Sparkman, Matter of
| Decision Date | 11 April 1983 |
| Docket Number | No. 82-4202,82-4202 |
| Citation | 703 F.2d 1097 |
| Parties | In the matter of Bill D. SPARKMAN also known as Billy D. Sparkman, dba Sparkman Apiaries, Debtor in Possession. MERCED PRODUCTION CREDIT ASSOCIATION, A California corporation, Claimant-Appellee, v. Bill D. SPARKMAN, also known as Billy D. Sparkman, dba Sparkman Apiaries, Debtor in Possession/Appellant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Dean A. Bailey, Stammer, McKnight, Barnum & Bailey, Fresno, Cal., Noble K. Gregory, Joe C. Creason, Jr., Kevin M. Fong, Pillsbury, Madison & Sutro, San Francisco, Cal., for claimant-appellee.
T.N. Petersen, Joseph Genshlea, Law Office of T.N. Petersen, Law Office of John Bucan, Merced, Cal., for debtor in possession/appellant.
Appeal from the United States District Court for the Eastern District of California.
Before GOODWIN and SNEED, Circuit Judges, and FRYE *, District Judge.
This case involves a counterclaim for breach of contract, attorneys' fees, and punitive damages brought by Billy Sparkman against his claimant, Merced Production Credit Association, in connection with Sparkman's bankruptcy proceedings. The bankruptcy court found for Sparkman on the breach of contract issue but denied attorneys' fees and punitive damages. The district court affirmed the bankruptcy court's judgment. We agree with the district court with respect to punitive damages, but disagree with respect to attorneys' fees. Thus, we affirm in part, reverse in part, and remand.
To finance his honey bee business, Sparkman borrowed money from the Merced Production Credit Association (MPCA). 1 MPCA secured the loan agreement by obtaining a security interest in Sparkman's stock of bees, equipment, and other property. In conformity with the agreement as orally amended, Sparkman moved his bees from California to North Dakota in mid-1977 because of the greater potential honey yield there. Later that year, Sparkman fell behind in his payments. MPCA elected to forego its right to foreclose on Sparkman's collateral, and the two parties reached another agreement. Under its terms Sparkman would turn over to MPCA a check received from a customer as payment for honey; MPCA would deposit the check and refund to Sparkman the surplus amount--approximately $8,600--by which the check The agreement was not carried out. Sparkman turned over the check and executed the deed of trust, but MPCA refused to refund the surplus. Consequently, Sparkman lacked funds to return the bees from North Dakota, and almost all the bees were killed by a frost in January, 1978. Because of these losses, Sparkman was unable to pay the loan installment due in March, 1978. MPCA then applied the surplus retained from the check to that installment and began foreclosure proceedings on its collateral, including the property subject to the deed of trust.
exceeded his current indebtedness; Sparkman would return the bees to California; and Sparkman would give MPCA a deed of trust on his last mortgageable real property.
In April, 1978, Sparkman filed a Chapter XI bankruptcy petition (under the old Bankruptcy Act). MPCA filed its proof of claim. Sparkman objected to the claim, and counterclaimed, alleging tortious breach of contract and seeking damages for emotional distress, loss of property, business, and profits, and punitive damages.
The bankruptcy court held a five-day trial. It approved MPCA's claim, as reduced, but rendered judgment for Sparkman on his counterclaim. The court found that MPCA did not enter into the December, 1977 agreement in good faith since it did not intend to refund the surplus proceeds from the check. The court concluded that the deed of trust was obtained by fraud because MPCA knew that Sparkman needed the proceeds to return his bees to California. The court awarded Sparkman damages for the destruction of his bees and for one year's lost profits.
The bankruptcy court also granted Sparkman his costs of suit, but denied his request for damages for emotional distress and for attorneys' fees. Although finding that MPCA's conduct was "willful, malicious, and fraudulent," the court held that MPCA was immune from liability for punitive damages because it was an instrumentality of the United States government.
MPCA's claim was set off against the damages and Sparkman was awarded the difference.
Sparkman appealed to the district court, arguing that: (1) the bankruptcy court abused its discretion in refusing to award him attorneys' fees; (2) MPCA is not immune from punitive damages; and (3) the court's calculation of actual damages was too low. In a brief opinion the district court affirmed.
Sparkman filed a timely appeal in this court, raising only the first two issues.
The bankruptcy court held that Sparkman is not entitled to attorneys' fees for his counterclaim on the security agreements and promissory notes. The bankruptcy court relied on the so-called "American Rule" in rejecting the request for fees. This rule denies attorneys' fees to a litigant in federal court in the absence of a contract, applicable statute, or other exceptional circumstance. Alyeska Pipeline Co. v. Wilderness Society, 421 U.S. 240, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975). We reverse.
When a bankruptcy court adjudicates a contract claim in connection with a petition in bankruptcy, the court applies state law to the contract dispute unless the bankruptcy code provides otherwise. 4A Collier's on Bankruptcy p 70.04, at 60-62 n. 31 (14th ed. 1978). Moreover, the court should apply state law not merely in determining whether a breach of contract occurred, but also in deciding whether to award attorneys' fees on the claim. See In Re Sonoma V, 23 B.R. 789, 796 (Bkrtcy. 9th Cir.1982); see also Klopfenstein v. Pargeter, 597 F.2d 150, 152 (9th Cir.1978) (); Matter of Comstock, 16 B.R. 206 (Bkrtcy.D.Idaho 1981) (). Thus, Sparkman's entitlement to attorneys' fees in the present case turns on the applicable state law, not the American Rule.
California law governs the substantive issues involved in Sparkman's counterclaim. Under a California statute, the prevailing party in a contract action is entitled to reasonable attorneys' fees if the contract specifically provides that attorneys' fees shall be awarded to one of the parties. 2 The prevailing party need not be the party so designated. Sparkman signed security agreements and installment promissory notes which provided that, upon default or suit, he would pay attorneys' fees to the secured party, MPCA. Sparkman is therefore entitled to attorneys' fees from the secured party provided he is the prevailing party for the purposes of the statute.
Under California law, where claims and counterclaims arise in connection with a contract containing an attorneys' fees provision, the party who obtains a favorable judgment is deemed to be the prevailing party even though he did not successfully obtain all the relief which he sought in the action. See, e.g., Epstein v. Frank, 125 Cal.App.3d 111, 124, 177 Cal.Rptr. 831, 838 (1982); Western Decor & Furnishings Industries, Inc. v. Bank of America, 91 Cal.App.3d 293, 311, 154 Cal.Rptr. 287, 297 (1979) (). According to this definition, Sparkman is the prevailing party.
Although Sparkman did not ask for attorneys' fees until his post-trial motion for costs, this should not bar an award for attorneys' fees. Under California law, attorneys' fees are subsumed into costs. Moulin Electric Corp. v. Roach, 120 Cal.App.3d 1067, 175 Cal.Rptr. 111 (1981). Moreover, the preferred method for seeking such fees is by post-trial motion. See Beneficial Standard Properties, Inc. v. Scharps, 67 Cal.App.3d 227, 232 n. 3, 136 Cal.Rptr. 549, 552 n. 3 (1977) ().
We therefore hold that Sparkman is entitled to attorneys' fees for the counterclaim, and remand this case to the district court to have reasonable attorneys' fees determined.
The bankruptcy court declined to hold MPCA liable to Sparkman for punitive damages because MPCA is an "instrumentality" of the United States. The court relied on the long-established principle that the United States, its agencies, and instrumentalities cannot be held liable for punitive damages unless there is express statutory authorization for such liability. See 28 U.S.C. Secs. 2671, 2674; Missouri Pacific R.R. Co. v. Ault, 256 U.S. 554, 41 S.Ct. 593, 65 L.Ed. 1087 (1921).
Congress set up production credit associations as part of the Farm Credit Act of 1933, modeling them on the farm loan associations established 17 years earlier. The 1933 Act expressly declared the production credit associations to be instrumentalities of the United States. 48 Stat. 267 (1933) ().
In 1971, Congress amended the Farm Credit Act of 1933. The amendments retained the language of the earlier provision, and added to another section of the 1933 Act the words: "Each production credit association ... shall continue as a federally chartered instrumentality of the United States." 85 Stat. 597 (1971) (codified at 12 U.S.C. Sec. 2091). The legislative history of the 1971 amendments explains that the 1933 language was "substantially retained to support the existing [production credit] associations as federal instrumentalities." House Rep. No. 92-593, 92d Cong., 1st Sess., reprinted in 1971 U.S.Code Cong. & Admin. News 2091, 2109. Neither the 1933 Act nor the amendments to the Act made production credit associations subject to liability for punitive damages.
Sparkman contends, however, that the immunity from...
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