Civil Code Section 1717: Bankruptcy Related Actions Were Recoverable By Successful Lender

Fourth District, Division 1 Finds No Basis To Assess Fees Against Nonsignatory Individual Principal In the Absence of an Alter Ego Finding.

     In New Century Corporation v. Positive Investments, Inc., Case No. ECU03797 (4^th Dist., Div. 1 July 8, 2009) (unpublished), lender was awarded attorney's fees of $83,329 under an attorney's fees clause of a loan agreement (out of a requested $114,339.77 in fees) against a defaulting borrower who fraudulently quitclaimed to a new entity and then filed serial bankruptcies forcing lender to take bankruptcy actions that eventually resulted in dismissal of the bankruptcy cases. (The bankruptcy judge ordered sanctions against the fraudulent transferee, transferee's principal Mr. Lo, and transferee's bankruptcy counsel.) However, the trial court refused to award fees against Mr. Lo, who was not a signatory to the loan agreement (being only the principal of the borrower signatory). Borrower appealed, and lender cross-appealed.

     Borrower lost its procedural challenges because a prior appellate ruling affirmed the underlying judgment of dismissal that was the genesis of the later fee award. Because a trial court retains jurisdiction to award postjudgment fees during the pendency of an appeal, the previous appeal did not deprive it of power to do so. (Pazderka v. Caballeros Dimas Alang, 62 Cal.App.4^th 658, 666 (1998); Cal. Rules of Court, rule 3.1702(b)(1).)

     Lender cross-appealed, claiming that its bankruptcy work was compensable and that fees should have been awarded against Mr. Lo based on the bankruptcy sanctions finding that Lo and borrower "may be treated as identical." The appellate panel found that it was error to not compensate lender for its bankruptcy work in state court after the bankruptcy case had been dismissed. (Circle Star Center Associates, L.P. v. Liberate Technologies, 147 Cal.App.4^th 1203, 1208-1210 (2007); see also Chinese Yellow Pages Co. v. Chinese Overseas Marketing Service Corp., 170 Cal.App.4^th 868, 882, 884-885 (2008) [reviewed in our January 1, 2009 post].) However, the trial court correctly refused to award fees against Mr. Lo. He was never proven to be an alter ego; the proper procedure was to add him as a judgment debtor based under an alter ego theory and only then enforce the fee award against him. (See, e.g., Hennessey's Tavern, Inc. v. American Air Filter Co., 204 Cal.App.3d 1351, 1358 (1988); NEC Electronics, Inc. v. Hurt, 208 Cal.App.3d 772, 778 (1989).) Although the bankruptcy court determined that Lo and borrower could be treated as one for purposes of bankruptcy sanctions, this was far different than determining that Lo was responsible to bear contractual attorney's fees under a contract to which he was not a party.

     Thus, the case was only reversed with directions that the lower court award an additional $31,010.77 in attorney's fees for bankruptcy work; otherwise, the remainder of the judgment was affirmed.