Sweidy et al v. Sieben

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Not for Publication
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
OAKLAND DIVISION
In re Gregory P. Sieben and Susan D. Haas, 	) 	Case No. 04-43339
)
) 	Chapter 7
Debtors. 	)
__________________________________________)
)
Kimberly Sweidy and Raymie Stata, 	) 	Adv. Pro. No. 08-4037
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Plaintiffs, 	)
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v. 	)
) 	FINDINGS OF FACT, OPINION
)
Gregory P. Sieben, 	) 	AND CONCLUSIONS OF LAW
)
Defendant. 	)
__________________________________________)
This adversary proceeding is before the Court pursuant to a trial on the merits held on
February 9 and 10, 2009, on a complaint filed by Kimberly Sweidy and Raymie Stata (herein
collectively “Sweidy”) asserting causes of action against the Debtor to determine the
dischargeability of a debt pursuant to 11 U.S.C. §523(a)(2)(A); §523(a)(3)(B) and §523(a)(6).
At the conclusion of that trial, the court issued a tentative ruling in favor of Sweidy, and
requested that the parties provide further post-trial briefing on issues concerning an award of
attorneys’ fees and costs. After reviewing those briefs and the applicable law, the Court
reaffirms its tentative ruling, and submits the following findings of fact, opinion and conclusions
Signed: August 14, 2009
________________________________________
RANDALL J. NEWSOME
U.S. Bankruptcy Judge
________________________________________
Case: 08-04037 Doc# 47 Filed: 08/14/09 Entered: 08/17/09 15:04:30 Page 1 of 11
Entered on Docket
September 29, 2009
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 08-04037 Doc# 49 Filed: 08/14/09 Entered: 09/29/09 15:35:48 Page 1 of
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1 The Court’s tentative ruling as stated on the record at the conclusion of the trial is wholly incorporated
here. See, TR vol. II at 118 to 147. Upon conclusion of the post-trial briefing, on May 7, 2009, the Debtor filed a
Statement of Conditional Non-Opposition to the Tentative Judgment (doc. 46), conditioned upon the Debtor
reserving his right to file an opposition to any challenge to the tentative ruling filed by Sweidy. An opposition from
Sweidy to the tentative ruling is not on file.
2 The findings of fact largely follow the Joint Stipulation of Facts and Authenticity of Exhibits submitted
by the parties at trial, and are not disputed to any significant extent.
3 Fine Homeworks, Inc., a building contractor company owned by the Debtor, worked on the Sweidy
project. On June 15, 2004, Fine Homeworks filed bankruptcy case 04-43336 under chapter 7 of the Bankruptcy
Code. (TR vol. I at 252, 255-256; In re Fine Homeworks, Inc., 04-43336, doc. 1)
4 IMX recorded a $96,340 mechanics lien against the property and filed a complaint in Superior Court
against Sweidy to foreclose on its mechanics lien (herein the “IMX Action”). Truitt & White recorded an amended
mechanic’s lien for $2,762.85 against the property, and Rogelio Esqueda threatened to do so. (Plaintiff Exs. 34, 35
and 40). Sweidy eventually paid IMX $20,000 to settle the IMX Action. Sweidy also paid Truitt & White $1,500 to
settle its mechanics lien, and paid Rogelio Esqueda $1,500 in settlement to avoid the recordation of a mechanics lien.
(Plaintiff Exs. 36-37; 41-44; 45-46; TR vol. I at 110-111).
2
of law. 1
FINDINGS OF FACT2
On or about June 23 and December 8 of 2003, Sweidy contracted with the Debtor to
demolish an existing structure on Sweidy’s property and to build a new house in its place.
(Plaintiff Exs. 1 and 2; Transcript (“TR”), vol. I at 88-89). Pursuant to such contracts, Sweidy
paid a total of $458,531.18, which included $6,458.50 for reimbursement of costs alleged to have
been incurred by Fine Homeworks, Inc., prior to execution of the June 23, 2003 contract.3
Sweidy paid all of the invoices on the project sent by the Debtor except for a final invoice in the
amount of $39,056.08. (Plaintiff Exs. 4-16; 17-27; TR, vol. I at 87-88, 97-98). The invoices
paid by Sweidy included amounts for work performed by subcontractors, including IMX,
Rogelio Esqueda and Truitt & White. The Debtor did not, however, pay these subcontractors for
some or all of the work as stated on the invoices. (TR vo1. II at 78).4 Additionally, some of the
invoices overcharged Sweidy by 5 to 10 percent, and other invoices overcharged by about 25
percent. (TR vo. I at 228-236, 247-248). On or about March 21, 2004, Sweidy terminated the
Debtor’s involvement on the project. (Plaintiff Ex. 60; TR, vol. I at 85, 99-100).
On June 15, 2004, the Debtor filed this case under chapter 7 of the Bankruptcy Code.
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5 Pursuant to Federal Rule of Bankruptcy Procedure 1009(a), unless otherwise ordered by the court after
notice and a hearing on a motion filed by a party in interest, which did not occur here, the debtor is responsible for
noticing creditors affected by an amendment to the matrix list. After filing the July 6, 2004 creditor matrix, such
notice by the Debtor does not appear on the docket in this case.
6 The creditor list filed on July 6, 2004 contained over 200 creditor names and addresses. It was not,
however, titled as an amendment or accompanied by the document amendment fee and, most importantly, the then
required computer disk containing the creditor names and addresses was not provided to the clerk. As such, the
creditor names and addresses on the July 6, 2004 filing were not added to the matrix, and so notice of the discharge
was sent only to those creditors appearing on the original June 15, 2004 matrix, along with certain additional parties
having requested special notice, taxing authorities, the trustee and the Debtors (docs. 21 and 22). For this same
reason, notice of the August 31, 2005 Order Granting the Debtor’s Motion to Reopen Case (docs. 31 and 32) was
also sent only to those creditors appearing on the original June 15, 2004 matrix. On September 12, 2005, the Debtor
properly filed an amended list of creditors, and the matrix was then amended to reflect the current 245 listed
creditors. Thereafter, however, the only activity in the case was a September 14, 2005 request for notice, and a
January 24, 2006 notice of correction of address, both filed by Sweidy (docs. 34 and 35). On September 27, 2006 an
order entered to re-close the case (doc. 36).
3
(Petition, doc. 1). Sweidy was not included among the 21 creditors on the initial creditor matrix
attached to and filed with the petition. Consequently Sweidy does not appear on the June 19,
2004 service list for the Notice of Chapter 7 Bankruptcy Case, Meeting of Creditors, and
Deadlines. The Notice of Chapter 7 Bankruptcy Case noticed September 13, 2004 as the
deadline to file a complaint objecting to the entry of a discharge or to determine the
dischargeability of certain debts. (docs. 1, 5 and 6). Thereafter, on July 6, 2004, the Debtor filed
a statement of financial affairs, bankruptcy schedules and a more extensive creditor matrix list,
which listed the name and an address for Sweidy (docs. 10 and 11). 5 On September 17, 2004, a
discharge order entered in this case. Sweidy does not appear on the service list for the discharge
order.6 On September 23, 2004 this case was closed. On November 4, 2004, Sweidy first
learned that the Debtor had filed this bankruptcy case. (TR vol. I at 101). On March 4, 2008,
Sweidy filed this adversary proceeding.
OPINION AND CONCLUSIONS OF LAW
Prior to November 11, 2004, Sweidy did not have notice or actual knowledge of this
bankruptcy case in time to permit the filing of a complaint to determine the dischargeability of a
debt before the September 13, 2004 deadline. Additionally, the Debtor has not shown
extraordinary circumstances or a compelling reason for the defense of laches to bar the filing of
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this adversary proceeding. Accordingly, this adversary proceeding was filed timely pursuant to
§523(a)(3)(B). (TR, vol. II at 119-121); In re Beaty, 306 F.3d 914, 928 (9th Cir. 2002); In re
Staffer, 306 F.3d 967 (9th Cir. 2002).
A preponderance of the evidence establishes that in presenting invoices for payment on
the project, the Debtor knowingly made false representations to Sweidy that certain
subcontractors were being reimbursed from Sweidy’s payment of the invoices, since such
subcontractors were not being paid at all or were paid only partially for the work asserted by the
invoices. The Debtor made such false representations with the intent to deceive Sweidy.
Sweidy justifiably relied upon the Debtor’s false representations, and as a proximate cause of
such reliance incurred damages. Additionally, a preponderance of the evidence establishes that
the Debtor committed actual fraud in overcharging Sweidy on certain of the invoices, for which
Sweidy also incurred damages. Finally, a preponderance of the evidence also shows that as to
such false representations and certainly the overcharging, the Debtor’s conduct was objectively
certain to injure Sweidy, and in fact did so, and was intentionally done without just cause and/or
excuse. Such damages, not including attorneys’ fees, total $129,987, and pursuant to
§523(a)(2)(A), §523(a)(6) and §523(a)(3)(B), are found to be non-dischargeable in this
bankruptcy case. 	(TR, vol. II at 121-128); In re Slyman, 234 F.3d 1081, 1085 (9th Cir. 2000);
Recover Edge, L.P., v. Pentecost 44 F.3d 1284, 1293 (5th Cir. 1995), cited with approval in In re
Eashai, 87 F.3d 1082, 1089 (9th Cir. 1996); In re Su, 290 F.3d 1140 (9th Cir. 2002).
Recovery of Attorneys’ Fees and Costs as Damages
Attorneys’ fees and costs arising from the Debtor’s fraudulent conduct established
pursuant to §523(a)(2) are excepted from discharge. Cohen v. De La Cruz, 523 U.S. 213, 218,
223 (1998); Ghomeshi v. Sabban (In re Sabban), 384 B.R. 1, 6-7 (9th Cir. BAP 2008). Similarly,
attorneys’ fees and costs arising from a debtor’s willful and malicious conduct established
pursuant to §523(a)(6) are also excepted from discharge. Bertola v. Northern Wisconsin
Produce Company, Inc. (In re Bertola), 317 B.R. 95, 100 (9th Cir. 2004). In such instances, the
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7 Here, the complaint asserts only claims of non-dischargeability based upon torts for actual fraud and
willful and malicious injury. As such, §1717 does not apply. See, In re Davison, 289 B.R. at 724 (§1717 does not
apply to dischargeability claim based upon fraud).
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determinative question is whether the successful plaintiff could recover such fees and costs in a
non-bankruptcy court, and in the instant case pursuant to applicable California law. In re
Bertola, at 100; AT&T Universal Card Services, Corp., v. Pham (In re Pham), 250 B.R. 93, 99
(9th Cir. BAP 2000).
Pursuant to California law, the “tort of another” doctrine provides that when a person is
required to institute or defend an action against a third person as a direct result of the tort of
another, attorneys’ fees and costs incurred in such an action are recoverable as damages. Third
Eye Blind, Inc. v. Near North Entertainment Insurance Services, 127 Cal. App. 4 th 1311, 1324-
1325 (2005); Prentice v. North American Title Guaranty Corp., 59 Cal.2d 618, 620 (1963). The
“tort of another” doctrine does not apply, however, where the action against the third person is
unrelated to or independent of another’s wrongdoing and not a natural and proximate
consequence of the tort. Flyer's Body Shop Profit Sharing Plan v. Ticor Title Ins. Co., 185 Cal.
App.3d 1149, 1156-1157 (1986). Moreover, the doctrine does not apply when two defendants
jointly commit a tort and “one [joint tortfeasor’s] conduct caused the plaintiff to pursue an action
against the other [joint tortfeasor].” Electrical Electronic Control, Inc. v. Los Angeles Unified
School District, 126 Cal. App.4th 601, 617 (2005); Ashley v. Church (In re Ashley), 903 F.2d
599, 605 (9th Cir. 1992).
Additionally, if a contract provides for an award of attorneys’ fees incurred to enforce the
contract, California Civil Code §1717 provides that the prevailing party shall be entitled to an
award of reasonable attorneys’ fees. 	Section 1717, however, applies only to attorneys’ fees
incurred to litigate contract claims, and does not apply to award such fees incurred to litigate tort
claims, such as the claims litigated here. See, Santisas v. Goodin, 17 Cal. 4 th 599, 615 (1998); In
re Davison, 289 B.R. 716, 723-725 (9th Cir BAP 2003).7 An agreement between the parties,
however, may otherwise provide for an award of attorneys’ fees incurred to litigate tort claims.
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8 Sweidy’s asserted attorneys’ fees and costs are broken-down as: Last & Faoro $8,387.21; Thelen Reid &
Priest $89,747.23; Neal H. Konami $31,111.75; Dewey & LeBoeuf $97,541.36; and Morgan Miller Blair
$195,459.73. (doc. 41 at 1-2, Exs. A-E).
6
In such instance, courts “look to the language of the agreement to determine whether an award of
attorneys’ fees is warranted in a tort action.” In re Davison, 289 B.R. at 724; citing, 3250
Wilshire Boulevard Building v. W.R. Grace & Company, 990 F.2d 487, 489 (9th Cir. 1993); Cal.
Code Civ. Pro. §1021.
Sweidy asserts a total of $422,247.28 in attorneys’ fees and costs incurred for services
performed by five separate law firms as arising from the Debtor’s fraudulent conduct.8 Sweidy
asserts that the fees and costs of Last & Faoro and Thelen Reid & Priest (herein “Thelen”) are
recoverable pursuant to the “tort of another” doctrine for work incurred to litigate the IMX
Action, the Rogelio Esqueda and Truitt & White mechanics liens, and a claim against the Gulf
Insurance Company to collect on the Debtor’s construction bond. Sweidy asserts that the
remaining fees and costs, attributable to Neal H. Konami (“Konami”), Dewey & LeBoeuf and
Morgan Miller Blair were incurred to investigate and prosecute this adversary proceeding, and
are recoverable pursuant to an indemnification provision found in Section 8.13.1 of the June 23,
2003 contract. (docs. 40 and 41; Plaintiff Ex. 1).
The Konami, Dewey & LeBoeuf and Morgan Miller Blair Fees and Expenses
The attorneys’ fees and costs attributable to Konami, Dewey & LeBoeuf and Morgan
Miller Blair, are asserted to be recoverable pursuant to Section 8.13.1 of the June 23, 2003
contract. As such, the Court must consider the language of Section 8.13.1 “to determine whether
an award of attorneys’ fees is warranted in a tort action.” In re Davison, 289 B.R. at 724.
Section 8.13.1 provides, in relevant part, that the Debtor shall indemnify and hold Sweidy
harmless:
from and against claims damages, losses and expenses, including but not limited
to attorneys’ fees, arising out of or resulting from performance of the Work,
provided that such claim, damage, loss or expenses is attributable to bodily injury,
sickness, disease or death, or to injury to or destruction of tangible property (other
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than the Work itself), but only to the extent caused by the negligent acts or
omissions of [the Debtor], a Subcontractor, anyone directly or indirectly
employed by them or anyone from whose acts they may be liable, regardless of
whether or not such claim, damage, loss or expense is caused in part by a party
indemnified hereunder.
(Plaintiff Ex. 1). Section 8.13.1 is narrow in scope, providing for the Debtor to indemnify
Sweidy for attorneys’ fees if such fees are attributable to a bodily injury, sickness, disease or
death, or to the destruction of or an injury to certain tangible property, but only to the extent
caused by the Debtor’s negligence. The litigation and adjudication of this adversary proceeding
did not involve negligent acts or omissions on the part of the Debtor, but rather tort claims based
upon the Debtor’s knowing and intentional conduct. Additionally, here Sweidy was found to
have been injured by the Debtor’s conduct, but such did not cause Sweidy to incur a bodily
injury, sickness, disease or death. Sweidy’s injury was strictly monetary, based upon having
paid for work on the project the Debtor fraudulently stated had been performed, and work for
which the Debtor intentionally overcharged. Moreover, no tangible property was found to have
been injured or destroyed by the Debtor’s conduct. As such, Section 8.13.1 does not provide a
basis for an award of attorneys’ fees and costs in this adversary proceeding.
The Last & Faoro and Thelen Fees and Costs
The Court finds that Sweidy’s retention of Last & Faoro and the Thelen firm to litigate
the IMX complaint, the other mechanics liens and the Gulf Insurance bond payment, was
necessary and reasonable to protect Sweidy’s interest in the property, and was a direct result of
the Debtor’s fraudulent conduct. As such, the “tort of another” doctrine may apply, and
reasonable attorneys’ fees and costs thereby incurred may be recoverable as damages and
excepted from discharge under §523(a)(2)(A). See, Bell v. Smith (In re Smith), 232 B.R. 461,
468 (Bankr. D. Idaho1998); In re Bertola, 317 B.R. at 103 (“tort of another” doctrine applicable
to attorneys’ fees and costs resulting from fraud established pursuant to §523(a)(2)).
As to Last & Faoro, Sweidy filed time entries totaling $9,522.21, asserts to have paid
Last & Faoro $9,507.21, and states that $1,120 of this amount was for work unrelated to the
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9 In addition to unsegregated time entries, some individual time entries similarly clump together tasks that
may come within the “tort of another” doctrine with other tasks that do not. In such instance, the entry was pro rated
to determine an amount not applicable to the “tort of another” doctrine. (See for example, doc. 41 Ex. B, Invoice
6885206 entry dated 3/11/05).
8
Debtor, leaving $8,337.21 asserted as to have been related to matters involving the Debtor.
Sweidy did not segregate entries applicable to the “tort of another” doctrine from entries that are
not applicable. (doc. 41, Ex. A). Upon review, however, certain entries plainly do not come
within the doctrine. Fees and costs of $185.75 to prepare and file a proof of claim in this
bankruptcy case (Id., at Invoice 16193), and $491.12 to respond to a request for documents from
the California Contractor State Licensing Board (Id., at Invoice 17250), do not come within the
“tort of another” doctrine, as such charges were incurred for services rendered litigating against
the Debtor, and not against a third person as the doctrine requires. Additionally, the Court finds
that $1,680 billed to the general category of “93 Broad Acres Road” (Id., at Invoices 14449,
15467, and 16012) lack sufficient detail to ascertain whether the “tort of another” doctrine
applies, and on that basis are disallowed. The aforementioned totals $2,356.87 and 10.05 hours.
Deducting that amount from $9,507.21 results in attorneys’ fees and costs of $7,150.34 for
services performed by Last & Faoro attributable to the mechanics liens and Gulf Insurance bond
payment, and recoverable as damages.
Similarly, time entries documenting the services of Thelen (doc. 41, Ex. B), are also not
segregated, and facially several plainly do not come within the “tort of another” doctrine. Fees
totaling $2,436.25 for 6.125 hours (Id., at Invoice 6885206, entries dated 3/10/05; 3/11/05;
3/16/05) to discuss and research the scope of the Debtor’ bankruptcy discharge, the status of the
Debtor’s bankruptcy case and that of Fine Homeworks, possible bankruptcy crimes and a
revocation of the discharge, do not come within the “tort of another” doctrine as such charges are
for services rendered to litigate against the Debtor.9 Additionally, a portion of the Thelen time
entries concern the litigation of a cross-complaint filed by Sweidy against IMX and its corporate
president in the IMX Action. The cross-complaint (Defendant Ex. I) asserts three causes of
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action: one for breach of contract alleging defective work performed on the project and billing
for unperformed work, a second for conspiring with the Debtor as an alleged joint tortfeasor to
defraud Sweidy on funds paid on the invoices, and a third for fraudulent, unlawful and unfair
business practices under California Business and Professions Code §17200 et seq. Such causes
of action could have been asserted against IMX independent of the Debtor’s fraud, and/or
involve IMX as a joint tortfeasor with the Debtor. As such, the “tort of another” doctrine does
not apply to allow recovery of fees and costs incurred to prosecute the IMX cross-complaint.
Flyer's Body Shop 185 Cal. App.3d at 1156-1157; Electrical Electronic Control, 126 Cal.
App.4th at 617. Time entries totaling 21.06 hours and fees of $7,055.56, specifically mention
and wholly or partially bill for tasks concerning the cross-complaint or the answer to the cross-
complaint, and are not recoverable as damages. (doc. 41, Ex. B, Invoices 688520 and 6892257,
entries dated 3/11/05 to 3/31/05 and 5/2/05 to 5/10/05).
The Court finds, however, that defending against the complaint filed in the IMX Action
was necessary and reasonable and resulted directly from the Debtor’s fraudulent conduct. As
such, reasonable attorneys’ fees and costs incurred to defend against the complaint are
recoverable under the “tort of another” doctrine, and may be excepted from discharge under
§523(a)(2)(A). In considering the Thelen time entries, however, separating the non-recoverable
fees and costs attributable to the cross-complaint from those recoverable for defending against
the complaint, is problematic. Services and costs billed, for example, for research, conducting
discovery, drafting pleadings, court appearances and numerous similar items, inherently
intertwine litigation of the complaint and the cross-complaint. As such, the Court finds that
allocating one half of the allowed fees and costs billed by Thelen to the defense of the complaint
comprises a reasonable award. Accordingly, the $89,747.23 billed on the Thelen time entries,
less the $2,436.25 and $7,055.56 for entries facially not within the scope of the “tort of another”
doctrine, and then divided in half, results in $40,127.71 of attorneys’ fees and costs attributable
to defending against the IMX complaint, and recoverable as damages. See, Dawson v.
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10 The Thelen time entries total 263 hours. Divided in half and then deducting for the 27.185 of hours
attributable to the disallowed entries results in about 104.3 hours attributable to defending against the IMX
complaint. The Last & Faoro time entries total 34.35 hours, and after deducting the 10.05 hours attributable to
disallowed entries results in 24.3 hours for billed services that come within the “tort of another” doctrine. The Court
finds such hours from Thelen covering a 7 month period at hourly rates of $175 to $410, and from Last & Faoro over
14 months at the hourly rates of $120 to $250, to be reasonable. See, In re Dawson, 390 F.3d 1139, 1152-1153 (9th
Cir. 2004) (within discretion of bankruptcy court to consider hours expended and rate charged in considering
reasonable fee).
10
Washington Mutual Bank (In re Dawson), 390 F.3d 11391152-1153 (9th Cir. 2004) cert. denied
546 U.S. 927 (2005) (5% pro rata allocation of unsegregated attorneys’ fees and costs to
percentage of litigation for which such fees and costs may be recovered is within discretion of
the bankruptcy court); and Stinson v. Bi-Rite Restaurant Supply, Inc. (In re Stinson), 295 B.R.
109, 118-119 (9th Cir. BAP 2003), aff’d in part and rev’d in part 128 Fed. Appx. 30, 2005 WL
736668 (9th Cir. 2005) (same with 20% pro rata allocation). In accordance with the foregoing,
the Court finds that attorneys’ fees and costs of $7,150.34 attributable to Last & Faoro, plus
$40,127.71 attributable to Thelen, totals $47,278.05 and is recoverable under the “tort of
another” doctrine as damages in this adversary proceeding. 10
CONCLUSION
The damages of $129,987 previously found at trial, plus attorneys’ fees and costs of
$47,278.05, totals $177,265.05. In accordance with the foregoing, $177,265.05 owed by the
Debtor to Sweidy is hereby found to be non-dischargeable in this bankruptcy case.
IT IS SO ORDERED.
**END OF ORDER**
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COURT SERVICE LIST
C. Randall Bupp
Bardellini, Straw, Cavin and Bupp
2000 Crow Canyon Pl. #330
San Ramon, CA 94583
Michael K. Brown
Kevin R. Brodehl
Morgan Miller Blair
1331 N California Blvd. #200
Walnut Creek, CA 94596-4544
Office of the U.S. Trustee
1301 Clay St. #690N
Oakland, CA 94612
Case: 08-04037 Doc# 47 Filed: 08/14/09 Entered: 08/17/09 15:04:30 Page 11 of
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Case: 08-04037 Doc# 49 Filed: 08/14/09 Entered: 09/29/09 15:35:48 Page 11 of
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