1 FOR PUBLICATION 2 UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF CALIFORNIA 3 In re: JUNDER JOE BASBAS DE ) 4 GUZMAN and SONIA CAMACHO DE ) GUZMAN ) Case No. 23-24575-C-7 5 ) Debtors. ) 6 ) ELMAR SIBAYAN, ) Adv. Pro. 2024-02029 7 Plaintiff, ) v. ) 8 ) JUNDER JOE BASBAS DE GUZMAN and ) 9 SONIA CAMACHO DE GUZMAN, ) ) 10 ___________________D_e_f_e_n_d_a_n_t_s_.__) 11 12 OPINION ON FEES UNDER CALIFORNIA CIVIL CODE § 1717 13 CHRISTOPHER KLEIN, Bankruptcy Judge: 14 Artful pleading in order not to state a contract cause of 15 action in a bankruptcy dischargeability case does not necessarily 16 insulate against exposure to prevailing party attorney’s fees for 17 actions “on a contract” under California Civil Code § 1717. 18 The victorious defendant in a nondischargeability action 19 seeks attorney’s fees based on the reciprocal prevailing party 20 fee provisions of California Civil Code § 1717. 21 A business divorce agreement between 50 percent shareholders 22 of a business required Defendant to pay Plaintiff $275,000, 23 consisting of $137,500 cash and $137,500 backed by a note and 24 deed of trust on Defendant’s home to be recorded after the cash 25 payment was made. The Shareholder Buyout Agreement required, 26 pursuant to Joint Escrow Instructions, the executed Deed of Trust 27 (“DOT”) to be held in trust and not recorded until Defendant 28 raised the $135,000 cash component by refinancing his home. 1 The DOT was not recorded for a year after the refinancing. 2 In the interval before recording, another DOT was recorded, 3 leaving Plaintiff under-secured when he eventually initiated the 4 foreclosure proceedings that precipitated this chapter 7 case. 5 Plaintiff sought to except the debt from discharge under 11 6 U.S.C. §§ 523(a)(2) and (a)(6), alleging fraud and willful and 7 malicious conduct in deferring recording of the DOT until after 8 obtaining other secured debt senior in position to Plaintiff. 9 The Note and DOT each have attorney’s fee provisions that 10 the victorious Defendant now invokes under the reciprocal fee 11 provision of California Civil Code § 1717. 12 13 I 14 California Civil Code § 1717 15 California’s reciprocal fee statute, as a matter of state 16 public policy, makes reciprocal all fee provisions in contracts 17 in favor of the prevailing party in litigation. The terms of the 18 contractual attorney fee provision may extend to tort and other 19 non-contract claims. In other words, all one-sided fee provisions 20 in contracts are reciprocal and entitle the prevailing party to 21 reasonable attorney fees. Cal. Civ. Code § 1717; Santisas v. 22 Goodin, 17 Cal. 4th 599, 614 (1998)(California Supreme Court); 23 Penrod v. AmeriCredit Fin. Servs. (In re Penrod), 802 F.3d 1084, 24 1088 (9th Cir. 2015). 25 The California Supreme Court has been specific that, 26 depending on the language of the particular contractual fee 27 provision, § 1717 may embrace tort and other noncontractual 28 claims. Santisas, 17 Cal. 4th at 622-23. 1 Section 1717 "was enacted to establish mutuality of remedy where a contractual provision makes recovery of attorney's fees 3 || available for only one party, and to prevent oppressive use of one-sided attorney's fees provisions." Reynolds Metals Co. v. 5] Alperson, 25 Cal.3d 124, 128 (1979). 6 7 Il 8 California Civil Code $ 1717 Applies in Bankruptcy 9 It is settled that California Civil Code § 1717 applies in 10 | bankruptcy when state law issues are integral to the bankruptcy 11] litigation. Heritage Ford v. Baroff (In re Baroff), 105 F.3d 439, 12] 442 (Sth Cir. 1997); Merced Proc. Credit Ass’n v. Sparkman (In re 13] Sparkman), 703 F.2d 1097, 1099-1100 (9th Cir. 1983). 14 That applicability, however, was formerly circumscribed in 15 the Ninth Circuit to exclude litigation in which the court 16 || decided only federal bankruptcy law issues. Fobian v. W. Farm 17 || Credit Bank (In re Fobian), 951 F.2d 1149, 1153 (9th Cir. 1991). 18 The United States Supreme Court disapproved the Ninth 19] Circuit Fobian rule in 2007 in Travelers Casualty & Surety Co. v. 20 || Pacific Gas & Electric Co., 549 U.S. 443, 452 (2007). 21 In rejecting Fobian, the Supreme Court held that claims 22} enforceable under applicable state law will be allowed in 23} bankruptcy unless they are expressly disallowed. It reasoned that 24 the validity of creditor claims in bankruptcy is ordinarily a 25 question of state law and “we generally presume that claims 26 enforceable under applicable state law will be allowed in 27 | bankruptcy unless they are expressly disallowed.” In particular, 28} it held that nothing in the Bankruptcy Code expressly disallows
claims for attorney's fees simply because the fees are incurred 2] litigating questions of federal bankruptcy law. Travelers, 549 at 452-53. 4 A consequence of Travelers is that California Civil Code S$ 1717 applies in all bankruptcy litigation when a party prevails in an action “on a contract” and otherwise satisfies the 7i}essential elements of that statute. Penrod, 802 F.3d at 1088. 8 In Penrod, the bankruptcy court had rejected § 1717 fees because enforcement of the subject contract had been defeated 10 under bankruptcy law, rather than non-bankruptcy law. The Ninth 11 |} Circuit reversed, noting that the “bankruptcy court’s reasoning 12 1 might have been valid before the Supreme Court” decided 13] Travelers, but not thereafter. Penrod, 802 F.3d at 1088. 14 The Ninth Circuit in Penrod explained that after Travelers, 15 |] the question is whether § 1717 categorically precludes awards of attorney’s fees when a party successfully limits enforcement of a 17 |} contract solely on the basis of bankruptcy law. It then answered 18 | the question in the negative, concluding that California fee- 19] shifting statutes, such as § 1717, apply to issues litigated 20 |} under bankruptcy law. Penrod, 802 F.3d at 1189. 21 In short, § 1717 applies to bankruptcy litigation when the 22 \|/essential elements for that statute are satisfied. 23 24 Til 25 Essential Elements of Civil Code § 1717 26 The three essential elements for Civil Code § 1717 attorney fee awards are: (1) an action “on a contract”; (2) a clause in 28 | the contract providing for fees; and (3) the movant must have
been the prevailing party. Penrod, 802 F.3d at 1088 (citing 2 | California law). 3 4 5 First Essential Element: “On A Contract.” 6 As a matter of California law, the term action “on a 7 || contract” is liberally construed to extend to any action, as long it "involves" a contract and one of the parties would be entitled to recover attorney fees under the contract if that 10} party prevails in its lawsuit. In re Tobacco Cases I, 193 Cal. 11] App. 4th 1591, 1601 (2011), cited by Penrod, 802 F.3d at 1087. 12 13 14 As applied in bankruptcy, an action in bankruptcy court is 15 ]} “on a contract” for purposes of § 1717 if the bankruptcy court 16 || needed to determine enforceability of the agreement in order to 17 || determine dischargeability. Conversely, if the court did not need 18 || to determine whether the agreement is enforceable, then it is not 19 an action “on a contract.” Penrod, 802 F.4th at 1088-89 (noting 20 || effect of Travelers); Bos v. Bd. of Trs., 818 F.3d 486, 489-90 21 (9th Cir.
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1 FOR PUBLICATION 2 UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF CALIFORNIA 3 In re: JUNDER JOE BASBAS DE ) 4 GUZMAN and SONIA CAMACHO DE ) GUZMAN ) Case No. 23-24575-C-7 5 ) Debtors. ) 6 ) ELMAR SIBAYAN, ) Adv. Pro. 2024-02029 7 Plaintiff, ) v. ) 8 ) JUNDER JOE BASBAS DE GUZMAN and ) 9 SONIA CAMACHO DE GUZMAN, ) ) 10 ___________________D_e_f_e_n_d_a_n_t_s_.__) 11 12 OPINION ON FEES UNDER CALIFORNIA CIVIL CODE § 1717 13 CHRISTOPHER KLEIN, Bankruptcy Judge: 14 Artful pleading in order not to state a contract cause of 15 action in a bankruptcy dischargeability case does not necessarily 16 insulate against exposure to prevailing party attorney’s fees for 17 actions “on a contract” under California Civil Code § 1717. 18 The victorious defendant in a nondischargeability action 19 seeks attorney’s fees based on the reciprocal prevailing party 20 fee provisions of California Civil Code § 1717. 21 A business divorce agreement between 50 percent shareholders 22 of a business required Defendant to pay Plaintiff $275,000, 23 consisting of $137,500 cash and $137,500 backed by a note and 24 deed of trust on Defendant’s home to be recorded after the cash 25 payment was made. The Shareholder Buyout Agreement required, 26 pursuant to Joint Escrow Instructions, the executed Deed of Trust 27 (“DOT”) to be held in trust and not recorded until Defendant 28 raised the $135,000 cash component by refinancing his home. 1 The DOT was not recorded for a year after the refinancing. 2 In the interval before recording, another DOT was recorded, 3 leaving Plaintiff under-secured when he eventually initiated the 4 foreclosure proceedings that precipitated this chapter 7 case. 5 Plaintiff sought to except the debt from discharge under 11 6 U.S.C. §§ 523(a)(2) and (a)(6), alleging fraud and willful and 7 malicious conduct in deferring recording of the DOT until after 8 obtaining other secured debt senior in position to Plaintiff. 9 The Note and DOT each have attorney’s fee provisions that 10 the victorious Defendant now invokes under the reciprocal fee 11 provision of California Civil Code § 1717. 12 13 I 14 California Civil Code § 1717 15 California’s reciprocal fee statute, as a matter of state 16 public policy, makes reciprocal all fee provisions in contracts 17 in favor of the prevailing party in litigation. The terms of the 18 contractual attorney fee provision may extend to tort and other 19 non-contract claims. In other words, all one-sided fee provisions 20 in contracts are reciprocal and entitle the prevailing party to 21 reasonable attorney fees. Cal. Civ. Code § 1717; Santisas v. 22 Goodin, 17 Cal. 4th 599, 614 (1998)(California Supreme Court); 23 Penrod v. AmeriCredit Fin. Servs. (In re Penrod), 802 F.3d 1084, 24 1088 (9th Cir. 2015). 25 The California Supreme Court has been specific that, 26 depending on the language of the particular contractual fee 27 provision, § 1717 may embrace tort and other noncontractual 28 claims. Santisas, 17 Cal. 4th at 622-23. 1 Section 1717 "was enacted to establish mutuality of remedy where a contractual provision makes recovery of attorney's fees 3 || available for only one party, and to prevent oppressive use of one-sided attorney's fees provisions." Reynolds Metals Co. v. 5] Alperson, 25 Cal.3d 124, 128 (1979). 6 7 Il 8 California Civil Code $ 1717 Applies in Bankruptcy 9 It is settled that California Civil Code § 1717 applies in 10 | bankruptcy when state law issues are integral to the bankruptcy 11] litigation. Heritage Ford v. Baroff (In re Baroff), 105 F.3d 439, 12] 442 (Sth Cir. 1997); Merced Proc. Credit Ass’n v. Sparkman (In re 13] Sparkman), 703 F.2d 1097, 1099-1100 (9th Cir. 1983). 14 That applicability, however, was formerly circumscribed in 15 the Ninth Circuit to exclude litigation in which the court 16 || decided only federal bankruptcy law issues. Fobian v. W. Farm 17 || Credit Bank (In re Fobian), 951 F.2d 1149, 1153 (9th Cir. 1991). 18 The United States Supreme Court disapproved the Ninth 19] Circuit Fobian rule in 2007 in Travelers Casualty & Surety Co. v. 20 || Pacific Gas & Electric Co., 549 U.S. 443, 452 (2007). 21 In rejecting Fobian, the Supreme Court held that claims 22} enforceable under applicable state law will be allowed in 23} bankruptcy unless they are expressly disallowed. It reasoned that 24 the validity of creditor claims in bankruptcy is ordinarily a 25 question of state law and “we generally presume that claims 26 enforceable under applicable state law will be allowed in 27 | bankruptcy unless they are expressly disallowed.” In particular, 28} it held that nothing in the Bankruptcy Code expressly disallows
claims for attorney's fees simply because the fees are incurred 2] litigating questions of federal bankruptcy law. Travelers, 549 at 452-53. 4 A consequence of Travelers is that California Civil Code S$ 1717 applies in all bankruptcy litigation when a party prevails in an action “on a contract” and otherwise satisfies the 7i}essential elements of that statute. Penrod, 802 F.3d at 1088. 8 In Penrod, the bankruptcy court had rejected § 1717 fees because enforcement of the subject contract had been defeated 10 under bankruptcy law, rather than non-bankruptcy law. The Ninth 11 |} Circuit reversed, noting that the “bankruptcy court’s reasoning 12 1 might have been valid before the Supreme Court” decided 13] Travelers, but not thereafter. Penrod, 802 F.3d at 1088. 14 The Ninth Circuit in Penrod explained that after Travelers, 15 |] the question is whether § 1717 categorically precludes awards of attorney’s fees when a party successfully limits enforcement of a 17 |} contract solely on the basis of bankruptcy law. It then answered 18 | the question in the negative, concluding that California fee- 19] shifting statutes, such as § 1717, apply to issues litigated 20 |} under bankruptcy law. Penrod, 802 F.3d at 1189. 21 In short, § 1717 applies to bankruptcy litigation when the 22 \|/essential elements for that statute are satisfied. 23 24 Til 25 Essential Elements of Civil Code § 1717 26 The three essential elements for Civil Code § 1717 attorney fee awards are: (1) an action “on a contract”; (2) a clause in 28 | the contract providing for fees; and (3) the movant must have
been the prevailing party. Penrod, 802 F.3d at 1088 (citing 2 | California law). 3 4 5 First Essential Element: “On A Contract.” 6 As a matter of California law, the term action “on a 7 || contract” is liberally construed to extend to any action, as long it "involves" a contract and one of the parties would be entitled to recover attorney fees under the contract if that 10} party prevails in its lawsuit. In re Tobacco Cases I, 193 Cal. 11] App. 4th 1591, 1601 (2011), cited by Penrod, 802 F.3d at 1087. 12 13 14 As applied in bankruptcy, an action in bankruptcy court is 15 ]} “on a contract” for purposes of § 1717 if the bankruptcy court 16 || needed to determine enforceability of the agreement in order to 17 || determine dischargeability. Conversely, if the court did not need 18 || to determine whether the agreement is enforceable, then it is not 19 an action “on a contract.” Penrod, 802 F.4th at 1088-89 (noting 20 || effect of Travelers); Bos v. Bd. of Trs., 818 F.3d 486, 489-90 21 (9th Cir. 2016); cf., Howard v. Ray Hodge & Assocs. (In re 22 || Howard), 2025 Westlaw 763478, 74 Bankr. Ct. Dec. 94 (9th Cir. 2025) (reversing denial of § 1717 fees). 24 Here, Plaintiff contends that his nondischargeability action not “on a contract” because the Complaint pled only fraud and 26 willful and malicious conduct under §§$ 523(a) (2) and (a) (6). The 27 || argument falls short where, as here, the fraud and conduct allegations can only be assessed by referring to the Shareholder
1 Buyout Agreement and its payment and security provisions. Even 2 before Travelers disapproved Fobian, the fact that review of the 3 agreement was essential to understanding the allegations could 4 have warranted § 1717 fees in bankruptcy under Baroff. After 5 Travelers, Plaintiff’s argument is foreclosed. 6 7 2 8 At the trial on the § 523(a)(2) count, Plaintiff urged that 9 Defendant made a fraudulent misrepresentation by agreeing in the 10 Shareholder Buyout Agreement to record the DOT in favor of Plaintiff, 11 without disclosing that the DOT in favor of Plaintiff might not be 12 recorded until long after obtaining the contemplated financing loan 13 and might become subject to yet another loan, thereby leaving 14 Plaintiff in a less secure junior position. 15 At the trial on the § 523(a)(6) count, Plaintiff urged that 16 Defendant’s one-year deferral of recording Plaintiff’s DOT until after 17 the financing loan was obtained was both willful and malicious. 18 Determining whether Defendant made a material misrepresentation 19 or acted willfully and with malice required the Court to examine the 20 terms of the Shareholder Buyout Agreement and the attendant Note and 21 DOT in order to determine enforceability. 22 The gravamen of the Complaint was that Defendant breached his 23 contractual obligation to cause the DOT to be recorded promptly upon 24 obtaining the intended financing. The evidence established the 25 Plaintiff’s DOT was executed November 17, 2021, concurrent with 26 entering into the Shareholder Buyout Agreement, which supposedly had a 27 90-day “no recording” clause. Defendant refinanced for $464,000 with 28 Nationstar Mortgage LLC as evidenced by a DOT executed January 25, 1 2022, and recorded February 3, 2022. Although the contract anticipated 2 Plaintiff’s DOT would then be recorded in February 2022, it was not 3 recorded until February 9, 2023. During that one-year delay, Defendant 4 obtained a $39,400 home equity line of credit from Sequoia Federal 5 Credit Union on December 15, 2022, for which the DOT was recorded 6 January 9, 2023, i.e., 31 days before Plaintiff’s DOT was recorded. 7 The existence of the Sequoia DOT relegated Plaintiff to a 8 partially unsecured position when the chapter 7 case was filed. 9 This Court determined from examining the Shareholder Buyout 10 Agreement: (1) that the Defendant was required to obtain financing to 11 make the first payment; and (2) that, to enable Defendant to raise the 12 $137,500 cash payment, the agreement did not mandate immediate 13 recording by Defendant, and was otherwise vague about timing. 14 Interpreting the transaction in the context of the Shareholder 15 Buyout Agreement and the attendant Note and DOT, this trier of fact 16 concluded Defendant did not make a representation at the time of the 17 agreement that was false, knowingly false, made for the purpose of 18 inducing reliance by Plaintiff, and upon which Plaintiff justifiably 19 relied as required by § 523(a)(2). 20 While there was little doubt that Defendant breached the payment 21 and recording provision of the Shareholder Buyout Agreement, this 22 trier of fact was not persuaded that the failure was animated by the 23 malice required by § 523(a)(6). Hence, this Court ruled the debt owed 24 to Plaintiff to be dischargeable. 25 The Shareholder Buyout Agreement was central to the adversary 26 proceeding. The Note and DOT and the recording thereof were integral 27 features of the contractual transaction. The foreclosure prompting the 28 chapter 7 filing was an exercise in enforcing that agreement. 1 Mindful of the liberal construction interpretation of § 1717 2 applied by California courts, it follows that the first essential 3 element that there be an “action on a contract” is satisfied. 4 5 B 6 Second Essential Element: Contract Fee Clause 7 The Note and DOT required by the Shareholder Buyout Agreement 8 contain contractual fee clauses. 9 The Note provides for attorney fees if the holder prevails “in a 10 lawsuit to collect on it.”1 11 The DOT requires the Trustor “to appear in and defend any action 12 purporting to affect the security, or the rights and powers of 13 Beneficiary or Trustee; and to pay all costs and expenses ... 14 including attorney fees in a reasonable sum, in any such action in 15 which beneficiary or Trustee may appear.”2 16 The application of those clauses in the Note and the DOT against 17 the Plaintiff may come as a surprise but, in view of § 1717, should 18 not be regarded as an unintended consequence of prosecuting an 19 adversary proceeding premised on breach of the Shareholder Buyout 20 Agreement to which the Note and DOT were integral. 21 It is ironic that Plaintiff’s foreclosure activity prompted the 22 23 1Note: “If the holder(s) of this note prevail(s) in a lawsuit to collect on it, the signer(s) agree(s) to pay the holder(s)’ attorney 24 fees in an amount the court finds to be just and reasonable.” Promissory Note Secured by DOT, Plaintiff’s Ex. 3. 25 2DOT: The Trustor agrees “To appear in and defend any action or 26 proceeding purporting to affect the security, or the rights and powers of Beneficiary or Trustee; and to pay all costs and expenses, 27 including cost of evidencing title and attorney fees in a reasonable sum, in any such action or proceeding in which beneficiary or Trustee 28 may appear.” DOT and Assignment of Rents Securing a Promissory Note, Plaintiff’s Ex. 2. 1 filing of the chapter 7 case in which he prosecuted this adversary 2 proceeding to an unhappy end. Hoist on his own petard. 3 Accordingly, the second § 1717 essential element that there be a 4 contractual clause providing for fees is satisfied. 5 6 C 7 Third Essential Element: Prevailing Party 8 The prevailing party for purposes of § 1717 is determined by the 9 court based on the party who recovered, in the words of § 1717(b), 10 “greater relief” in the action on the contract. The court has 11 discretion to determine there is no party prevailing. In addition, 12 there is no prevailing party where an action is voluntarily dismissed 13 or dismissed pursuant to settlement. Cal. Civ. Code § 1717(b). 14 Here, the successful defense of the nondischargeability counts 15 afforded Defendant the “greater relief.” He is the prevailing party. 16 Accordingly, the third § 1717 essential element is satisfied. 17 18 D 19 The Supreme Court’s Traveler’s analysis that claims allowable 20 under applicable state law are allowable in bankruptcy leads to the 21 conclusion that the request for reasonable attorney’s fees under 22 California Civil Code § 1717 is allowable in this case. 23 24 IV 25 This Fee Application 26 The victorious Defendant applies under California Civil Code 27 § 1717 for attorney’s fees and expenses totaling $20,571.90, 28 consisting of $19,195.00 in fees, plus expenses of $1,376.00, and 1] has the burden of proof on whether the services were reasonable and appropriate. 3 Plaintiff opposes, asserting that $1,057.50 of the fees claimed should not be allowed. This Court agrees with Plaintiff.° 5 With the exception of the three categories of items set forth in the margin, this Court finds in its judgment and 7 || experience that the fees and expenses requested are reasonable, 8 || appropriate, and acceptable. 9 Therefore, $19,514.40 will be awarded as attorney’s fees and 10 || expenses pursuant to California Civil Code § 1717. 11 1? kkK* 13 As explained in this decision, artful pleading alleging only 14 || non-contract causes of action does not necessarily operate to 15) dodge exposure to liability for action “on a contract” fees pursuant to California Civil Code § 1717. 17 An appropriate order awarding fees and expenses in the total 18 |} amount of $19,514.40 will be entered. 19 20 Dated: June 09, 2025
\| \} 22 Pedy 23 United States Bankruptcy Judge 24 ~pervices tnat ao not relate to tne aaversary proceeaing ($270.00) are neither necessary, nor reasonable. Services for 25 || obtaining vacation of entry of default ($292.50) by counsel who reviewed the Complaint in ample time to have prepared and fileda 26 || response are neither necessary, nor reasonable - the opposing party should not be required to pay the expenses of the opponent’s 27 disorganization. Services for motions that were not filed ($495.00) and that could have prevented entry of default are not necessary and 28 || not appropriate for fee-shifting purposes, even though they may be appropriate for a lawyer to charge his client. 10