In In re Penrod, 2013 WL 1962338 (N.D.Cal. 2013), Judge Gonzalez-Rogers held that the debtor was not entitled to her attorneys’ fees incurred in this protracted litigation because recovery of fees derived purely from state law, which, the bankruptcy court had determined did not afford a right to attorneys’ fees. Penrod’s tortured procedural history was summarized as follows:
Ultimately the bankruptcy judge relied on a decision by Bankruptcy Judge Morgan, who had held that the portion of the debt representing the payoff of the negative equity in the trade-in vehicle was not secured by a “purchase money security interest.” Therefore, the “hanging paragraph” of subsection 1325(a) did not protect the negative equity associated with the trade-in vehicle. Accordingly, the bankruptcy judge allowed Ms. Penrod to treat the negative equity portion of the loan as unsecured debt, overruled AmeriCredit’s objection to confirmation, and confirmed Ms. Penrod’s reorganization plan. ¶ Following confirmation of Ms. Penrod’s reorganization plan, AmeriCredit appealed the bankruptcy court decision that allowed Ms. Penrod to bifurcate its claim. The Bankruptcy Appellate Panel affirmed. AmeriCredit Fin. Servs., Inc. v. Penrod (In re Penrod), 392 B.R. 835 (9th Cir.B.A.P.2008). The Ninth Circuit Court of Appeals affirmed. AmeriCredit Fin. Servs., Inc. v. Penrod ( In re Penrod), 611 F.3d 1158 (9th Cir.2010). The Ninth Circuit denied AmeriCredit’s request for rehearing en banc, AmeriCredit Fin. Servs., Inc. v. Penrod ( In re Penrod), 636 F.3d 1175 (9th Cir.2011), and the United States Supreme Court denied AmeriCredit’s petition for writ of certiorari, AmeriCredit Fin. Servs., Inc. v. Penrod, 132 S.Ct. 108 (2011). ¶ After the Supreme Court denied AmeriCredit’s petition for writ of certiorari, Ms. Penrod sought to recover attorneys’ fees under the contractual attorneys’ fees clause and California Civil Code § 1717, which makes the unilateral contractual fee clause a reciprocal obligation in a contract enforcement action. The bankruptcy judge denied the attorneys’ fees request finding that the issue on which Ms. Penrod prevailed involved questions of federal bankruptcy law and therefore, she did not prevail “on the contract” within the meaning of California Civil Code § 1717. Ms. Penrod timely appealed, arguing that she is entitled to fees pursuant to California Civil Code § 1717 as the party prevailing “on the contract.”
The district court affirmed the denial of attorneys’ fees, explaining:
The issue presented on appeal is: “Did the Bankruptcy Court err in failing to award attorneys’ fees and costs to Debtor pursuant to Cal. Civ.Code § 1717 in light of, inter alia, the decision of the United States Supreme Court in Travelers Casualty & Surety Co. v. Pacific Gas and Electric Co., 549 U.S. 443, 127 S.Ct. 1199, 178 L.Ed. 178 (2007), and the Bankruptcy Court’s apparent reliance upon the discredited rule articulated in Fobian v. Western Farm Credit Bank (In re Fobian), 951 F.2d 1149 (9th Cir.1991).” This is a two part issue: (A) did the bankruptcy judge apply the incorrect law; and, if the correct law was applied, (B) was the decision of the bankruptcy judge based on an erroneous application of the law. Because the answer to both questions is “no,” the Court AFFIRMS. ¶ . . . Ms. Penrod argues that the bankruptcy judge erred by applying the wrong law. Even though the bankruptcy judge did not reference In re Fobian, Ms. Penrod contends that the bankruptcy judge implicitly relied upon the so-called “Fobian” rule. Following In re Fobian, courts in the Ninth Circuit prohibited awards of attorneys’ fees when only issues of federal bankruptcy law were litigated in cases involving a contract. In re Fobian, supra, 951 F.2d at 1153 (“where the litigated issues involve not basic contract enforcement questions, but issues peculiar to federal bankruptcy law, attorney’s fees will not be awarded absent bad faith or harassment by the losing party.”). The Supreme Court in Travelers, supra, 549 U.S. at 449, overruled the Fobian rule. ¶ As pertinent here, Travelers holds that state law governs whether Ms. Penrod is entitled to recover contractual attorneys’ fees. Although the bankruptcy judge did not reference Travelers in his memorandum opinion, the bankruptcy judge acknowledged during oral argument “that after Travelers, this is purely a question of state law.” ¶ Here, the bankruptcy judge did consider the pertinent state law, California Civil Code § 1717, and concluded that fees were not recoverable. Contrary to Ms. Penrod’s assertion, his decision did not “rel[y] upon the discredited rule articulated in Fobian,” i.e., that the Bankruptcy Code precludes Ms. Penrod from recovering attorneys’ fees because the action involved bankruptcy issues. Rather, the bankruptcy judge determined that, “in light of, inter alia, … Travelers,” state law only allows attorneys’ fees where the moving party was “the party prevailing on the contract.” ¶ Based on the foregoing analysis, the Court finds that in reaching his decision, the bankruptcy judge considered and applied the correct law regarding Ms. Penrod’s entitlement to attorneys’ fees. ¶ . . . Ms. Penrod asserts this was an action “on a con-tract.” According to Ms. Penrod, filing a proof of claim, as well as any litigation incident to the filing of a proof of claim was an attempt by AmeriCredit “to collect what [Ms. Penrod] owe[s]” on a contract. Therefore, she argues that the litigation concerning the treatment of AmeriCredit’s bankruptcy claim was an action on a contract within the meaning Section 1717 of the California Civil Code, making the unilateral fee provision in the contract a reciprocal obligation. ¶ The bankruptcy judge disagreed, finding that the action was not “on a contract” because: “In the present case, Debtor did not contest the amount due under the Installment Sales Contract, the meaning of that contract, or the enforceability of that contract under state law. Instead, Debtor sought to modify the terms of the contract under federal bankruptcy law.” (Order at 7:10–14.) The bankruptcy judge further held that “a party who avoids the obligation of a contract through federal bankruptcy law does not prevail on the contract within the meaning of section 1717.” (Id. at 5:22–24 (citing Terra Nova Indus., Inc. v. Chen (In re Chen), 345 B.R. 197, 199–203 (N.D.Cal.2006)) .) ¶ The bankruptcy judge was within the bounds of his discretion in concluding that the action was not “on a contract” under California Civil Code § 1717. The litigation had little to do with the parties’ actual contract and concerned only abstract issues of how to treat the negative equity associated with a debtor’s trade-in vehicle under bankruptcy law. Not only did the appellate courts treat these as pure questions of law, even the bankruptcy judge made his decision on purely legal grounds, relying on a decision by Judge Morgan, not the parties’ contract or the specific facts of this case.