Utah Court
of Appeals has explained, the reciprocal fee statute “does not create an independent right
to a fee award that the contract’s attorney fee provision would not allow to either party
simply because the fee provision is one-sided.” PC Crane Servs., LLC v. McQueen
Masonry, Inc., 273 P.3d 396, 408 (Utah Ct. App. 2012).
The district court concluded that because payments made under the promissory
note were put at issue, Key would have been able to claim attorneys’ fees had it
prevailed. We cannot agree with this conclusion. Some Utah cases have held that
defending against a challenge to the validity of a contract qualifies for a reciprocal fee
award. See Anderson & Karrenberg v. Warnick, 289 P.3d 600, 605 (Utah Ct. App. 2012)
(“[T]he defense of [defendant’s] counterclaim was covered by the fees provision because
if [defendant] had proved that the Agreement had been procured by fraud, [plaintiff]
could not enforce it.”); Chase v. Scott, 38 P.3d 1001, 1005 (Utah Ct. App. 2001) (holding
that defense to suit to rescind a contract was “litigation . . . to enforce” the contract under
the meaning of an attorneys’ fees provision). But the contractual provisions at issue in
those cases were much broader than the one at issue in this case. See Anderson &
Karrenberg, 289 P.3d at 602 (fees available “[i]n the event that sums payable under this
agreement become the subject of litigation”); Chase, 38 P.3d at 1003 (allowing for fees
“[i]n the event of litigation . . . to enforce this Contract”). Because Key did not incur
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expenses to collect on the note, the fee provision in this case would not have allowed for
recovery if Key had successfully defended against Velocity’s claims. See Giusti v.
Sterling Wentworth Corp., 201 P.3d 966, 981 (Utah 2009) (rejecting argument “that
whenever litigation is based on a writing that contains a provision allowing at least one
party to recover attorney fees, the precise terms of the provision are irrelevant, and
district courts should liberally award fees to prevailing parties”).
Velocity argues that the relevant inquiry is not whether Key would have been
entitled to fees had it successfully defended against the claims asserted, but whether the
hypothetical assertion by Key of an analogous claim would have entitled Key to fees.
And because the only way Velocity could have breached the agreement, Velocity
contends, is by failing to pay, fees should be available for any and all breach of contract
claims. The promissory notes do not support Velocity’s factual assertion: they provide
several grounds upon which Velocity might default. Moreover, Velocity’s proffered
mode of analysis is inconsistent with that applied by Utah courts. The reciprocal fee
analysis “is undertaken in the hypothetical—under an alternative consideration in which
the tables were turned and the opposite party prevailed.” Hooban v. Unicity Int’l, Inc.,
285 P.3d 766, 771 (Utah 2012); see also Insight Assets, Inc., 321 P.3d at 1027 (fees
available to defendant because plaintiff would have been entitled to fees had it prevailed
“in the action”); Anderson & Karrenberg, 289 P.3d at 604 n.4 (reciprocal fee
“determination is focused on the claims that trigger the fees provision”). We must look
to whether fees would have been available to the other party had it prevailed on the
claims asserted rather than considering hypothetical claims that might have been asserted
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by the losing party.4 And because we conclude that the fee provision was not triggered
by Velocity’s claims, we reverse the fee award.
VIII
For the foregoing reasons, we AFFIRM in part, REVERSE in part, and
REMAND for further proceedings consistent with this order and judgment.
Entered for the Court
Carlos F. Lucero
Circuit Judge
4
Velocity argues that Key should not be permitted to take the position that it
would not have been entitled to fees had it prevailed because Key requested attorneys’
fees below. However, Key requested an award of attorneys’ fees only pursuant to the
reciprocal fee statute based on Velocity’s request for fees. Because Key did not assert an
independent entitlement to fees, we reject Velocity’s argument.
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