FILED
DEC 11 2017
1 NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
2 OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. CC-17-1154-SAKu
)
6 LETICIA JOY ARCINIEGA, ) Bk. No. 6:11-bk-15412-SY
)
7 Debtor. ) Adv. No. 6:11-ap-01735-SY
______________________________)
8 )
LETICIA JOY ARCINIEGA, )
9 )
Appellant, )
10 )
v. ) MEMORANDUM*
11 )
JAMES CLARK, )
12 )
Appellee. )
13 ______________________________)
14 Argued and Submitted on November 30, 2017
at Pasadena, California
15
Filed – December 11, 2017
16
Appeal from the United States Bankruptcy Court
17 for the Central District of California
18 Honorable Scott Ho Yun, Bankruptcy Judge, Presiding
19 Appearances: Bruce Adelstein argued for appellant; David Edward
Hays of Marshack Hays LLP argued for appellee.
20
21 Before: SPRAKER, ALSTON** and KURTZ, Bankruptcy Judges.
22
23
24 *
This disposition is not appropriate for publication.
Although it may be cited for whatever persuasive value it may
25 have (see Fed. R. App. P. 32.1), it has no precedential value.
26 See 9th Cir. BAP Rule 8024-1.
**
27 Hon. Christopher M. Alston, United States Bankruptcy
Judge for the Western District of Washington, sitting by
28 designation.
1 INTRODUCTION
2 This is the second appeal from this adversary proceeding.
3 In the prior appeal, we vacated the bankruptcy court’s
4 nondischargeability judgment against chapter 131 debtor Leticia
5 Joy Arciniega and remanded so that the bankruptcy court could
6 determine whether the $1,000-per-day liquidated damages clause in
7 the parties’ settlement agreement was reasonable within the
8 meaning of Cal Civ. Code § 1671(b). We also remanded so that the
9 bankruptcy court could apply the correct standard for awarding
10 Arciniega’s former husband James Clark his attorneys’ fees.
11 On remand, the bankruptcy court determined that there was no
12 evidence in the record supporting Arciniega’s claim that the
13 liquidated damages clause was unreasonable and hence Arciniega
14 had failed to meet her burden of proof on the reasonableness
15 issue. The bankruptcy court, in addition, identified the
16 prevailing party attorneys’ fees provision in the settlement
17 agreement and Cal. Civ. Code § 1717 as the basis for its fee
18 award. It then determined that most of the services Clark’s
19 counsel furnished in prosecuting the adversary proceeding were
20 inextricably intertwined rendering it impossible to realistically
21 or meaningfully separate the services related to contract issues
22 from those related to fraud and nondischargeability issues.
23 Based on these determinations, the bankruptcy court entered
24 an amended judgment again awarding Clark $281,000 in liquidated
25
26 1
Unless specified otherwise, all chapter and section
27 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
all "Rule" references are to the Federal Rules of Bankruptcy
28 Procedure, Rules 1001-9037;.
2
1 damages, as well as $244,586.50 in attorneys’ fees.
2 Arciniega now appeals from the amended judgment after
3 remand. She contends that the bankruptcy court’s reasonableness
4 finding with respect to the liquidated damages clause was clearly
5 erroneous. We agree, and we will REVERSE that finding. In light
6 of the procedural history of this matter, however, Clark has
7 never been afforded a reasonable opportunity to prove up his
8 actual damages proximately caused by Arciniega’s fraud.
9 Therefore, we will again REMAND the matter to allow the
10 bankruptcy court to reopen the record on the proximate cause and
11 actual damages.
12 As for attorneys’ fees, we perceive no reversible error in
13 the bankruptcy court’s determination of the amount of the fee
14 award. The bankruptcy court’s finding that the fees were
15 inextricably intertwined was not clearly erroneous, and
16 Arciniega’s fact-based argument on appeal challenging that
17 finding was not raised below. That being said, the decision to
18 remand for determination of actual damages may call into question
19 the prevailing party determination. If on remand Clark cannot
20 prove actual damages, it may well be that he is not the
21 prevailing party and is not entitled to attorneys’ fees under the
22 settlement agreement and Cal. Civ. Code § 1717. Accordingly, the
23 fee award must be VACATED because prevailing party attorneys’
24 fees cannot be awarded under § 1717 until the final resolution of
25 the underlying claims.
26 For the reasons set forth below we will REVERSE IN PART,
27 VACATE IN PART AND REMAND the matter for a determination of
28 proximate cause, actual damages, and prevailing party.
3
1 FACTS
2
A. The Couple’s Two Residences And Their Post-Dissolution
3 Dispute Over Ownership.
4 During the course of their marriage, Clark and Arciniega
5 purchased two residences. They purchased the first one, on
6 Arrowhead Avenue in San Bernardino, California, in 1979. They
7 purchased the second residence, on Verona Avenue in Hemet,
8 California, in 1991. To purchase the Verona property, the couple
9 utilized home financing available as part of Clark’s veterans’
10 benefits.
11 Very shortly after their purchase of the Verona property,
12 the couple separated. After they separated, Clark resided at the
13 Arrowhead property, and Arciniega resided at the Verona property.
14 In 2000, their marital dissolution became final. Nonetheless,
15 both remained on the legal title for each property. In 2006,
16 Clark deeded to Arciniega his interest in the Verona property.
17 And in 2007, he sued Arciniega in the San Bernardino County
18 Superior Court to obtain sole legal title to the Arrowhead
19 property. Although Clark has testified that the principal
20 purpose of the lawsuit was to force Arciniega to relinquish her
21 interest in the Arrowhead property, we do not know much else
22 about the state court lawsuit because the only document from it
23 in the record is a copy of the settlement agreement resolving the
24 lawsuit.
25
B. Settlement of the Property Dispute, Partial Performance, and
26 Subsequent Bankruptcy Court Litigation.
27 The settlement agreement resolved the principal dispute in
28 the state court lawsuit (regarding title to the Arrowhead
4
1 property) as follows:
2 A. Plaintiff [Clark] will pay Settling Defendant
[Arciniega] the principal sum of Fifty Thousand
3 Dollars ($50,000). The settlement draft will be
made payable to defendant and her counsel of
4 record. This payment is due on Wednesday May 13,
2009, so long as all parties have executed the
5 settlement agreement and defendant has provided
plaintiff with a properly signed and notarized
6 quitclaim deed granting her entire interest in the
[Arrowhead] Property to plaintiff. Plaintiff is
7 required to pay defendant $1,000 for each day that
he is late in delivering the settlement funds to
8 defendant, so long as all the conditions set forth
above are met.
9
10 Agreement of Compromise, Settlement, and Mutual and General
11 Release (May 11, 2009) at Section II. A (“Subpart A”).
12 The settlement agreement contains a separate provision
13 dealing with the Verona property. This provision obliged
14 Arciniega to take the steps necessary to pay off the “VA loan”
15 encumbering the Verona property. Clark’s subsequent
16 nondischargeability claims arose from this obligation. The
17 provision states:
18 B. No later than May 13, 2010, defendant will take
all necessary measures to payoff the existing VA
19 loan and removing plaintiff’s name from the loan
on her property located at 890 Verona Avenue,
20 Hemet, California. Defendant will not attempt to
assume the VA loan. Defendant agrees to pay
21 plaintiff liquidated damages at the rate of $1,000
per day for everyday that she is late complying
22 with this provision. Plaintiff will execute all
necessary documents so as to enable defendant [to]
23 effectuate the removal of plaintiff’s name from
the loan on her property on 890 Verona, Hemet, CA.
24
25 Agreement of Compromise, Settlement, and Mutual and General
26 Release (May 11, 2009) at Section II. B (“Subpart B”).
27 The other critical provision of the settlement agreement is
28 its attorneys’ fees clause, which provides in relevant part as
5
1 follows:
2 In the event of future actions including, but not
limited to filing a motion to enforce settlement,
3 litigation or arbitration relating to the enforcement
of this Agreement, the prevailing party shall be
4 entitled to his or her reasonable attorney’s fees,
expenses and costs incurred therein pursuant to
5 California Civil Code section 1717.
6 Id. at Section II. 1.
7 Both parties duly performed their respective obligations
8 under Subpart A, resolving the principal dispute in the state
9 court lawsuit. But Arciniega failed to remove Clark from the VA
10 loan secured by the Verona property, as required by Subpart B.
11 In February 2011, she commenced her chapter 7 case. As of the
12 petition date, the balance on the VA loan was roughly $75,000.
13 In May 2011, Clark filed his adversary complaint seeking
14 relief against Arciniega under § 523(a)(2)(A) and (a)(6), and
15 under § 727(a)(2), (a)(4) and (a)(6).2 In relevant part, Clark
16 alleged that Arciniega’s contractual obligation to remove him
17 from the VA loan amounted to a false promise – that she never
18 intended to actually pay off the VA loan. Clark asserted that at
19 the time Arciniega entered into the settlement agreement she knew
20 it was impossible for her to payoff the VA loan – given her poor
21 financial condition. Moreover, Clark maintained that the stated
22 encumbrances against the Verona property significantly exceeded
23 its value – by at least $80,000.
24 Arciniega responded that the settlement agreement did not
25 require her to actually pay off the VA loan. Rather, she argued
26
27
2
The bankruptcy court’s judgment denied Clark any relief on
28 his § 727 claims. Clark did not appeal this denial.
6
1 that it merely required her to exercise her best efforts to pay
2 off the VA loan. Alternately, she contended that she did indeed
3 intend to pay off the VA loan. According to Arciniega, the over-
4 encumbrance of the Verona property, combined with overall
5 economic conditions at the time, defeated her good faith intent
6 and best efforts to refinance the Verona property.
7 The bankruptcy court held a trial on March 17, 2015. Trial
8 consisted of the testimony and arguments of Arciniega and Clark
9 and lasted roughly one day. Up until the time of trial,
10 Arciniega was represented by counsel. However, at trial,
11 Arciniega represented herself.
12 After trial, the bankruptcy court decided the § 523 claims
13 in favor of Clark. The bankruptcy court determined that the
14 settlement agreement required Arciniega to actually pay off the
15 VA loan but that she never intended to honor this obligation.
16 The court relied upon a series of letters between Arciniega, her
17 lender and others. In particular, in one dated May 2, 2009 –
18 only nine days before she entered into the settlement agreement –
19 Arciniega lamented her poor financial condition. In it, she
20 effectively admitted her inability to refinance the Verona
21 property or otherwise pay off the VA loan. The bankruptcy court
22 inferred that Arciniega had knowledge of her inability to
23 refinance from her experience in the real estate and banking
24 industries.
25 As for damages, the bankruptcy court awarded Clark the
26 $50,000 he paid to Arciniega under the settlement agreement for
27 the conveyance of her interests in the Arrowhead property. The
28 court also awarded Clark $281,000 in liquidated damages. The
7
1 $281,000 was based on the settlement agreement’s $1,000 per day
2 liquidated damages clause, measured from May 13, 2010, the day
3 Arciniega defaulted on her promise to pay off the VA loan, to
4 February 18, 2011, the day Arciniega filed her chapter 7
5 petition. Additionally, the bankruptcy court awarded Clark
6 $209,806.42 in attorney's fees and costs.
7 C. First Appeal from the Bankruptcy Court’s Judgment.
8 On appeal from the bankruptcy court’s judgment, we upheld
9 the bankruptcy court’s determination that Arciniega had committed
10 nondischargeable fraud under § 523(a)(2)(A). On the other hand,
11 we overturned the bankruptcy court’s award of $50,000 in actual
12 damages. We held that Clark’s $50,000 settlement payment was not
13 proximately caused by Arciniega’s false promise to pay off the VA
14 loan. In so holding, we reasoned that “[n]o tie exists between
15 the $50,000 payment Clark made to Arciniega and Arciniega's
16 obligation to pay off the VA loan.”3
17 We also overturned the bankruptcy court’s liquidated damages
18 award because the bankruptcy court did not consider whether the
19 liquidated damages clause was reasonable.4 As we explained, Cal.
20
21 3
We based this reasoning primarily on the structure of the
22 settlement agreement. More specifically, the $50,000 payment was
part of the parties’ rights and duties set forth in Subpart A,
23 governing the parties’ obligations with respect to the Arrowhead
property, whereas the VA loan payoff was part of the parties’
24 rights and duties set forth in Subpart B, governing Arciniega’s
obligations with respect to the Verona property. The Subpart A
25 obligations were fully performed by both parties, whereas
26 Arciniega did not perform her Subpart B obligations.
4
27 We acknowledged Clark’s argument that Arciniega did not
adequately preserve the liquidated damages issue for appeal, but
28 (continued...)
8
1 Civ. Code § 1671(b) invalidates liquidated damages provisions if
2 the damages provided for are “unreasonable under the
3 circumstances existing at the time the contract was made.” Id.
4 We vacated and remanded on the liquidated damages issue so that
5 “the bankruptcy court [could] evaluate whether the liquidated
6 damages were enforceable under California law.” We further
7 stated:
8 Given the standard set by the California Supreme Court
[in Ridgley v. Topa Thrift & Loan Ass'n, 17 Cal. 4th
9 970, 977 (1998)], it seems unlikely that the $1,000/day
provision was related to any anticipated actual loss
10 Clark would suffer by remaining on the VA loan.
Accordingly, upon remand, the bankruptcy court will
11 need to review the subject provision under the given
standard and determine the appropriate amount of
12 liquidated damages, if any.
13 Mem Dec. (Feb. 3, 2016) at 26:25-27:4.
14 As for the fee award, we vacated the bankruptcy court’s
15 award of attorneys’ fees because the apparent grounds for the
16 award, the attorneys’ fees clause in the settlement agreement and
17 Cal. Civ. Code § 1717, only permitted recovery of fees for
18 actions on a contract. At trial, the bankruptcy court did not
19 attempt to apportion the requested fees into compensable services
20
21 4
(...continued)
we rejected this argument for two reasons. First, we posited
22
that Arciniega had preserved the issue by contending during her
23 pro se closing argument that she should not be subjected to
liquidated damages. Second, even if the issue was not adequately
24 preserved, we explained that we still could consider it because
the issue was purely a legal one and Clark would not be
25 prejudiced. According to the prior panel, there was no prejudice
26 to Clark in considering the issue because he addressed it in his
responsive appeal brief and because the liquidated damages issue
27 was connected to Clark’s burden to establish his damages, as one
of the elements for obtaining relief under § 523(a)(2)(A) and
28 (a)(6).
9
1 rendered on contract issues and noncompensable services rendered
2 on fraud and nondischargeability issues. We also noted that the
3 bankruptcy court potentially could determine on remand that it
4 was impractical or impossible to apportion fees because the
5 subject claims arose from a common core of facts or implicated
6 issues that were inextricably intertwined. If this were the
7 case, we explained, apportionment was unnecessary and the court
8 could exercise its discretion to award all fees incurred.
9 D. Proceedings On Remand.
10 1. Resolution of Liquidated Damages Issue.
11 On remand, the bankruptcy court held an initial status
12 conference at which it ordered the parties to further brief the
13 issues remanded and to provide evidence on the reasonableness of
14 the liquidated damages clause. At that hearing, held in October
15 2016, Arciniega advocated that the Panel’s decision did not
16 contemplate, or even permit, the bankruptcy court to reopen the
17 record concerning the reasonableness of the liquidated damages
18 clause. The bankruptcy court initially rejected that notion and
19 directed the parties to submit declarations and exhibits on the
20 reasonableness issue.
21 After briefing and the submission of written evidence, the
22 bankruptcy court held a second post-remand status conference. At
23 the hearing, the bankruptcy court reversed itself on the need to
24 reopen the record to take additional evidence on the
25 reasonableness of the liquidated damages clause and declined to
26 reopen the record. The bankruptcy court then pointed out that
27 the burden was on Arciniega to establish the unreasonableness of
28 the liquidated damages clause. According to the bankruptcy
10
1 court, there was little or no evidence in the record relevant to
2 the reasonableness of the liquidated damages clause.5 Therefore,
3 the court concluded, Arciniega failed to meet her burden to
4 establish the unreasonableness of the liquidated damages clause,
5 and the clause was valid and enforceable under California law.
6 Arciniega argued that the liquidated damages clause itself
7 (and the surrounding circumstances regarding the VA loan)
8 established that the clause was unreasonable. She contended that
9 $1,000 per day – with no termination date – was grossly
10 disproportionate with any potential damages the parties could
11 have conceived of, at the time the settlement agreement was
12 entered into, as potentially arising from breach of the VA loan
13 payoff obligation. The bankruptcy court gave two reasons for
14 rejecting Arciniega’s argument. First, according to the
15 bankruptcy court, the accumulation of liquidated damages at a
16 rate of $1,000 per day was not in danger of continuing in
17 perpetuity. The bankruptcy court explained that Clark had
18 limited his liquidated damages request in the adversary
19 proceeding to the first 281 days of Arciniega’s default, so the
20 liquidated damages were capped at $281,000. And second, the
21 bankruptcy court noted that Subpart A of the settlement agreement
22 imposed similar $1,000 per day liquidated damages on Clark if he
23 defaulted on his obligation to pay $50,000 to Arciniega. The
24 bankruptcy court found that these factors negated any argument
25 that the liquidated damages clause invoked against Arciniega was
26
5
27 The court observed that at trial Arciniega had only
questioned Clark about the timing as to when the liquidated
28 damages had been inserted into the settlement agreement.
11
1 unreasonable, and, therefore, the provision was enforceable under
2 California.
3 2. Resolution of Attorneys’ Fees Issue.
4 At the end of the second post-remand hearing, both parties
5 agreed to a process for the review and consideration of the fee
6 issue. Clark’s counsel agreed to provide its billing entries on
7 a spread sheet that would enable Arciniega and the court to
8 comment upon and potentially exclude from compensation individual
9 billing entries.
10 Clark duly submitted counsel’s billing entries in the form
11 contemplated. He also voluntarily reduced his fee request by
12 roughly $25,000 as a result of his review of the billing entries
13 and his ability to determine that roughly $25,000 of the services
14 provided did not pertain to contract-related issues. As for the
15 remaining services, Clark maintained that he could not apportion
16 them between contract related fees and fraud/nondischargeability
17 related fees because they all arose from a common core of facts
18 and also were inextricably intertwined.
19 Arciniega, on the other hand, did not conduct a line-item
20 review or comment regarding specific billing entries. Instead,
21 in her six-page opposition to the requested fees, she made two
22 summary arguments: (1) Clark had not presented any evidence
23 establishing that he was entitled to recover his attorneys’ fees
24 for any of his counsel’s services in the litigation; and (2) the
25 fees Clark sought to recover were grossly excessive and
26 unreasonable.
27 At the third and final hearing on remand, the bankruptcy
28 court deducted an additional $7,500 from Clark’s fee request
12
1 based on its own review of the billing entries. The court
2 otherwise agreed with Clark’s position that the remaining fees
3 arose from a common core of facts and that the contract and
4 fraud/nondischargeability issues were inextricably intertwined.
5 Based upon this finding, it concluded that it was impractical or
6 impossible to further apportion the fees. The bankruptcy court
7 also rejected Arciniega’s argument that the amount of fees were
8 unreasonable. According to the court, the large amount of fees
9 both parties incurred were the result of the litigiousness of the
10 parties and not the result of unreasonable billings. Ultimately,
11 the bankruptcy court awarded Clark $244,586.50 in attorneys’ fees
12 and $11,032.02 in costs.
13 The bankruptcy court entered its amended judgment after
14 remand on May 9, 2017, and Arciniega timely appealed.
15 JURISDICTION
16 The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
17 §§ 1334 and 157(b)(2)(I) and (J), and we have jurisdiction under
18 28 U.S.C. § 158.
19 ISSUES
20 1. Did the bankruptcy court commit reversible error when, on
21 remand, it awarded Clark $281,000 in liquidated damages?
22 2. Did the bankruptcy court commit reversible error when, on
23 remand, it awarded Clark $244,586.50 in attorneys’ fees?
24 STANDARDS OF REVIEW
25 We review the bankruptcy court's liquidated damages award
26 for an abuse of discretion. Traxler v. Multnomah Cty., 596 F.3d
27 1007, 1015 (9th Cir. 2010). We review the bankruptcy court’s
28 attorneys’ fees award under the same standard. Dinan v. Fry
13
1 (In re Dinan), 448 B.R. 775, 783 (9th Cir. BAP 2011).
2 The bankruptcy court abused its discretion if it applied an
3 incorrect legal standard or its factual findings were illogical,
4 implausible or without support in the record. TrafficSchool.com,
5 Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011).
6 DISCUSSION
7 A. Validity of Liquidated Damages Clause.
8 In California, the validity of a liquidated damages clause
9 is governed by Cal Civ. Code § 1671(b), which provides:
10 Except as provided in subdivision (c), a provision in a
contract liquidating the damages for the breach of the
11 contract is valid unless the party seeking to
invalidate the provision establishes that the provision
12 was unreasonable under the circumstances existing at
the time the contract was made.
13
14 Cal. Civ. Code § 1671 (West). The current version of the statute
15 thus imposes on the adverse party the burden of proving that the
16 clause was unreasonable. Prior to 1978, Cal Civ. Code § 1671 was
17 silent on the burden of proof, but case law at the time squarely
18 placed the burden of proof on the party seeking to invoke the
19 liquidated damages clause. See Krechuniak v. Noorzoy, 11 Cal.
20 App. 5th 713, 721 (2017) (citing cases). In 1978, the California
21 legislature adopted the recommendation of California’s Law
22 Revision Commission and amended Cal Civ. Code § 1671 to
23 “liberalize” the availability of liquidated damages in non-
24 consumer contract cases. Ridgley v. Topa Thrift & Loan Ass'n,
25 17 Cal. 4th 970, 977 (1998). The legislature accomplished this
26 liberalization, in part, by shifting the burden of proof
27 regarding reasonableness. Id.
28 In addition, under the amended statute, the amount of actual
14
1 damages the plaintiff incurred no longer is relevant to the
2 reasonableness of the liquidated damages clause. This point is
3 made clear in the Law Revision Commission commentary accompanying
4 the amended statute:
5 § 1671(b) limits the circumstances that may be taken
into account in the determination of reasonableness to
6 those in existence “at the time the contract was made.”
The validity of the liquidated damages provision
7 depends upon its reasonableness at the time the
contract was made and not as it appears in retrospect.
8 Accordingly, the amount of damages actually suffered
has no bearing on the validity of the liquidated
9 damages provision.
10 Law Revision Commission Comments accompanying Cal. Civ. Code
11 § 1671 (West).6
12 The Law Revision Commission further explained what
13 circumstances typically are relevant to the reasonableness
14 consideration:
15 All the circumstances existing at the time of the
making of the contract are considered, including the
16 relationship that the damages provided in the contract
bear to the range of harm that reasonably could be
17 anticipated at the time of the making of the contract.
Other relevant considerations in the determination of
18 whether the amount of liquidated damages is so high or
so low as to be unreasonable include, but are not
19 limited to, such matters as the relative equality of
the bargaining power of the parties, whether the
20 parties were represented by lawyers at the time the
contract was made, the anticipation of the parties that
21 proof of actual damages would be costly or
inconvenient, the difficulty of proving causation and
22 foreseeability, and whether the liquidated damages
provision is included in a form contract.
23
24
6
“The Law Revision Commission has provided a detailed
25 explanation of the relevant changes in section 1671. Their
26 ‘comments are entitled to great weight in construing statutes
proposed by the Commission and adopted without substantial
27 change.’” Krechuniak, 11 Cal. App. 5th at 721 (quoting Pac.
Trust Co. TTEE v. Fidelity Fed. Sav. & Loan Ass’n, 184 Cal. App.
28 3d 817, 823 (1986)).
15
1 Id.
2 However, in interpreting Cal Civ. Code § 1671, the
3 California Supreme court in Ridgley simplified the reasonableness
4 determination under certain circumstances:
5 A liquidated damages clause will generally be
considered unreasonable, and hence unenforceable under
6 section 1671(b), if it bears no reasonable relationship
to the range of actual damages that the parties could
7 have anticipated would flow from a breach. The amount
set as liquidated damages must represent the result of
8 a reasonable endeavor by the parties to estimate a fair
average compensation for any loss that may be
9 sustained. In the absence of such relationship, a
contractual clause purporting to predetermine damages
10 must be construed as a penalty. . . . In short, [a]n
amount disproportionate to the anticipated damages is
11 termed a penalty. A contractual provision imposing a
penalty is ineffective, and the wronged party can
12 collect only the actual damages sustained.
13 Ridgley, 17 Cal. 4th at 977 (citations and internal quotation
14 marks omitted); see also Grand Prospect Partners, L.P. v. Ross
15 Dress for Less, Inc., 232 Cal. App. 4th 1332, 1358, as modified
16 on denial of reh'g (Feb. 9, 2015) (“[T]he general rule for
17 whether a contractual condition is an unenforceable penalty
18 requires the comparison of (1) the value of the money or property
19 forfeited or transferred to the party protected by the condition
20 to (2) the range of harm or damages anticipated to be caused that
21 party by the failure of the condition. If the forfeiture or
22 transfer bears no reasonable relationship to the range of
23 anticipated harm, the condition will be deemed an unenforceable
24 penalty.”).
25 Accordingly, when the damages provided for in a liquidated
26 damages clause do not bear a rational and proportional
27 relationship to the range of harm the parties conceivably could
28 have anticipated arising from a breach at the time the parties
16
1 entered into the contract, the liquidated damages clause is
2 unenforceable. See, e.g., Vitatech Int’l, Inc. v. Sporn, 2017 WL
3 4876175, at *6-8 (Cal. Ct. App. Sept. 29, 2017), as modified
4 (Oct. 30, 2017); Purcell v. Schweitzer, 224 Cal. App. 4th 969,
5 975–76 (2014); Greentree Fin. Grp. Inc. v. Execute Sports, Inc.,
6 163 Cal. App. 4th 495, 498-500 (2008); Harbor Island Holdings v.
7 Kim, 107 Cal. App. 4th 790, 796, 132 Cal. Rptr. 2d 406, 409
8 (2003).
9 Here, Clark admitted that the underlying purpose of the VA
10 loan payoff provision was to restore his entitlement to obtain a
11 new VA loan, which he maintained only could occur if Arciniega
12 paid off the VA loan (or otherwise managed to remove his name
13 from the loan). Thus, the harm the parties could have
14 anticipated arising from Arciniega’s default necessarily had to
15 be tied to Clark’s inability to obtain a new VA loan. More to
16 the point, such damages would be the difference in costs and
17 interest between the presumably more favorable VA loan and a non-
18 VA loan.
19 The imposition of $1,000 per day in damages was neither
20 rational nor proportional to this anticipated harm. Regardless
21 of whether Arciniega’s default would have relegated Clark to
22 obtaining a non-VA loan, or no loan at all, it is inconceivable
23 that the parties could have or would have anticipated Clark
24 suffering $1,000 per day in damages as a result of Arciniega’s
25 default. Nor can the obligation to pay $1,000 per day in
26 liquidated damages be reconciled to the mortgage payments or
27 balance owed on the Verona property. The record indicates that
28 the monthly mortgage payment was only $1,025.48, and the balance
17
1 of the loan as of the settlement was roughly $75,000.
2 The temporal aspect of this liquidated damages clause also
3 is problematic. An indefinite daily imposition of $1,000 in
4 damages is neither rational nor proportional. The liquidated
5 damages clause contains no termination date, and is not limited
6 to payment of the loan. Thus, the clause could impose $1,000 per
7 day in damages against Arciniega in perpetuity, leaving the
8 damages to grow endlessly – unless and until Arciniega cured the
9 default. This type of gross disconnect between the amount of
10 liquidated damages and the anticipated damages is sufficient by
11 itself to invalidate a liquidated damages clause. See Dollar
12 Tree Stores Inc. v. Toyama Partners LLC, 875 F. Supp. 2d 1058,
13 1071-73 (N.D. Cal. 2012); see also Ridgley, 17 Cal. 4th at 977;
14 Smith v. Royal Mfg. Co., 185 Cal. App. 2d 315, 324 (1960) (“Where
15 a fixed sum is agreed upon as liquidated damages for one of
16 several breaches of varying degree, it is to be inferred that a
17 penalty was intended.”).7
18
19 7
We are aware that Royal Mfg. predates the major changes to
20 Cal Civ. Code § 1671(b) enacted in 1978. Nonetheless, its
observation regarding the nature of liquidated damages clauses
21 that impose the same fixed damages for varying degrees of breach
still makes perfect sense today, under Cal Civ. Code § 1671(b)’s
22
current standard. In addition, Royal Mfg. is particularly
23 salient to us, because the bankruptcy court reasoned that the
liquidated damages clause at issue herein was reasonable, in
24 part, because the same $1,000 per day penalty was to be imposed
against both Arciniega and Clark, depending on who defaulted on
25 their settlement agreement obligations. As suggested by Royal
26 Mfg., the application of the same liquidated damages clause to
different types of potential breaches, with significantly
27 different types and amounts of potential damages, is evidence of
the clause’s unreasonableness, rather than its reasonableness, as
28 the bankruptcy court figured.
18
1 The bankruptcy court rejected the argument that the
2 liquidated damages were potentially limitless and, hence,
3 unreasonable. The bankruptcy court reasoned that, because Clark
4 only asked for 281 days of liquidated damages, up until
5 Arciniega’s bankruptcy filing, the liquidated damages clause was
6 both limited and reasonable. This determination was neither
7 logical nor supported by the record. That Clark voluntarily
8 limited its liquidated damages request does not alter the
9 undisputed fact that the liquidated damages clause itself did not
10 provide for any limit or ceiling on damages.8 Furthermore, by
11 focusing on Clark’s unilateral cap on his liquidated damages
12 request, the bankruptcy court misapplied the legal standard under
13 Cal. Civ. Code § 1631 because it relied on a circumstance that
14 did not exist “at the time the contract was made.” Id.
15 The bankruptcy court additionally opined that Arciniega
16 presented little or no evidence and, therefore, did not satisfy
17 her burden of proof to establish the unreasonableness of the
18 liquidated damages clause. This determination ignored the
19 factual and legal significance of the settlement agreement itself
20 as evidence and the undisputed fact that the existing VA loan
21 balance was roughly $75,000 at the time of the settlement. This
22
8
23 That Clark voluntarily and unilaterally capped the accrual
of liquidated damages as of the date of Arciniega’s petition
24 filing suggests that he believed that the commencement of a
bankruptcy case somehow terminates the accrual of
25 nondischargeable debt arising from fraud. We are not aware of
26 any such limit on nondischargeable fraud damages. In fact, such
a limit would be inconsistent with the Supreme Court’s
27 pronouncement that Ҥ 523(a)(2)(A) bars the discharge of all
liability arising from fraud.” Cohen v. de la Cruz, 523 U.S.
28 213, 222, (1998) (emphasis added).
19
1 evidence reasonably supports only one conclusion: that the
2 liquidated damages clause bore no rational or proportionate
3 relationship to Clark’s conceivable damages at the time the
4 parties entered into the settlement agreement.9
5 We acknowledge that there is a debate amongst the California
6 appellate courts as to whether the validity/reasonableness of
7 liquidated damages clauses is a question of fact or question of
8 law and as to what standard of review applies. Compare Vitatech
9 Int'l, Inc., 2017 WL 4876175, at *6, and Krechuniak, 11 Cal. App.
10 5th at 722–23 (question of fact), with Jade Fashion & Co. v.
11 Harkham Indus., Inc., 229 Cal. App. 4th 635, 646 (2014) (question
12 of law). Here, however, we do not need to predict how the
13 California Supreme Court will resolve this debate, because the
14 bankruptcy court’s determination cannot be upheld under any
15 potentially applicable standard of review – de novo, clearly
16 erroneous or abuse of discretion – for the reasons set forth
17 above. Consequently, we REVERSE the bankruptcy court’s
18 determination that the liquidated damages clause was valid, and
19
20
9
As set forth in the facts section, supra, the bankruptcy
21 court ultimately ruled on remand not to reopen the record on the
reasonableness of the liquidated damages clause. Neither party
22
has challenged this ruling on appeal. Furthermore, we see no
23 basis to conclude that this ruling was an abuse of discretion.
See generally Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S.
24 523, 551 (1983) (“On remand, the decision on whether to reopen
the record should be left to the sound discretion of the trial
25 court”); Carter Jones Lumber Co. v. LTV Steel Co., 237 F.3d 745,
26 751 (6th Cir. 2001) (same). Nor did our prior decision require a
particular ruling either way on the reopening of evidence, as it
27 was silent on the issue. Id.; see also Hall v. City of L.A.,
697 F.3d 1059, 1067 (9th Cir. 2012) (stating that trial court on
28 remand is free to decide anything not foreclosed by the mandate).
20
1 we hold that the clause was unenforceable under California law.
2 Nonetheless, our decision does not preclude Clark from all
3 relief. Even though Clark is not entitled to liquidated damages,
4 he still might be entitled to recover his actual damages. See
5 Ridgley, 17 Cal. 4th 970, 977. Ordinarily, we would have
6 expected Clark to have made his case for actual damages at the
7 original trial, as part of his case in chief, because proximate
8 cause and damages are elements of his nondischargeability claims.
9 See Cossu v. Jefferson Pilot Sec. Corp. (In re Cossu), 410 F.3d
10 591, 596 (9th Cir. 2005); Romesh Japra M.D., F.A.C.C., Inc. v.
11 Apte (In re Apte), 180 B.R. 223, 231 (9th Cir. BAP 1995), aff'd,
12 96 F.3d 1319 (9th Cir. 1996), partially abrogated on other
13 grounds by, Kawaauhau v. Geiger, 523 U.S. 57, 61-64 (1998); see
14 also Arciniega v. Clark (In re Arciniega), 2016 WL 455428, at *15
15 n.10 (Mem. Dec.) (9th Cir. BAP Feb. 3, 2016) (applying proximate
16 cause element to § 523(a)(6) claim).
17 Here, however, the record demonstrates why Clark did not do
18 so. Up until her closing argument after trial, Arciniega had
19 done nothing to put the validity of the liquidated damages clause
20 at issue. As a result, at no time before or during trial did
21 Clark have any reason to suspect that he might have to prove the
22 amount of his actual damages or that those damages were
23 proximately caused by Arciniega’s fraud. He understood his
24 assertion of liquidated damages was undisputed.
25 To deprive Clark of a reasonable opportunity to prove the
26 amount of his actual damages proximately caused by Arciniega’s
27 fraud would amount to a deprivation of his due process rights.
28 One of the most fundamental requirements of due process is the
21
1 opportunity to be heard at a meaningful time and in a meaningful
2 manner. Armstrong v. Manzo, 380 U.S. 545, 552, 85 S. Ct. 1187,
3 1191, 14 L. Ed. 2d 62 (1965). That will not happen here unless
4 the record is reopened. Consequently, we must REMAND. On
5 remand, the bankruptcy court must reopen the record and give the
6 parties a reasonable opportunity to present evidence on proximate
7 cause and damages.
8 B. Disposition of Attorneys’ Fees Issue.
9 Our prior decision set forth the legal standards and rules
10 applicable to Clark’s request for attorneys’ fees. Those
11 standards and rules are law of the case. See Am. Express Travel
12 Related Servs. Co. v. Fraschilla (In re Fraschilla), 235 B.R.
13 449, 454 (9th Cir. BAP 1999), aff'd, 242 F.3d 381 (table) (9th
14 Cir. 2000). We directed the bankruptcy court, to the extent
15 practicable, to apportion the fees between compensable services
16 rendered on contract issues and non-compensable services rendered
17 on fraud and nondischargeability issues. We also noted that the
18 bankruptcy court was not obliged to apportion fees to the extent
19 it was impractical or impossible to do so because the subject
20 claims arose from a common core of facts or implicated issues
21 that were inextricably intertwined. Harmon v. City & Cty. of
22 S.F., 158 Cal. App. 4th 407, 417 (2007).
23 More specifically, when the facts, evidence and/or legal
24 work substantially overlap, the trial court typically does not
25 abuse its discretion in declining to apportion fees between
26 compensable and non-compensable units. See, e.g., Calvo Fisher &
27 Jacob LLP v. Lujan, 234 Cal. App. 4th 608, 626 (2015); Amtower v.
28 Photon Dynamics, Inc., 158 Cal. App. 4th 1582, 1605 (2008), as
22
1 modified (Feb. 15, 2008); Thompson Pac. Const., Inc. v. City of
2 Sunnyvale, 155 Cal. App. 4th 525, 556 (2007); Mann v. Quality Old
3 Time Serv., Inc., 139 Cal. App. 4th 328, 342 (2006); Erickson v.
4 R.E.M. Concepts, Inc., 126 Cal. App. 4th 1073, 1085–86 (2005), as
5 modified (Feb. 14, 2005). At bottom, the determination of
6 whether issues on compensable and noncompensable claims are
7 inextricably intertwined is a factual question. See Harman,
8 158 Cal. App. 4th at 424.
9 On remand, the record reflects that Clark duly submitted all
10 of its detailed time entries and that the bankruptcy court duly
11 reviewed these time entries and deducted fees that it determined
12 were either unreasonable or were attributable solely to non-
13 contract issues arising in Clark’s § 727 claims for relief. In
14 addition, Clark asserted that the contract and non-contract
15 issues arising in his § 523 claims arose from a common core of
16 facts and were inextricably intertwined. The bankruptcy court
17 agreed with Clark regarding this overlap.
18 Arciniega, who was represented by counsel on remand, was
19 given ample opportunity to review these same time entries and to
20 make objections to specific time entries as being unreasonable or
21 noncompensable or both. She only submitted a barebones objection
22 containing three pages of argument. In the objection, she
23 summarily asserted that Clark had not factually established that
24 any of his fees were for services rendered on compensable
25 contract issues. She also asserted that the amount Clark
26 expended on legal services in this litigation was unreasonable
27 and disproportionate with the amount at stake.
28 Notably, in the bankruptcy court, Arciniega did not oppose
23
1 Clark’s contention that the fees could not be apportioned between
2 contract and non-contract issues. She never challenged the
3 notion that the contract and non-contract issues arose from a
4 common core of facts and were inextricably intertwined. On
5 appeal, she waits until page 58 of her 60-page brief to assert
6 for the first time that the bankruptcy court could have
7 practicably apportioned the fees by focusing on the discovery
8 questions propounded and on the evidence presented at trial.
9 One overarching theme of this litigation is Arciniega’s
10 failure to timely assert arguments, claims and defenses – even
11 when she has been represented by counsel. We have discretion to
12 decline to consider issues and arguments that Arciniega raised
13 for the first time on appeal. El Paso City of Tex. v. Am. W.
14 Airlines, Inc. (In re Am. W. Airlines), 217 F.3d 1161, 1165 (9th
15 Cir. 2000). There are certain exceptions that will permit us to
16 review an issue for the first time on appeal. See Mano-Y & M,
17 Ltd. v. Field (In re Mortg. Store, Inc.), 773 F.3d 990, 995 (9th
18 Cir. 2014) (to prevent a miscarriage of justice, to preserve the
19 integrity of the judicial process, to address a change in the
20 law, or to consider a purely legal issue when it does not depend
21 on the factual record or when the record already has been fully
22 developed). Arciniega has not asserted that any of these
23 exceptions apply here. Nor do we perceive adequate grounds to
24 apply any of them.
25 Even if we were to consider Arciniega’s new argument on
26 appeal, she has failed to develop such argument. Nonetheless, we
27 have reviewed the pleadings, exhibits and other documents
28 included in the record in this litigation. Arciniega argued
24
1 vigorously at trial that: (1) the VA loan payoff provision only
2 required her to use her best efforts to pay off the loan; and
3 (2) her communications with various financial institutions and
4 other entities both before and after execution of the settlement
5 agreement demonstrated her full and complete performance of her
6 obligations under the loan payoff provision. These hotly
7 contested issues in this litigation concerned contract
8 interpretation and contract performance. But, these issues also
9 implicated Clark’s fraud claims, which required evidence that she
10 understood her contractual obligations and was aware that she
11 would not be able to remove Clark from the VA loan. In short,
12 there could not have been any actionable promissory fraud unless
13 and until Clark established what Arciniega promised and that she
14 did not honor that promise.
15 Moreover, virtually all of the discovery taken and evidence
16 submitted on the § 523 claims was relevant to both contract and
17 tort issues. Arciniega claims otherwise, but she only is able to
18 make this claim with the benefit of hindsight. Until the
19 bankruptcy court ruled, after trial, that the VA loan payoff
20 provision was unambiguous, the discovery and presentation of
21 extrinsic evidence regarding Arciniega’s financial condition and
22 regarding her communications with financial institutions and
23 other entities on the subject of her loans and finances were
24 potentially admissible contract interpretation evidence. See
25 Pacific Gas & E. Co. v. G.W. Thomas Drayage etc. Co., 69 Cal.2d
26 33, 37-40 (1968) (holding that credible extrinsic evidence is
27 admissible to determine whether a contract term is susceptible to
28 more than one meaning and, hence, ambiguous); London Mkt.
25
1 Insurers v. Sup. Ct., 146 Cal. App. 4th 648, 656 (2007) (“In
2 determining if a provision is ambiguous, we consider not only the
3 face of the contract but also any extrinsic evidence that
4 supports a reasonable interpretation.”).
5 As for the discovery and evidence on the § 727 claims, the
6 bankruptcy court made deductions for non-compensable services
7 rendered on the § 727 claims. Arciniega has done virtually
8 nothing to establish that the bankruptcy court’s deductions were
9 insufficient. On this record, and given Arciniega’s limited
10 effort on the issue, we cannot say that the bankruptcy court’s
11 deductions for the § 727 claims were based on clearly erroneous
12 factual findings or an erroneous view of the law. We are not
13 obliged to search the entire record ourselves, unaided, for
14 error. Tevis v. Wilke, Fleury, Hoffelt, Gould & Birney, LLP
15 (In re Tevis), 347 B.R. 679, 686 (9th Cir. BAP 2006).
16 Nor can we reverse as clearly erroneous the bankruptcy
17 court’s determination that the amount of fees requested was
18 unreasonable. The court painstakingly considered the
19 reasonableness of all of Clark’s counsel’s billing entries and
20 made a number of deductions based on reasonableness. In
21 addition, the bankruptcy court took into account the overall
22 nature of the litigation and concluded that the large amount of
23 fees incurred was not the result of unreasonable billings but
24 rather was the result of the litigious nature of the parties.
25 The bankruptcy court, as the trial court, is in a far better
26 position than us to make this type of assessment, and Arciniega
27 has not offered us any legitimate grounds to disturb that
28 assessment. Ellis v. Toshiba America Information Systems, Inc.,
26
1 218 Cal.App.4th 853, 889 (2013), as modified (Aug. 14, 2013), as
2 modified on denial of reh'g (Sept. 10, 2013).
3 Even so, a prevailing party attorney fee award should not be
4 granted under Cal. Civ. Code § 1717 to a plaintiff who obtains no
5 recovery on any of his claims. See Hsu v. Abbara, 9 Cal. 4th
6 863, 876 (1995) (“when a defendant defeats recovery by the
7 plaintiff on the only contract claim in the action, the defendant
8 is the party prevailing on the contract under section 1717 as a
9 matter of law.”). We have previously reversed the award of the
10 $50,000 settlement payment relating to the Arrowhead property,
11 and now hold that an award of liquidated damages is
12 unenforceable.10 Thus, there is presently no award of damages to
13 Clark. In the absence of a damages award in his favor, Clark is
14 not the prevailing party for attorneys’ fees purposes. See id.;
15 see also Cal Civ. Proc. Code § 1032(a)(4) (stating that a
16 “prevailing party” includes “a defendant as against those
17 plaintiffs who do not recover any relief against that
18 defendant.”). Put another way, the prevailing party
19 determination only can be made on final resolution of the
20 contract claims. Hsu, 9 Cal. 4th 863, 876; Brosio v. Deutsche
21 Bank Nat. Trust Co. (In re Brosio), 505 B.R. 903, 910 (9th Cir.
22 BAP 2014).
23 In light of our reversal of the bankruptcy court’s
24 liquidated damages award, and our remand to permit trial on
25
10
26 In light of our prior reversal of the $50,000 damages
award, our remand for trial on proximate cause and damages is not
27 meant to reopen the record with respect to the $50,000 Clark paid
in exchange for Arciniega’s transfer of title to the Arrowhead
28 property.
27
1 proximate cause and damages, we must VACATE the current
2 attorneys’ fees award. If, on remand, the bankruptcy court
3 ultimately awards some actual damages to Clark, then the
4 bankruptcy court may determine whether Clark or Arciniega is the
5 prevailing party within the meaning of Cal. Civ. Code § 1717.
6 See generally In re Tobacco Cases I, 216 Cal. App. 4th 570, 577,
7 (2013), as modified (May 8, 2013) (explaining how determination
8 is to be made). If Clark is the prevailing party, then the
9 bankruptcy court may reinstate or amend its last fee award.
10 CONCLUSION
11 For the reasons set forth above, we REVERSE IN PART AND
12 VACATE IN PART. Also, this matter is REMANDED for further
13 proceedings consistent with this decision.
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