Court Opinion

ID: 4203892
Source: CourtListenerOpinion
Date Created: 2017-09-15 17:01:14.990783+00
Date Added: 2024-06-11T14:41:05.597027
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

IN RE CWS ENTERPRISES, INC.,        No. 14-17045
                       Debtor,
                                       D.C. Nos.
                                  2:10-cv-00779-KJM
SPILLER MCPROUD,                  2:10-cv-00780-KJM
            Plaintiff-Appellee,   2:12-cv-00142-KJM

              v.

CHARLES W. SILLER,
         Defendant-Appellant,

             and

DAVID D. FLEMMER, Chapter 11
Trustee; CWS ENTERPRISES,
INC.,
                  Defendants.
2              IN RE CWS ENTERPRISES

IN RE CWS ENTERPRISES, INC.,           No. 14-17046
                       Debtor,
                                         D.C. Nos.
                                    2:10-cv-00779-KJM
SPILLER MCPROUD,                    2:10-cv-00780-KJM
            Plaintiff-Appellee,     2:12-cv-00142-KJM

              v.
                                          OPINION
CWS ENTERPRISES, INC.;
CHARLES W. SILLER,
                   Defendants,

              and

DAVID D. FLEMMER, Chapter 11
Trustee,
          Defendant-Appellant.

     Appeal from the United States District Court
        for the Eastern District of California
     Kimberly J. Mueller, District Judge, Presiding

       Argued and Submitted October 21, 2016
             San Francisco, California

               Filed September 14, 2017
                     IN RE CWS ENTERPRISES                               3

   Before: Andrew J. Kleinfeld and Milan D. Smith, Jr.,
  Circuit Judges, and Edward R. Korman,* District Judge.

                    Opinion by Judge Kleinfeld

                            SUMMARY**

                             Bankruptcy

    The panel affirmed the district court’s reversal of the
bankruptcy court’s decision reducing a claim for pre-petition
attorneys’ fees pursuant to 11 U.S.C. § 502(b)(4), which
limits claims for services rendered by the debtor’s attorney to
the extent that such claims exceed the reasonable value of
such services.

    Agreeing with the Tenth Circuit, the panel held that
section 502(b)(4) acts as a federal cap on a fee already
determined pursuant to state law. The proper mode of
analysis is: (1) an acknowledgment or determination that the
fee contract was breached; (2) an assessment of the damages
for the breach under state law; (3) a determination under
section 502(b)(4) of reasonableness of the damages claim
afforded by state law; and (4) a reduction of the claim by
whatever extent, if any, it is deemed excessive. The panel
held that it is error for a bankruptcy court to bypass this

    *
     The Honorable Edward R. Korman, United States District Judge for
the Eastern District of New York, 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.
4                 IN RE CWS ENTERPRISES

analysis and determine for itself in the first instance a
reasonable contingent fee using the lodestar method.

    Agreeing with the Third Circuit, which analyzed section
502(b)(7), the panel held that the bankruptcy code’s
reasonableness cap limits a pre-petition obligation for a
debtor’s attorneys’ fees, even if such fees were allowable
under state law, and even if such fees had been reduced to a
state court judgment.

    The panel held that the bankruptcy court was required to
give full faith and credit to a state court’s judgment,
confirming an arbitration award and entitling the attorneys to
their fees, to the same extent that California res judicata law
would give that judgment preclusive effect. The panel
affirmed the district court’s conclusion that issue preclusion
applied because the arbitration proceeding establishing the
reasonableness of the fees was fully contested and later
confirmed by the judgment of a California court. The panel
held that, although there might in some cases be room for a
reduction, under section 502(b)(4)’s reasonableness cap, of a
state court judgment confirming an arbitration award for a
contingent fee, there was no room in this case because the
relationship between the contracted-for amount the service
the attorneys provided was not such as to make enforcement
of the contract or payment of the fee unreasonable.

                         COUNSEL

Bradley A. Benbrook (argued) and Stephen M. Duvernay,
Benbrook Law Group PC, Sacramento, California; David A.
Cheit, DLA Piper LLP (US), Sacramento, California; for
Defendant-Appellant David D. Flemmer.
                      IN RE CWS ENTERPRISES                           5

Randy Michelson (argued), Michelson Law Group, San
Francisco, California, for Defendant-Appellant Charles W.
Siller.

Steven T. Spiller (argued), Spiller McProud, Nevada City,
California; Walter R. Dahl, Dahl Law, Sacramento,
California, for Plaintiff-Appellee Spiller McProud.

                              OPINION

KLEINFELD, Senior Circuit Judge:

    We address the bankruptcy code’s provision on claims for
pre-petition attorneys’ fees, 11 U.S.C. § 502(b)(4).

                                FACTS

    Charles Siller has been litigating with his brothers over
his interest in the family business since 1982. The family
business, Siller Brothers, Inc., held among its assets some 500
pieces of real estate, and Siller owned 40% of the stock. By
2001, Siller Brothers, Inc. had obtained a $10 million
judgment against Siller, and it was threatening to execute on
his shares. To fight this litigation, Siller retained several law
firms at various times.

   In 2001, Charles Siller hired the law firm Cotchett, Pitre
& Simon1 to represent him both in his lawsuit with his
brothers and a legal malpractice dispute with some of his
former lawyers. The Cotchett firm agreed to a contingent fee

    1
        The firm would later be renamed Cotchett, Pitre & McCarthy.
6                 IN RE CWS ENTERPRISES

of 28% of the net settlement or trial award after subtraction
of a $10 million judgment against Siller in favor of his
brothers. The engagement agreement said that Siller was
“without funds to pay hourly fees.” The arbitration provision,
initialed by Siller when he signed it, stated that “any dispute”
relating to the fee agreement or the Cotchett firm’s
performance of services would be submitted to arbitration.

    Two and a half years later, Siller retained the Spiller •
McProud law firm. Siller hired the Spiller firm “not as
additional trial attorneys, but to assist, advise and discuss
these legal matters personally” with Siller, and to act as “an
interface” for Siller “with the attorneys at the Cotchett law
firm.” The Spiller firm was to work to ensure that Siller
could “fully understand and [be] in agreement with the
Cotchett law firm’s trial strategy, trial preparation (including
selection of experts), and conduct of the trial itself.” The
Spiller firm was to serve as Siller’s “general counsel” and “to
communicate to the Cotchett law firm [Siller’s] ideas,
suggestions, and requests.”

    Siller wanted Spiller • McProud to convince the Cotchett
firm to pursue a theory that Siller’s brother’s death entitled
Siller to purchase his brother’s shares for a small fraction of
what they were worth, under a separate contract Siller had
with his deceased brother. The Spiller firm agreed, but Siller
and the Spiller firm expressly agreed that the contingent fee
would not depend on the success of this theory. The Spiller
firm was to get 8% of the same net amount from which the
Cotchett firm’s 28% contingent fee was to be calculated.
Siller and the Spiller firm also incorporated the other terms of
Siller’s agreement with the Cotchett firm, including the
arbitration provision.
                  IN RE CWS ENTERPRISES                     7

    The Cotchett firm, consulting with the Spiller firm, won
Siller’s case against Siller Brothers, Inc. After a failed
mediation and a stay of execution on Siller Brothers, Inc.’s
$10 million judgment against Siller, the case went to trial in
California Superior Court. The judge issued a proposed
judgment valuing Siller’s shares at over $56 million. Pending
appeal and cross appeal, the parties settled for $10 million
cash to Siller and $20.5 million worth of real estate in
exchange for Siller’s shares. Consistent with Siller’s fee
agreements with the firms, the contingent fees were to be
based upon the $30.5 million value of the settlement.
Documentation was delayed while Siller’s counsel, working
with tax experts, created for Siller a new corporate spinoff,
CWS Enterprises, Inc., so that Siller could mitigate the tax
impact of his lawyers’ victory.

    The firms also tried other cases that Siller insisted on.
While the dissolution case was ongoing, the Cotchett and
Spiller firms filed a separate action against Siller Brothers,
Inc. and pursued Siller’s preferred theory (that Siller had
acquired a right to buy his deceased brothers’ shares cheaply
under a separate contract). They lost that case. The two
firms also lost a malpractice case Siller brought against one
of his previous lawyers, and they negotiated a $41,000
settlement in another case where Siller had refused to pay a
different set of previous lawyers. (Siller then refused to pay
even the $41,000 settlement, so those disputes remained
pending after he moved on from the Cotchett and Spiller
firms.)

    Nor would Siller pay the 28% and 8% fees he had agreed
to pay the Cotchett and Spiller firms, respectively. Siller’s
failure to pay the Spiller firm its 8% contingent fee is the
subject of the appeal before us. Siller and the two firms
8                 IN RE CWS ENTERPRISES

arbitrated the fee dispute before a retired state judge acting as
arbitrator, presenting two days of testimony and extensive
argument.

    Every aspect of the arbitration, including whether it
should take place, was hotly contested. Despite his
agreement to arbitrate “any dispute,” Siller refused to do so
until the Superior Court denied his ex parte application to
prevent such arbitration. Siller then continued his attempt to
evade arbitration by way of unsuccessful motions in limine
before the arbitrator.

    During the arbitration, Siller’s counsel led off his cross
examination of the attorneys’ lead witness, Mr. Pitre of
Cotchett, Pitre, by asking what his and his associates’ hourly
rates were. Siller’s lawyer then asked why they had
contracted for a contingent fee. Pitre replied, “Because Mr.
Siller didn’t have any money,” so the attorneys would have
to be paid “[o]ut of a recovery, hopefully.” The lawyers
advanced about $400,000 in expenses, as well as their time
and effort. Pitre was initially reluctant to pursue the case
against Siller’s deceased brother under the buy-sell agreement
(the theory under which Siller would buy his brother’s shares
for a valuation price that was a small fraction of what the
shares were worth) because he doubted that agreement’s
enforceability. But, as Spiller had agreed to do in his retainer
agreement, he consulted with Pitre and came up with a theory
that the two firms could advance with a straight face. (They
lost that portion of the case, as they did the malpractice case
Siller had started against one of his previous lawyers.)

    As Siller’s attorney presented his case during the
arbitration, (1) the real estate accounting for two thirds of the
settlement had declined in value since the settlement, so if a
                  IN RE CWS ENTERPRISES                        9

contingent fee applied at all, it should be against much less
than the $30.5 million; (2) the value of the legal services was
far less than the contingent fee would yield; (3) much of the
work, including the failed lawsuits against the deceased
brother’s estate and the failed lawsuit against one of Siller’s
previous attorneys, produced no value, so the attorneys
should not be compensated for it; (4) Spiller had participated
actively in the successful trial, but had only been retained as
“general counsel” to consult, so he ought not to be
compensated for any of that time; and (5) the money went to
the spinoff created for Siller to avoid taxes, not to Siller, and
the spinoff had not signed the fee agreement, so no fees were
due.

     Siller’s case focused largely on the reasonable value of
the Cotchett and Spiller firms’ respective services, both as an
alternative to the contingent fee agreement and as
justification for not holding him to his contingent fee
agreement. Siller’s attorney urged the arbitrator to limit
compensation to “the reasonable value of the services
rendered” because the Cotchett and Spiller firms had “failed
to fulfill” their contracts. He argued that “[i]f you have a
breach of contract then the answer’s in quantum meruit.”
“And even if it’s a contract, the law says you must prove
reasonable value of the services, and that goes to the
performance.” Siller’s attorney argued that the hours were
also relevant to “the issue of conscionability.” “[T]he
conscionability of this fee will be determined also based upon
. . . [the] hours they devoted to matters that they failed to
bring to conclusion through their own errors,” referring to the
unsuccessful malpractice case against one of Siller’s prior
lawyers.
10                IN RE CWS ENTERPRISES

    The Cotchett and Spiller firms objected to all this
evidence, which was the bulk of Siller’s case, on the theory
that evidence as to quantum meruit was not necessary in a
breach of contract action. But they conceded that Siller could
“inquire about the amount of time put into the matters . . . the
time for their quantum meruit,” because it was an issue the
arbitrator could reach if he deemed the contract void.

    Siller’s attorney pointed out that the arbitrator had not yet
ruled on whether the contingent fee agreement was binding,
so “quantum meruit is still an issue.” He argued that if the
contract was not deemed to be binding, then quantum meruit
would determine the proper amount of the fee, and even if the
contract were binding, counsel would still have to show a
reasonable effort to justify the amount of the fee under state
bar rules. So “[u]ltimately this comes down to hours,”
Siller’s attorney argued, which apparently is why Siller’s
presentation was largely a challenge to how many hours
ought not to be compensated because they were either not
contracted-for or led to no success.

    The arbitrator overruled the Cotchett and Spiller firms’
objections and let in all of Siller’s evidence going to the value
of the attorneys’ services, including evidence concerning the
reasonableness of the attorneys’ contingent fees, the hours the
attorneys worked, and the reasonableness of the time they
spent relative to the results (except for some details regarding
valuation of the parcels of real estate they won for Siller),
evidently because that evidence might bear on quantum
meruit or unconscionability if the arbitrator decided the case
on either basis.

   Spiller testified that he put in 1,760 hours and that his
usual rate was $250 per hour. He and Pitre had told Siller
                  IN RE CWS ENTERPRISES                       11

that the actions to enforce the buy-sell agreement and for
legal malpractice were likely to be unsuccessful (and they
were), but Siller insisted on pursuing them anyway.

    After hearing all of this testimony and argument, the
arbitrator chose to view the case as a claim on a contract, the
written fee agreements. He concluded that the fee agreements
were not unconscionable, that they were “reasonable,” and
that the two firms were entitled to every penny of the fees
they and Siller had agreed to, as well as the expenses the
firms had advanced on Siller’s behalf. The Cotchett firm and
Siller have since settled, so we need discuss only the Spiller
firm’s claim.

    The arbitrator found that Siller provided extensive advice
almost daily for the three years of the litigation, working “full
bore” for “over 1,760 hours on Siller’s behalf.” (The dispute
had been litigated through multiple trials and proceedings in
multiple courts on multiple theories, including Siller’s
disputes with several of his former attorneys.) The arbitrator
also concluded that, as Siller himself admitted in his
testimony, he had hired Spiller to assist trial counsel, not just
to advise.

     The arbitrator wrote a detailed, 26-page, single-spaced
opinion explaining his decision. After rejecting Siller’s
theories for why the arbitration should not proceed, and why
it should not bind CWS (the corporate spinoff created so that
Siller could avoid taxes on his $30.5 million settlement), the
arbitrator made findings of fact regarding the fee agreements.
He found that Spiller “worked . . . alongside [the Cotchett
lawyers] on all litigation.” As for Siller’s contention that
Spiller was not supposed to do that, just act as his “general
counsel” to advise and inform him and the Cotchett firm, the
12                IN RE CWS ENTERPRISES

arbitrator found otherwise. “Siller testified that he hired
Spiller to ‘help Frank [Pitre] and not just to advise . . .
although Spiller did provide Siller with extensive advice
about the progress of the litigation on an almost daily basis
throughout three years of representation.” The arbitrator
further found that Spiller spent less than 5% of his time on
the unsuccessful malpractice litigation against one of Siller’s
previous lawyers and sought no fees for that work.

    As for not completing the contract, the arbitrator credited
Spiller’s contention that Siller fired his lawyers “hoping to
avoid paying his now former counsel” by “actions clearly
designed to avoid payment of his legal obligations attendant
to the extraordinary result obtained,” a $30.5 million
settlement on a $45.7 judgment obtained after years of
representation in complex litigation.

    The critical question for this appeal, as argued on Siller’s
behalf, is whether the arbitrator resolved only the issue of
whether the contingent fee was unconscionable as applied to
the $30.5 million result, or whether the arbitrator also
determined the reasonable value of the legal services
performed. The transcripts show, and the arbitrator found,
that Siller’s attorney “devoted most of his cross examination
to a detailed attack on how Mr. Pitre and Mr. Spiller spent
their time on the case, on the theory that the Arbitrator might
find the contract to be unconscionable (it is not) and that
quantum meruit would be relevant.” The arbitrator
concluded, though, that quantum meruit was not relevant
because the contingent fee agreement was a valid contract.
He expressly found that the contracted-for percentages were
“reasonable” based on the work put into the case, the risks,
and the need for counsel to finance the litigation.
                  IN RE CWS ENTERPRISES                     13

    Siller did not pay what the arbitrator concluded he owed,
so the Cotchett and Spiller firms sought and obtained
confirmation of the award in California Superior Court. The
Superior Court entered a money judgment in their favor for
the amount of the award. But Siller did not pay the judgment,
either; instead, he prevented its execution by filing for
chapter 11 bankruptcy.

    The bankruptcy court took a fresh look at the “reasonable
value” of Spiller’s services under section 502(b)(4) and
applied a lodestar approach, multiplying Spiller’s hourly rate
by those hours that the bankruptcy court adjudged to be
productive on the portions of the litigation on which Spiller
was successful. Using this approach, the bankruptcy court
concluded that Spiller’s fee was unreasonably high and
should have been $440,250 (rather than the arbitrator’s figure
of just under $2.5 million).

    The bankruptcy court’s view was that there were “two
tiers of reasonableness scrutiny,” first under state law, which
if not satisfied required disallowance of the claim as
“unenforceable,” and then under bankruptcy law,
independently of state standards. The bankruptcy court did
not articulate what the federal standard of reasonableness
was, just that it was not necessarily satisfied by
reasonableness under state standards. As the bankruptcy
court saw it, the arbitrator had not determined reasonableness
because he merely conducted a contract analysis under the
contingent fee agreement. Responding to the attorneys
argument that full faith and credit should be given to the
Superior Court judgment, the bankruptcy court held that “as
a matter of the Supremacy Clause, and regardless of the state
preclusion law, the state-court judgment based on state law
cannot trump the specific provision in Bankruptcy Code
14                 IN RE CWS ENTERPRISES

502(b)(4).” As for claim and issue preclusion, the bankruptcy
court’s view was that since section 502(b)(4) of the
bankruptcy code could not have been raised in the arbitration
(because Siller had not yet filed for bankruptcy), the claim
arbitrated did not involve the same “primary right.” The
bankruptcy court thus could determine reasonableness on a
clean slate without taking account of the arbitration award
and the California Superior Court judgment.

    The district court, on the Spiller firm’s appeal, reversed.
The controlling determination in the district court decision
was that “the similarity between the standard for determining
the unconscionability of a contingent fee agreement, which
was before the arbitrator, and the bankruptcy court’s standard
for determining the reasonable value of the fees suggests that
the issue of an appropriate fee for appellant’s work was
necessarily determined and actually litigated in the formal
arbitration that took place here.” The district court noted that
the bankruptcy court “did not consider the transcript of the
arbitration proceedings in determining what was before the
arbitrator.” The district court did consider the transcript to
see whether reasonableness was at issue. It noted that Siller’s
position in the arbitration, fully litigated, was that, despite a
contingent fee agreement, the attorneys still had to prove
“reasonable effort . . . to justify the fee.” The arbitrator heard
evidence about the time spent and the complexities and risks
of the litigation, not just the contract itself, and evaluated all
of these factors for reasonableness. The district court
concluded that “[b]y considering both the reasonable nature
of the contingent fee contracts and rejecting the claim that the
contracts were unconscionable, and applying California’s
tests for both determinations, the arbitrator necessarily
decided that the fees were reasonable within the
contemplation of § 502(b)(4).”
                   IN RE CWS ENTERPRISES                       15

    After a trial in the bankruptcy court, Siller and the trustee
argued in a second appeal to the district court that the issues
adjudicated by the arbitrator were not “identical,” as required
by California res judicata law, to the reasonableness
determination under the bankruptcy code, so the judgment
confirming the arbitration award should have no preclusive
effect. But the district court, based on the arbitration
transcript and arbitrator’s decision, found that “the arbitrator
determined that Spiller’s fees were not unconscionable
applying a test equivalent to the federal reasonableness test,”
so the California Superior Court judgment was entitled to
preclusive effect. Because the case required no further
proceedings in bankruptcy court once the amount of Spiller’s
claim was liquidated, and because that condition had
occurred, the district court held that Spiller was entitled to the
full amount of his claim as adjudicated.

    Siller and his new spinoff corporation appeal.

                          ANALYSIS

    Two statutes are at issue in this case, the bankruptcy
code’s provision on claims for pre-petition attorneys’ fees,
11 U.S.C. § 502(b)(4), and the Full Faith and Credit Act,
28 U.S.C. § 1738. The first limits claims after the objection
of an interested party. Here is its text:

        (b) Except as provided in subsections (e)(2),
        (f), (g), (h) and (I) of this section, if such
        objection to a claim is made, the court, after
        notice and a hearing, shall determine the
        amount of such claim in lawful currency of
        the United States as of the date of the filing of
16                     IN RE CWS ENTERPRISES

           the petition, and shall allow such claim in
           such amount, except to the extent that–

                                 ...

           (4) if such claim is for services of an insider
           or attorney of the debtor, such claim exceeds
           the reasonable value of such services.2

Here is the text of the Full Faith and Credit Act:

           The Acts of the legislature of any State,
           Territory, or Possession of the United States,
           or copies thereof, shall be authenticated by
           affixing the seal of such State, Territory or
           Possession thereto.

           The records and judicial proceedings of any
           court of any such State, Territory or
           Possession, or copies thereof, shall be proved
           or admitted in other courts within the United
           States and its Territories and Possessions by
           the attestation of the clerk and seal of the
           court annexed, if a seal exists, together with a
           certificate of a judge of the court that the said
           attestation is in proper form.

           Such Acts, records and judicial proceedings or
           copies thereof, so authenticated, shall have the
           same full faith and credit in every court within
           the United States and its Territories and
           Possessions as they have by law or usage in

     2
         11 U.S.C. § 502.
                      IN RE CWS ENTERPRISES                          17

           the courts of such State, Territory or
           Possession from which they are taken.3

    There is little circuit court authority on section 502(b)(4)
of the bankruptcy code. It limits claims for services rendered
by the debtor’s attorney to the extent that such claims exceed
“the reasonable value of such services.”4 The text leaves
room for argument about how to apply it, especially in
conjunction with any prior determination regarding attorneys’
fees and with the Full Faith and Credit Act.5 The district
court concluded that a Tenth Circuit decision, Landsing
Diversified Properties v. First National Bank and Trust Co.
(In re Western Real Estate Fund, Inc.),6 provided a sound
analysis, and so do we. There are a number of bankruptcy
court, bankruptcy appellate panel, and district court decisions
taking both consistent and different views.7 We adopt the
Tenth Circuit’s position. Federal law benefits from
consistency between circuits, and we agree with our sister
circuit’s reasoning.

    3
        28 U.S.C. § 1738.
    4
        11 U.S.C. § 502(b)(4).
    5
        28 U.S.C. § 1738.
    6
      922 F.2d 592 (10th Cir. 1990), modified sub nom. Abel v. West,
932 F.2d 898 (10th Cir. 1991).
    7
      See, e.g., In re Placide, 459 B.R. 64 (B.A.P. 9th Cir. 2011); In re
Solar Trust of America, LLC, No. 12-11136, 2015 WL 1011548 (Bankr.
D. Del. Jan. 12, 2015); In re Boulder Crossroads, LLC, No. 09-10381,
2010 WL 4924745 (Bankr. W.D. Tex. Dec. 1, 2010); In re Heritage
Organization, L.L.C., No. 04-35574, 2006 WL 6508182 (Bankr. N.D.
Tex. Jan. 6, 2006); In re Russell Cave Co., 253 B.R. 815 (Bankr. E.D. Ky.
2000); In re Nelson, 206 B.R. 869 (Bankr. N.D. Ohio 1997).
18                      IN RE CWS ENTERPRISES

    In Western Real Estate, the bankrupt entered into a pre-
petition fee agreement with counsel for a reduced hourly rate
plus a 25% contingent fee.8 Agreeing with our decision in In
re Yermakov, the Tenth Circuit reasoned that, subject to
section 502(b)(4), “a pre-petition contingency fee agreement
between the debtor and an attorney is . . . ‘like any other
contract claim against the estate.’”9 Citing our decision in In
re Pacific Far East Line, the Tenth Circuit concluded that the
source of allowable contract damages for a breached
attorney’s fee agreement is state law.10 Western Real Estate
rejects the notion that under section 502(b)(4), federal law
provides for a bankruptcy court to establish the
reasonableness of an attorney’s fee in the first instance,
independently of state law. Instead, 502(b)(4) works as a
federal cap on a fee already determined pursuant to state
law.11 The proper mode of analysis, Western Real Estate
holds, is:

                (1) an acknowledgment or determination
                    that the fee contract was breached;

                (2) an assessment of the damages for the
                    breach under state law;

                (3) a determination under section
                    502(b)(4) of the reasonableness of the

     8
         Western Real Estate, 922 F.2d at 594.
     9
         Id. (citing Yermakov, 718 F.2d 1465, 1470 (9th Cir. 1983)).
     10
       Id. (citing Pacific Far East Line, Inc., 654 F.2d 664, 668–70 (9th
Cir. 1981)).
     11
          See id. at 595–97.
                           IN RE CWS ENTERPRISES                    19

                       damages claim afforded by state law;
                       and

                (4) a reduction of the claim by whatever
                    extent, if any, it is deemed excessive.12

Western Real Estate holds that it is error for a bankruptcy
court to bypass this analysis, as the bankruptcy court did in
this case, and determine for itself in the first instance a
reasonable contingent fee using the lodestar method.13

    Western Real Estate also holds that contingent fee
agreements “provide reasonable alternatives to the hourly
retainer, despite the fact that, as a result of their contingent
and therefore risky nature, such agreements typically generate
fees . . . substantially in excess of” lodestar calculations
when the lawyer succeeds.14 Citing our decision in Venegas
v. Skaggs,15 Western Real Estate holds that the contingent and
therefore risky nature of a contingent fee is itself an element
of the reasonableness analysis.16

   In the case before us, the Spiller firm’s fee had been
reduced to judgment pursuant to state law in a California state

    12
         See id. at 597.
    13
         See id. at 597–98.
    14
         Id. at 597.
    15
      867 F.2d 527 (9th Cir. 1989), aff’d sub nom. Venegas v. Mitchell,
495 U.S. 82 (1990).
    16
       Id. at 532 (citing Hamner v. Rios, 769 F.2d 1404, 1409 (9th Cir.
1985)).
20                     IN RE CWS ENTERPRISES

court. It had also been “deemed allowed” under section
502(a) subject to Siller’s section 502(b)(4) objection.17 Siller
had argued that because he fired the Cotchett and Spiller
firms before the settlement was collected, he did not owe
them their contingent fees. But the arbitrator found that this
attempt by Siller to evade the fees should fail. The Superior
Court judgment established that under California law, the
Spiller firm was entitled to $2,497,325.07 for his fees and
$800 for costs (plus 10% interest beginning November 25,
2008). So the first and second steps of the Western Real
Estate analysis are complete.

    Applying the section 502(b)(4) reasonableness test and
reducing the claim to the extent of any excess are the third
and fourth steps of the analysis, not the first. The bankruptcy
court performed its reasonableness analysis from scratch,
using the lodestar method, rather than treating it as a cap on
the amount allowed under state law. We therefore conclude
that the bankruptcy court’s analysis was mistaken in this case
for the same reason as the bankruptcy court’s analysis in
Western Real Estate.

    So far, we have glossed over another question: whether
section 502(b)(4) of the bankruptcy code leaves any room to
reduce an attorney’s fee that a state court has deemed
reasonable as a matter of state law, that is, whether the
section 502(b)(4) reasonableness cap can ever require a
reduction in such a fee. And we also have not yet spoken to
the res judicata effect of a judgment entered prior to the filing
of a bankruptcy petition.

     17
          11 U.S.C. § 502(a).
                       IN RE CWS ENTERPRISES                         21

     The Third Circuit, in Anthony v. Interform,18 answered
these questions for another of the section 502(b) exceptions.
As in our case, the bankruptcy claim in Anthony was based on
a pre-petition state court judgment confirming an arbitration
award.19 Anthony construes section 502(b)(7) of the
bankruptcy code, which limits a claimant’s damages from the
termination of an employment contract to one year’s pay after
termination or after the employer filed for bankruptcy (even
if the employer breached a multi-year employment contract
and left more than a year unfulfilled).20 The employer in
Anthony thwarted the employee’s attempt to execute on his
state court judgment by filing for chapter 11 bankruptcy
relief,21 so the employee filed a bankruptcy claim for the
amount of the judgment.22

   Anthony rejects the proposition that the 502(b)(7) cap
applies only to executory contracts and not to judgments.23
Even though the employee obtained a state court judgment
amounting to several years’ pay after his employer’s breach,

    18
         96 F.3d 692 (3d Cir. 1996).
    19
         Id. at 693.
    20
         11 U.S.C. § 502(b)(7).
    21
         Anthony, 96 F.3d at 693.
    22
         Id.
    23
        Bankruptcy courts have gone both ways on this issue. Compare,
e.g., In re Vic Snyder, Inc., 23 B.R. 185, 186–87 (Bankr. E.D. Pa. 1982)
with In re Networks Elec. Corp., 195 B.R. 92, 99–100 (B.A.P. 9th Cir.
1996).
22                     IN RE CWS ENTERPRISES

in bankruptcy he was entitled only to one year’s pay.24 The
Anthony court looked through the employee’s state court
judgment to the claim upon which it was based, applying the
section 502(b)(7) cap to that underlying claim.25

    Reasonable arguments may be made against extending the
Third Circuit’s position to the section 502(b)(4)
reasonableness cap at issue in our case. The section
502(b)(7) cap is specific and calculable. The section
502(b)(4) cap, which limits attorneys’ fees to a “reasonable”
amount, is indefinite in application. The section 502(b)(7)
cap applies only to a future expectancy and only where the
bankrupt has before filing paid the employee for services
rendered. The section 502(b)(4) cap limits fees for services
already performed.

     Perhaps most strikingly, our sister circuit’s approach is
inconsistent with the common law doctrine of merger. In
California (as in most, if not all, common law jurisdictions),
a claim that has been reduced to a judgment merges into the
judgment. That is to say, an employee who was terminated
before his employment contract ran out, having filed suit and
obtained a judgment on that contract, no longer has a claim
for unpaid wages. He now has a claim for what used to be
called “debt on a judgment.” The employee can no longer
sue for breach of contract, as he otherwise might prefer to do
if that theory entitled him to more, because he no longer has
a claim for breach of contract. All that remains is his

     24
          Anthony, 96 F.3d at 697.
     25
       See id. at 695–97. Anthony cited with approval our circuit’s
Bankruptcy Appellate Panel decision in Networks Elec. Corp., 195 B.R.
at 92.
                     IN RE CWS ENTERPRISES                  23

entitlement to the debt owed him on the earlier judgment.
The Anthony approach, which looks through the judgment to
the underlying claim and then caps the amount of the
judgment according to statutory criteria, is contrary to this
common law doctrine.

    On the other hand, merger is a common law principle, not
a constitutional one. Subject to the Full Faith and Credit
Act,26 discussed below, Congress has the power to
promulgate bankruptcy law that supersedes what would
otherwise be binding state law. The bankruptcy code’s one-
year cap on claims for post-breach wage and salary, for
example, balances the employee’s interest in recovering his
damages against other creditors’ interests in their claims.27
There is also much to be said for aligning Ninth Circuit law
with our sister circuits, removing the reward from forum
shopping and providing law that is useful and predictably
applied nationwide.

    The distinction between the clear, mathematically
calculable cap under section 502(b)(7), and the indefinite
“reasonableness” cap under section 502(b)(4), might support
distinguishing them, so that looking through a state court
judgment might be appropriate under section 502(b)(7) but
not under section 502(b)(4). We conclude, though, that this
distinction should not make a difference. Reading section
502(b)(4) in its entirety, rather than limiting our analysis to
the attorneys’ fees phrase, shows why.

   26
        28 U.S.C. § 1738.
   27
        See Networks Elec. Corp., 195 B.R. at 100.
24                      IN RE CWS ENTERPRISES

    The text of section 502(b)(4) limits to a “reasonable
value” not only the services of attorneys but also the “services
of an insider.” It imposes this limitation “if such claim is for
services of an insider or attorney of the debtor.”28 Among
others,29 “insiders” include family members, partners, and

     28
          11 U.S.C. § 502(b)(4).
     29
          Defined at 11 U.S.C. § 101(31), the term “insider” includes–

            (A) if the debtor is an individual–

                (i) relative of the debtor or of a general partner of
                the debtor;

                (ii) partnership in which the debtor is a general
                partner;

                (iii) general partner of the debtor; or

                (iv) corporation of which the debtor is a director,
                officer, or person in control;

            (B) if the debtor is a corporation–

                (i) director of the debtor;

                (ii) officer of the debtor;

                (iii) person in control of the debtor;

                (iv) partnership in which the debtor is a general
                partner;

                (v) general partner of the debtor; or

                (vi) relative of a general partner, director, officer,
                or person in control of the debtor;
                    IN RE CWS ENTERPRISES                               25

corporations the debtor controls. Collier suggests that
Congress sought to protect creditors from “over-
generosity,”30 an obvious hazard when the debtor is taking
money from creditors to pay his own family members,
partners, or corporation. And that concern arises even if the
claim has been reduced to judgment, since the judgment
might be a consent judgment or otherwise collusive. Such
“over-generosity,” that is, intentionally paying more than a
service is reasonably worth due to the close relationship
between the debtor and creditor, may be likely with a relative,
but it is not likely with the debtor’s attorney.

       (C) if the debtor is a partnership–

            (i) general partner in the debtor;

            (ii) relative of a general partner in, general partner
            of, or person in control of the debtor;

            (iii) partnership in which the debtor is a general
            partner;

            (iv) general partner of the debtor; or

            (v) person in control of the debtor;

       (D) if the debtor is a municipality, elected official of the
       debtor or relative of an elected official of the debtor;

       (E) affiliate, or insider of an affiliate as if such affiliate
       were the debtor; and

       (F) managing agent of the debtor.
   30
      4 COLLIER ON BANKRUPTCY ¶ 502.03[5][c] (Alan N. Resnick &
Henry J. Sommer eds., 16th ed. 2012).
26                     IN RE CWS ENTERPRISES

    But, not least because they are in the same subsection, the
reasonableness cap for payment of services to insiders should
not be distinguished from the reasonableness cap for payment
of services to attorneys. There are other contexts where
courts decide the reasonableness of attorneys’ fees due to, for
example, the lack of an adversarial relationship or the risk of
collusion, and such concerns may apply to an attorneys’ fee
even if that fee has been reduced to a judgment. Among
these contexts are cases where attorneys’ fees are shifted
from the client to the losing party, as in English rule awards31
and class action settlements. We therefore adopt the Third
and Tenth Circuit’s approaches to attorneys’ fees under
section 502(b)(4). The bankruptcy code’s reasonableness cap
limits a pre-petition obligation for a debtor’s attorneys’ fees,
even if such fees were allowable under state law, and even if
such fees had been reduced to a state court judgment.

    Finally, we must consider how the state court judgment in
this case may have had preclusive impact on the
“reasonableness” analysis under section 502(b)(4). The Full
Faith and Credit Act applies in bankruptcy courts.32 The
bankruptcy court in this case was thus required to give full
faith and credit to the California Superior Court’s judgment

     31
       See, e.g., 42 U.S.C. § 1988(b) (permitting the award of fees to the
prevailing party under the English rule in many actions brought under
federal law); Alaska R. Civ. P. 82 (requiring generally that the losing party
pay the prevailing party’s fees); Ariz. Rev. Stat. § 12-341.01 (permitting
the award of fees to the prevailing party under the English rule in contract
cases); APL Co. Pte. v. UK Aerosols Ltd., 582 F.3d 947, 957 (9th Cir.
2009) (applying the law of Singapore and noting that it follows the
English rule for attorneys’ fees).
     32
          28 U.S.C. § 1738; In re Nourbakhsh, 67 F.3d 798, 800 (9th Cir.
1995).
                      IN RE CWS ENTERPRISES                              27

entitling Spiller to his fees to the same extent that California
res judicata law would give that judgment preclusive effect.33
The relevant question is not whether the California judgment
for the amount of Spiller’s fees establishes that Siller was
contractually obligated to pay him (it does), but whether
Siller was precluded from arguing in the bankruptcy court
that the amount of the California judgment exceeded the
“reasonable value” of Spiller’s services. In other words, the
question is not whether a state court judgment always has
preclusive effect on the “reasonableness” analysis under
section 502(b)(4) (we have already explained why it does
not), the question is whether the state court judgment had
preclusive effect on the reasonableness analysis in the
particular circumstances of this case.

    Issue preclusion, under California law,34 requires that
(1) “the issue sought to be precluded from relitigation must
be identical to that decided in a former proceeding,” (2) the
“issue must have been actually litigated in the former
proceeding,” (3) the issue “must have been necessarily
decided in the former proceeding,” (4) “the decision in the
former proceeding must be final and on the merits,” and
(5) “the party against whom preclusion is sought must be the
same as, or in privity with, the party to the former

    33
         Nourbakhsh, 67 F.3d at 800.
    34
       In the past, California courts have referred to issue preclusion using
the older terms “collateral estoppel” or “estoppel by judgment” or the
broader term “res judicata.” They now use the modern term “issue
preclusion.” For an explanation of the use of these terms in California
courts, see Lucido v. Superior Court, 795 P.2d 1223, 1225 n.3 (Cal. 1990)
and Olson v. Cory, 134 Cal. App. 3d 85, 103 n.9 (1982).
28                     IN RE CWS ENTERPRISES

proceeding.”35 The party asserting preclusion bears the
burden of establishing these elements.36 California courts
have recognized exceptions to California’s preclusion law,
but none applies here.37

    Using those standards, the district judge concluded that
issue preclusion applied here, and so do we. The arbitration
proceeding establishing the reasonableness of Spiller’s fee
was fully contested and later confirmed by the judgment of a
California court.

    Siller argues that the arbitrator could not have decided
section 502(b)(4) reasonableness because that is a bankruptcy
standard and he had not yet filed for bankruptcy. We reject
the notion that the word “reasonable” in section 502(b)(4) is
a bankruptcy term of art with a meaning different from its
ordinary usage. There is no special definition of “reasonable”
in the bankruptcy code. “Reasonable” under section
502(b)(4) means what it means in ordinary English.
Determining a “reasonable” contingent fee cannot be reduced
to a mechanical formulation. It calls upon the judgment of
the tribunal in the particular circumstances of the matter
before it. Some (but not all) of the factors bearing on
reasonableness of a fee are whether the client had a fair
opportunity to understand what he was agreeing to, the time
the lawyer spent, the risk of not collecting, the need to

     35
      Lucido, 795 P.2d at 1225; see also In re Harmon, 250 F.3d 1240,
1245 (9th Cir. 2001).
     36
          Lucido, 795 P.2d at 1225; Harmon, 250 F.3d at 1245.
     37
      Such preclusion exceptions include public policy, unforeseeability,
and the inability or lack of incentive to litigate the prior adjudication. See
Olson, 134 Cal. App. 3d at 103 n.9.
                  IN RE CWS ENTERPRISES                     29

advance time or expenses, the effect of representation on the
lawyer’s ability to take on other cases, the ease or difficulty
of working with a particular client, the legal market in the
locality regarding hourly rates and contingent fee
percentages, and — especially important here — whether the
fee is contingent upon success.

    Reasonableness, so understood, can be (and quite often is)
decided in an arbitration proceeding like the one conducted
here. Arbitration is a common method of resolving fee
disputes under the bar rules of many states. Overall
reasonableness is the usual criterion. And in the typical fee
arbitration, the ex ante agreement between the lawyer and
client is strong evidence of reasonableness, particularly where
the fee was a contingent one.

    Siller argues that even if reasonableness could have been
determined in an arbitration proceeding, it was not
determined in this one. The arbitrator decided that the
parties’ fee agreement, not quantum meruit, established the
amount. But the arbitration consisted in large part of Siller
presenting not just his arguments that the contract was
unconscionable and Spiller failed to perform, but also his
arguments and evidence to show that the Cotchett and Spiller
firms’ fees were unreasonable.            Siller devoted his
presentation almost entirely to making this point. He cross-
examined extensively and put on his own evidence, including
an expert witness, to prove that the fees were so unreasonable
as to be unconscionable, and to establish a lower number for
a quantum meruit award if the arbitrator accepted his
challenge to the fee agreements.

    After hearing all of Siller’s arguments and evidence, the
arbitrator concluded that Siller’s positions were wrong and
30                      IN RE CWS ENTERPRISES

the Cotchett and Spiller firms’ right. The quantum meruit
analysis was irrelevant and Spiller’s fee was not
unconscionable (a standard different from unreasonable). But
that was not all the arbitrator concluded. He also concluded
that Siller’s contract with the Spiller firm for an 8%
contingent fee was “reasonable.” And he based his
reasonableness determination on the work the parties
anticipated, the work Spiller actually put into the case, the
risks assumed by the parties, and Siller’s need for Spiller to
finance his litigation.

    Siller urges us to accept the bankruptcy court’s use of the
lodestar method to determine the reasonableness of Spiller’s
fee. But we explained in Venegas v. Skaggs that a continent
fee may be reasonable where “it reflect[s] the risk of
nonrecovery . . . assumed in accepting [a] case.”38 In this
case, a lodestar fee would be unreasonable and could not, for
that reason, serve as a cap under section 502(b)(4). No
sensible attorney would undertake to represent a client at his
usual hourly rate in these circumstances — where the client
had been litigating for decades, had no money to pay, and had
a history of declining to pay his lawyers and suing them for
malpractice, the case was likely to take all or most of the
lawyer’s time for the next several years, and the lawyer could
get paid — if at all — only if he won. A “reasonable” fee
must be reasonable for the lawyer as well as the client.

    Had the arbitrator concluded that the amount of Spiller’s
fee was unreasonable, but not so unreasonable as to make the
contract’s formation or enforcement unconscionable, then the
section 502(b)(4) reasonableness cap might have room to
operate, because in that case the issue of 502(b)(4)

     38
          867 F.2d at 534.
                      IN RE CWS ENTERPRISES                           31

reasonableness would not be identical to any of the issues
arbitrated. But that is not how this case was arbitrated and
decided.       Under California law, one element of
unconscionability is reasonableness,39 and a contingent fee
contract can be rejected as unconscionable if it is sufficiently
unreasonable in the circumstances.40 The arbitrator rejected
that conclusion in this case. After hearing Siller’s arguments
and extensive evidence to show unreasonableness, the
arbitrator not only concluded that Spiller’s 8% contingent fee
ought to be enforced, he specifically decided that it was
“reasonable.”

    So, although there might in some cases be room for a
reduction, under section 502(b)(4)’s reasonableness cap, of a
state court judgment confirming an arbitration award for a
contingent fee, there is no room here. The performance in
this case was difficult and demanding. And the relationship
between the contracted-for amount and the service Spiller
provided was not such as to make enforcement of the contract
or payment of the fee unreasonable. The Full Faith and
Credit Act requires, in the circumstances of this case, that the
judgment of the state court confirming Spiller’s arbitration
award for his fee be given full faith and credit in Siller’s
bankruptcy proceeding.

    The judgment of the district court is AFFIRMED.

    39
         See Ketchum v. Moses, 17 P.3d 735, 742 (Cal. 2001).
    40
       See Carlson v. Home Team Pest Def., Inc., 191 Cal. Rptr. 3d 29, 40
(Cal. Ct. App. 2015).