Giles Spellman v. Bradley R. Kirk and Associates ( 2018 )

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS JUN 15 2018
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: GILES DUANE SPELLMAN, No. 15-56508
Debtor, D.C. No. 2:15-cv-00507-PA
______________________________
GILES DUANE SPELLMAN, MEMORANDUM*
Appellant,
v.
BRADLEY R. KIRK AND ASSOCIATES,
INC.,
Appellee.
Appeal from the United States District Court
for the Central District of California
Percy Anderson, District Judge, Presiding
In re: GILES DUANE SPELLMAN, No. 16-60024
Debtor, BAP No. 15-1026
______________________________
BRADLEY R. KIRK AND ASSOCIATES,
INC.; BRADLEY R. KIRK,
Appellants,
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
v.
GILES DUANE SPELLMAN,
Appellee.
Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Kirscher, Kurtz, and Faris, Bankruptcy Judges, Presiding
Submitted, Submission Deferred April 6, 2017**
Resubmitted June 8, 2018
Pasadena, California
Before: McKEOWN and CALLAHAN, Circuit Judges, and QUIST,*** District
Judge.
The law firm, Bradley R. Kirk & Associates, Inc. (“BRKA”), initiated
California Superior Court (“Superior Court”) proceedings against its former client,
Giles Spellman (“Spellman”), seeking recovery of a disputed contingency fee.
The Superior Court awarded BRKA $237,008.88. BRKA then filed a claim in
bankruptcy court against the bankruptcy estate for that amount, in addition to post-
award interest. The bankruptcy court, pursuant to 11 U.S.C. § 502(b)(4) and
California’s rules for preclusion, reduced this award to $43,875. That court also
**
The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).
***
The Honorable Gordon J. Quist, United States District Judge for the
Western District of Michigan, sitting by designation.
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upheld Spellman’s Chapter 13 plan, which resulted in the creditors, including
BRKA, receiving 3 cents for every dollar owed. When BRKA appealed to the
district court the reduction of its claim, the district court held that the Full Faith
and Credit Act (“FFCA”), 28 U.S.C. § 1738, applies to 11 U.S.C. § 502(b)(4), and
that California’s issue preclusion and res judicata law accords preclusive effect to
the California Superior Court’s judgment. Adjudicating BRKA’s appeal, the
Bankruptcy Appellate Panel (“BAP”) upheld the feasibility of Spellman’s Chapter
13 bankruptcy plan. We have jurisdiction under 28 U.S.C. § 158(d)(1).1
These two appeals require us to consider four issues: (1) whether the FFCA
applies to § 502(b)(4); (2) the preclusive effect to the Superior Court’s judgment in
this case; (3) whether the bankruptcy court correctly conducted its reasonableness
analysis under § 502(b)(4); and (4) the BAP’s decision upholding the bankruptcy
plan’s feasibility.
1. The first issue was answered by our recent opinion in In re CWS
Enterprises, 870 F.3d 1106 (9th Cir. 2017). In In re CWS Enterprises, we held that
the “[FFCA] applies in bankruptcy courts,” and that the bankruptcy court in that
case “was thus required to give full faith and credit to the California Superior
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As the parties are familiar with the facts and procedural history, we restate
them only as necessary to explain our decision.
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Court’s judgment.” Id. at 1119. Accordingly, we agree with the district court that
the FFCA applies to the allowance of the claims or interest pursuant to § 502(b)(4).
2. We next consider whether California’s law on issue preclusion and res
judicata accords preclusive effect to the Superior Court’s judgment. Our opinion
in In re CWS Enterprises provides that a state court’s judgment does not
necessarily constrain the bankruptcy court’s obligation to determine the
reasonableness of the attorneys’ fees in issue. See id. “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.” Id. Thus, “the question is not whether a state
court judgment always has preclusive effect on the ‘reasonableness’ analysis under
section 502(b)(4) . . . , the question is whether the state court judgment had
preclusive effect on the reasonableness analysis in the particular circumstances of
this case.” Id.
In In re CWS Enterprises, the debtor contested the reasonableness of the
attorneys’ fees in the underlying arbitration proceeding and the arbitrator rejected
the debtor’s arguments and found that the attorneys’ fees were reasonable. Id. at
1120. Accordingly, we held that the FFCA required confirmation of the judgment
of the state court. Id. at 1121. But we also recognized that § 502(b)(4)’s
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reasonableness cap would have room to operate if the reasonableness of the
attorneys’ fees had not been decided in the state court proceeding. Id.
That is the situation present here. The Superior Court did not determine the
reasonableness of the attorneys’ fees. It addressed only whether the contingent fee
agreement between Kirk and Spellman was enforceable. Under California law, the
reasonableness of attorneys’ fees has no relevance to such an enforceability
inquiry. First, California Business and Professional Code § 6147, which governs
contingent-fee agreements, does not require that the bargained-for fee be
reasonable to be enforceable. Second, although a fee agreement may be
unenforceable if it is unconscionable, unconscionability is different from
reasonableness. See Cotchett, Pitre & McCarthy v. Universal Paragon Corp., 187
Cal. App. 4th 1405, 1419 (2010) (“[N]ot all unreasonable risk allocations are
unconscionable.”) (citations and internal quotation marks omitted); In re
Goldstone, 214 Cal. 490, 499 (1931) (stating that a fee is unconscionable when it is
“so exorbitant and wholly disproportionate to the services performed as to shock
the conscience”).
Moreover, BRKA, which bears the burden of showing issue preclusion, has
not presented any evidence that the state court actually ruled on the reasonableness
of the attorneys’ fees. As a result, it is impossible to know what “precise question
[] was raised and determined in the [state proceedings],” which is reason enough
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not to apply issue preclusion. Dunkin v. Boskey, 82 Cal. App. 4th 171, 182 (2000)
(citations and internal quotation marks omitted); see also Patel v. Crown
Diamonds, Inc., 247 Cal. App. 4th 29, 40 (2016) (“A primary factor in determining
whether to give collateral estoppel effect to a prior final judgment is whether the
record in the former proceeding adequately reflects the issues actually litigated and
decided in that proceeding.”) (citations, internal quotation marks and alteration in
original omitted). Thus, Spellman was not precluded from challenging the
reasonableness of the attorneys’ fees in the bankruptcy proceedings. To the extent
the district court held to the contrary, it was wrong.
3. We next consider whether the bankruptcy court properly reduced
BRKA’s claim. A bankruptcy court’s award of attorneys’ fees should not be
reversed absent an abuse of discretion or an erroneous application of the law. In re
Bennett, 298 F.3d 1059, 1063 (9th Cir. 2002); In re Jastrem, 253 F.3d 438, 442
(9th Cir. 2001). The amount of, and the propriety of, the fee award are reviewed
for abuse of discretion. In re Lewis, 113 F.3d 1040, 1043 (9th Cir. 1997); In re
Hunt, 238 F.3d 1098, 1101 (9th Cir. 2001).
In re CWS Enterprises sets forth the following analytical sequence to
determine whether an attorneys’ fees award constitutes “reasonable value” under §
502(b)(4):
(1) an acknowledgment or determination that the fee contract was breached;
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(2) an assessment of the damages for the breach under state law;
(3) a determination under § 502(b)(4) of the 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.
870 F.3d at 1115—16 (citations omitted). We hold that the bankruptcy court’s
determination is not inconsistent with the approach set forth in In re CWS
Enterprises. The bankruptcy court acknowledged the breach of fees contract,
accepted the state court judgment as the assessment of damages, and concluded
that the state court proceedings did not actually determine the “reasonableness” of
the assessment of damages. Moreover, the bankruptcy court’s federal “lodestar”
analysis did not generate a result materially different from what In re CWS
Enterprises’s fourth step would have elicited. Consequently, to the extent that the
district court reversed the bankruptcy court’s order concerning Spellman’s
objection to BRKA’s claim, we reverse the district court’s order and remand.
4. Finally, we hold that the BAP was correct in affirming the bankruptcy
court’s reduction, particularly with respect to the feasibility of Spellman’s Chapter
13 bankruptcy plan. Because we affirm that the bankruptcy court’s § 502(b)(4)
determination, we see no error in the BAP’s decision upholding the bankruptcy
court’s confirmation of the Chapter 13 bankruptcy plan.
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In No. 15-56508, the judgment of the district court is reversed and the case
is remanded with directions to reinstate the bankruptcy court’s order on Spellman’s
objection to BRKA’s claim. In No. 16-60024, the judgment of the BAP is
affirmed.
REVERSED AND REMANDED as to 15-56508. AFFIRMED as to 16-
60024.
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