Financial Services Vehicle Trust, by and through i v. Barlaam

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
SAN FERNANDO VALLEY DIVISION
In re:
Steve Barlaam
Debtor(s).
CHAPTER 7
Case No.: 1:11-bk-13387-GM
Adv No: 1:11-ap-01402-GM
MEMORANDUM OF OPINION DENYING
PLAINTIFF’S MOTION TO AMEND THE
JULY 31, 2013 JUDGMENT FOR PLAINTIFF
AFTER TRIAL TO INCLUDE ATTORNEYS’
FEES [Docket #135]
Financial Services Vehicle Trust, by and
through its servicer, BMW Financial
Services NA, LLC
Plaintiff(s),
v.
Steve Barlaam
Defendant(s).
Date: September 17. 2013
Time: 10:00 a.m.
Courtroom: 303
This is a motion to reconsider my denial of attorney's fees under an Order
FILED & ENTERED
OCT 01 2013
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	Williams
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Granting Judgment ("Judgment", docket #128) and Memorandum of Opinion
("Memorandum, docket #127), each entered 7/31/13, awarding plaintiff Financial
Services Vehicle Trust ("Plaintiff") $118,924.22 and declaring that amount to be non-
dischargeable pursuant to §523(a)(2)(B).
Memorandum
For ease of reference, the portion of the Memorandum dealing with attorney's
fees is set forth below:
Plaintiff is seeking to recover its attorney’s fees in this nondischargeability action.
A recent 9th Circuit Bankruptcy Appellate Panel decision clearly sets forth the
rather complicated precedent governing an award of attorneys’ fees in a
§523(a)(2) action [Sharma v. Salcido (In re Sharma), 2013 Bankr. LEXIS 2286,
50-51 (B.A.P. 9th Cir. May 14, 2013)]:
Under the principle known as the "American Rule," prevailing parties in
federal court are not ordinarily entitled to attorney's fees unless authorized
by contract or by statute. Alyeska Pipeline Serv. Co. v. Wilderness Soc'y,
421 U.S. 240, 257, 95 S. Ct. 1612, 44 L. Ed. 2d 141 (1975). The
Bankruptcy Code does not provide a general right to recover attorney's
fees. Heritage Ford v. Baroff (In re Baroff), 105 F.3d 439, 441 (9th Cir.
1997).
The Supreme Court has addressed the precise issue of whether a
prevailing creditor can recover attorney's fees in a Section 523(a)(2)
action. In Cohen v. de la Cruz, 523 U.S. 213, 118 S. Ct. 1212, 140 L. Ed.
2d 341 (1998), the Court held that a debt incurred by fraud can include
costs and attorney's fees. "Once it has been established that specific
money or property has been obtained by fraud, . . . 'any debt' arising
therefrom is excepted from discharge." Id. at 218.
A prevailing creditor's right to attorney's fees is not absolute, however. We
have interpreted Cohen such that "the determinative question for awarding
attorney's fees is whether the creditor would be able to recover the fee
outside of bankruptcy under state or federal law." AT & T Universal Card
Servs., Corp. v. Hung Tan Pham (In re Hung Tan Pham), 250 B.R. 93, 99
(B.A.P. 9th Cir. 2000). Put more precisely, the question is "whether [the]
creditor would be entitled to fees in state court for 'establishing those
elements of the claim which the bankruptcy court finds support a
conclusion of nondischargeability.'" In re Dinan, 448 B.R. at 785 (quoting
Kilborn v. Haun (In re Haun)), 396 B.R. 522, 528 (Bankr. D. Idaho 2008)).
Because the basis for attorney's fees can be statutory or contractual, id. at
786, and there is no express statutory basis for attorney's fees, our
analysis centers on the attorney's fee provision in the Settlement
Agreement as construed under non-bankruptcy law (as there is no such
provision in either of the promissory notes). If the scope of the attorney's
fee provision is broad enough to encompass a state court action that has
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the same elements as a Section 523(a)(2)(A) claim — common law fraud
— then Salcido is entitled to attorney's fees. [citation omitted]
The leases in this case contain identical attorney’s fee provisions
providing that if Barlaam is in default under the lease, the Plaintiff is entitled,
among other things, to require Barlaam to pay “all fees and costs of collection,
including reasonable attorneys’ fees, court costs, interest, and other related
expenses for all losses you incur in connection with my default of this Lease.”
In determining whether this provision covers attorney’s fees in an action
for fraud, the Court applies California law, because ¶40 of each lease makes the
lease subject to the laws of the state where the lease was signed. Again,
Sharma is instructive:
California statute expressly allows parties to contract as they see fit
concerning the payment of attorney's fees. "Except as attorney's fees are
specifically provided for by statute, the measure and mode of
compensation of attorneys is left to the agreement, express or implied, of
the parties[.]" Cal. Code Civ. Prov. § 1021 (West 2012). The type of claim
— tort, contract, or otherwise — is irrelevant under the statute. Miske v.
Bisno, 139 Cal. Rptr. 3d 626, 634, 204 Cal. App. 4th 1249, 1259 (2012);
see Redwood Theaters, Inc. v. Davison (In re Davison), 289 B.R. 716, 724
(B.A.P. 9th Cir. 2003). The sole issue is whether the contractual provision
itself covers tort claims for fraud. See Miske, 139 Cal. Rptr. 3d at 634.
The California courts have repeatedly interpreted clauses that authorize
attorney's fees to "enforce" or "interpret" a contract to not include tort
claims for fraud. Exxess Electronixx v. Heger Realty Corp., 75 Cal. Rptr.
2d 376, 383-84, 64 Cal. App. 4th 698, 707-08 (1998); see Xuereb v.
Marcus & Millichap, Inc., 5 Cal. Rptr. 2d 154, 157, 3 Cal. App. 4th 1338,
1341-42 (1992). On the other hand, California courts have held that
certain broadly-worded clauses do cover fraud claims. Santisas v. Goodin,
951 P.2d 399, 405, 17 Cal. 4th 599, 608, 71 Cal. Rptr. 2d 830 (1998)
("claims arising out of the execution of the agreement or the sale" (internal
quotation marks omitted) (emphasis added)); Miske, 139 Cal. Rptr. 3d at
628-29 ("If any dispute arises between the Partners . . . prevailing party
shall be entitled to . . . reasonable attorney's fees." (emphasis added));
Lerner v. Ward, 16 Cal. Rptr. 2d 486, 488, 13 Cal. App. 4th 155, 159
(1993) ("in any action or proceeding arising out of this agreement"
(internal quotation marks omitted) (emphasis added)); Xuereb, 5 Cal. Rptr.
2d at 157 ("attorney fees and costs in any lawsuit or other legal
proceeding to which this Agreement gives rise" (internal quotation marks
omitted) (emphasis added)).
Xuereb stated that "gives rise" even includes events that occurred prior to
contract formation. 5 Cal. Rptr. 2d at 157. But even the phrase "any
dispute" is not determinative, as a clause limiting fees to "any dispute
under this agreement" does not cover fraud claims because "under this
agreement" limits the claims to those that arise directly out of the contract
and not those that rely on events that occurred before contract formation.
See Thompson v. Miller, 4 Cal. Rptr. 3d 905, 911, 112 Cal. App. 4th 327,
334 (2003).
The BAP ultimately determined that an action to “enforce or interpret any part of
this agreement” was not broad enough to encompass a claim for fraud in the
inducement.
The attorney’s fees provisions in both the Rolls Royce Lease and the
BMW Lease are included under “all fees and costs of collection.” Like
enforcement in Sharma, collection under the contract is simply not broad enough
to cover fraud in the inducement. That the attorney’s fees clause ends with “and
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all other related expenses for all losses you incur in connection with my default of
this Lease” similarly indicates that attorney’s fees are limited to enforcement
actions and do not extend to fraud.
Plaintiff’s request for attorney’s fees is denied.
Memorandum at 23-25 (footnotes and thus many citations omitted).
Motion
The relevant credit applications contained the language that the "information in
this application is true and correct to the best of my knowledge." The debtor-defendant
Steve Barlaam ("Defendant") signed acknowledging this. Plaintiff relied on Debtor's
income representations in awarding the credit requested. Paragraph 26 of the relevant
vehicle leases states that "I will be in default under this Lease if ... (g) Any information in
my credit application or a guarantor's credit application is false or misleading."
Paragraph 26 goes on to state that if "I am in default, you may do any or all of the
following ... (e) Require that I pay the sum of ... (5) all fees and costs of collections,
including attorneys' fees, court costs, interest, and other related expenses for all losses
you incur in connection with my default of this Lease."
Plaintiff argues that this Court failed to consider paragraph 26(g) of the leases,
which makes the very conduct underlying the Judgment -- intentionally submitting false
and misleading formation on the credit applications -- an event of default under the
leases. Each lease provides for the recovery of "all fees and costs of collections,
including attorneys' fees" as a remedy for the specified defaults. If paragraph 26 is
read as a whole, it is clear that the defaults for which a remedy is provided include
Defendant's fraud.
Plaintiff seeks reasonable fees be added to the amount of the prior judgment.
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Opposition
Subparagraph 26(g), which includes false and misleading statements as a
default, does not change the plain language in paragraph 26 that states what attorney's
fees may be recovered when the Defendant is in default.
While Plaintiff might be entitled to attorney's fees incurred in connection with
Defendant's default due to providing false or misleading information, that default is not
equivalent to establishing all seven elements of common law fraud under California law.
Section 26 of the leases clearly limits "all losses in connection with" defaults
under the leases to contract claims.
The provision in the leases awarding attorney's fees is much more limited in
scope than the provisions that courts have found to be broad enough to encompass
attorney's fees in a state court fraud action (and consequently for §523(a)(2) actions).
The court should not consider language from the credit applications to interpret
the leases unless the leases are ambiguous, which they are not. Even if the leases
were ambiguous, that ambiguity should be resolved against the drafter -- the Plaintiff.
Reply
The language of the leases is clear on attorney's fees: the attorney's fees clause
ends with "and all other related expenses for all losses you incur in connection with my
default of this Lease." The leases include providing false or misleading information in
the credit applications as an event of default. The Court has determined that the
Defendant did provide false and misleading information on both credit applications and,
relying on these false statements, that Defendant's conduct satisfied all elements of a
§523(a)(2)(B) fraud action.
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Analysis
There is a fair amount of verbiage in the papers, but the underlying facts and law
are relatively straightforward. It appears undisputed that
1. Defaults under the leases include providing false or misleading information on
the credit applications.
2. This court has determined that the Defendant did provide false and misleading
information on the credit applications.
3. That determination formed part but not all of the Court's determination that
Defendant's conduct satisfied all elements required for non-dischargeability under
§523(a)(2)(B).
4. The relevant lease provision gives the Plaintiff (if Defendant defaults) the right to
recover: "(5) all fees and costs of collections, including reasonable attorneys' fees,
court costs, interest, and other related expenses for all losses you incur in connection
with my default of this Lease."
5. Under applicable precedent, as set forth in detail in the Memorandum, the
relevant question is whether "the scope of the attorney's fee provision is broad enough
to encompass a state court action that has the same elements as a Section
523(a)(2)[(B]) claim - common law fraud . . . " (quoting Sharma). Put more broadly:
under California law, does the attorney’s fees provision in the contract extend to tort
actions between the parties?
6. California Civil Code §1021 leaves coverage of attorney’s fees to the agreement
of the parties. Numerous California cases under §1021 have considered whether
particular attorney’s fees provisions in a contract also extend to related tort actions.
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Provisions covering “any dispute” (Miske v. Coxeter, 204 Cal. App. 4th 1249, 1259 (Cal.
Ct. App. 1st Dist. 2012)), “any lawsuit or other legal proceeding” to which “this
Agreement gives rise” (Xuereb v. Marcus & Millichap, Inc., 3 Cal. App. 4th 1338, 1342
(Cal. Ct. App. 1st Dist. 1992)), any claim or action “arising out of” or ”in connection with”
(see generally Maynard v. BTI Group, Inc., 216 Cal. App. 4th 984, 993 (Cal. Ct. App.
1st Dist. 2013)), and “any litigation … of any of the rights and remedies” (Mililani Group
v. O’Reilly Auto, 2013 U.S. Dist. LEXIS 130073 at 6 (E.D. Cal. Sept. 10, 2013)) have
been found to extend to fraud or other tort actions. Clauses covering actions “to
enforce” a contract (Exxess Electronixx v. Heger Realty Corp., 64 Cal. App. 4th 698
(Cal. Ct. App. 2d Dist. 1998)), “disputes . . . under the contract” (Thompson v. Miller,
112 Cal. App. 4th 327 (Cal. App. 3d Dist. 2003)) and “to enforce or interpret any part of
this agreement” (Sharma, 2013 Bankr. LEXIS 2286 at 51) have not.
Conclusion
The Court is not persuaded that paragraph 26 taken as a whole provides for
attorney's fees in a state court action for fraud in the inducement, or for any action in
tort. It does not have the broad sweep of the attorney’s fees provisions that have been
held to cover fees in tort actions. Instead, the provision seems limited to actions in
contract. Attorney's fees are included within the general category of costs of
"collections", which, under reasonable interpretation, refers to collections of amounts
due under the contract. In other words, "collections" describes a contract cause of
action, not an action for fraud. Even if I were to ignore that limitation, the phrase
"incurred in connection with my default” also refers to a contract cause of action (i.e.
defaults under the contract). It does not extend to an action on fraud merely because
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one of the Defendant's defaults included some of the elements of an action for fraud.
Ruling
For the reasons stated above, the Motion is denied.
###
Date: October 1, 2013
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This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California.
June 2012 F 9021-1.1.NOTICE.ENTERED.ORDER
NOTICE OF ENTERED ORDER AND SERVICE LIST
Notice is given by the court that a judgment or order entitled (specify): MEMORANDUM OF OPINION
DENYING PLAINITFF’S MOTION TO AMEND THE JULY 31, 2013 JUDGMENT FOR PLAINTIFF TO
INCLUDE ATTORNEYS’ FEES [Docket #135] was entered on the date indicated as AEntered@ on the
first page of this judgment or order and will be served in the manner stated below:
1. SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (NEF) B Pursuant to controlling
General Orders and LBRs, the foregoing document was served on the following persons by the court via
NEF and hyperlink to the judgment or order. As of September 26. 2013, the following persons are
currently on the Electronic Mail Notice List for this bankruptcy case or adversary proceeding to receive
NEF transmission at the email addresses stated below.
Christopher P Ayayo chris@ayayolaw.com,
debbie@ayayolaw.com;alo.bankruptcy@gmail.com;kevin@ayayolaw.com
Rebecca A Caley rcaley@caleylaw.com, kana@caleylaw.com;carolyn@caleylaw.com
David Keith Gottlieb (TR) dkgtrustee@crowehorwath.com,
dgottlieb@ecf.epiqsystems.com,renee.johnson@crowehorwath.com
Tina M Starr tstarr@caleylaw.com
United States Trustee (SV) ustpregion16.wh.ecf@usdoj.gov
Service information continued on attached
page
2. SERVED BY THE COURT VIA UNITED STATES MAIL: A copy of this notice and a true copy of this
judgment or order was sent by United States mail, first class, postage prepaid, to the following persons
and/or entities at the addresses indicated below:
Service information continued on attached
page
3. TO BE SERVED BY THE LODGING PARTY: Within 72 hours after receipt of a copy of this judgment
or order which bears an AEntered@ stamp, the party lodging the judgment or order will serve a complete
copy bearing an AEntered@ stamp by United States mail, overnight mail, facsimile transmission or email
and file a proof of service of the entered order on the following persons and/or entities at the addresses,
facsimile transmission numbers, and/or email addresses stated below:
Service information continued on attached
page
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This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California.
June 2012 F 9021-1.1.NOTICE.ENTERED.ORDER
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