Asphalt Prof'ls Inc. v. Davis (In re Davis)

• Citation: 595 B.R. 818
• Decision Date: 18 January 2019
• Docket Number: Case No.: 1:10-bk-17214-VK,Adv. No.: 1:10-ap-01354-VK
• Parties: IN RE: Darin DAVIS, Debtor. Asphalt Professionals Inc., Plaintiff, v. Darin Davis, Defendant.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Central District of California

595 B.R. 818

IN RE: Darin DAVIS, Debtor.

Asphalt Professionals Inc., Plaintiff,

v.Darin Davis, Defendant.

Case No.: 1:10-bk-17214-VK

Adv. No.: 1:10-ap-01354-VK

United States Bankruptcy Court, C.D. California, San Fernando Valley Division.

Hearing Dates: September 17, 2018; October 17, 2018; and November 21, 2018, Location: Courtroom 301, 21041 Burbank Blvd., Woodland Hills, CA 91367

Signed January 18, 2019

Ray B. Bowen, Jr., Tarzana, CA, for Plaintiff.

Alan W. Forsley, Los Angeles, CA, for Defendant.

MEMORANDUM OF DECISION RE DEFENDANT DARIN DAVIS'S MOTION FOR AN AWARD OF ATTORNEYS' FEES AND COSTS

Victoria S. Kaufman, United State Bankruptcy Judge

I. INTRODUCTION

In 2005, plaintiff Asphalt Professionals, Inc. ("API") sued defendant Darin Davis ("Davis") and T.O. IX, LLC ("T.O."), among others, for breach of a subcontract agreement and fraud, among other claims, in state court. The subcontract agreement included a reciprocal attorneys' fees provision; Davis was not a signatory to the agreement, but the agreement provided for T.O. to enforce all provisions of the agreement. At all times, API alleged that T.O. is an alter ego of Davis.

After splitting the action into three phases, the state court ruled in API's favor on API's breach of contract claim and API's alter ego allegations, holding that T.O. is an alter ego of Davis. Based on the subcontract agreement, the state court also awarded API attorneys' fees in connection with litigating the breach of contract claim, for which Davis was held liable.

During the parties' state court litigation, Davis filed a chapter 7 petition. Subsequently, API filed a complaint to establish nondischargeability of its debt and denial of Davis's discharge. API's claim under 11 U.S.C. § 523(a)(2)(A) mirrored API's claim of fraud in state court; before the state court reached the fraud phase, this Court adjudicated API's claim under 11 U.S.C. § 523(a)(2)(A). The Court entered judgment in favor of Davis on API's claims under 11 U.S.C. §§ 523 and 727. Davis's motion for an award of attorneys' fees followed.

Davis asserts he is entitled to an award of attorneys' fees pursuant to the subcontract agreement and in accordance with California Civil Code § 1717 and/or California Code of Civil Procedure §§ 1021 and 1032. API contends it is not liable for Davis's attorneys' fees because: (A) the action is not an "action on a contract" for purposes of California Civil Code § 1717 ; (B) the language of the subcontract agreement does not entitle Davis to an award of attorneys' fees; (C) Davis is not a prevailing party because API prevailed in state court; (D) Davis is not a signatory to the agreement; (E) the state court's alter ego holding does not entitle Davis to collect attorneys' fees pursuant to the subcontract agreement; and (F) Davis is barred from collecting attorneys' fees pursuant to California Business & Professions Code § 7031. This Memorandum explains the Court's reasoning in awarding Davis his incurred attorneys' fees and costs with respect to this adversary proceeding.

II. BACKGROUND

A. The Subcontract Agreement

On June 2, 2004, API, as the subcontractor, and an unidentified contractor (the "Contractor") entered into the subcontract agreement (the "Agreement"). In the Agreement, T.O. was identified as the "Owner" and as a third-party beneficiary. Id. In relevant part, the Agreement (¶¶ 1, 23) provides:

PARTIES: This Subcontract Agreement ("Agreement") is between Contractor and Subcontractor. Any references to "Owner" shall refer to T.O. IX, LLC. The Owner is an express third-party beneficiary to this Agreement. Owner has the right to enforce the provisions of this Agreement against Subcontractor . At any time Owner requests information it deems necessary from Subcontractor, Subcontractor agrees to provide such information within three (3) days of Owner's request. In the event Contractor's involvement in the Project terminates for any reason, Subcontractor will, upon Owner's written request, recognize Owner or any person or entity designated by Owner as the successor-in-interest to Contractor under this Agreement.

...

ATTORNEYS' FEES: In the event that Contractor prevails in any reference proceeding or court action arising out of this Agreement or the enforcement or breach thereof, or in any action brought against Subcontractor by third parties in which Contractor is joined as a party or interpleads, whether the same proceeds to judgment or not, Subcontractor agrees to pay to Contractor reasonable attorneys' fees. In the event that Subcontractor prevails in any reference proceeding or court action arising out of this Agreement or the enforcement or breach thereof, or in any action brought against Contractor by third parties in which Subcontractor is joined as a party or interpleads, whether the same proceeds to judgment or not, Contractor agrees to pay to Subcontractor reasonable attorneys' fees. The parties' covenants set forth in this Paragraph 23 shall survive and be enforceable following termination of this Agreement.

B. The State Court Action

On September 29, 2005, after T.O. did not pay API for all of API's work on a project, API sued T.O., Davis and others in state court (the "State Court Action"). In the State Court Action, API asserted claims of breach of contract, foreclosure of a mechanic's lien, quantum meruit and fraud. Throughout its fourth amended complaint filed in the state court (the "FAC"), API alleged that, at all times, T.O. was the alter ego of Davis, among others. API also alleged that on "June 2, 2004, [API] entered into a written contract with defendants T.O., D and S, D & S Development, [Davis] " and others. API alleged that all of these named defendants had breached the Agreement.

The trial court trifurcated the State Court Action into three trial phases, with the first phase involving API's causes of action for breach of contract, foreclosure on a mechanic's lien and quantum meruit. On October 29, 2010, after a bench trial, the state court entered a judgment in favor of API and against T.O. on API's breach of contract, foreclosure of mechanic's lien and quantum meruit claims (the "Phase One Judgment").

On January 18, 2011, after entry of the Phase One Judgment, the state court entered an order against T.O. awarding API attorneys' fees (the "Fees Order"). The state court based its award on the attorneys' fees provision in the Agreement ("The attorney fee clause and only the attorney fees clause can ultimately render the aggrieved party whole....").

The second phase of the State Court Action involved API's alter ego claims. On December 23, 2011, after trial, the state court issued a statement of decision on alter ego liability (the "Alter Ego Judgment"). In relevant part, after making extensive findings, the state court held:

There is such a unity of interest and ownership that the separateness of defendants T.O. IX, LLC, D and S Homes, Inc., D & S Development, L.L.C., [Davis]... has ceased;

Adherence to the separate existence of defendants D and S Homes, Inc., D & S Development, L.L.C., [Davis]... with T.O. IX, LLC, would, under the particular circumstances of this case, sanction a fraud or promote injustice; that is, if the acts are treated as those of T.O. IX, LLC alone, an inequitable result will follow;

Defendants D and S Homes, Inc., D & S Development, L.L.C., [Davis]... are each the alter ego of defendant T.O. IX, LLC.

The liability of the Interlocutory Judgment After Court Trial entered October 29, 2010 and of the Order Re Attorney Fees entered January 18, 2011 and any other or future order or orders awarding damages, punitive damages, attorneys fees and/or costs to [API] against T.O. IX, LLC in this case hereby is and will be extended to defendants D and S Homes, Inc., D & S Development, L.L.C., [Davis]... jointly and severally, based upon the doctrine of alter ego ....

(Emphasis added). The Alter Ego Judgment was affirmed on appeal (the "Alter Ego Appellate Decision"). In the Alter Ego Appellate Decision, the appellate court noted that:

API signed the subcontract with T.O. IX but the agreement provides the parties are API, the subcontractor, and a "Contractor" that is not identified. After signing the contract, API learned that T.O. IX was not the builder. On August 11, 2005, Davis, the president of D & S Homes, notified API that he was terminating the T.O. IX contract. In that letter he referred to that agreement as "our contract," not as T.O. IX's contract.

C. Davis's Bankruptcy Case and the Adversary Proceeding

On June 15, 2010, Davis filed a voluntary chapter 7 petition. On August 16, 2010, API filed a complaint against Davis (the "Adversary Complaint"), objecting to Davis's discharge pursuant to 11 U.S.C. § 727(a)(2) and (a)(4) and requesting nondischargeability of any debt owed to it pursuant to 11 U.S.C. § 523(a)(2)(A). In the Adversary Complaint, API alleged:

[Davis] falsely represented that he intended to act as a licensed general contractor for a proposed building project in Thousand Oaks. [Davis] also falsely represented that he and various unlicensed entities he owned or controlled were "owner/builders" of the proposed building project, rather than licensed general contractors. From 2003 until 2005, [Davis] and the unlicensed entities proceed to construct the subject real property. [Davis] knew that, under California law, only a properly licensed general contractor could construct, or contract with other to construct, the subject real property.

In 2004, [Davis] and entities he owned and controlled knowingly entered into the Agreement with [API] for labor, materials and services without disclosing that [Davis] and the entities he owned and controlled were unlicensed contractors and without disclosing that the construction engineering, surveying, plans and drawings provided to [API] were based on an inaccurate and incomplete 40-year-old "as built" survey. Because of the incomplete and inaccurate information provided to [API], [API] was unable to construct a portion

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