(BK) In Re: Buettner
Case Information
UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF CALIFORNIA RESIDENTIAL FUNDING District Case No. 2:23-cv-02543-DJC CORPORATION, et al., [master] Appellants, Bankr. Case No. 16-26531-C-13G v. Bankr. Adversary Case No. 22-02015-C HAL EDWIN BUETTNER, III, et al.,
Appellees. District Case No. 2:23-cv-02544-DAD DEUTSCHE BANK NATIONAL TRUST [closed] COMPANY, et al., Bankr. Case No. 15-21528-A-13C Appellants, Bankr. Adversary Case No. 22-02038-C v. KEVIN RANDALL KRONE, ORDER
Appellee.
This appeal arises from consolidated bankruptcy adversary proceedings in which the Bankruptcy Court granted summary judgment in favor of Appellees on their claims that Appellants failed to properly reconvey void deeds of trust following Appellees’ completion of their Chapter 13 bankruptcy plans and awarded Appellees fees under California Civil Code section 1717. Appellants claim that the Bankruptcy Court erred in awarding Appellees fees under section 1717 because they were not the prevailing parties in the adversary proceedings for the purposes of section 1717, and because California courts have held that section 1717 is inapplicable to the fee provisions in the deeds of trust at issue here.
Having considered the Parties briefings, the Court agrees that California precedent precludes an award of attorneys’ fees based on Civil Code section 1717 in this case. Accordingly, the Court will reverse the Bankruptcy Court’s grant of summary judgment insofar as the Bankruptcy Court awarded attorneys’ fees under that code section, and will remand this matter for further proceedings consistent with this order.
BACKGROUND
I. The Bankruptcy Adversary Proceeding
Appellees Hal Edwin Buettner, III and Michele Kay Elkins (the “Buettners”) and Appellee Kevin Randall Krone (“Krone”) (collectively, “Appellees”) each allege that they applied for, and received, second mortgages on their homes in 2006. (Buettner Appellants’ Opening Br. (ECF No. 11) at 1; Krone Appellants’ Opening Br. (ECF No. 17) at 1.) Appellees allege their secondary mortgages were evidenced by a note and deed of trust. ( Buettner Appellants’ Opening Br. at 1; Krone Appellants’ Opening Br. at 1.) The Buettners and Krone subsequently filed for Chapter 13 bankruptcy in the U.S. District Court for the Eastern District of California in 2016 and 2015 respectively, thereafter completing payments under their bankruptcy plans and receiving a bankruptcy discharge on January 24, 2022, and February 8, 2021, respectively. (Buettner Appellants’ Opening Br. at 2; Krone Appellants’ Opening Br. at 1.)
The Buettners’ and Krone’s bankruptcy plans each provided that the deeds of trust securing their second mortgages would be deemed void, i.e., “stripped,” at the completion of their plans and thereafter reconveyed to Appellees under the terms of the deeds. [1] ( Am. Resp’ts’ Br. (ECF No. 20) at 1; Buettner Appellants’ Opening Br. at 2; Krone Appellants’ Opening Br. at 1.) Accordingly, counsel for the Buettners and Krone contacted their creditors at the completion of their plans to inform them of their duty to reconvey the void deeds. (Am. Resp’ts’ Br. at 1– 2; Bankr. Ct. Op. (ECF No. 17- 1) at ER_0435 – 36. [2] )
After receiving no response, on March 4, 2022, the Buettners filed an adversary complaint against Appellants Residential Funding Corporation, Ocwen Loan Servicing, LLC, and PHH Mortgage Corporation (collectively, the “Buettner Appellants”) alleging their deed of trust was stripped upon completion of their Chapter 13 plan, but that the Buettner Appellants failed to release the associated lien. ( Buettner Appellants’ Opening Br. at 2. ) In particular, the Buettners brought five causes of actions for (1) declaratory relief concerning the validity and value of the deed of trust; (2) extinguishment of the deed of trust; (3) violation of California Civil Code section 2941(d); (4) breach of contract; and (5) fees. ( Id.; see also Buettner Adversary Compl. (ECF No. 11-1) at ER0013 – 22.) Krone likewise received no response from his creditors and filed an adversary complaint against Appellants Deutsche Bank National Trust Company, Ocwen Loan Servicing, LLC, and PHH Mortgage Corporation (collectively, the “Krone Appellants”) on June 22, 2022, alleging the same causes of action as the Buettners . (Krone Appellants’ Opening Br. at 2; see also Krone Adversary Compl. (ECF No. 17-1) at ER_0009 – 19.)
In response to these adversary complaints, PHH Mortgage Corporation recorded a full reconveyance of the Buettners’ deed of trust on March 23, 2022 . (Buettner Appellants’ Opening Br. at 2; see also Buettner Reconveyance (ECF No. 11- 1) at ER0211.) PHH Mortgage Corporation also recorded a full reconveyance of Krone’s deed of trust on August 2, 2022. (Krone Appellants’ Opening Br. at 2 ; see also Krone Reconveyance (ECF No. 17-1) at ER_0068 69.) The Parties subsequently discussed settling the adversary proceedings, as Appellants contended these reconveyances mooted Appellees’ claims, but no agreement was reached. (Buettner Appellants’ Opening Br. at 2; Krone Appellants’ Opening Br. at 2. ) The Buettner s’ and Krone’s adversary proceedings were consolidated on February 11, 2023, because of their cases’ similarities. ( Buettner Appellants’ Opening Br. at 2; Krone Appellants’ Opening Br. at 2.)
II. The Bankruptcy Court ’s Order
On December 2, 2022, the Buettner Appellants moved for summary judgment, arguing the reconveyance mooted the Buettners’ claims, the Buettners were not entitled to attorneys’ fees, and the Buettners failed to establish any damages. (Buettner Appellants’ Opening Br. at 2.) The Krone Appellants moved for summary judgment on May 17, 2023, on the same basis. (Krone Appellants’ Opening Br. at 2.)
On October 11, 2023, as amended October 17, 2023, the Bankruptcy Court issued an opinion granting summary judgment in favor of the Buettners and Krone and awarding them attorneys’ fees. (Bankr. Ct. Op. at ER_0431 56.) Notably, the Bankruptcy Court held that Appellees were the prevailing parties on their federal causes of action for declaratory relief and extinguishment of their liens, and that Appellees’ actions qualified as “on the contract” for purposes of their demand for fees under California Civil Code section 1717, entitling Appellees to invoke the fee provisions in their underlying notes and deeds of trust. ( Id. at ER_0433.)
Specifically, concerning Appellees’ claim for declaratory relief , the Bankruptcy Court found that Appellees’ deeds of trust were void because:
The values of the subject junior liens, effective on completion of plan payments, were conclusively fixed as $0.00 in the plan confirmation orders. The values matured to $0.00 and became final upon completion of plan payments and the filings of the Chapte r 13 Trustee’s Notice of Completed Plan Payments. It follows that there is nothing left to declare regarding value in a declaratory judgment. The only remaining step is to clear the cloud on title by removing the lien.
( Id. at ER_0447.)
Concerning Appellees’ claim for extinguishment of the deeds of trust, the Bankruptcy Court observed that Appellees’ “lender [s], by virtue of the contractual terms of the deeds of trust, ha[d] a contractual duty to request that the trustee reconvey upon payment of all sums secured by the deeds of trust.” ( Id. at ER_0448 & n.9 (citing Buettner Deed of Trust (ECF No. 11-1) at ER0175 (Section 20); Krone Deed of Trust (ECF No. 17-1) at ER_0043 (Section 22)).) As the Bankruptcy Court explained:
Completion of chapter 13 plan payments on a plan in which the subject debt has been valued by the court at $0.00 satisfies the performance contingency inherent in the plan. At that point, the debt, beyond cavil, is $0.00. It follows that all sums secured by the affected deeds of trust have been paid . . . [and] [t]he lender thereupon has a federal duty to request that the trustee reconvey the deed of trust on the void debt. If voluntary reconveyance does not timely occur following completion of chapter 13 plan payments, then the debtor is entitled to invoke the federal lien removal power in an adversary proceeding seeking involuntary reconveyance.
( Id. at ER_0448.) The Bankruptcy Court also noted that California imposes a statutory duty to reconvey under California Civil Code section 2941. ( Id. )
The Bankruptcy Court next considered whether Appellees could collect fees for their efforts to force reconveyance. The Bankruptcy Court found that Appellees could under Civil Code section 1717(a), which provides:
In any action on a contact, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees in addition to other costs.
Applying this section, the Bankruptcy Court found that Appellees’ adversary proceedings to enforce the judicial determinations that their deeds of trust were void and force reconveyance of the deeds qualified as “action[s] on a contract,” and that the Appellants reconveyance of the deeds of trust in response to Appellees filing their adversary proceedings made Appellees the “prevailing parties” for the purposes of section 1717. ( Id. at ER_0452.) The Bankruptcy Court further found that the Buettners’ deed of trust provided for attorneys’ fees in Sections 7, 17, and 18, while Krone’s deed of trust provided for attorneys’ fees in Sections 8, 18, and 21. ( Id. at ER_0451 n.12; see also Buettner Deed of Trust at ER0173 74; Krone Deed of Trust at ER_0039, ER_0041 – 43.) The Bankruptcy Court also noted that Buettners’ and Krone’s notes likewise contained attorneys’ fee provisions in Sections 10 and 6 respectively. (Bankr. Ct. Op. at ER_0451 n.13; see also Buettner Note (ECF No. 11-1) at ER0165; Krone Note (ECF No. 17-1) at ER_0028.) Accordingly, the Bankruptcy Court concluded that Appellees were “entitled to attorneys’ fees and costs pursuant to the fee provisions in the respective deeds of trust” under Civil Code section 1717. (Bankr. Ct. Op. at ER_0456.) III. The Pending Appeal
Appellants appealed the Bankruptcy Court’s summary judgment order on November 2, 2023. (Notice Appeal (ECF No. 1).) In short, Appellants argue that the Bankruptcy Court erred in holding Appellees were entitled to fees under Civil Code section 1717 because California courts have declined to apply section 1717 to fee provisions in similar deeds of trust. (Buettner Appellants’ Opening Br. at 4 –12; Krone Appellants’ Opening Br. at 4– 11.) Appellants also argue that the Bankruptcy Court erred in holding Appellees were the prevailing parties for the purposes of section 1717 because Appellants voluntarily released Appellees deeds of trust at the outset of the adversary proceedings such that Appellees received none of the relief sought on their actual contract claims (i.e., extinguishment and damages) in the Bankruptcy Court’s final judgment. (Buettner Appellants’ Opening Br. at 12 –15; Krone Appellants’ Opening Br. at 11– 13.) The appeals were submitted without oral argument pursuant to the Parties’ request on March 12, 2024. (ECF No. 23.)
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ISSUES ON APPEAL
1. Whether the Bankruptcy Court erred in holding California Civil Code section 1717 applies to Appellees’ notes and deeds of trust; and
2. Whether the Bankruptcy Court erred in holding the release of Appellees’ deeds of trust rendered Appellees the prevailing parties for purposes of California Civil Code section 1717.
LEGAL STANDARD
A bankruptcy court’s decision granting summary judgment is subject to de
novo review.
See AFI Holding, Inc. v. Mackenzie (In re AFI Holding, Inc.)
,
ANALYSIS
I. Whether Civil Code section 1717 Applies to the Attorneys’ Fee Provisions
in Appellees’ Notes and Deeds of Trust
Appellants argue that the Bankruptcy Court erred in awarding Appellees fees under Civil Code section 1717 because California precedent forecloses the application of section 1717 to Appellees’ respective notes and deeds of trust. The Court agrees.
“Under the American Rule, the prevailing litigant is ordinarily not entitled to
collect a reasonable attorneys ’ fee from the loser[;] [t]his default rule can, of course, be
overcome by statute.”
Travelers Cas. and Sur. Co. of Am. v. Pac. Gas & Elec. Co.
, 549
U.S. 443, 448 (2007) (citations and quotations omitted). Under California law, unless
an award of fees is expressly permitted by statute, “the measure and mode
of compensation of attorneys and counselors at law is left to the agreement, express
or implied, of the parties.” Cal. Code Civ. Proc. § 1021. State law governs the
interpretation and application of a provision in a contract that permits an award of
fees.
Resolution Tr. Corp. v. Midwest Fed. Sav. Bank of Minot
,
In relevant part, California’s Civil Code provides:
In any action on a contract, where the contract specifically
provides that attorney’s fees and costs, which are incurred to
enforce that contract, shall be awarded either to one of the
parties or to the prevailing party, then the party who is
determined to be the party prevailing on the contract,
whether he or she is the party specified in the contract or not,
shall be entitled to reasonable attorney’s fees in addition to
other costs.
Civ. Code § 1717(a). “The primary purpose of section 1717 is to ensure mutuality of
remedy for attorney fee claims under contractual attorney fee provisions.”
Santisas v.
Goodin
,
Three (sometimes four) conditions must be met before fees may be awarded
pursuant to section 1717(a). “First, the action in which the fees are incurred must be
an action ‘on a contract,’ a phrase that is liberally construed.”
Penrod v. AmeriCredit
Fin. Servs. (In re Penrod)
,
Here, Appellants contend that the second condition is not met because “[t]he
California Court of Appeals has recognized Section 1717 does not apply to a standard
form deed of trust that merely allows a lender to incur reasonable attorneys’ fees to
protect its interest in the property or rights under the security instrument.” (Buettner
Appellants’ Opening Br. at 5; Krone Appellants’ Opening Br. at 5.) In particular,
Appellants rely on
Hart v. Clear Recon Corp.
,
[S]ection 1717 applies only where a “contract specifically provides that attorney’s fees . . . shall be awarded” to one party or the prevailing party. We must consider whether paragraph 9 of the deed of trust specifically so provides. By its plain language, it does not. The paragraph allows the lender to take numerous actions, including incurring attorney’s fees, to protect its interest. It then provides, in the language we emphasized above, that [“] [a]ny amounts disbursed by Lender under this Section 9 shall become additional debt of Borrower secured by this Security Instrument.” This is not a provision that attorney’s fees “shall be awarded” ; it is, instead, a provision that attorney’s fees, like any other expenses the lender may incur to protect its interest, will be added to the secured debt.
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The
Chacker
court reached a similar outcome, holding “[t]he Deed of Trust
Authorizes the Addition of Attorney Fees to the Loan Amount, Not a Separate Award
To Pay Fees.”
Here, Appellees argue that their deeds of trust have unilateral attorneys’ fee provisions which the Bankruptcy Court properly relied on when granting them attorneys’ fees under Civil Code section 1717. (Am. Resp’ts’ Br. at 11 13.) In particular, the Bankruptcy Court cited Sections 7, 17, and 18 in the Buettners’ deed of trust, along with Sections 8, 18, and 21 in Krone’s deed of trust , as a basis for the attorneys’ fee award . (Bankr. Ct. Op. at ER_0451 n.12.)
Having reviewed those sections, the Court finds that the most applicable provisions appear in Section 7 of the Buettners’ deed of trust, and Section 8 of Krone’s deed of trust, which permit lenders to recover fees from borrowers in the event that the borrowers fail to perform any covenants contained in the deeds. Assuming Civil Code section 1717 applied to make those fee provisions reciprocal, Appellees (the borrowers) would likewise be able to recover fees from Appellants (the lenders) for their breach of the covenants contained in the deeds of trust, notably the covenants to reconvey contained in Section 20 of the Buettners’ deed of trust and Section 22 of Krone’s deed of trust. ( See Buettner Deed of Trust at ER0175; Krone Deed of Trust at ER_0043.)
However, these fee provisions bear significant similarities to the clauses at issue in Chacker and Hart . Notably , the Buettners’ deed of trust states in Section 7:
If Borrower fails to perform the covenants and agreements contained in this Deed of Trust or if any action or proceeding is commenced which materially affects Lender ’ s interest in the Property, then Lender, at Lender ’ s option, upon notice to Borrower, may make such appearances, disburse such sums, including reasonable attorneys’ fees , and take such action as is necessary to protect Lender’s interest . . . . . Any amounts disbursed by Lender pursuant to this paragraph 7, with interest thereon, at the Note rate, shall become additional indebtedness of Borrower secured by this Deed of Trust. (Buettner Deed of Trust at ER0173 (emphasis added).)
Krone’s deed of trust similarly provides in Section 8: If (a) Borrower fails to perform the covenants and agreements contained in this Security Instrument, (b) there is a legal proceeding that might significantly affect Lender ’ s interest in the Property and/or rights under this Security Instrument (such as a proceeding in bankruptcy, probate, for condemnation or forfeiture, for enforcement of a lien which has or may attain priority over this Security Instrument or to enforce laws or regulations), or (c) Borrower has abandoned the Property, then Lender may do and pay for whatever is reasonable or appropriate to protect Lender ’ s interest in the Property and rights under this Security Instrument, including protecting and/or assessing the value of the Property, and securing and/or repairing the Property. Lender’s actions can include, but are not limited to: (a) paying any sums secured by a lien which has or may attain priority over this Security Instrument; (b) appearing in court; and (c) paying reasonable attorneys' fees to protect its interest in the Property and/or rights under this Security Instrument , including its secured position in a bankruptcy proceeding . . . . Any amounts disbursed by Lender under this Section 8 shall become additional debt of Borrower secured by this Security Instrument if allowed under Applicable Law.
(Krone Deed of Trust at ER_0039 (emphasis added).)
Much like the clauses in Chacker and Hart , the clauses here do not state that attorneys’ fees “ shall be awarded ” to either party. Rather, the clauses provide that the fees and costs shall “ become additional debt of Borrower ” secured by the deeds of trust. Thus, these clauses do not provide for a separate award of attorneys’ fees, and the Bankruptcy Court erred in awarding attorneys’ fees under section 1717(a) based on these provisions.
Sections 17 and 18 in the Buettners’ deed of trust and Sections 18 and 21 in Krone’s deed of trust similarly do not support an award of attorneys’ fees here. Those sections govern the lender’s right to accelerate payment of the sums secured by the deed of trust and foreclose on the secured property in the event of the borrower’s breach of their covenants under the deed, and provide that the lender may “ collect all reasonable costs and expenses incurred in pursuing ” acceleration and sale of the property, including reasonable fees. ( See Buettner Deed of Trust at ER0174; Krone Deed of Trust at ER_0041 43.) Those sections also provide that if the lender invokes the power of sale and the property is sold, the trustee shall apply sale proceeds first to sale expenses, “ including, but not limited to, reasonable Trustee ’ s and attorneys ’ fees. ” ( See Buettner Deed of Trust at ER0174; Krone Deed of Trust at ER_0043.) Much like Sections 7 and 8 discussed above, these sections do not authorize an award of attorney s’ fees to the prevailing party in a lawsuit. Rather, they authorize lenders to collect attorneys ’ fees in connection with a foreclosure and provide a method for collecting them, by applying the proceeds of the trustee ’ s sale. These provisions are also inapplicable to the relief sought by Appellees in their adversary proceeding, as Appellees do not contest the payment of any sums under the deeds of trust but rather seek reconveyance of the deeds. Thus, the Bankruptcy Court erred in awarding fees under those provisions.
Finally, while Section 10 in Buettners’ note and Section 6 in Krone’s note also contain attorneys’ fee provisions , those sections are likewise inapplicable, as they provide that the note holder may seek repayment of fees spent in enforcing the note. ( See Buettner Note at ER0165; Krone Note at ER_0028.) Appellees here seek to enforce the terms of their deeds of trust, not their notes. Thus, the Bankruptcy Court erred in awarding attorneys’ fees based on those note provisions.
Appellees cite several cases in support of their argument that the Bankruptcy
Court correctly awarded fees here as bankruptcy courts have previously awarded
attorneys’ fees under Civil Code section 1717 in similar federal lien removal cases.
(
See
Am. Resp’ts’ Br. at 10 (citing
Blendheim v. Note Holder (In re Blendheim),
No. 09-
10283-MLB,
In sum, the Court holds that the Bankruptcy Court erred in awarding Appellees fees under Civil Code section 1717 as no clause in the deeds of trust or notes at issue here provide that attorneys’ fees “shall be awarded” for the relief sought by Appellees, i.e., enforcement of their contractual right to reconveyance. Thus, the Court will overturn the Bankruptcy Court’s summary judgment ruling on this point. II. Whether Appellees Were the Prevailing Parties in the Bankruptcy
Adversary Proceeding for the Purposes of Civil Code section 1717 As discussed above, the Bankruptcy Court erred in granting Appellees fees under Civil Code section 1717 because the applicable attorneys’ fee provisions do not “award” attorneys’ fees as required under the plain language of section 1717. Thus, the Court need not reach the question of whether Appellees were the prevailing parties for the purposes of section 1717.
CONCLUSION
For the reasons set forth above, the Court hereby: 1. REVERSES the Bankruptcy Court’s grant of summary judgment in favor of Appellees on the award of fees under California Civil Code section 1717;
2. REMANDS this matter to the Bankruptcy Court for further proceedings consistent with this order; and
3. DIRECTS the Clerk of Court to close this case.
IT IS SO ORDERED. Dated: August 27, 2025 Hon. Daniel J. Calabretta UNITED STATES DISTRICT JUDGE DJC4 Buettner23cv2543.BankrAppeal
Notes
[1] Wholly unsecured junior mortgages may be “stripped off” and rendered “void” in Chapter 13 cases by 28 virtue of 11 U.S.C. §§ 506(d) and 1322(b)(2) once plan payments are complete.
[2] Citations to Appellants’ Record s refer to the page number in the Excerpts of Record, not original page 28 numbers.