Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_03-cv-03399/USCOURTS-cand-3_03-cv-03399-0/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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United States District Court

For the Northern District of California

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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

In re: CAPTAIN BLYTHER'S, INC.,

 Debtor. 

THE CITY OF MARTINEZ,

 Appellant / Third Party

Plaintiff,

 v.

NEW HAMPSHIRE INSURANCE COMPANY,

Appellee / Third Party

Defendant. 

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No. C-03-3399 SC

ORDER DENYING NEW

HAMPSHIRE INSURANCE

COMPANY'S MOTION FOR

ATTORNEY'S FEES 

I. INTRODUCTION

This case has returned to this Court after review by the

Ninth Circuit Court of Appeals.

In 2000, the City of Martinez ("City" or "Martinez") filed a

third-party complaint against New Hampshire Insurance Company

("NH") in the Bankruptcy Court for the Northern District of

California. NH prevailed on its motion for summary judgment, a

ruling which the City appealed to this Court, which reversed. On

appeal, the Ninth Circuit reversed this Court and remanded with

instructions that this Court enter judgment for NH. 

Presently before the Court is NH's motion for attorney's fees

in the amount of $190,971.00. 

For the reasons stated herein, the Court DENIES NH's motion.

Case 3:03-cv-03399-SC Document 39 Filed 05/11/06 Page 1 of 9
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1

 Alfred John Schlette is the sole officer, director, and

shareholder of Captain Blyther's. Remand at 2. 

2

II. BACKGROUND

This third-party action arises from litigation over a 1997

lease agreement ("Lease") between the City of Martinez and the

bankrupt debtor Captain Blyther's Inc. ("Captain Blyther's").1

The Lease contained an attorney fee provision. See New Hampshire

Insurance Company's Memorandum in Support of Motion for Attorney's

Fees at 1 ("NH's Mem."). The Lease required Captain Blyther's to

obtain insurance for the leased premises and to name Martinez as

an additional insured. See Order Remanding Case to Bankruptcy

Court at 2, Docket Entry No. 23 ("Remand Order"). Captain

Blyther's selected New Hampshire Insurance Company as the carrier

of the policy ("Policy"). Id. The Policy does not contain an

attorney fee provision. The City of Martinez's Memorandum in

Opposition to Motion for Attorney's Fees at 1 ("City Mem."). 

 In 1998, Captain Blyther's filed a Chapter 11 Bankruptcy

Petition and, in 1999, filed a complaint in the Bankruptcy Court

against the City of Martinez for alleged breaches of the Lease. 

Remand Order at 5. The City tendered its defense to NH, which

refused to provide coverage. Id. at 6. Then, in 2000, the City

filed a third-party complaint against NH. Id. After the

Bankruptcy Court granted NH's motion for summary judgment, finding

that NH had no duty under the Policy to defend Martinez in this

matter, the City of Martinez appealed the Bankruptcy Court's

decision to this Court. Id. at 6-7. This Court vacated and

reversed the judgment of the Bankruptcy Court, a decision that the

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2 More specifically, NH contends that (A) state law controls

the issue of attorney's fees, (B) the third party action by

Martinez against NH arose from the lease and was "thus on the

contract," (C) NH is owed fees because it was the prevailing party,

(D) California Civil Code § 1717 applies to non-signatories to a

contract, (E) the fees provision in the contract is broad enough to

encompass the action by Martinez against NH, (F) NH "is subrogated

to the rights and liabilities of Martinez under the lease" and (G)

the fees and costs sought by NH are reasonable. 

3

Ninth Circuit, in 2005, reversed with instructions to enter

judgment for NH. NH's Mem. at 3. This Court entered judgment for

NH in March 2006. See Docket Entry No. 32. 

Now, NH moves for attorney's fees in accordance with Local

Rule 54-6 in the amount of $190,971.00. NH's Mem. at 3. 

III. DISCUSSION

The Court's ruling on this motion turns on the merit of NH's

assertion that though NH is not a signatory to the Lease, it can

recover attorney fees through it because the instant action "is

premised on the complaint filed by Captain Blyther's against

Martinez. The Captain Blyther's complaint is premised on a breach

of the Lease, which contains an attorney fee provision." NH's

Mem. at 4. If this contention is meritless, NH's other

contentions are without foundation and the Court will dismiss the

motion.2 

The City of Martinez contends that the "litigation between

Martinez and New Hampshire arises out of an insurance contract

between Martinez and New Hampshire. That insurance contract does

not provide for attorney fees to the prevailing party in a dispute

over coverage." City Mem. at 1.

NH faces an uphill battle. The Bankruptcy Code does not

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28 4

provide a general right to attorney's fees. See Heritage Ford v.

Baroff (In re Baroff), 105 F.3d 439, 441 (9th Cir. 1997). A

prevailing party, however, "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." Id.

(citations removed). "Because state law necessarily controls an

action on a contract, a party to such an action is entitled to an

award of fees if the contract provides for an award and state law

authorizes fee shifting arrangements." Id.

In California, attorney's fees are awarded to the prevailing

party in an action on a contract, where the contract specifically

provides for the award of attorney's fees and costs, even if the

prevailing party is not a signatory to the contract. See

California Civil Code § 1717. Section 1717 was enacted to "avoid

the perceived unfairness of one-sided attorney fee provisions." 

International Billing Services, Inc. v. Emigh, 84 Cal. App. 4th

1175, 1182 (Cal. Ct. App. 2000). "Its purposes require section

1717 be interpreted to further provide a reciprocal remedy for a

nonsignatory defendant, sued on a contract as if he were a party

to it, when a plaintiff would clearly be entitled to attorney's

fees should he prevail in enforcing the contractual obligation

against the defendant." Reynolds Metals Company v. Alperson, 25

Cal.3d 124, 128 (1979) (emphasis added). 

The Court finds that NH cannot recover attorney's fees. The

City sued NH as a defendant on the Policy, not the Lease. Though

the Lease is part of the factual genealogy of the third-party

action, the action was an adjudication of the parties'

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3

 On this issue, the Court rejects NH's assertion that the

attorney's fees provision in the Lease is broad enough to encompass

the action between Martinez and NH. NH's Mem. at 7. That

provision provides for attorney's fees in the event that a suit is

brought by the lessor against the lessee to enforce payment of

rent, conditions of the Lease, unlawful detention of the property,

and possession. See Declaration of Scott M. Reddie in Support of

NH's Motion for Attorney's Fees, Ex. A at 755. In addition to the

fact that NH has not assumed or been assigned any rights under the

Lease, the third-party action was not brought to litigate any of

the issues covered by the provision. 

5

responsibilities and rights under the Policy.3

NH cites four cases in support of its contention, none of

which are in the least helpful. In the first, California

Wholesale Material Supply, Inc. v. Wilson & Sons, Inc., a

subcontractor assigned its accounts receivable to the plaintiff,

pursuant to a security agreement that contained an attorney's fees

provision. 96 Cal. App. 4th 598, 605 (Cal. Ct. App. 2002). The

plaintiff lost in its action against the defendant Wilson & Sons,

Inc. to collect the fees owed by the subcontractor. Id. 600-601. 

The California Court of Appeal held that the defendant was

entitled to fees because the plaintiff, as assignee, held the

rights and reciprocal obligations of the subcontractor under the

security agreement, including attorney fees. Id. at 605-606. 

Unlike the defendant in California Wholesale, NH is not an

assignee entitled to the rights under the Lease.

In the second case, In re Baroff, the Ninth Circuit, under

California Civil Code § 1717, awarded attorney's fees to the

prevailing party because the parties had "expressly agreed in the

settlement agreement that the prevailing party in an action to

enforce the agreement should recover his attorney fees." 105 F.3d

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at 443. 

Unlike the factual situation in In re Baroff, the third-party

action in this case was brought to enforce the Policy, a contract

without a fee provision, not the Lease. 

In the third case, Texas Commercial Bank v. Garamendi, the

California Court of Appeal held that the plaintiffs/appellants

were entitled to attorney's fees under the investment contracts

because the defendants/respondents, having been appointed

conservators of the insolvent insurer, "stand[] in the shoes" of

the insolvent insurer. 28 Cal. App. 4th 1234, 1245 (Cal. Ct. App.

2005). 

Unlike the defendants/respondents in Texas Commercial, NH has

not been appointed as a conservator nor does it occupy any

position in which it assumes the legal rights and responsibilities

of the parties to the Lease. 

The final case NH cites on this issue is Dell Merk, Inc. v.

Franzia, 132 Cal. App. 4th 443 (Cal. Ct. App. 2005). Dell Merk

Inc. secured a loan from Pacific State Bank through a security

contract which contained an attorney's fees provision, and,

secondly, through a pledge of security in the form of an

assignment of proceeds from a construction contract Dell Merk Inc.

had with Bobcat Central. Id. at 445-446. Pacific State Bank

later tried - and failed - to recover money owed by Dell Merk Inc.

from Bobcat Central through the security agreement with the

attorney fee provision and through its assignment of proceeds from

the construction contract. Id. at 447-448. 

Because the Bank was entitled to bring suit under the

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security agreement, the California Court of Appeal ruled that,

under the reciprocal arrangement mandated by section 1717, Bobcat

Central was owed attorney's fees for its defense in the action on

the security agreement, even though it was not a signatory to the

agreement. Id. at 456. The court, however, ruled that it was not

owed money on the action under the assignment because that

contract - the one between Dell Merk Inc. and Bobcat - contained

no attorney fees provision. Id. at 454. 

Dell Merk Inc. involves a formal, legal assumption and

assignment of rights for which there is no parallel in the present

action. 

NH loudly bruits the fact that "California courts liberally

construe the term 'on a contract' as used within section 1717. As

long as the action involve[s] a contract it is on [the] contract

within the meaning of Section 1717." Dell Merk, Inc., 132 Cal.

App. 4th at 455 (citations and internal quotation marks removed). 

Though that statement is apparently broad, the principle it

lays forth is applied more narrowly, indicating that a more

careful reading of the statement is warranted. Dell Merk itself

is an instance of this:

The [California] Supreme court has concluded that Section

1717 provides a reciprocal remedy for a nonsignatory

defendant sued on a contract as if he were a party to it, if

the signatory would clearly be entitled to attorneys' fees

should he prevail in enforcing the contractual obligation

against the [nonsignatory]. Read literally, the requirements

[] are met: Bank, in an action on a contract, sought damages

from Franzia, a nonsignatory defendant. Had Bank established

that Franzia was bound by the contract, it would have been

entitled to attorneys' fees consistent with the terms of the

security agreement.

Id. (citations and quotation marks removed).

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4 Specifically, the Court agrees that state law controls the

issue of attorney's fees and that section 1717 can apply to nonsignatories of a contract. The Court does not find that the thirdparty action was on the Lease, nor does it find that NH was the

prevailing party in any way that would entitle NH to attorney's

fees. Because of these findings, the Court finds it unnecessary to

consider whether the amount of fees and costs sought by NH is

reasonable. This issue of the breadth of the Lease's attorney's

fees provision was addressed in Footnote 3. 

8

The instant case is not like Dell Merk, upon which NH so

heavily relies. The City of Martinez brought an action on the

Policy, to which NH was a signatory. NH was not sued on the Lease

and had no rights under it. 

Yet, NH contends that because the Ninth Circuit and this

Court looked to the Lease to find out whether NH was bound by the

Policy to provide a defense, this action was therefore on the

Lease. Reply to Opposition to NH's Motion for Attorney's Fees at

2. The Court finds that merely using the Lease to flesh out the

factual circumstances surrounding the Policy does not constitute

an action on the Lease. 

The Court's determination that the Policy, rather than the

Lease, is the contract at issue disposes of NH's contentions, as

listed in Footnote 24, though one particular contention - that of

subrogation - is worth one final note.

NH contends that 

had Martinez convinced the Court that it was entitled to a

defense in the action brought against it by Captain

Blyther's, and had Martinez ultimately prevailed in its

action, Martinez would be entitled to attorneys' fees against

Captain Blyther's under the Lease. New Hampshire, after

defending Martinez in the action, would then be subrogated to

Martinez' [sic] rights to collect attorneys' fees under the

Lease. Accordingly, New Hampshire should be entitled to its

attorneys' fees based on the Lease. 

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NH's Mem. at 10. NH is hoist by its own petard. This contention is a list of

contingencies, not one of which has occurred. 

NH does no better in the case law it cites. The first,

Employers Mutual Liability Insurance Company v. Tudor-Saliba

Corporation, 17 Cal.4th 632, 639 (1998), is particularly

inapposite because it deals with subrogation rights under a policy

for workers' compensation insurance. The second, Allstate

Insurance Company v. Loo, states that an "insurer/subrogee paying

for a loss has the right to pursue its insured's rights and

remedies against the third-party causing the loss." 46 Cal. App.

4th 1794, 1799 (Cal. Ct. App. 1996). Because NH refused to

provide a defense for the City of Martinez, it cannot be said to

be "paying for the loss." The third case cited, Texas Commerce

Bank v. Garamendi, was discussed above. 

IV. CONCLUSION

The Court finds that New Hampshire Insurance Company is not

entitled to attorney's fees. Accordingly, NH's motion is DENIED. 

The Court will not now impose sanction on NH, as requested by

the City of Martinez. 

IT IS SO ORDERED.

Dated: May 11, 2006

 UNITED STATES DISTRICT JUDGE

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