Sibayan v. De Guzman, 670 B.R. 567

Plaintiff and Defendant were each 50% shareholders in a business and entered into a Shareholder Buyout Agreement, requiring Defendant to pay Plaintiff $275,000 ($137,500 cash and $137,500 secured by a note and deed of trust (DOT)).
The agreement specified the DOT was to be held and recorded after the cash payment, contingent on refinancing Defendant’s home, but the recording was delayed for a year, during which another DOT was recorded, undermining Plaintiff’s security.
Plaintiff brought a nondischargeability adversary proceeding in bankruptcy after initiating foreclosure, alleging fraud (§ 523(a)(2)) and willful/malicious conduct (§ 523(a)(6)) related to the delay and subordination of his security interest.
Defendant prevailed in the nondischargeability action and sought attorney’s fees based on contractual attorney’s fee provisions and California Civil Code § 1717.
The court had to determine whether the action was “on a contract” for purposes of awarding fees under § 1717 despite Plaintiff’s attempt to frame claims in tort (fraud/willful misconduct).
Defendant sought $20,571.90, but the court reduced the award by services it deemed non-compensable, granting $19,514.40 in fees and expenses.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Applicability of § 1717 fees in bankruptcy	Fees unavailable because action pled only fraud and willful/malicious conduct, not contract claims	Fees available because the claims necessarily involve the contract; the action was "on a contract"	Fees available; Plaintiff cannot avoid fee liability by artful pleading
Action qualifies as "on a contract" under § 1717	Only tort theories were pled, so not "on a contract"	Action turns on interpretation/enforcement of Buyout Agreement, Note, and DOT	Complaint's substance involved contract enforcement; "on a contract" satisfied
Existence and effect of contractual attorney’s fee clause	Fee clauses restricted to collection actions, not current litigation	Fee clauses apply reciprocally to contract-based actions per § 1717	Fee clause language and statute cover this litigation
Prevailing party status for fee award	Plaintiff, as creditor, not Defendant, should be favored	Defendant prevailed in dischargeability litigation	Defendant is prevailing party under § 1717

Santisas v. Goodin, 17 Cal. 4th 599 (Cal. 1998) (California Supreme Court on scope of reciprocal fee statutes and "action on a contract")
Reynolds Metals Co. v. Alperson, 25 Cal. 3d 124 (Cal. 1979) (purpose and public policy of Cal. Civ. Code § 1717)
Heritage Ford v. Baroff, 105 F.3d 439 (9th Cir. 1997) (application of § 1717 in bankruptcy context)
Merced Prod. Credit Ass’n v. Sparkman, 703 F.2d 1097 (9th Cir. 1983) (state fee statutes operate in bankruptcy)
Penrod v. AmeriCredit Fin. Servs. (In re Penrod), 802 F.3d 1084 (9th Cir. 2015) (post-Travelers, § 1717 applies to contract issues in bankruptcy)
Travelers Cas. & Sur. Co. v. Pacific Gas & Elec. Co., 549 U.S. 443 (2007) (state law governs validity of contractual fee claims in bankruptcy)