Action for Fraudulent Transfer Not “On a Contract”

Posted by NCBRC - September 27, 2016

An adversary proceeding alleging fraudulent transfer was not an “action on a contract” for purposes of application of the contract’s fee agreement. Jones v. Cheplick (In re Jones), No. 15-2148 (E.D. Cal. Sept. 22, 2016).

David Jones was President and majority shareholder of Telecomm Engineering which was a party to a lease agreement with Wally Cheplick. When Telecomm defaulted on its lease obligations, Mr. Cheplick obtained a judgment against it for $55,656.00. Telecomm failed to pay the judgment and forfeited the property. Mr. Jones filed for chapter 7 bankruptcy, and Mr. Cheplick filed an adversary proceeding, under sections 523 and 747, seeking to recover the Telecomm judgment on the grounds that Mr. Jones had fraudulently transferred Telecomm’s assets to avoid paying creditors. The bankruptcy court held a hearing in which it found insufficient evidence of fraud to support nondischargeability. The court, however, denied Mr. Jones’s motion for attorney’s fees.

On appeal, the district court relied on state law to find that the adversary proceeding was not an “action on a contract” bringing it within the purview of the fee shifting clause contained in the lease agreement between Telecomm and Mr. Cheplick. California law provides:

“In any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees in addition to other costs.”

The ninth circuit has found that “an action is ‘on a contract’ when a party seeks to enforce, or avoid enforcement of, the provisions of the contract.” In re Penrod, 802 F.3d 1084, 1088 (9th Cir. 2015). The court in Jones found that, unlike Penrod, the action against Mr. Jones did not implicate the terms of the lease agreement. Rather, it involved Mr. Jones’s allegedly fraudulent transfer of property to avoid paying creditors. The court also distinguished Circle Star Center Associates, L.P. v. Liberate Technologies, 147 Cal. App. 4th 1203 (2002), where the creditor was found to be entitled to attorney’s fees incurred in obtaining the dismissal of the debtor’s bankruptcy case in order to pursue his contractual remedies. In that case, the terms of the contract had not yet been litigated and the action in the bankruptcy court facilitated that litigation. In Jones, on the other hand, Mr. Cheplick already had a judgment based on the contract and was seeking access to funds he claimed had been fraudulently transferred. Because the action against Mr. Jones did not involve the terms of the lease agreement, the court affirmed the bankruptcy court’s denial of attorney’s fees.

Jones ED Cal opinion Sept 2016


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