Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_05-cv-03762/USCOURTS-cand-3_05-cv-03762-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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1

 A pre-petition claim is a claim submitted during bankruptcy proceedings by a party owed some

payment or performance by the party petitioning for bankruptcy. The claim is designated a pre-petition

claim because the debt was incurred and outstanding before the bankruptcy petition was filed. In this

case, Momentum filed a claim asserting that Aureal owed $104,000 on an executory contract and

Momentum held no security on that debt. See 1-1COLLIER ON BANKRUPTCY § 1.03(4)(B)(15th ed., rev.

2005).

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States District C

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For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

In re: AUREAL, INC., 

Debtor.

______________________________________/

NEXT FACTORS, INC.,

Appellant,

 v.

 AUREAL, INC.,

Appellee.

 /

No. C 05-03762 SI

ORDER AFFIRMING BANKRUPTCY

COURT’S AWARD OF ADDITIONAL

ATTORNEYS’ FEES TO AUREAL’S

ESTATE REPRESENTATIVES

Having carefully considered the submitted papers, the Court hereby AFFIRMS the decision of

the bankruptcy court granting additional attorneys' fees to the estate representatives of Aureal, Inc.

BACKGROUND

Prior to the commencement of this bankruptcy case, Aureal and Momentum Data Systems

entered into a written Software Development Agreement (“SDA”) for development of computer

software. The SDA contained a clause allowing the prevailing party in any dispute arising over the

interpretation or enforcement of the SDA to recover attorneys’ fees and costs.

On April 5, 2000, Aureal filed a voluntary petition for Chapter 11 bankruptcy. Shortly thereafter,

Aureal sold substantially all of its assets to Creative Technologies, Ltd. (“Creative”). Upon learning of

Aureal’s bankruptcy petition, Momentum filed a proof of claim, asserting a general, unsecured claim,

or pre-petition claim,1 for $104,000. Aureal objected to all but four thousand dollars of the claim. On

Case 3:05-cv-03762-SI Document 19 Filed 07/25/06 Page 1 of 3
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 An administrative claim is a claim submitted by a creditor when an executory contract between

the debtor and the claimant is assumed by the debtor’s bankruptcy estate, but subsequently is breached

by the estate. The claimant then has an administrative claim for damages arising from that breach. See

1-1 COLLIER ON BANKRUPTCY § 1.03(4)(B) (15th ed., rev. 2005).

2

October 16, 2000, Next Factors, Inc. (“Next”) purchased Momentum’s interest in the claim submitted

to Aureal’s bankruptcy estate.

In July 2001, Next filed an amended pre-petition claim on Momentum’s behalf in the amount

of $254,000 plus uncalculated pre-petition interest and royalties. Aureal objected to the claim. The

bankruptcy court issued a Memorandum of Decision in October 2001, disallowing certain portions of

Next’s pre-petition claim. See ER Ex. 7 at 11. It deferred ruling on other portions of the claim to allow

Next further opportunity for discovery. Id.

Next also filed an administrative claim2 for $25 million in royalties in September 2001. Next

later amended the administrative claim, changing the claim from $25 million to a claim for damages of

an unknown amount.

Two years after the bankruptcy court allowed Next to pursue further discovery, Aureal filed a

motion for summary judgment on Next’s remaining pre-petition claim and the administrative claim. In

December 2003, the bankruptcy court issued a Memorandum of Decision granting Aureal’s motion for

summary judgment. See ER Ex. 12 at 25.

On February 19, 2004, the estate representatives filed a request for recovery of attorneys’ fees

and costs associated with litigating Next’s claims. The request was for $174,781.50 in fees and

$1,887.64 in costs incurred through December 31, 2003, but the estate representatives reserved the right

to supplement their request to account for fees and costs incurred thereafter. The bankruptcy court

granted Aureal a substantial portion of its requested fees. See ER Ex. 17 at 15. On appeal, this Court

affirmed the bankruptcy court’s grant of attorneys’ fees to Aureal, with the exception of fees related to

the administrative appeal, as to which the matter was remanded for further findings. 

On August 18, 2005, the bankruptcy court awarded additional attorneys’ fees and costs to Aureal

in the sum of $234,333.52 covering costs associated with Next’s continuing appeals and efforts to

prevent enforcement of the first attorneys’ fee awards. See ER Ex. 32. Next now appeals that order.

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LEGAL STANDARD

In reviewing a bankruptcy court’s decision, the reviewing court examines findings of fact for

clear error and conclusions of law de novo. See In re Strand, 375 F.3d 854, 857 (9th Cir. 2004). A

bankruptcy court’s determination of attorneys’ fees will not be disturbed “unless the bankruptcy court

abused its discretion or erroneously applied the law.” Id.

DISCUSSION

Next appeals the bankruptcy court’s decision to grant additional attorneys’ fees on grounds

identical to those argued in its previous appeal from the first attorneys’ fees order. In that appeal, this

Court affirmed the decision of the bankruptcy court in all respects save the inclusion of fees associated

with the administrative claim. On remand, the bankruptcy court will determine whether such fees were

“inextricably intertwined” with fees associated with the pre-petition claim. The issue of whether fees

associated with the administrative appeal should be included in the first award is not relevant to the

current appeal, which deals with fees incurred in enforcing the first award. Reversal of the first appeal

on this small point alone does not change Aureal’s status as the overall prevailing party in this dispute.

See Snyder v. Marcus & Millichap, 46 Cal. App. 4th 1099, 1101-02 (Cal. App. 1996) (drawing

distinction between overall prevailing party and party prevailing on partial appeal of damages). As Next

advances no new arguments on this appeal beyond those disposed of in the first appeal, the Court agrees

with and affirms the judgment of the bankruptcy court. 

CONCLUSION

For the foregoing reasons and for good cause shown, the Court hereby AFFIRMS the bankruptcy

court’s grant of additional attorneys’ fees to Aureal’s estate representatives (Docket No. 1). 

IT IS SO ORDERED.

Dated: July 25, 2006 

SUSAN ILLSTON

United States District Judge

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