Court Opinion

ID: 4031449
Source: CourtListenerOpinion
Date Created: 2016-09-06 17:01:19.878055+00
Date Added: 2024-06-11T07:45:59.618927
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

IN RE CASTELLINO VILLAS,              No. 12-57186
A. K. F. LLC,
                       Debtor,          D.C. No.
                                   2:12-cv-07282-JFW

PICERNE CONSTRUCTION CORP.,
DBA Camelback Construction,             OPINION
                   Appellant,

              v.

CASTELLINO VILLAS, A. K. F.
LLC,
                     Appellee.

     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
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 post-
discharge 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.
                 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
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
                  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.
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
                    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.
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.
                     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
Bankruptcy Code.” 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).
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
                 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
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 “post-
petition attorney fee awards are not discharged where post-
petition, 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).
                  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 bankruptcy were
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
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 post-
discharge 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 reasonably contemplate 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.
                   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 “fairly or reasonably contemplate” 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.