Terra Nova Industries, Inc. v. Chen et al

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UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re 	)
) Bankruptcy Case
GEORGE Q. CHEN, 	) No.03-32157DM
)
Debtor(s) ) Chapter 11
___________________________________)
TERRA NOVA INDUSTRIES, INC., a 	) Adversary Proceeding
California corporation, 	) No. 03-3712DM
)
Plaintiff, 	)
)
v. 	)
)
GEORGE Q. CHEN; GQC HOLDINGS, INC.,)
a California corporation; GQC 	)
HOLDING COMPANY, INC., a California)
corporation; RESTAURANT QI-SFO, LLC)
a California limited liability 	)
company; QI ASSOCIATES, LLC, a 	)
California corporation; PACIFIC 	)
GATEWAY PARTNERSHIP, a business 	)
entity doing business in 	)
California; REININGA CORPORATION, 	)
a California corporation; and 	)
MARKETPLACE DEVELOPMENT, a business)
entity, 	)
)
Defendants. 	)
___________________________________)
MEMORANDUM DECISION REGARDING GEORGE Q. CHEN’S
MOTION FOR AWARD OF ATTORNEY’S FEES
I. Introduction
Terra Nova Industries, Inc. (“Terra Nova”) failed in its 11
U.S.C. § 523(a)(2)(A) nondischargeability proceeding against
debtor and defendant George Q. Chen (“Chen”). 	Terra Nova sought a
Signed and Filed: October 21, 2005
________________________________________
DENNIS MONTALI
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
October 24, 2005
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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determination that Chen was an alter ego of GQC Holdings, Inc. and
related entities (“GQC”); monetary damages, costs, attorney’s
fees, and interest; and a determination of nondischargeability.
After judgment was entered in his favor, Chen filed a motion to
recover his attorney’s fees pursuant to the contract between GQC
and Terra Nova (“Contract”). 	Under California law, recovery of
contractual attorney’s fees is governed by Cal. Civ. Code § 1717
(“CCC § 1717”) and Cal. Civ. Proc. Code § 1021 (“CCPC § 1021”).
Terra Nova argues that Chen is not entitled to an award of
contractual attorney’s fees under applicable California and
bankruptcy law, and is barred from seeking attorney’s fees because
he failed to plead them as a claim in his answer as required by
Fed. R. Bankr. P. 7008(b) (“Rule 7008(b)”).
For the reasons stated below, the court concludes that Chen
may not recover his attorney’s fees under CCC § 1717 or CCPC
§ 1021. 	Chen is not entitled to recovery under CCC § 1717 because
Chen was not the prevailing party in any action on the Contract.
Chen is not entitled to recovery under CCPC § 1021 because he only
prevailed on nondischargeability, a tort claim, not a contract
claim, and neither the Contract nor the law permit recovery of
attorney’s fees for successfully litigating the
nondischargeability tort claim.
Chen’s failure to plead attorney’s fees as a claim in his
answer does not affect the outcome. 	If Chen were entitled to
recover on the merits, the court would have to balance the federal
rules’ liberal pleading regime under Fed. R. Civ. P. 54(c) (“Rule
54(c)”) and Fed. R. Civ. P. 15 against the mandate of Fed. R.
Bankr. P. 7008(b) (“Rule 7008(b)”). 	However, in this case, the
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1 The following discussion constitutes the court’s
findings of fact and conclusions of law. 	Fed. R. Bankr. P.
7052(a).
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court need not decide whether failure to plead attorney’s fees
bars recovery.
II. Facts and Procedural History1
In 2000, GQC entered into the Contract with Terra Nova
whereby Terra Nova was to assist in building a restaurant at San
Francisco International Airport. 	The Contract had a prevailing
party attorney’s fee clause. 	Eventually, GQC stopped paying Terra
Nova, which nonetheless continued to perform work.
On July 25, 2003, Chen filed a voluntary petition for Chapter
13 bankruptcy. 	On August 13, 2003, the court ordered the case
converted to Chapter 11. 	On July 15, 2005, while this adversary
proceeding was pending, the court ordered the case converted to
Chapter 7.
On December 1, 2003, Terra Nova filed its nondischargeability
complaint against Chen, and on November 17, 2004, its amended
complaint (“Complaint”). 	In its Complaint, Terra Nova requested a
determination that Chen was an alter ego of GQC and other related
corporations and was therefore personally liable on the Contract.
It also sought damages of $525,990, the amount of outstanding
unpaid invoices under the Contract, “reasonable costs and
attorney’s fees pursuant to contract and statute,” interest, and a
nondischargeability determination under 11 U.S.C. § 523(a)(2)(A).
In his answer, filed on December 10, 2004, Chen did not
assert any counterclaims, and in his prayer for relief, he
requested “[t]hat Plaintiff take nothing by reason of its
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complaint,” “[f]or costs of suit; and” “[f]or such other and
further relief as is proper in the premises.” 	He did not plead a
claim for, or otherwise request, recovery of his attorney’s fees.
In its trial brief, Terra Nova argued for its attorney’s fees
pursuant to the Contract and stated that “Plaintiff will be making
a claim for reimbursement of its attorney’s fees and costs
incurred in its collection efforts. 	The amount of the fees and
costs claimed will be proved at trial.” 	Terra Nova raised its
attorney’s fees in its opening statement at trial. 	Chen did not
address attorney’s fees in his trial brief or at trial.
On July 22, 2005, this court issued a judgment ordering that
Terra Nova take nothing from Chen by way of its complaint, but
specifying that the judgment had no effect on Terra Nova’s claim
against Chen’s bankruptcy estate; that subject to Chen’s receipt
of a discharge, all debts owed by Chen to Terra Nova were
dischargeable; and that Chen recover all his costs of suit but
that any claim attorney’s fees shall be brought by separate
motion.
On August 8, 2005, Chen filed a motion to recover attorney’s
fees. 	Terra Nova filed its opposition on August 26, and Chen
filed his reply on September 2. 	The hearing in this matter was
held on September 9, 2005.
III. Issues
A. Whether Chen may recover attorney’s fees pursuant to the
Contract.
B. Whether Chen is barred from recovering attorney’s fees by
failing to plead them as a claim in his answer.
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IV. Discussion
Under the American Rule, applied by federal courts, each
party must pay his or her own attorney’s fees absent “a contract
or statute granting a right to attorney’s fees,” “the conferring
of a common benefit by the recovery of a fund or property,”
“willful disobedience of a court order,” or “a finding that the
losing party has acted in bad faith, vexatiously, wantonly or for
oppressive reasons.” 	Skehan v. Bd. of Trs. of Bloomsburg State
Coll., 538 F.3d 53, 56 (3rd Cir. 1976) (citing Alyeska Pipeline
Servs. Co. v. Wilderness Soc’y, 421 U.S. 240 (1975)); see also
Engel v. Teleprompter Corp., 732 F.2d 1238, 1240 (5th Cir. 1984)
(exceptions to the American rule have “always been recognized
where a fee award is authorized either by statute or by private
contract.”); V. M. v. S. S. (In re S. S.), 271 B.R. 240, 245
(Bankr. D.N.J. 2002).
A. 	Chen May Not Recover Attorney’s Fees Pursuant To The Contract
l. 	Recovery of Contractual Attorney’s Fees Is Governed
By California Law
Although there is no general right to attorney’s fees under
bankruptcy law, “a prevailing party in a bankruptcy proceeding may
be entitled to an award of attorney fees in accordance with
applicable state law if state law governs the substantive issues
raised in the proceedings.” 	Ford v. Baroff (In re Baroff), 105
F.3d 439, 441 (9th Cir. 1997); Fobian v. W. Farm Credit Bank (In
re Fobian), 951 F.2d 1149, 1153 (9th Cir. 1991) (in bankruptcy
proceedings, awards of contractual attorney’s fees are governed by
state law). 	In nondischargeability proceedings, “‘[t]he
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determinative question . . . is whether the successful plaintiff
could recover attorney’s fees in a non-bankruptcy court.’” 	Sea
Win, Inc. v. Tran (In re Tran), 301 B.R. 576, 584 (Bankr. N.D.
Cal. 2003) (quoting AT & T Universal Card Servs., Corp. v. Pham
(In re Pham), 250 B.R. 93, 99 (B.A.P. 9th Cir. 2000)). 	When the
litigated issues are particular to federal bankruptcy law and do
not involve state law questions, “attorney’s fees will not be
awarded absent bad faith or harrassment by the losing party.”
Fobian, 951 F.2d at 1153 (citing Collingwood Grain, Inc. v. Coast
Trading Co. (In re Coast Trading Co.), 744 F.2d 686, 693 (9th Cir.
1984) (“Absent bad faith or harassment, attorney’s fees are not
available for the litigation of federal bankruptcy issues under a
contract which provides for attorney’s fees for enforcement of the
contract.”)).
Therefore, Chen may be able to recover his attorney’s fees
pursuant to the Contract if available under California law,
including CCC § 1717 (reciprocal award of attorney’s fees) and
CCPC § 1021 (award of attorney’s fees governed by contract).
Otherwise, if the litigated issues were particular to bankruptcy
law, Chen may not recover.
2. 	Chen May Not Recover Attorney’s Fees Under
California Civil Code § 1717
CCC § 1717(a) provides:
In any action on a contract, where the contract
specifically provides that attorney’s fees and
costs, 	which 	are 	incurred 	to 	enforce 	that
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contract, shall be awarded either to one of the
parties 	or 	to 	the 	prevailing 	party, 	then 	the
party 	who 	is 	determined 	to 	be 	the 	party
prevailing on the contract, whether he or she is
the 	party 	specified 	in 	the 	contract 	or 	not,
shall be entitled to reasonable attorney's fees
in addition to other costs.
Accordingly, in order for Chen to recover attorney’s fees
under CCC § 1717, he must show that the adversary proceeding was
an “action on a contract,” that Chen was the prevailing party, and
that the Contract provides for an award of attorney’s fees
incurred to enforce the Contract.
a. 	Each Issue Litigated Must Be Analyzed
Separately
CCC § 1717 authorizes the recovery of attorney’s fees only in
an “action on a contract.” 	Terra Nova claims that the adversary
proceeding was not an action on a contract because the complaint
did not contain a breach of contract claim. 	Rather, Terra Nova
asserts that because it stated only one claim for
nondischargeability for fraud under § 523(a)(2)(A), Chen may not
recover attorney’s fees under CCC § 1717.
A § 523(a)(2)(A) nondischargeability proceeding may be
considered an action on a contract even when the plaintiff only
asserts only one claim for fraud. 	See Pham, 250 B.R. at 96 (even
though the plaintiff did not expressly specify breach of contract
as a ground for relief, it nonetheless pleaded a contract cause of
action because it sought “determination of [a] debt and recovery
of attorney’s fees” based on its contract with the debtor). 	If a
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proceeding involves contract and tort claims, attorney’s fees may
only be recovered under CCC § 1717 for the contract claims.
Redwood Theatres, Inc. v. Davison (In re Davison), 289 B.R. 716,
723 (B.A.P. 9th Cir. 2003) (“If an action asserts both contract
and tort or other noncontract claims, . . . [CCC §] 1717 applies
only to attorney fees incurred to litigate the contract claims.”);
Reynolds Metals Co. v. Alperson, 599 P.2d 83, 86 (Cal. 1979) (en
banc) (“Where a cause of action based on the contract providing
for attorney’s fees is joined with other causes of action beyond
the contract, the prevailing party may recover attorney’s fees
under section 1717 only as they relate to the contract action.”).
Each issue actually litigated must be analyzed separately to
determine whether it constituted an action on the contract and, if
so, whether the attorney’s fees incurred to litigate that issue
are recoverable under CCC § 1717. 	See McKenzie v. Kaiser-Aetna,
127 Cal. Rptr. 275, 278 (Cal. Ct. App. 1976).
b. 	Terra Nova Litigated Issues Beyond
Nondischargeability
In determining whether a proceeding was an action on a
contract, courts may look beyond the parties’ pleadings. 	Tran,
301 B.R. at 584 (citing Yadidi v. Herzlich (In re Yadidi), 274
B.R. 843, 851–852 (B.A.P. 9th Cir. 2002) and Fed. R. Civ. P.
15(b)) (“Once a case is tried, what was actually litigated takes
precedence over the pleadings.”). 	In Tran, the court held that an
adversary proceeding included a claim for breach of contract, even
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though the complaint only asserted nondischargeability claims,
because “the trial was conducted primarily as a breach of contract
action.” 	Id. 	The defendant had disputed liability under the
contract, requiring the plaintiff to put on evidence to establish
both dischargeability and breach of contract. 	Id.
In this proceeding, Terra Nova needed to establish more than
nondischargeability. 	First, it had to establish Chen’s liability,
and to do so, it sought to prove that Chen was an alter ego of GQC
and that Chen, as GQC’s alter ego, owed at least $525,990 for
unpaid invoices. 	Then it had to establish that Chen’s debt was
nondischargeable due to fraud. 	The court must determine whether
the litigation of each of these issues was an action on the
Contract and, if so, whether Chen was the prevailing party.
c. 	Chen May Not Recover Attorney’s Fees Under CCC § 1717
For Terra Nova’s Attempt to Establish Liability Under
The Contract
Under California law, an action to establish alter ego
liability under a contract is an action on a contract. 	See
Reynolds, 599 P.2d at 85 (under CCC § 1717, an “action on a
contract” includes “any action where it is alleged that a person
is liable on a contract, whether or not the court concludes he is
a party to that contract.”). 	An action to establish the existence
or amount owed pursuant to a contract is also an action on a
contract. 	See Baroff, 105 F.3d at 442-443. 	Therefore, Terra
Nova’s attempt to establish liability was an action on the
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Contract.
To recover under CCC § 1717, Chen must have been the
prevailing party. 	Cal. Civ. Code § 1717(b)(1) reads:
The 	court, 	upon 	notice 	and 	motion 	by 	a
party, 	shall 	determine 	who 	is 	the 	party
prevailing on the contract for purposes of
this 	section, 	whether 	or 	not 	the 	suit
proceeds 	to 	final 	judgment. 	Except 	as
provided 	in 	paragraph 	(2), 	the 	party
prevailing 	on 	the 	contract 	shall 	be 	the
party 	who 	recovered 	a 	greater 	relief 	in
the action on the contract. 	The court may
also 	determine 	that 	there 	is 	no 	party
prevailing on the contract for purposes of
this section.
The trial court is given wide discretion in determining the
prevailing party. 	Sears v. Baccaglio, 70 Cal. Rptr. 2d 769, 784
(Cal. Ct. App. 1998). 	Because this court did not rule on either
the alter ego issue or the amount of debt owed, there was no
prevailing party on either issue. 	Accordingly, Chen may not
recover his attorney’s fees under CCC § 1717 for litigating the
liability portion of the proceeding.
d. 	Chen May Not Recover Attorney Fees Under
CCC § 1717 For Terra Nova’s
Nondischargeability Claim
Because this court held that Chen’s debt was dischargeable,
Chen was the prevailing party on the nondischargeability claim.
To recover his attorney’s fees, the litigation of the claim must
have been an action on the Contract within the meaning of CCC §
1717. 	In determining whether it was, the court may look at
whether the Contract played an integral role in the proceeding.
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See Baroff, 105 F.3d at 442 (nondischargeability action “was an
action on [the] contract because the document containing the
attorney’s fee clause . . . played an integral role in the
proceedings.”). 	The Baroff court distinguished Grove v. Fulwiler
(In re Fulwiler), 624 F.2d 908 (9th Cir. 1980), where the contract
was collateral to the nondischargeability proceedings. 	Baroff,
105 F.3d at 442. 	In Fulwiler, the “bankruptcy court did not
adjudicate the validity of the note in determining whether the
debt was dischargeable.” 	Id. (citing Fulwiler, 624 F.2d at
909–910). 	“Rather, the court determined that the debtors obtained
the loan evidenced by the note through fraud.” 	Id. 	The Ninth
Circuit “held that if the bankruptcy court did not need to
determine whether the contract was enforceable, then the
dischargeability claim [was] not an action on the contract within
the meaning of CCC § 1717.” 	Davison, 289 B.R. at 723 (citing Am.
Express Travel Related Servs. Co. Inc. (In re Hashemi), 104 F.3d
1122, 1126 (9th Cir. 1996)). 	In Santisas, the California Supreme
Court narrowed the analysis further, holding that “only a contract
claim is an action on a contract within the meaning of . . . [CCC]
§ 1717.” 	Davison, 289 B.R. at 724 (citing Santisas, 951 P.2d at
409) (internal quotations omitted) (emphasis added). 	Accordingly,
the Ninth Circuit BAP held that it would award attorney’s fees
“only if the action involves a contract claim.” 	Id.
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Here, while the Contract was necessary for context, it played
played no meaningful role in this court’s dischargeability
determination. 	The court found that the alleged debt was
dischargeable because Terra Nova failed to show that Chen had
knowingly made material misrepresentations or that Terra Nova
justifiably relied on any representations. 	Further, the
nondischargeability claim was a tort claim, not a contract claim.
See Davison, 289 B.R. at 724; Pham, 250 B.R. at 97 (“federal cause
of action for nondischargeability for fraud . . . is entirely a
tort action, and not an action on a contract.”). 	Litigants may
not recover attorney’s fees under CCC § 1717 for tort claims.
Santisas, 951 P.2d at 209 (an action is “outside the ambit of
[CCC] § 1717 insofar as it asserts tort claims.”). 	Accordingly,
Chen may not recover his attorney’s fees under CCC § 1717 for
litigating the nondischargeability claim.
3. 	Chen May Not Recover Attorney’s Fees Under California
Civil Procedure Code Section 1021
Attorney’s fees may be recoverable under CCPC § 1021 even if
not recoverable under CCC § 1717. 	Davison, 289 B.R. at 724.
Unlike CCC § 1717, CCPC § 1021 allows recovery for tort and
contract actions. 	Id. 	CCPC § 1021 provides:
Except as attorney’s fees are specifically
provided 	for 	by 	statute, 	the 	measure 	and
mode 	of 	compensation 	of 	attorneys 	and
counselors 	at 	law 	is 	left 	to 	the
agreement, 	express 	or 	implied, 	of 	the
parties; 	but 	parties 	to 	actions 	or
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proceedings 	are 	entitled 	to 	their 	costs,
as hereinafter provided.
Chen only prevailed in litigating the nondischargeability
claim, which was purely a tort action. 	Pham, 250 B.R. at 97. 	To
determine whether attorney’s fees are recoverable in a tort
action, the court looks to the language of the agreement.
Davison, 289 B.R. at 724. 	Section 14.6.5 of the Contract
provides: “In the event it becomes necessary for the Contractor to
engage legal counsel to collect payments due and unpaid under the
Contract Documents, the prevailing party shall be entitled to all
costs of collection including reasonable attorney’s fees.”
To recover attorney’s fees, Chen must show that the Contract
provided for an attorney’s fee award in a tort action. 	In
Davison, the court declined to award attorney’s fees under CCPC
§ 1021 to the prevailing debtor in a nondischargeability
proceeding. 	The contract at issue in Davison provided that
attorney’s fees would be awarded to the prevailing party if “any
action at law or equity” was necessary to “enforce or to interpret
the terms of [the] Agreement.” 	289 B.R. at 724 (emphasis added).
The court found that the words “to enforce” meant that the
creditor’s action must have been brought to enforce its rights
under the agreement, a limited meaning not encompassing fraud
claims. 	Id. at 725.
Here, the Contract’s language is narrower than in Davison.
The phrase “collect payments due and unpaid under the Contract” is
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one of several means of enforcing the terms of the Contract. 	It
has no application other than in connection with enforcing the
terms of the Contract, as it otherwise might have if the language
had simply read “collect payments due and unpaid.” 	Therefore,
this court finds that the Contract does not provide for an award
of attorney’s fees for litigating a tort claim. 	Chen may not
recover his attorney’s fees under CCPC § 1021.
B. 	Chen’s Failure to Plead Attorney’s Fees Is Irrelevant To The
Outcome
Terra Nova argues that Chen is barred from recovering his
attorney’s fees because he failed to plead them as a claim in his
answer. 	Rule 7008(b) states that “[a] request for an award of
attorney’s fees shall be pleaded as a claim in a complaint, cross-
claim, third-party complaint, answer, or reply as may be
appropriate.” 	Chen did not plead or otherwise request an award of
attorney’s fees in his answer to Terra Nova’s nondischargeability
complaint, in his trial brief, or at trial. 	Chen argues that,
notwithstanding Rule 7008(b), a post-trial motion for attorney’s
fees is sufficient and that he is entitled to relief on the merits
under Rule 54(c), made applicable in bankruptcy proceedings by
Fed. R. Bankr. P. 7054. 	At the hearing to consider the attorney
fees motion, Chen offered to amend his answer if necessary.
Even though Chen did not plead his request for attorney’s
fees in his answer, the court may have discretion to allow leave
to amend under the federal rules’ liberal pleading regime. 	“‘The
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. . . Rules reject the approach that pleading is a game of skill
in which one misstep by counsel may be decisive to the outcome and
accept the principle that the purpose of pleading is to facilitate
a proper decision on the merits.’” 	Foman v. Davis, 371 U.S. 178,
181–182 (1962) (quoting Conley v. Gibson, 355 U.S. 41, 48 (1957)).
Rule 54(c) states in part “[E]very final judgment shall grant the
relief to which the party in whose favor it is rendered is
entitled, even if the party has not demanded such relief in the
party’s pleadings.” 	It may justify “an award of attorneys’ fees
to a prevailing party who failed to plead for such an award.”
Engel, 732 F.2d at 1241. 	Although the rule “was written with
prevailing plaintiffs in mind,” the Ninth Circuit applies it to
prevailing defendants as well. 	Id.
Fed. R. Civ. P. 15(a), made applicable in adversary
proceedings by Fed. R. Bankr. P. 7015, “declares that leave to
amend ‘shall be freely given when justice so requires’; this
mandate is to be heeded.” 	Foman, 371 U.S. at 182 (internal
citation omitted). 	The court has discretion to grant or deny
leave to amend, which should be freely given unless the amendment
would cause, among other things, undue prejudice to the opposing
party. 	Id. 	“Outright refusal to grant the leave without any
justifying reason” is abuse of discretion. 	Id.
Although it is unlikely that Terra Nova would be prejudiced
if this court allowed Chen to amend his pleadings, there is ample
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authority supporting denial in attorney’s fee actions not governed
by 11 U.S.C. § 523(d). 	See, e.g., Hartford Police F.C.U. v.
DeMaio (In re DeMaio), 158 B.R. 890, 892, 893 (Bankr. D. Conn.
1993) (denying attorney’s fees to prevailing creditor who failed
to plead a claim for attorney’s fees and failed to refer to the
claim in pre-trial memoranda); Garcia v. Odom (In re Odom), 113
B.R. 623, 625 (Bankr. C.D. Cal. 1990) (denying attorney’s fees to
a prevailing creditor who failed to plead a claim for attorney’s
fees; request for fees in the form of a prayer only insufficient
under Rule 7008(b)); S. S., 271 B.R. at 243-244 (creditor’s
failure to request statutory attorney’s fees in advisory complaint
bars recovery under Rule 7008(b)).
To resolve the issue, the court would have to balance the
conflict between Rules 54(c) and 15(a), on the one hand, and Rule
7008(b) on the other. 	However, since Chen is not entitled to
recover his attorney’s fees pursuant to substantive law, the court
need not decide whether his failure to plead bars recovery.
V. Conclusion
For the reasons set forth above, Chen’s motion for attorney’s
fees will be denied by separate order issued concurrently with
this memorandum decision.
**END OF MEMORANDUM DECISION**
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