FILED AUG 21 2019 ORDERED PUBLISHED SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
In re: BAP No. AZ-18-1289-BFL
MICHAEL ALLEN ZITO and Bk. No. 3:09-bk-25681-GBN ELIZABETH ZITO,
Debtors.
MICHAEL ALLEN ZITO; ELIZABETH ZITO,
Appellants,
v. OPINION
DOUGLASS ENTERPRISES, LLC,
Appellee.
Argued and Submitted on July 18, 2019 at Phoenix, Arizona
Filed – August 21, 2019
Appeal from the United States Bankruptcy Court for the District of Arizona
Honorable George B. Nielsen, Jr., Bankruptcy Judge, Presiding Appearances: Appellant Michael Allen Zito argued pro se; Philip J. Giles of Allen Barnes & Jones, PLC argued for Appellee Douglass Enterprises, LLC.
Before: BRAND, FARIS and LAFFERTY, Bankruptcy Judges.
BRAND, Bankruptcy Judge:
INTRODUCTION
Douglass Enterprises, LLC sued debtors Michael and Elizabeth Zito
in Arizona state court to recover on a personal guarantee. The Zitos
returned to the bankruptcy court and sought an order that the debt was
discharged in their previous chapter 111 bankruptcy case despite
§ 523(a)(3)(A). After the bankruptcy court determined that the Zitos' debt
to Douglass Enterprises was not discharged, Douglass Enterprises, as the
prevailing party, sought and obtained a judgment from the bankruptcy
court awarding attorney's fees and costs for defending the discharge action.
The Zitos now appeal the post-judgment award of attorney's fees and costs
to Douglass Enterprises. Although we agree that Douglass Enterprises, as
the prevailing party in this action, would be entitled to reasonable
attorney's fees and costs in the event that it ultimately prevails in its
1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
2 personal guarantee action, the bankruptcy court erred by awarding fees
and costs prematurely. Accordingly, we REVERSE.
I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
The Zitos owned and managed BySynergy, LLC, a Delaware limited
liability company in the business of real estate development. Prior to 2008,
BySynergy was developing a 106 single-family home project in Arizona. To
help fund the venture, BySynergy obtained a $200,000 loan from Douglass
Enterprises, which was evidenced by a note and a second-position deed of
trust against the project property in favor of Douglass Enterprises. To
further secure repayment, the Zitos executed a Personal Guarantee for the
amounts owed to Douglass Enterprises under the note. The Personal
Guarantee was governed by Arizona law and contained an attorney's fees
clause providing for reasonable attorney's fees to the prevailing party in
any suit "to enforce any of its terms."
In 2008, BySynergy filed a chapter 11 bankruptcy case, which was
later converted to chapter 7. Ultimately, Douglass Enterprises's second-
position lien was wiped out by a senior lienholder and it received nothing
on its unsecured claim.
The Zitos then filed their individual chapter 11 bankruptcy case on
October 13, 2009. They did not list Douglass Enterprises or the Personal
Guarantee debt on their bankruptcy schedules. They received a discharge
on October 9, 2012.
3 In April 2013, Douglass Enterprises filed suit against the Zitos in the
Arizona state court for breach of the Personal Guarantee. The Zitos
reopened their individual chapter 11 case and sought a determination from
the bankruptcy court that the Personal Guarantee debt had been
discharged. After trial, the bankruptcy court found that the Zitos had failed
to establish that Douglass Enterprises had notice or actual knowledge of
the case in time to file a timely proof of claim. Accordingly, the debt was
not discharged under § 523(a)(3)(A). A judgment was entered to that effect
on September 7, 2018, which the Zitos appealed.2
Douglass Enterprises then moved for $207,210.85 of attorney's fees
and costs incurred in the § 523 action ("Fee Application"). Douglass
Enterprises maintained that it was entitled to such an award because the
Personal Guarantee provided for the recovery of attorney's fees and costs
to the prevailing party. The Zitos opposed the Fee Application. They
argued that, because the § 523 action involved only a question of
bankruptcy law — i.e., whether the debt owed to Douglass Enterprises was
discharged under § 523(a)(3)(A) — and did not address the enforceability
of the contract under state law, attorney's fees were not recoverable under
the Personal Guarantee or Arizona law. Because the underlying contractual
matter was yet to be litigated in the state court, the Zitos argued that the
2 We are concurrently issuing an affirmance in that appeal. See BAP No. AZ-18- 1236-BFL.
4 issue of attorney's fees could be addressed there, should Douglass
Enterprises prevail in that litigation.
After a hearing, the bankruptcy court announced its oral ruling
granting the Fee Application. The court reasoned that, even though the
§ 523 action involved the determination of whether the debt was
discharged under bankruptcy law, it "really turned into a factual case, not
an issue of abstract bankruptcy law, . . . but what the facts were and the
facts were such that I concluded the claim was not discharged." The court
opined that the Zitos' § 523 action "was an attempt to short-circuit Arizona
Superior Court litigation that was pending against them as well."
The bankruptcy court entered a judgment in favor of Douglass
Enterprises and against the Zitos for attorney's fees and costs in the
requested amount of $207,210.85 plus interest ("Fee Judgment"). The Zitos
timely appealed. While this appeal was pending, Douglass Enterprises
filed a Notice of Partial Satisfaction, after the Zitos alerted Douglass
Enterprises that the Fee Judgment inadvertently contained fees awarded in
prior sanctions orders and paid by the Zitos. Accordingly, the amount
owed on the Fee Judgment is now $184,210.35.
II. JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
5 III. ISSUE
Did the bankruptcy court err by awarding Douglass Enterprises its
attorney's fees and costs for defending the § 523(a)(3)(A) action?
IV. STANDARDS OF REVIEW
We review a bankruptcy court's determination on attorney's fees for
abuse of discretion. Bertola v. N. Wisc. Produce Co. (In re Bertola), 317 B.R. 95,
99 (9th Cir. BAP 2004). A bankruptcy court abuses its discretion if it applies
the wrong legal standard, or misapplies the correct legal standard, or if its
factual findings are clearly erroneous. United States v. Hinkson, 585 F.3d
1247, 1262 (9th Cir. 2009) (en banc). The bankruptcy court's decision to
award attorney's fees under § 523 and under Arizona law is an issue of law
that we review de novo. In re Bertola, 317 B.R. at 99.
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FILED AUG 21 2019 ORDERED PUBLISHED SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
In re: BAP No. AZ-18-1289-BFL
MICHAEL ALLEN ZITO and Bk. No. 3:09-bk-25681-GBN ELIZABETH ZITO,
Debtors.
MICHAEL ALLEN ZITO; ELIZABETH ZITO,
Appellants,
v. OPINION
DOUGLASS ENTERPRISES, LLC,
Appellee.
Argued and Submitted on July 18, 2019 at Phoenix, Arizona
Filed – August 21, 2019
Appeal from the United States Bankruptcy Court for the District of Arizona
Honorable George B. Nielsen, Jr., Bankruptcy Judge, Presiding Appearances: Appellant Michael Allen Zito argued pro se; Philip J. Giles of Allen Barnes & Jones, PLC argued for Appellee Douglass Enterprises, LLC.
Before: BRAND, FARIS and LAFFERTY, Bankruptcy Judges.
BRAND, Bankruptcy Judge:
INTRODUCTION
Douglass Enterprises, LLC sued debtors Michael and Elizabeth Zito
in Arizona state court to recover on a personal guarantee. The Zitos
returned to the bankruptcy court and sought an order that the debt was
discharged in their previous chapter 111 bankruptcy case despite
§ 523(a)(3)(A). After the bankruptcy court determined that the Zitos' debt
to Douglass Enterprises was not discharged, Douglass Enterprises, as the
prevailing party, sought and obtained a judgment from the bankruptcy
court awarding attorney's fees and costs for defending the discharge action.
The Zitos now appeal the post-judgment award of attorney's fees and costs
to Douglass Enterprises. Although we agree that Douglass Enterprises, as
the prevailing party in this action, would be entitled to reasonable
attorney's fees and costs in the event that it ultimately prevails in its
1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
2 personal guarantee action, the bankruptcy court erred by awarding fees
and costs prematurely. Accordingly, we REVERSE.
I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
The Zitos owned and managed BySynergy, LLC, a Delaware limited
liability company in the business of real estate development. Prior to 2008,
BySynergy was developing a 106 single-family home project in Arizona. To
help fund the venture, BySynergy obtained a $200,000 loan from Douglass
Enterprises, which was evidenced by a note and a second-position deed of
trust against the project property in favor of Douglass Enterprises. To
further secure repayment, the Zitos executed a Personal Guarantee for the
amounts owed to Douglass Enterprises under the note. The Personal
Guarantee was governed by Arizona law and contained an attorney's fees
clause providing for reasonable attorney's fees to the prevailing party in
any suit "to enforce any of its terms."
In 2008, BySynergy filed a chapter 11 bankruptcy case, which was
later converted to chapter 7. Ultimately, Douglass Enterprises's second-
position lien was wiped out by a senior lienholder and it received nothing
on its unsecured claim.
The Zitos then filed their individual chapter 11 bankruptcy case on
October 13, 2009. They did not list Douglass Enterprises or the Personal
Guarantee debt on their bankruptcy schedules. They received a discharge
on October 9, 2012.
3 In April 2013, Douglass Enterprises filed suit against the Zitos in the
Arizona state court for breach of the Personal Guarantee. The Zitos
reopened their individual chapter 11 case and sought a determination from
the bankruptcy court that the Personal Guarantee debt had been
discharged. After trial, the bankruptcy court found that the Zitos had failed
to establish that Douglass Enterprises had notice or actual knowledge of
the case in time to file a timely proof of claim. Accordingly, the debt was
not discharged under § 523(a)(3)(A). A judgment was entered to that effect
on September 7, 2018, which the Zitos appealed.2
Douglass Enterprises then moved for $207,210.85 of attorney's fees
and costs incurred in the § 523 action ("Fee Application"). Douglass
Enterprises maintained that it was entitled to such an award because the
Personal Guarantee provided for the recovery of attorney's fees and costs
to the prevailing party. The Zitos opposed the Fee Application. They
argued that, because the § 523 action involved only a question of
bankruptcy law — i.e., whether the debt owed to Douglass Enterprises was
discharged under § 523(a)(3)(A) — and did not address the enforceability
of the contract under state law, attorney's fees were not recoverable under
the Personal Guarantee or Arizona law. Because the underlying contractual
matter was yet to be litigated in the state court, the Zitos argued that the
2 We are concurrently issuing an affirmance in that appeal. See BAP No. AZ-18- 1236-BFL.
4 issue of attorney's fees could be addressed there, should Douglass
Enterprises prevail in that litigation.
After a hearing, the bankruptcy court announced its oral ruling
granting the Fee Application. The court reasoned that, even though the
§ 523 action involved the determination of whether the debt was
discharged under bankruptcy law, it "really turned into a factual case, not
an issue of abstract bankruptcy law, . . . but what the facts were and the
facts were such that I concluded the claim was not discharged." The court
opined that the Zitos' § 523 action "was an attempt to short-circuit Arizona
Superior Court litigation that was pending against them as well."
The bankruptcy court entered a judgment in favor of Douglass
Enterprises and against the Zitos for attorney's fees and costs in the
requested amount of $207,210.85 plus interest ("Fee Judgment"). The Zitos
timely appealed. While this appeal was pending, Douglass Enterprises
filed a Notice of Partial Satisfaction, after the Zitos alerted Douglass
Enterprises that the Fee Judgment inadvertently contained fees awarded in
prior sanctions orders and paid by the Zitos. Accordingly, the amount
owed on the Fee Judgment is now $184,210.35.
II. JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
5 III. ISSUE
Did the bankruptcy court err by awarding Douglass Enterprises its
attorney's fees and costs for defending the § 523(a)(3)(A) action?
IV. STANDARDS OF REVIEW
We review a bankruptcy court's determination on attorney's fees for
abuse of discretion. Bertola v. N. Wisc. Produce Co. (In re Bertola), 317 B.R. 95,
99 (9th Cir. BAP 2004). A bankruptcy court abuses its discretion if it applies
the wrong legal standard, or misapplies the correct legal standard, or if its
factual findings are clearly erroneous. United States v. Hinkson, 585 F.3d
1247, 1262 (9th Cir. 2009) (en banc). The bankruptcy court's decision to
award attorney's fees under § 523 and under Arizona law is an issue of law
that we review de novo. In re Bertola, 317 B.R. at 99.
V. DISCUSSION
A. The bankruptcy court did not err in determining that Douglass Enterprises would be entitled to its attorney's fees and costs for defending the § 523(a)(3)(A) action, but it did err by awarding them prematurely.
The Zitos argue that the bankruptcy court erred by awarding
attorney's fees to Douglass Enterprises based on the Personal Guarantee.
They contend that such fees were not recoverable because the only issue
before the court was whether the Personal Guarantee debt had been
discharged under § 523(a)(3)(A); that action did not address the
enforceability of the contract.
6 Under the "American Rule," prevailing parties in federal court are not
ordinarily entitled to attorney's fees unless authorized by contract or
statute. Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 257 (1975).
The 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 Fee
Judgment is silent as to what authority the bankruptcy court relied upon
for its ruling. Its oral ruling is also not clear. We cannot tell whether the
court awarded fees and costs based on the contract or an Arizona statute.
For their argument, the Zitos rely on In re Baroff, Fobian v. West Farm
Credit Bank (In re Fobian), 951 F.2d 1149 (9th Cir. 1991), Johnson v. Righetti
(In re Johnson), 756 F.2d 738 (9th Cir. 1985), and Collingwood Grain, Inc. v.
Coast Trading Co. (In re Coast Trading Co.), 744 F.2d 686 (9th Cir. 1984). The
Fobian line of cases has been abrogated by the Supreme Court in Travelers
Casualty & Surety Co. v. Pacific Gas & Electric Co., 549 U.S. 443 (2007).
However, Travelers does not govern here either. As we noted in Fry v.
Dinan (In re Dinan), 448 B.R. 775, 785 (9th Cir. BAP 2011), "while Travelers
supports the proposition that an unsecured creditor may assert a
postpetition claim against the estate for attorney's fees if governing
contracts and state law permit such fees, such cases apply to claims against
the estate, not to nondischargeable claims against the debtor. In
nondischargeability actions, Cohen [v. de la Cruz, 523 U.S. 213 (1998)]
applies." We further recognized in AT&T Universal Card Services Corp. v.
7 Pham (In re Pham), 250 B.R. 93, 99 (9th Cir. BAP 2000), that the general rule
in Baroff and American Express Travel Related Services Co. v. Hashemi (In re
Hashemi), 104 F.3d 1122 (9th Cir. 1997), no longer retained any vitality in
nondischargeability actions in light of Cohen. Baroff and Hashemi held that
whether fees may be awarded in bankruptcy proceedings generally
depends on whether the case involves state or federal claims and whether
the applicable law allows such fees. In re Baroff, 105 F.3d at 441; In re
Hashemi, 104 F.3d at 1126-27. See also In re Bertola, 317 B.R. at 99-100
(upholding award of attorney's fees under § 523(a)(6) based on Cohen).
In Cohen, the Supreme Court held that the discharge exception under
§ 523(a)(2)(A) applies to all liability arising on account of a debtor's
fraudulent conduct, including attorney's fees and costs. 523 U.S. at 223
(because creditors were entitled to treble damages and attorney's fees and
costs under a state statute for debtor's fraudulent conduct, the entire debt
was nondischargeable, including the attorney's fees and costs). Cohen is not
limited to cases under § 523(a)(2)(A). The Supreme Court indicated that its
holding would apply to nondischargeability cases under other paragraphs
in § 523 as well, such as (a)(1), (a)(4), (a)(6), and (a)(9). Id. at 219-20. See also
Correia–Sasser v. Rogone (In re Correia-Sasser), BAP No. AZ-13-1461-KiTaPa,
2014 WL 4090837, at *13 (9th Cir. BAP Aug. 19, 2014) (applying Cohen to
§ 523(a)(4)); In re Bertola, 317 B.R. at 100 (applying Cohen to § 523(a)(6)). We
have also applied Cohen to § 523(a)(14). See In re Dinan, 448 B.R. at 786.
8 Although we could not locate a case where a court has applied or refused
to apply Cohen to § 523(a)(3), we see no logical reason why its holding
would not extend to § 523(a)(3). See Brown v. Link (In re Link), 538 B.R. 783,
792 (Bankr. E.D. Mo. 2015) (reasoning that Cohen applies to any exception of
a debt from discharge under § 523(a)). Cohen is also not limited to
attorney's fees awarded under state or federal statutes; it applies equally to
cases in which fees are provided for by contract. In re Dinan, 448 B.R. at 786
(citing Redwood Theaters, Inc. v. Davison (In re Davison), 289 B.R. 716, 725 (9th
Cir. BAP 2003)).
“[U]nder Cohen, 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.” Id. at 785 (citing Levitt v. Cook (In re
Levitt), BAP No. AZ–07–1166, 2008 WL 8448069, at *6 (9th Cir. BAP July 22,
2008); In re Bertola, 317 B.R. at 99–100; Kilborn v. Haun (In re Haun), 396 B.R.
522, 528 (Bankr. D. Idaho 2008)). The entire basis for the debt the Zitos
sought to have discharged under § 523(a)(3)(A) was the Personal
Guarantee, a contract governed by Arizona law.3 It contains an attorney's
fee clause which states:
3 Under Arizona law, "[a] contractual provision for attorneys' fees will be enforced according to its terms. Unlike fees awarded under A.R.S. § 12–341.01(A), the court lacks discretion to refuse to award fees under the contractual provision." Chase Bank of Ariz. v. Acosta, 880 P.2d 1109, 1121 (Ariz. Ct. App. 1994) (internal citations omitted). Thus, if a contractual provision states fees will be awarded to the prevailing party, the court must award fees.
9 In the event suit is brought by any party under this Personal Guarantee to enforce any of its terms, it is agreed . . . that the prevailing party shall be entitled to reasonable attorneys' fees in said suit, or in any appeal therefrom, to be fixed by the Court.
Douglass Enterprises was seeking to enforce the terms of the Personal
Guarantee against the Zitos with its breach of contract action in the state
court. For reasons not entirely clear, that matter was stayed so the Zitos
could seek a determination from the bankruptcy court on whether the
Personal Guarantee debt had been discharged in the Zito's chapter 11
bankruptcy case. However, the state court had concurrent jurisdiction to
decide that issue and was not required to apply a stay. See Rein v. Providian
Fin. Corp., 270 F.3d 895, 904 n.15 (9th Cir. 2001) (bankruptcy courts and
state courts have concurrent jurisdiction over all nondischargeability
actions except those brought under § 523(a)(2), (4), (6) and (15)).
Litigation relating to the enforcement of the Personal Guarantee falls
under the attorney's fees clause, and the prevailing party in such litigation
is entitled to reasonable fees. The Zitos' § 523(a)(3)(A) action was
essentially litigating an affirmative defense to the enforceability of the
Personal Guarantee. The bankruptcy court determined that the Personal
Guarantee debt was not discharged, and we have affirmed that ruling. But
the § 523(a)(3)(A) action was only part of the litigation between the parties.
The Arizona state court has yet to determine whether the Personal
Guarantee is enforceable against the Zitos under state law. Because that
10 litigation is still pending, there is no "prevailing party" as of yet.
While we agree that Douglass Enterprises was the prevailing party in
the § 523(a)(3)(A) action and entitled to an award of fees and costs per the
contract and Cohen, the award was premature. It would be an inequitable
result for the Zitos to have to pay those fees and costs if Douglass
Enterprises ultimately loses at the state court.4 Therefore, we believe the
bankruptcy court erred by prematurely awarding Douglass Enterprises its
attorney's fees and costs. However, should Douglass Enterprises prevail in
the state court litigation, that court should include in its award the amount
of the Fee Judgment, which is now $184,210.35.
VI. CONCLUSION
For the reasons stated above, we REVERSE.
4 While the Zitos appear to contest on appeal the reasonableness of the fees, we decline to consider this argument since it was never raised before the bankruptcy court. See Smith v. Marsh, 194 F.3d 1045, 1052 (9th Cir. 1999) (generally, appellate courts will not consider arguments raised for first time on appeal).