Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-12-57186/USCOURTS-ca9-12-57186-0/pdf.json

Parties Involved:
Castellino Villas, A. K. F. LLC

Picerne Construction Corp.
Appellant

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN RE CASTELLINO VILLAS,

A. K. F. LLC,

Debtor,

PICERNE CONSTRUCTION CORP.,

DBA Camelback Construction,

Appellant,

v.

CASTELLINO VILLAS, A. K. F.

LLC,

Appellee.

No. 12-57186

D.C. No.

2:12-cv-07282-JFW

OPINION

Appeal from the United States District Court

for the Central District of California

John F. Walter, District Judge, Presiding

Argued and Submitted February 4, 2015

Submission Vacated March 13, 2015

Resubmitted August 29, 2016

Pasadena, California

Filed September 6, 2016

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2 IN RE CASTELLINO VILLAS

Before: Michael J. Melloy,

*

 Jay S. Bybee,

and Sandra S. Ikuta, Circuit Judges.

Opinion by Judge Ikuta

SUMMARY**

Bankruptcy

The panel affirmed the district court’s affirmance of the

bankruptcy court’s order denying a motion for post-discharge

attorneys’ fees arising from state court litigation filed by the

plaintiff against the debtor.

The panel held that attorneys’ fees incurred by the

plaintiff during litigation after confirmation of the debtor’s

Chapter 11 bankruptcy plan were discharged by that

bankruptcy. Plaintiff’s claim for attorneys’ fees arose before

the debtor filed its bankruptcy petition, and plaintiff’s postdischarge conduct did not amount to a whole new course of

litigation. Accordingly, under the circumstances of this case,

the attorneys’ fees claim was discharged.

* The Honorable Michael J. Melloy, Senior Circuit Judge for the U.S.

Court of Appeals for the Eighth Circuit, sitting by designation.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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IN RE CASTELLINO VILLAS 3

COUNSEL

Scott E. Hennigh (argued),Meredith A. Jones-McKeown, and

Scott A. Vignos, Sheppard Mullin Richter & Hampton LLP,

San Francisco, California, for Appellant.

Beth Ann R. Young (argued), Ron Bender (argued), and

Krikor J. Meshefejian; Levene, Neale, Bender, Yoo & Brill

LLP, Los Angeles, California, for Appellee.

OPINION

IKUTA, Circuit Judge:

We are asked to determine whether the bankruptcy court

erred as a matter of law by holding that attorneys’ fees

incurred during litigation after the confirmation of a Chapter

11 bankruptcy plan were discharged by that bankruptcy. We

have jurisdiction under 28 U.S.C. § 158(d). Picerne’s claim

for attorneys’ fees arose before Castellino filed its bankruptcy

petition, and Castellino’s post-discharge conduct did not

amount to “a whole new course of litigation,” Siegel v. Fed.

Home Loan Mortg. Corp., 143 F.3d 525, 534 (9th Cir. 1998). 

Therefore, under the circumstances of this case, Picerne’s

attorneys’ fees claim was discharged in Castellino’s

bankruptcy.

I

Castellino Villas LLC (Castellino) hired Picerne

Construction Corp. dba Camelback Construction (Picerne), a

general contractor, to construct a 120-unit apartment complex

on Castellino’s property. Picerne and Castellino entered into

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4 IN RE CASTELLINO VILLAS

an agreement for the work that contained an attorneys’ fees

provision, which stated, in pertinent part:

Attorneys’ Fees. In any suit, action or

proceeding between the parties arising out of,

or in connection with, any of the terms,

covenants, provisions or agreements in the

Agreement, the prevailing party in such suit

. . . shall be awarded . . . all reasonable

attorneys’ fees incurred before any trial or

proceeding, at all trials or proceedings and on

all appeals.

Castellino defaulted on its obligations and failed to pay

Picerne and its subcontractors for their work. In response,

Picerne filed a demand for arbitration and a mechanic’s lien

against the apartment complex. A few months later, Picerne

filed a complaint in California Superior Court to foreclose on

the mechanic’s lien. Picerne later amended the complaint to

add Castellino’s lender, Bank of the West, as a defendant. In

response, Bank of the West asserted that its deed of trust on

Castellino’s property, which it held as security for

Castellino’s $14 million debt to the Bank, was superior to

Picerne’s mechanic’s lien.

The court stayed Picerne’s action in May 2007 to permit

arbitration in accordance with the contract. On May 11,

2009, the arbitrator issued an award in favor of Picerne. The

superior court confirmed the arbitration award on July 24,

2009. That same day, Castellino filed a Chapter 11 petition

for bankruptcy. The bankruptcy filing automatically stayed

Picerne’s foreclosure action, see 11 U.S.C. § 362(a), but the

bankruptcy court granted Picerne’s motion to lift the stay so

that the parties could continue to litigate the mechanic’s lien

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IN RE CASTELLINO VILLAS 5

action in state court. Castellino disputed the validity, priority,

and amount of Picerne’s lien.

In bankruptcy court, Picerne filed an objection to

confirmation of Castellino’s proposed plan of reorganization. 

In order to obtain confirmation of its plan, Castellino entered

into a settlement agreement with Picerne. The settlement

agreement provided that if Picerne’s foreclosure action in

state court resulted in a determination that Picerne’s

mechanic’s lien was a “valid, properly perfected and

enforceable mechanics lien against the Castellino property”

and was senior to the Bank’s lien, Picerne would receive

specified payments from the trust account which Castellino

would fund. The parties expressly did not agree as to whether

Picerne was entitled to interest, costs or attorneys’ fees if it

prevailed on its claim; the settlement agreement stated that

“Castellino contends that under no circumstance is Picerne

entitled to interest, attorneys’ fees or costs” as part of its

claim, and “Picerne disputes said contention.” Castellino

reserved its defenses relating to the state court litigation. The

settlement agreement also provided that upon the court’s

approval of the settlement terms, Castellino’s plan of

reorganization would be modified to include those terms and

Picerne would withdraw its objection to the confirmation of

the plan as modified. Finally, the parties entered into mutual

releases, agreeing to release “any and all claims, demands,

and causes of action . . . that exist as of the date of this

Agreement or any time prior thereto.”

After a hearing, the bankruptcy court approved the

settlement agreement, and confirmed Castellino’s plan of

reorganization, as modified to conform to the settlement

agreement. As a result, Castellino was discharged from

bankruptcy.

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6 IN RE CASTELLINO VILLAS

Pursuant to the plan and settlement agreement, the parties

continued litigating the mechanic’s lien action in state court. 

After a nine day trial, the state court held that Picerne’s

mechanic’s lien was valid and had priority over the Bank’s

lien, and the court entered judgment for Picerne in the amount

of some $2.6 million (including prejudgment interest). 

Picerne moved for an award of attorneys’ fees. The state

court held that under the bankruptcy court’s order, it lacked

the authority to adjudicate or award attorneys’ fees, so it

denied the motion without prejudice. Castellino appealed the

decision to the California Court of Appeal.

While the appeal was pending, Picerne moved the

bankruptcy court for a ruling that the state court had the

authority to award attorneys’ fees. Picerne argued that

although it initiated litigation before Castellino filed its

petition in bankruptcy, it was entitled to an award of

attorneys’ fees that were incurred after the confirmation of

Castellino’s plan, citing In re Ybarra, 424 F.3d 1018 (9th Cir.

2005). Picerne also argued that the releases in the settlement

agreement and plan of reorganization did not preclude it from

seeking post-confirmation attorneys’ fees.

The bankruptcy court denied the motion. It reasoned that

when Picerne sued Castellino, the contract between the

parties gave Picerne a contingent and unliquidated claim for

attorneys’ fees. Because this claim arose before Castellino

filed a petition in bankruptcy, it was discharged by the

confirmation of Castellino’s plan of reorganization or was

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IN RE CASTELLINO VILLAS 7

released by the parties’ settlement agreement. The district

court affirmed, and Picerne timely appealed.1

On appeal, Picerne contends that the bankruptcy court

erred in denying its motion for post-discharge attorneys’ fees. 

First, Picerne argues that its claim for attorneys’ fees arising

from litigation in state court arose after Castellino filed its

petition in bankruptcy and therefore was not discharged by

the confirmation of Castellino’s plan of reorganization. 

Relying on In re Ybarra, Picerne argues that when a newly

reorganized debtor voluntarily “returns to the fray” of

litigation that began before filing a bankruptcy petition, the

debtor is not free from liability for attorneys’ fees incurred

after discharge. 424 F.3d at 1023–24. Second, Picerne

contends that its settlement agreement with Castellino

released only “existing claims,” and not claims for attorneys’

fees incurred after the settlement agreement was approved by

the court.2 We review a bankruptcy court’s factual findings

for clear error and its conclusions of law de novo. In re

Gebhart, 621 F.3d 1206, 1209 (9th Cir. 2010).

II

We first consider when claims for attorneys’ fees are

discharged in bankruptcy. The confirmation of a plan of

reorganization under Chapter 11 “discharges the debtor from

1 We vacated submission after hearing oral argument pending the

resolution of Castellino’s appeal of the state trial court’s ruling. The

California Court of Appeal affirmed the trial court and held that Picerne

had a valid mechanic’s lien that was superior to the Bank’s deed of trust. 

See Picerne Constr. Corp. v. Villas, 244 Cal. App. 4th 1201 (2016).

2 We do not reach this issue because we conclude that the attorneys’

fees were discharged by Castellino’s bankruptcy.

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8 IN RE CASTELLINO VILLAS

any debt that arose before the date of such confirmation”

except as provided in the statute, the plan, or the order

confirming the plan. 11 U.S.C. § 1141(d)(1) (emphasis

added).3“Debt” is liability on a “claim.” 11 U.S.C.

§ 101(12). “Claim” is defined to include a “right to payment,

whether or not such right is reduced to judgment, liquidated,

unliquidated, fixed, contingent, matured, unmatured,

disputed, undisputed, legal, equitable, secured, or unsecured.” 

11 U.S.C. § 101(5). A “creditor” is defined to include an

“entity that has a claim against the debtor that arose at the

time of or before the order for relief concerning the debtor.” 

11 U.S.C. § 101(10).

A claim is “contingent” when “the debtor will be called

upon to pay [it] only upon the occurrence or happening of an

extrinsic event which will trigger the liability of the debtor to

the alleged creditor.” In re Fostvedt, 823 F.2d 305, 306 (9th

Cir. 1987) (internal quotation marks omitted). A claim is

“unliquidated” when it is not “subject to ready determination

and precision in computation of the amount due.” Id.

3 Although § 1141(d)(1) provides that a Chapter 11 debtor is generally

discharged from any pre-confirmation debts, we have sometimes referred

to pre-petition claims in discussing whether claims discharged in a

Chapter 11 bankruptcy have subsequently been revived. See, e.g., In re

SNTL Corp., 571 F.3d 826, 843–44 (9th Cir. 2009). Other courts have

recognized a similar inconsistency. See In re Manville Forest Prods.

Corp., 209 F.3d 125, 128 n.1 (2d Cir. 2000) (noting “an inconsistency

between the wording of the Bankruptcy Code, which discharges debt

arising before the confirmation date” and its statement in a prior decision

“that the discharged debt must arise before the filing date”). As in

Manville Forest, we need not resolve that point here because it is

undisputed that the claim at issue arose before Castellino filed its Chapter

11 bankruptcy petition, and therefore the claim necessarily also arose

before the confirmation date. For simplicity, we will refer to prepetition

claims throughout this opinion.

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IN RE CASTELLINO VILLAS 9

(internal quotation marks omitted). “This broadest possible

definition of ‘claim’ is designed to ensure that all legal

obligations of the debtor, no matter how remote or

contingent, will be able to be dealt with in the bankruptcy

case.” In re Jensen, 995 F.2d 925, 929 (9th Cir. 1993)

(internal quotation marks omitted). “The breadth of the

definition of ‘claim’ is critical in effectuating the bankruptcy

code’s policy of giving the debtor a ‘fresh start.’” Id.

“[F]ederal law determines when a claim arises under the

BankruptcyCode.” In re SNTL Corp., 571 F.3d 826, 839 (9th

Cir. 2009). We have recognized that under some

circumstances, a creditor may have a claim against a debtor

for attorneys’ fees, even though the creditor has not yet

incurred those fees.4 For instance, where the debtor and

creditor have entered into a contract that includes an

attorneys’ fees agreement, the creditor may be deemed to

have a contingent claim for payment of attorneys’ fees even

before any fees are incurred. See id. at 843 & n.18 (“[W]hen

a creditor’s right to payment for fees exists prepetition [in a

Chapter 7 case], the right to payment constitutes a ‘claim,’

within the meaning of § 101(5)(A), albeit an unliquidated,

unmatured claim.” (quoting In re New Power Co., 313 B.R.

496, 508 (N.D. Ga. 2004))). Such a contingent claim would

then include attorneys’ fees incurred during and after the

bankruptcy case. “In general, if the creditor incurs the

attorneys’ fees postpetition [in a Chapter 7 case] in

connection with exercising or protecting a prepetition claim

that included a right to recover attorneys’ fees, the fees will

be prepetition in nature, constituting a contingent prepetition

4 The Bankruptcy Code defines any party with a contingent,

unliquidated prepetition claim against the debtor for attorneys’ fees to be

a “creditor.” See 11 U.S.C. § 101(10).

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10 IN RE CASTELLINO VILLAS

obligation that became fixed postpetition when the fees were

incurred.” Id. at 844 (quoting 5 Collier on Bankruptcy

§ 553.03[1][i] (15th ed. Updated 2007)). Said otherwise,

when the creditor had a prepetition contingent claim for

attorneys’ fees, even attorneys’ fees incurred after that date

may be discharged in bankruptcy.

In determining whether a creditor’s claim arose

prepetition, we use the “fair contemplation” test. Under this

test, “a claim arises when a claimant can fairly or reasonably

contemplate the claim’s existence even if a cause of action

has not yet accrued under nonbankruptcy law.” Id. at 839;

see also In re Jensen, 995 F.2d at 930–31. For instance, in

Jensen we held that when a state environmental regulatory

agency was aware that the groundwater at the debtors’ site

was seriously contaminated before the debtors filed a

bankruptcy petition, a contingent claim for cleanup costs was

in the “fair contemplation” of the state at the time the debtors

filed their Chapter 7 petition. Id. The state’s claim for

cleanup costs was therefore discharged in bankruptcy, even

though the state incurred nearly a million dollars in cleanup

costs after the discharge. Id. Accordingly, if a creditor and

debtor are engaged in prepetition litigation pursuant to a

contract that includes an attorneys’ fees provision, and the

creditor “can fairly or reasonably contemplate” that it will

have a claim for attorneys’ fees if an “extrinsic event” occurs

(that is, if it prevails in the litigation), then the creditor’s

claim for attorneys’ fees will be discharged in the debtor’s

bankruptcy even if the creditor incurs attorneys’ fees after the

debtor was discharged. See In re SNTL Corp., 571 F.3d at

839; In re Fostvedt, 823 F.2d at 306.

Despite the breadth of this rule, attorneys’ fees incurred

by a creditor pursuant to an agreement will not always be in

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IN RE CASTELLINO VILLAS 11

the “fair contemplation” of the parties. See, e.g., Siegel v.

Fed. Home Loan Mortg. Corp., 143 F.3d 525; see also In re

Ybarra, 424 F.3d 1018. In Siegel, the debtor defaulted on

two real estate loans and then filed a bankruptcy petition. 

143 F.3d at 527. The lender’s claims were resolved in the

bankruptcy, and the debtor received a discharge. Id. But the

debtor subsequently brought a lawsuit in state court (later

removed to federal court) against the lender, arguing that the

lender breached the deed of trust. Id. at 527–28. The district

court granted the lender’s motion for summary judgment, and

the court awarded the lender attorneys’ fees pursuant to the

deed of trust. Id. at 531. We affirmed, rejecting the debtor’s

argument that his discharge in bankruptcy included the

lender’s claim for attorneys’ fees. Id. at 533. We reasoned

that a claim for attorneys’ fees is a contingent claim only

where the potential for incurring post-discharge liability was

contingent “upon what others might do” and “entirely out of

[the debtor’s] hands before he entered bankruptcy.” Id. But

where the debtor voluntarily undertook a new course of

litigation, which we described as a decision “to return to the

fray,” id. at 533, any new liability for attorneys’ fees

constituted a post-discharge cost. Id.

We addressed a similar situation in Ybarra. In that case,

a debtor first brought a suit for employment discrimination

against her employer in state court. 424 F.3d at 1020. Some

eight months later, the debtor filed a Chapter 11 bankruptcy

petition, which was subsequently converted to Chapter 7. Id.

The trustee for the debtor’s bankruptcy estate negotiated a

settlement agreement with the employer, which was approved

by the bankruptcy court. Id. The state court then dismissed

the lawsuit. Id. Despite the dismissal of the lawsuit, the

debtor took affirmative actions “to revive the state suit.” Id.

at 1020, 1027. The debtor claimed her cause of action against

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12 IN RE CASTELLINO VILLAS

the employer constituted exempt property, litigated this issue

in bankruptcy court, and (after prevailing on appeal), rejected

the settlement agreement and “successfully persuaded the

state court to set aside the dismissal.” Id. at 1020. The debtor

lost in state court and the employer was awarded attorneys’

fees and costs. Id. at 1020–21 Because the bankruptcy court

had previously granted the debtor a discharge, the employer

moved the bankruptcy court for leave to enforce the state

award of fees and costs. Id. at 1021. The debtor claimed the

award was discharged in bankruptcy. Id.

We disagreed. Following Siegel, we noted that “the

award of post-petition attorney fees was not discharged”

where the debtor returned to the fray by engaging in the

“initiation of new litigation” post-petition. Id. at 1023–24

(citing Siegel, 143 F.3d at 534). We concluded that “postpetition attorney fee awards are not discharged where postpetition, the debtor voluntarily pursue[d] a whole new course

of litigation, commenced litigation, or return[ed] to the fray

voluntarily.” Id. at 1024 (alterations in original) (internal

quotation marks omitted). We therefore rejected the debtor’s

argument that the state lawsuit “should be considered

continuous litigation, rather than the commencement of a new

suit post-petition,” and we instead concluded that the debtor’s

“actions to revive the state suit were sufficiently voluntary

and affirmative to be considered ‘returning to the fray.’” Id.

at 1027; see also In re Sure-Snap Corp., 983 F.2d 1015,

1018–19 (11th Cir. 1993) (holding that when a debtor’s

liabilities under an agreement were discharged in bankruptcy,

but the debtor challenged the validity of the agreement

through a post-discharge appeal “initiated” by the debtor, the

debtor can be held liable for attorneys’ fees under the

agreement).

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IN RE CASTELLINO VILLAS 13

The analysis in these cases is consistent with our fair

contemplation test. When parties engage in prepetition

litigation that could lead to an award of attorneys’ fees, they

may fairly contemplate that the prevailing party will be

awarded those fees. Therefore, a creditor’s contingent claim

to such fees is discharged in bankruptcy, even if some fees

are incurred post-petition. But when the prepetition litigation

is resolved in bankruptcy so that any claim (including a

contingent claim for attorneys’ fees) against the debtor would

be discharged, we cannot say that the debtor’s affirmative

action to commence what amounts to “a whole new course of

litigation,” Siegel, 143 F.3d at 534, was in the fair

contemplation of the parties when the debtor filed a

bankruptcy petition. Rather, the debtor’s decision to eschew

the fresh start provided by bankruptcy and engage in new

litigation is more akin to post-petition conduct that, by

definition, was not in the fair contemplation of the parties

prepetition. Cf. O’Loghlin v. County of Orange, 229 F.3d

871, 875 (9th Cir. 2000) (holding that a debtor who engages

in postpetition illegal discriminatory conduct can be held

liable for that conduct, even if claims for similar illegal

discriminatory conduct occurring before the bankruptcywere

discharged).

III

We now turn to Picerne’s claim for attorneys’ fees related

to the state court litigation. Picerne argues it is entitled to

attorneys’ fees under an expanded reading of Ybarra and

Siegel. According to Picerne, if a debtor continues to litigate

a prepetition claim after discharge, and takes any affirmative

steps beyond what is necessary to extricate itself from the

litigation, the debtor has chosen to “return to the fray,” Siegel,

143 F.3d at 533, and any attorneys’ fees incurred were not

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14 IN RE CASTELLINO VILLAS

discharged. Here, Picerne contends, Castellino did more than

attempt to extricate itself from the state court litigation: it

brought a motion for summary judgment, opposed Picerne’s

motion for summary judgment, took party and non-party

discovery, and made a request for attorneys’ fees.5 Therefore,

according to Picerne, Castellino engaged in the sort of postdischarge conduct that makes it liable for post-discharge

attorneys’ fees.

We disagree. Because Picerne and Castellino had entered

into a contract with an attorneys’ fees provision, and Picerne

commenced an action under that contract against Castellino

in state court before Castellino filed a Chapter 11 bankruptcy

petition, Picerne’s contingent claim for attorneys’ fees arose

before both the filing of Castellino’s bankruptcy petition and

the confirmation of Castellino’s plan. Further, the

preconfirmation settlement agreement between Picerne and

Castellino required the parties to complete the state court

litigation. Under these circumstances, Picerne could fairly

and reasonablycontemplate that it would incur attorneys’ fees

associated with the state court litigation and would have a

claim for attorneys’ fees under the agreement if it prevailed.

Contrary to Picerne’s argument, Ybarra and Siegel are not

implicated here. Unlike the debtors in those cases, Castellino

was not relieved of liability under its agreement with Picerne

and given a fresh start by its discharge in bankruptcy. Rather,

the parties agreed that Picerne’s action against Castellino

would continue after discharge. Indeed, in order to obtain

Picerne’s agreement to withdraw its objections to the plan of

5 During the bankruptcy proceedings, Castellino disputed that it made

a claim for attorneys’ fees, stating that it made a single, mistaken request

for attorneys’ fees and did not pursue the claim.

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IN RE CASTELLINO VILLAS 15

reorganization, Castellino and Picerne agreed to litigate

Picerne’s mechanic’s lien claim to conclusion, and the terms

of the plan of reorganization were conditioned on the results

of the litigation. Nor did Castellino “pursue a whole new

course of litigation,” Siegel, 143 F.3d at 534, after receiving

a discharge. Rather, it merely continued to litigate the single

legal action that Picerne had commenced before Castellino

filed a petition in bankruptcy. Nothing in the agreement or in

the definition of “claim” suggests that Castellino’s efforts to

defend itself in the ongoing litigation were outside the fair

contemplation of the parties. We decline to adopt Picerne’s

expanded reading of Ybarra and Siegel, which is inconsistent

with our fair contemplation test. The pertinent question is

whether the right to obtain attorneys’ fees in the litigation is

within the fair contemplation of the parties, and Picerne

provides no reason why it would not have fairly contemplated

that the parties would proceed with litigation that had not

been resolved in bankruptcy.

We conclude that under the circumstances of this case,

Picerne could “fairlyor reasonablycontemplate” that it would

have a claim for attorneys’ fees if it prevailed in the state

litigation before Castellino filed its petition for bankruptcy. 

Therefore, the district court correctly determined that the

claim was discharged when the bankruptcy court confirmed

Castellino’s plan.6

AFFIRMED.

6 Because we decide the case on this ground, we need not reach

Castellino’s argument that Picerne’s release of “any and all claims”

pursuant to the settlement agreement precluded it from recovering

attorneys’ fees.

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