IN RE CWS ENTERPRISES, INC., Debtor, SPILLER MCPROUD, Plaintiff-Appellee, v. CHARLES W. SILLER, Defendant-Appellant, and DAVID D. FLEMMER, Chapter 11 Trustee; CWS ENTERPRISES, INC., Defendants.
No. 14-17045
United States Court of Appeals for the Ninth Circuit
D.C. Nos. 2:10-cv-00779-KJM 2:10-cv-00780-KJM 2:12-cv-00142-KJM
IN RE CWS ENTERPRISES, INC., Debtor, SPILLER MCPROUD, Plaintiff-Appellee, v. CWS ENTERPRISES, INC.; CHARLES W. SILLER, Defendants, and DAVID D. FLEMMER, Chapter 11 Trustee, Defendant-Appellant.
No. 14-17046
United States Court of Appeals for the Ninth Circuit
Filed September 14, 2017
D.C. Nos. 2:10-cv-00779-KJM 2:10-cv-00780-KJM 2:12-cv-00142-KJM Argued and Submitted October 21, 2016 San Francisco, California
Appeal from the United States District Court for the Eastern District of California Kimberly J. Mueller, District Judge, Presiding
Opinion by Judge Kleinfeld
SUMMARY**
Bankruptcy
The panel affirmed the district court‘s reversal of the bankruptcy court‘s decision reducing a claim for pre-petition attorneys’ fees pursuant to
Agreeing with the Tenth Circuit, the panel held that
Agreeing with the Third Circuit, which analyzed
The panel held that the bankruptcy court was required to give full faith and credit to a state court‘s judgment, confirming an arbitration award and entitling the attorneys to their fees, to the same extent that California res judicata law would give that judgment preclusive effect. The panel affirmed the district court‘s conclusion that issue preclusion applied because the arbitration proceeding establishing the reasonableness of the fees was fully contested and later confirmed by the judgment of a California court. The panel held that, although there might in some cases be room for a reduction, under
COUNSEL
Bradley A. Benbrook (argued) and Stephen M. Duvernay, Benbrook Law Group PC, Sacramento, California; David A. Cheit, DLA Piper LLP (US), Sacramento, California; for Defendant-Appellant David D. Flemmer.
Steven T. Spiller (argued), Spiller McProud, Nevada City, California; Walter R. Dahl, Dahl Law, Sacramento, California, for Plaintiff-Appellee Spiller McProud.
OPINION
KLEINFELD, Senior Circuit Judge:
We address the bankruptcy code‘s provision on claims for pre-petition attorneys’ fees,
FACTS
Charles Siller has been litigating with his brothers over his interest in the family business since 1982. The family business, Siller Brothers, Inc., held among its assets some 500 pieces of real estate, and Siller owned 40% of the stock. By 2001, Siller Brothers, Inc. had obtained a $10 million judgment against Siller, and it was threatening to execute on his shares. To fight this litigation, Siller retained several law firms at various times.
In 2001, Spiller hired the law firm Cotchett, Pitre & Simon1 to represent him both in his lawsuit with his brothers and a legal malpractice dispute with some of his former lawyers. The Cotchett firm agreed to a contingent fee of 28%
Two and a half years later, Siller retained the Spiller • McProud law firm. Siller hired the Spiller firm “not as additional trial attorneys, but to assist, advise and discuss these legal matters personally” with Siller, and to act as “an interface” for Siller “with the attorneys at the Cotchett law firm.” The Spiller firm was to work to ensure that Siller could “fully understand and [be] in agreement with the Cotchett law firm‘s trial strategy, trial preparation (including selection of experts), and conduct of the trial itself.” The Spiller firm was to serve as Siller‘s “general counsel” and “to communicate to the Cotchett law firm [Siller‘s] ideas, suggestions, and requests.”
Siller wanted Spiller • McProud to convince the Cotchett firm to pursue a theory that Siller‘s brother‘s death entitled Siller to purchase his brother‘s shares for a small fraction of what they were worth, under a separate contract Siller had with his deceased brother. The Spiller firm agreed, but Siller and the Spiller firm expressly agreed that the contingent fee would not depend on the success of this theory. The Spiller firm was to get 8% of the same net amount from which the Cotchett firm‘s 28% contingent fee was to be calculated. Siller and the Spiller firm also incorporated the other terms of Siller‘s agreement with the Cotchett firm, including the arbitration provision.
The firms also tried other cases that Siller insisted on. While the dissolution case was ongoing, the Cotchett and Spiller firms filed a separate action against Siller Brothers, Inc. and pursued Siller‘s preferred theory (that Siller had acquired a right to buy his deceased brothers’ shares cheaply under a separate contract). They lost that case. The two firms also lost a malpractice case Siller brought against one of his previous lawyers, and they negotiated a $41,000 settlement in another case where Siller had refused to pay a different set of previous lawyers. (Siller then refused to pay even the $41,000 settlement, so those disputes remained pending after he moved on from the Cotchett and Spiller firms.)
Nor would Siller pay the 28% and 8% fees he had agreed to pay the Cotchett and Spiller firms, respectively. Siller‘s failure to pay the Spiller firm its 8% contingent fee is the subject of the appeal before us. Siller and the two firms
Every aspect of the arbitration, including whether it should take place, was hotly contested. Despite his agreement to arbitrate “any dispute,” Siller refused to do so until the Superior Court denied his ex parte application to prevent such arbitration. Siller then continued his attempt to evade arbitration by way of unsuccessful motions in limine before the arbitrator.
During the arbitration, Siller‘s counsel led off his cross examination of the attorneys’ lead witness, Mr. Pitre of Cotchett, Pitre, by asking what his and his associates’ hourly rates were. Siller‘s lawyer then asked why they had contracted for a contingent fee. Pitre replied, “Because Mr. Siller didn‘t have any money,” so the attorneys would have to be paid “[o]ut of a recovery, hopefully.” The lawyers advanced about $400,000 in expenses, as well as their time and effort. Pitre was initially reluctant to pursue the case against Siller‘s deceased brother under the buy-sell agreement (the theory under which Siller would buy his brother‘s shares for a valuation price that was a small fraction of what the shares were worth) because he doubted that agreement‘s enforceability. But, as Spiller had agreed to do in his retainer agreement, he consulted with Pitre and came up with a theory that the two firms could advance with a straight face. (They lost that portion of the case, as they did the malpractice case Siller had started against one of his previous lawyers.)
As Siller‘s attorney presented his case during the arbitration, (1) the real estate accounting for two thirds of the settlement had declined in value since the settlement, so if a
Siller‘s case focused largely on the reasonable value of the Cotchett and Spiller firms’ respective services, both as an alternative to the contingent fee agreement and as justification for not holding him to his contingent fee agreement. Siller‘s attorney urged the arbitrator to limit compensation to “the reasonable value of the services rendered” because the Cotchett and Spiller firms had “failed to fulfill” their contracts. He argued that “[i]f you have a breach of contract then the answer‘s in quantum meruit.” “And even if it‘s a contract, the law says you must prove reasonable value of the services, and that goes to the performance.” Siller‘s attorney argued that the hours were also relevant to “the issue of conscionability.” “[T]he conscionability of this fee will be determined also based upon . . . [the] hours they devoted to matters that they failed to bring to conclusion through their own errors,” referring to the unsuccessful malpractice case against one of Siller‘s prior lawyers.
Siller‘s attorney pointed out that the arbitrator had not yet ruled on whether the contingent fee agreement was binding, so “quantum meruit is still an issue.” He argued that if the contract was not deemed to be binding, then quantum meruit would determine the proper amount of the fee, and even if the contract were binding, counsel would still have to show a reasonable effort to justify the amount of the fee under state bar rules. So “[u]ltimately this comes down to hours,” Siller‘s attorney argued, which apparently is why Siller‘s presentation was largely a challenge to how many hours ought not to be compensated because they were either not contracted-for or led to no success.
The arbitrator overruled the Cotchett and Spiller firms’ objections and let in all of Siller‘s evidence going to the value of the attorneys’ services, including evidence concerning the reasonableness of the attorneys’ contingent fees, the hours the attorneys worked, and the reasonableness of the time they spent relative to the results (except for some details regarding valuation of the parcels of real estate they won for Siller), evidently because that evidence might bear on quantum meruit or unconscionability if the arbitrator decided the case on either basis.
Spiller testified that he put in 1,760 hours and that his usual rate was $250 per hour. He and Pitre had told Siller
After hearing all of this testimony and argument, the arbitrator chose to view the case as a claim on a contract, the written fee agreements. He concluded that the fee agreements were not unconscionable, that they were “reasonable,” and that the two firms were entitled to every penny of the fees they and Siller had agreed to, as well as the expenses the firms had advanced on Siller‘s behalf. The Cotchett firm and Siller have since settled, so we need discuss only the Spiller firm‘s claim.
The arbitrator found that Siller provided extensive advice almost daily for the three years of the litigation, working “full bore” for “over 1,760 hours on Siller‘s behalf.” (The dispute had been litigated through multiple trials and proceedings in multiple courts on multiple theories, including Siller‘s disputes with several of his former attorneys.) The arbitrator also concluded that, as Siller himself admitted in his testimony, he had hired Spiller to assist trial counsel, not just to advise.
The arbitrator wrote a detailed, 26-page, single-spaced opinion explaining his decision. After rejecting Siller‘s theories for why the arbitration should not proceed, and why it should not bind CWS (the corporate spinoff created so that Siller could avoid taxes on his $30.5 million settlement), the arbitrator made findings of fact regarding the fee agreements. He found that Spiller “worked . . . alongside [the Cotchett lawyers] on all litigation.” As for Siller‘s contention that Spiller was not supposed to do that, just act as his “general counsel” to advise and inform him and the Cotchett firm, the
As for not completing the contract, the arbitrator credited Spiller‘s contention that Siller fired his lawyers “hoping to avoid paying his now former counsel” by “actions clearly designed to avoid payment of his legal obligations attendant to the extraordinary result obtained,” a $30.5 million settlement on a $45.7 judgment obtained after years of representation in complex litigation.
The critical question for this appeal, as argued on Siller‘s behalf, is whether the arbitrator resolved only the issue of whether the contingent fee was unconscionable as applied to the $30.5 million result, or whether the arbitrator also determined the reasonable value of the legal services performed. The transcripts show, and the arbitrator found, that Siller‘s attorney “devoted most of his cross examination to a detailed attack on how Mr. Pitre and Mr. Spiller spent their time on the case, on the theory that the Arbitrator might find the contract to be unconscionable (it is not) and that quantum meruit would be relevant.” The arbitrator concluded, though, that quantum meruit was not relevant because the contingent fee agreement was a valid contract. He expressly found that the contracted-for percentages were “reasonable” based on the work put into the case, the risks, and the need for counsel to finance the litigation.
The bankruptcy court took a fresh look at the “reasonable value” of Spiller‘s services under
The bankruptcy court‘s view was that there were “two tiers of reasonableness scrutiny,” first under state law, which if not satisfied required disallowance of the claim as “unenforceable,” and then under bankruptcy law, independently of state standards. The bankruptcy court did not articulate what the federal standard of reasonableness was, just that it was not necessarily satisfied by reasonableness under state standards. As the bankruptcy court saw it, the arbitrator had not determined reasonableness because he merely conducted a contract analysis under the contingent fee agreement. Responding to the attorneys argument that full faith and credit should be given to the Superior Court judgment, the bankruptcy court held that “as a matter of the Supremacy Clause, and regardless of the state preclusion law, the state-court judgment based on state law cannot trump the specific provision in Bankruptcy Code
The district court, on the Spiller firm‘s appeal, reversed. The controlling determination in the district court decision was that “the similarity between the standard for determining the unconscionability of a contingent fee agreement, which was before the arbitrator, and the bankruptcy court‘s standard for determining the reasonable value of the fees suggests that the issue of an appropriate fee for appellant‘s work was necessarily determined and actually litigated in the formal arbitration that took place here.” The district court noted that the bankruptcy court “did not consider the transcript of the arbitration proceedings in determining what was before the arbitrator.” The district court did consider the transcript to see whether reasonableness was at issue. It noted that Siller‘s position in the arbitration, fully litigated, was that, despite a contingent fee agreement, the attorneys still had to prove “reasonable effort . . . to justify the fee.” The arbitrator heard evidence about the time spent and the complexities and risks of the litigation, not just the contract itself, and evaluated all of these factors for reasonableness. The district court concluded that “[b]y considering both the reasonable nature of the contingent fee contracts and rejecting the claim that the contracts were unconscionable, and applying California‘s tests for both determinations, the arbitrator necessarily decided that the fees were reasonable within the contemplation of
Siller and his new spinoff corporation appeal.
ANALYSIS
Two statutes are at issue in this case, the bankruptcy code‘s provision on claims for pre-petition attorneys’ fees,
(b) Except as provided in subsections (e)(2), (f), (g), (h) and (I) of this section, if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of
the petition, and shall allow such claim in such amount, except to the extent that– . . .
(4) if such claim is for services of an insider or attorney of the debtor, such claim exceeds the reasonable value of such services.2
Here is the text of the Full Faith and Credit Act:
The Acts of the legislature of any State, Territory, or Possession of the United States, or copies thereof, shall be authenticated by affixing the seal of such State, Territory or Possession thereto.
The records and judicial proceedings of any court of any such State, Territory or Possession, or copies thereof, shall be proved or admitted in other courts within the United States and its Territories and Possessions by the attestation of the clerk and seal of the court annexed, if a seal exists, together with a certificate of a judge of the court that the said attestation is in proper form.
Such Acts, records and judicial proceedings or copies thereof, so authenticated, shall have the same full faith and credit in every court within the United States and its Territories and Possessions as they have by law or usage in
the courts of such State, Territory or Possession from which they are taken.3
There is little circuit court authority on
- an acknowledgment or determination that the fee contract was breached;
- an assessment of the damages for the breach under state law;
- a determination under
section 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.12
Western Real Estate holds that it is error for a bankruptcy court to bypass this analysis, as the bankruptcy court did in this case, and determine for itself in the first instance a reasonable contingent fee using the lodestar method.13
Western Real Estate also holds that contingent fee agreements “provide reasonable alternatives to the hourly retainer, despite the fact that, as a result of their contingent and therefore risky nature, such agreements typically generate fees . . . substantially in excess of” lodestar calculations when the lawyer succeeds.14 Citing our decision in Venegas v. Skaggs,15 Western Real Estate holds that the contingent and therefore risky nature of a contingent fee is itself an element of the reasonableness analysis.16
In the case before us, the Spiller firm‘s fee had been reduced to judgment pursuant to state law in a California state
Applying the
So far, we have glossed over another question: whether
Anthony rejects the proposition that the
Reasonable arguments maybe made against extending the Third Circuit’s position to the
Perhaps most strikingly, our sister circuit’s approach is inconsistent with the common law doctrine of merger. In California (as in most, if not all, common law jurisdictions), a claim that has been reduced to a judgment merges into the judgment. That is to say, an employee who was terminated before his employment contract ran out, having filed suit and obtained a judgment on that contract, no longer has a claim for unpaid wages. He now has a claim for what used to be called “debt on a judgment.” The employee can no longer sue for breach of contract, as he otherwise might prefer to do if that theory entitled him to more, because he no longer has a claim for breach of contract. All that remains is his
On the other hand, merger is a common law principle, not a constitutional one. Subject to the Full Faith and Credit Act,26 discussed below, Congress has the power to promulgate bankruptcy law that supersedes what would otherwise be binding state law. The bankruptcy code’s one-year cap on claims for post-breach wage and salary, for example, balances the employee’s interest in recovering his damages against other creditors’ interests in their claims.27 There is also much to be said for aligning Ninth Circuit law with our sister circuits, removing the reward from forum shopping and providing law that is useful and predictably applied nationwide.
The distinction between the clear, mathematically calculable cap under
Finally, we must consider how the state court judgment in this case may have had preclusive impact on the “reasonableness” analysis under
Issue preclusion, under California law,34 requires that (1) “the issue sought to be precluded from relitigation must be identical to that decided in a former proceeding,” (2) the “issue must have been actually litigated in the former proceeding,” (3) the issue “must have been necessarily decided in the former proceeding,” (4) “the decision in the former proceeding must be final and on the merits,” and (5) “the party against whom preclusion is sought must be the same as, or in privity with, the party to the former
Using those standards, the district judge concluded that issue preclusion applied here, and so do we. The arbitration proceeding establishing the reasonableness of Spiller’s fee was fully contested and later confirmed by the judgment of a California court.
Siller argues that the arbitrator could not have decided
Reasonableness, so understood, can be (and quite often is) decided in an arbitration proceeding like the one conducted here. Arbitration is a common method of resolving fee disputes under the bar rules of many states. Overall reasonableness is the usual criterion. And in the typical fee arbitration, the ex ante agreement between the lawyer and client is strong evidence of reasonableness, particularly where the fee was a contingent one.
Siller argues that even if reasonableness could have been determined in an arbitration proceeding, it was not determined in this one. The arbitrator decided that the parties’ fee agreement, not quantum meruit, established the amount. But the arbitration consisted in large part of Siller presenting not just his arguments that the contract was unconscionable and Spiller failed to perform, but also his arguments and evidence to show that the Cotchett and Spiller firms’ fees were unreasonable. Siller devoted his presentation almost entirely to making this point. He cross-examined extensively and put on his own evidence, including an expert witness, to prove that the fees were so unreasonable as to be unconscionable, and to establish a lower number for a quantum meruit award if the arbitrator accepted his challenge to the fee agreements.
After hearing all of Siller’s arguments and evidence, the arbitrator concluded that Siller’s positions were wrong and
Siller urges us to accept the bankruptcy court’s use of the lodestar method to determine the reasonableness of Spiller’s fee. But we explained in Venegas v. Skaggs that a continent fee may be reasonable where “it reflect[s] the risk of nonrecovery . . . assumed in accepting [a] case.”38 In this case, a lodestar fee would be unreasonable and could not, for that reason, serve as a cap under
Had the arbitrator concluded that the amount of Spiller’s fee was unreasonable, but not so unreasonable as to make the contract’s formation or enforcement unconscionable, then the
So, although there might in some cases be room for a reduction, under
The judgment of the district court is AFFIRMED.
Notes
- if the debtor is an individual–
- relative of the debtor or of a general partner of the debtor;
- partnership in which the debtor is a general partner;
- general partner of the debtor; or
- corporation of which the debtor is a director, officer, or person in control;
- if the debtor is a corporation–
- director of the debtor;
- officer of the debtor;
- person in control of the debtor;
- partnership in which the debtor is a general partner;
- general partner of the debtor; or
- relative of a general partner, director, officer, or person in control of the debtor;
- if the debtor is a partnership–
- general partner in the debtor;
- relative of a general partner in, general partner of, or person in control of the debtor;
- partnership in which the debtor is a general partner;
- general partner of the debtor; or
- person in control of the debtor;
- if the debtor is a municipality, elected official of the debtor or relative of an elected official of the debtor;
- affiliate, or insider of an affiliate as if such affiliate were the debtor; and
- managing agent of the debtor.