In Re: Larry's Apt. v. Carmel

• Decision Date: 26 April 2001
• Docket Number: No. 00-15728,00-15728
• Citation: 249 F.3d 832
• Parties: (9th Cir. 2001) In re: LARRY'S APARTMENT, L.L.C., Debtor. MICHAEL A. GALAM, Appellant, v. MICHAEL W. CARMEL, Chapter 11 Trustee for the Bankruptcy Estate of Larry's Apartment, L.L.C.; ND DUCO CORPORATION, a Nevada corporation; LARRY JARNAGIN, husband; LINDA JARNAGIN, wife, Appellees
• Court: U.S. Court of Appeals — Ninth Circuit

Page 832

249 F.3d 832 (9th Cir. 2001)

In re: LARRY'S APARTMENT, L.L.C., Debtor.

MICHAEL A. GALAM, Appellant, v. MICHAEL W. CARMEL, Chapter 11 Trustee for the Bankruptcy Estate of Larry's Apartment, L.L.C.; ND DUCO CORPORATION, a Nevada corporation; LARRY JARNAGIN, husband; LINDA JARNAGIN, wife, Appellees.

No. 00-15728

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted March 14, 2001,

Filed April 26, 2001,

[Copyrighted Material Omitted]

Howard C. Meyers, Burch & Cracchiolo, P. A., Phoenix, Arizona; Rebecca R. Driggs, Casebolt, Germaine & Driggs, P.L.C., Phoenix, Arizona, for the appellant.

Michael W. Carmel, Phoenix, Arizona, for appellee Michael W. Carmel; David A. Weatherwax, Fennemore Craig, Phoenix, Arizona, for appellees Larry Jarnagin and Linda Jarnagin.

Appeal from the United States District Court for the District of Arizona. Roger G. Strand, District Judge, Presiding. D.C. Nos. CV-98-02044-PHX-RGS. CV-98-02045-PHX-RGS. CV-98-02046-PHX-RGS. CV-99-00082-PHX-RGS.

Before: Joseph T. Sneed, Ferdinand F. Fernandez, and Andrew J. Kleinfeld, Circuit Judges

FERNANDEZ, Circuit Judge:

Michael A. Galam appeals the district court's order which affirmed the bankruptcy court's order awarding attorneys' fees against him. The award was in favor of N.D. Duco Corporation, Larry Jarnigan and Linda Jarnigan (collectively NDDC) and Michael W. Carmel, trustee for the bankruptcy estate of Larry's Apartment, L.L.C. (the Debtor). Galam asserts that the award was improperly granted pursuant to fee statutes of the State of Arizona regarding sanctions and contract claims. We agree and we reverse.

BACKGROUND

The Debtor operated a topless bar known as "The Jungle Cabaret" in Phoenix, Arizona. Michael T. Taraska, an attorney, was the major shareholder of the Debtor, and acted as its counsel. Throughout its operation, the Debtor leased a parking lot immediately to the west of The Jungle Cabaret, which it deemed to be necessary for the proper operation of the bar. The original lease was dated March 3, 1993, and was amended September 23, 1993. The lessor was the Abner E. England Trust. The September lease was for a term of five years with a five-year-renewal option. It provided that the lot was exclusively for the use of the bar. In December of 1993, the Debtor filed for bankruptcy. The September parking lease was included as an asset on the schedules filed in the bankruptcy action, and the Trust was listed as a creditor.

While the bankruptcy was still pending, a new lease of the parking lot was negotiated. Under that new lease, the monthly payments were reduced and the duration was changed from five years with a five-year-renewable option to a one-year lease with nine one-year-renewable options. The new lease required written notice and a five-day-grace period before it could be terminated for default. It also permitted a subsequent purchaser to terminate the lease, provided that the lessee was given 60 days written notice within 30 days of the purchase.

Galam first became involved with the bar in March of 1994. He loaned Taraska $ 25,000 for use in operating the bar, and he also agreed to go to Phoenix to observe the bar in operation. He remained in Phoenix for a number of months. During that time, he managed the bar and the Debtor paid his living expenses, including hotel and apartment bills. Over time, Galam became a part owner of the Debtor. The bankruptcy court noted that his interest had increased to 60 percent at the time that this litigation was going forward.

In October of 1994, Taraska sent a letter to the Trust, offering to purchase the parking lot. The letter stated that Galam and Taraska, acting in their individual capacities, would purchase the lot for $ 90,000, but only Galam ultimately made the purchase. The title report revealed that the lot was leased by the Debtor, and indicated that the lease would be assigned to Galam. After the sale closed, Galam terminated the lease without further ado, but he allowed the bar to continue to use the lot rent free until the middle of 1996.

However, in February of 1995 the Debtor filed a second voluntary petition in bankruptcy. This time the bankruptcy schedules did not list the parking lot as an asset. In June of 1996, NDDC filed an emergency motion to appoint a Chapter 11 trustee. After a five day hearing, the bankruptcy court granted the motion and Carmel was appointed. At the hearing, Taraska informed the court that the parking lot was essential to the bar's operation. He also stated that Galam, not the Debtor, owned the lot, and further told the court that if Taraska and Galam were removed from managing the bar, Galam would fence off and prohibit the bar from using that lot. Carmel informed Taraska and Galam that the Debtor had at least a possessory, if not an ownership, interest in the lot and also told them that interference with the Debtor's right to the lot would violate the automatic bankruptcy stay. Despite that warning, Galam proceeded to fence off the lot and to prohibit the bar from using it. This adversary action was then initiated, an injunction issued, and the matter ultimately proceeded to trial. Based on the evidence presented at trial, the bankruptcy court found that due to Galam's breach of his fiduciary duty to the Debtor, a constructive trust would be imposed, and that the parking lot, whose ownership was then vested in Galam, was held for the benefit of the Debtor. The court also held that Galam was not entitled to any compensation for the lot because, even though he paid $ 90,000 to purchase it, he had improperly caused the Debtor to pay for his personal expenses, which expenses exceeded that amount.

Once the bankruptcy court had resolved the merits of the dispute and imposed the constructive trust on the parking lot, it turned to motions for attorneys' fees filed on behalf of Carmel and NDDC. It determined that a fee award was proper under Arizona law, which provides for a discretionary award of fees in contract cases. See Ariz. Rev. Stat. 12-341.01(A). It also determined that an award was proper as a sanction for Galam's delaying and harassing strategy in defending the claim against him. See Ariz. Rev. Stat. 12-349. It then awarded substantial fees and costs to the Trustee --$ 28,395 --and to NDDC --$ 605,756.98. Galam appealed to the district court which affirmed, whereupon he appealed to us.

JURISDICTION AND STANDARD OF REVIEW

The district court had jurisdiction pursuant to 28 U.S.C. 158(a), and we have jurisdiction pursuant to 28 U.S.C. 158(d).

We review decisions of the bankruptcy court independently without deference to the district court's determinations. Robertson v. Peters (In re Weisman), 5 F.3d 417, 419 (9th Cir. 1993). The bankruptcy court's findings of fact are reviewed for clear error, while its conclusions of law are reviewed de novo. Id. "We will not disturb a bankruptcy court's award of attorneys' fees unless the bankruptcy court abused its discretion or erroneously applied the law." Kord Enters. II v. Cal. Commerce Bank (In re Kord Enters. II), 139 F.3d 684, 686 (9th Cir. 1998); see also Ford v. Baroff (In re Baroff), 105 F.3d 439, 441 (9th Cir. 1997).

DISCUSSION

Galam attacks the fee award on various grounds, two of which are dispositive for purposes of this appeal. He asserts that the action against him was not a contract action at all, and that it was improper to apply Arizona's sanction statute to this case in federal court. As we will explain, we agree with him on both bases. As a result the fee award must be reversed.

A. Contract Fee Award

It is firmly established that "there is no general right to attorneys' fees for actions in bankruptcy. A party may, however, be entitled to attorneys' fees in the bankruptcy proceeding in accord with the applicable state law. " Collingwood Grain, Inc. v. Coast Trading Co., Inc. (In re Coast Trading Co., Inc.), 744 F.2d 686, 693 (9th Cir. 1984); see also Fobian v. W. Farm Credit Bank (In re Fobian), 951 F.2d 1149, 1153 (9th Cir. 1991). In this adversary action, the law of Arizona applies and it provides that "in any contested action arising out of a contract, express or implied, the court may award the successful party reasonable attorney's fees." Ariz. Rev. Stat. 12-341.01(A). The difficulty here is that the action in question was not on a contract at all, even though a contract lurked in the background.

On occasion, the courts in Arizona have spoken rather expansively regarding what it means to have an action arise out of a contract. The Arizona Supreme Court has explained that the mere fact that an insurance bad faith claim sounded in tort did not preclude an award of fees because the facts could "show a breach of contract, the breach of which may also constitute a tort." Sparks v. Republic Nat'l Life Ins. Co., 132 Ariz. 529, 543, 647 P.2d 1127, 1141 (Sup. Ct. 1982) (en banc). The court went on to say that "the fact that the two legal theories are intertwined does not preclude recovery of attorney's fees under 12-341.01(A) as long as the cause of action in tort could not exist but for the breach of the contract." Id. Fees can also be awarded where the dispute is not over whether there was a breach of contract, but rather whether the contract was valid in the first place. See Marcus v. Fox, 150 Ariz. 333, 336, 723 P.2d 682, 685 (Sup. Ct. 1986) (en banc). On the other hand, where a contract is merely somewhere within the factual background, an award of fees under 12-341.01(A) is not proper. Thus, where an action was brought under a "Lemon Law" statute, it was held that it did not arise out of contract. Kennedy v. Linda Brock Auto. Plaza, Inc., 175 Ariz. 323, 325, 856 P.2d 1201, 1203 (Ct. App. 1993). It was true that the action could not have existed at all but for the fact that there had been a contract to purchase an automobile in the first place. Still, said the court, the fee statute "does not apply if the contract is only a factual...