Under a fee-shifting clause in a commercial lease, the landlord was ordered to pay the debtor $606,000 in reimbursement for attorneys’ fees the debtor had incurred in overcoming the landlord’s opposition to assumption of the lease.
In her February 19 opinion, Chief Bankruptcy Judge Maureen A. Tighe of Woodland Hills, Calif., decided that the debtor was not entitled to recover another $200,000 spent in fending off opposition raised by the landlord to other aspects of the chapter 11 case.
The Lease
The lease in a commercial building was evidently the debtor’s principal asset. Before bankruptcy, the landlord served a notice of default and a three-day notice to cure. The notices were conditions to the landlord’s ability to commence an eviction action in California.
The debtor responded by filing a chapter 11 petition, followed by a motion to assume the lease. The landlord opposed the assumption motion, claiming the lease was in default. Alternatively, the landlord sought adequate assurance of future performance.
Following discovery and a five-day trial, Judge Tighe ruled in favor of the debtor, allowed assumption and found that the debtor had not breached the lease. The judge had no reason to reach the question of adequate assurance.
After entry of the assumption order, the debtor sought $606,000 in attorneys’ fees to be levied against the landlord for opposition to the assumption motion, and more than $200,000 for successfully overcoming objections raised by the landlord in other aspects of the case.
The Law on Fee-Shifting
California law generally proscribes imposing the prevailing party’s attorneys’ fees on the loser unless the contract so provides. California law also makes fee-shifting reciprocal; that is, if the contract awards attorneys’ fees to only one party under a contract, either party who prevails is entitled to recovery.
California law only permits fee-shifting in an action on a “contract.”
Regardless of whether the landlord or the tenant was the “prevailing” party, the lease allowed recovery of attorneys’ fees in “any action or proceeding . . . relating to the provisions of this Lease or any default hereunder.” Judge Tighe separately analyzed whether the litigations in bankruptcy court were an “action or proceeding” and were related to the lease or default.
Filing Bankruptcy Isn’t Reimbursable
Judge Tighe decided that the filing of the chapter 11 petition was not an “action or proceeding,” even though it was necessitated by the landlord’s notice of default. She said that the “bankruptcy proceeding in itself is not a proceeding or action against anyone[,] and the law does not support generalizing all bankruptcy proceedings as arising out of a contract dispute where there has been a contract between the debtor and a creditor, even where that dispute is the precipitating factor for the bankruptcy.”
Furthermore, Judge Tighe said, the bankruptcy case in itself was not an action on a contract, as required by California law. She therefore refused to impose fees on the landlord for the debtor’s costs in commencing the chapter 11 case.
Opposing Assumption Was Compensable
The landlord’s opposition to the assumption motion was a different matter. Judge Tighe said that the issues on the assumption motion were the same as those in an eviction action, which would be an “action or proceeding.”
However, not every issue on an assumption motion would amount to an action on a contract, Judge Tighe said. If the debtor had been in default and the only issue involved adequate assurance, she said that “adequate assurance may not necessarily be considered a proceeding ‘on a contract.’”
But that was “not the case here,” Judge Tighe said. The debtor was the prevailing party, having proven there was no breach of lease, she said.
Judge Tighe assessed $606,000 against the landlord, representing attorneys’ fees incurred by the debtor in overcoming the landlord’s opposition to the assumption motion. “The Bankruptcy Code was simply a vehicle to resolve what can only be described as a contract dispute,” she said.
Another $200,000 Disallowed
The debtor sought another $200,000 from the landlord, representing fees for defeating the landlord’s opposition to four other motions, mostly involving use of the property. Judge Tighe denied the request, saying that the lease “was only incidental in order to determine whether relief was appropriate under §363. The Court was not adjudicating the rights of the parties pursuant to the Lease Agreement at that time.”
Likewise, opposing post-petition financing “had nothing to do with the Lease Agreement.”
Judge Tighe denied the request for another $200,000 in fees, because they were “not ‘on a contract’ nor do they relate enough to the Lease Agreement to warrant attorney’s fees and costs.”
Under a fee-shifting clause in a commercial lease, the landlord was ordered to pay the debtor $606,000 in reimbursement for attorneys’ fees the debtor had incurred in overcoming the landlord’s opposition to assumption of the lease.
In her February 19 opinion, Chief Bankruptcy Judge Maureen A. Tighe of Woodland Hills, Calif., decided that the debtor was not entitled to recover another $200,000 spent in fending off opposition raised by the landlord to other aspects of the chapter 11 case.
The Lease
The lease in a commercial building was evidently the debtor’s principal asset. Before bankruptcy, the landlord served a notice of default and a three-day notice to cure. The notices were conditions to the landlord’s ability to commence an eviction action in California.
The debtor responded by filing a chapter 11 petition, followed by a motion to assume the lease. The landlord opposed the assumption motion, claiming the lease was in default. Alternatively, the landlord sought adequate assurance of future performance.
Following discovery and a five-day trial, Judge Tighe ruled in favor of the debtor, allowed assumption and found that the debtor had not breached the lease. The judge had no reason to reach the question of adequate assurance.