Opinion
No. 00-42104 T.
August 14, 2006
MEMORANDUM OF DECISION ON REMAND
In an Order issued on July 25, 2006, the United States District Court for the Northern District of California (the "District Court") reversed a portion of this Court's order of October 1, 2004 (the "Fee Order"). The Court's ruling on remand is set forth below.
Since the matter was fully briefed before the issuance of the Fee Order and the ensuing appeal, the Court has not called upon the parties for further evidence and/or argument. Rather, it bases this ruling on remand on the evidence and argument previously presented.
DISCUSSION
A. BACKGROUND
The above-captioned chapter 11 case was filed on April 5, 2000. Shortly after the case was filed, Aureal, Inc. (the "Debtor") sold substantially all of its assets to Creative Technologies, Ltd. ("Creative").
Prior to the commencement of the case, Aureal, Inc. (the "Debtor") was a party to a software development agreement (the "SDA") with Momentum Data Systems ("Momentum"). When the bankruptcy case was filed, Momentum filed a proof of claim (the "Pre-Petition Claim"), asserting a general, unsecured claim for breach of contract in the amount of $104,000. Momentum subsequently sold the Claim to Next.
The Debtor objected to all but $4,000 of the Pre-Petition Claim. Next amended the Pre-Petition Claim, asserting a general, unsecured claim of $254,000 plus pre-petition interest and royalties in an unspecified amount. A few months later, Next filed an administrative claim for royalties in the amount of $25 million (the "Administrative Claim"). On November 7, 2001, Next amended the Administrative Claim, after the Court had disallowed the contract, asserting a tort claim in an unspecified amount. This claim alleged that the Debtor had included Momentum's software in its sale to Creative. The Debtor objected to the Administrative Claim as well.
Administrative claims include the "actual, necessary costs and expenses of preserving the estate. . . ." See 11 U.S.C. § 503(b)(1)(A). In a chapter 11 case, the plan must provide for payment in full of all administrative claims on the effective date of the plan unless the holder of the claim agrees otherwise.See 11 U.S.C. § 1129(a)(9)(A).
In 2003, the Debtor filed a motion for summary judgment with respect to its objections to the Pre-Petition and Administrative Claims. In December 2003, the Court issued a Memorandum of Decision (the "December 2003 Memo"), granting the Debtor's motion, disallowing all but $4,000 of the Pre-Petition Claim and disallowing the Administrative Claim in its entirety.
In February 2004, the attorneys who had represented the bankruptcy estate in this litigation (the "Estate Attorneys") filed a request for an award of attorneys' fees against Next as the prevailing party with respect to their objections to the Pre-Petition and Administrative Claims. In September 2004, the Court issued a Memorandum of Decision (the "September 2004 Memo") granting the request, with only a modest reduction in amount, on grounds not relevant here. Next filed a timely appeal from the order pursuant to the September 2004 Memo. In June 2005, the District Court issued an order affirming the Court's award of fees to the Estate Attorneys with respect to their objection to the Pre-Petition Claim and reversing and remanding the Court's award of fees to the Estate Attorneys with respect to their objection to the Administrative Claim (the "District Court Order").
The Court's award of attorneys' fees to the Estate Attorneys with respect to their objection to the Pre-Petition Claim was based on the attorneys' fee clause in the SDA. This clause permitted the prevailing party to recover its attorneys' fees in any action to "interpret" or "enforce" the SDA. The Pre-Petition Claim was for breach of contract. The Court found that the Estate Attorneys were the prevailing party with respect to their objection to the Pre-Petition Claim and that the objection required the Court to "interpret" and/or "enforce" the SDA.
The attorneys' fee clause in the SDA reads as follows: "8.7 ATTORNEY FEES. If either party incurs attorney fees and costs in interpreting or enforcing the terms of this Agreement, the prevailing party shall be entitled to recover its costs and reasonable attorney fees, regardless of whether a suit or action is filed, and if suit or action is filed, on any appeal therefrom."
The Administrative Claim was based on tort law. Nevertheless, the Court held that, as the prevailing party, the Estate Attorneys could recover their attorneys' fees pursuant to the attorneys' fee clause in the SDA because the objection to the Administrative Claim required the Court to "interpret" the SDA. The Estate Attorneys argued alternatively that they were entitled to recover their attorneys' fees in any event because the issues raised by their objection to Administrative Claim were "inextricably intertwined" with the issues raised by their objection to the Pre-Petition Claim. The Court declined to address this ground for the fee request since it agreed with the Estate Attorneys that their objection to the Administrative Claim required the Court to "interpret" the SDA. See September 2004 Memo, page 11, fn. 7.
On appeal, the District Court concluded that the Court had erred in holding that the objection to the Administrative Claim required the Court to "interpret" the SDA. It stated: "Close examination of the December 2003 memorandum does not reveal where, in its discussion of Next's administrative claim, the bankruptcy court ever interpreted the SDA." See District Court Order, page 7, lines 5-6. Therefore, it reversed the Court's award of attorneys' fees to the Estate Attorneys for their work on the objection to the Administrative Claim to the extent that it was based on this ground. It remanded the proceeding to the Court to consider the Estate Attorneys' alternative argument: i.e., that the issues raised by the objection to the Administrative Claim were "inextricably intertwined" with the issues raised by the objection to the Pre-Petition Claim.
B. ISSUE ON REMAND
In their motion for attorneys' fees, the Estate Attorneys sought $174,781.50 in attorneys' fees, reflecting fees incurred from August 1, 2001 through December 31, 2003. This amount included: (1) $13,076.75 in fees incurred by Luce, Forward, Hamilton Scripps, LLP ("Luce"), counsel for the liquidating trustee, (2) $25,339.50 in fees incurred by Bingham McCutchen LLP ("Bingham"), counsel for the Official Creditors' Committee, and (3) $136,834 in fees incurred by Hennigan, Bennett Dorman LLP ("Hennigan").
The Court disallowed a small portion of the requested fees: i.e., $318.75 in the fees requested by Luce and $3,319.50 in the fees requested by Bingham. Thus, the Court allowed a total of $171,612 in the fees of the Estate Attorneys: (1) $12,758 of Luce's fees, (2) $22,020 of Bingham's fees, and (3) all $136,834 of Hennigan's fees.
The motion was supported by the declarations of attorneys at each law firm, to which were attached time sheets describing in detail the work performed and the time spent, among other things. The legal ground stated in the motion was the attorneys' fee clause in the SDA and Cal. Civ. Code § 1717. The motion did not discuss any separate basis for allowing fees with respect to the estate's objection to the Administrative Claim.
In its opposition to the motion, Next noted that Administrative Claim sounded in tort. It asserted that attorneys' fees for litigating a tort claim could only be recovered if the contractual attorneys' fee clause was broad enough to cover such fees. It argued that the attorneys' fee clause in the SDA was not sufficiently broad to cover fees incurred litigating a tort claim.
The Estate Attorneys filed a reply in which they contested this assertion. They contended that the fees should be allowed in full because the issues raised by the two types of claims were so intertwined that the fees related to each could not practicably be apportioned. In support of this argument, they cited VSL Corp. v. General Technologies, Inc., 1998 WL 124208, *6-*7 (N.D.Cal.) and Abdallah v. United Savings Bank, 43 Cal. App. 4th 1101, 1111 (1996).
In VSL, VSL Corporation ("VSL") filed a complaint alleging ten causes of action, including breach of contract and misappropriation of trade secrets. During discovery, it became clear that the misappropriation claim had no merit. Nevertheless, VSL did not withdraw this claim until it filed its opposition to the defendant's summary judgment motion. The VSL court granted the defendant's motion as to all remaining claims. VSL at *2. The defendant then sought attorneys' fees on two grounds: (1) pursuant to Cal. Civ. Code § 3426.4, authorizing an award of attorneys' fees for a claim of misappropriation made in bad faith and (2) based on Cal. Civ. Code § 1717 and a contractual attorneys' fee clause in an unsigned confidentiality agreement. The VSL court concluded that both grounds warranted an award of fees. VSL at *4, *6.
VSL then argued that fees should only be allowed for the defense of these two claims. The VSL court declined to apportion the fees, noting that whether to do so is in the court's discretion. The court held that these two claims were "factually related" to and "inextricably intertwined" with the other eight claims alleged in the complaint so that it would be impracticable to divide the fees. VSL at *6.
In Abdallah, a secured creditor had foreclosed its deed of trust on real property owned by the plaintiffs after obtaining relief from the automatic stay in the bankruptcy case of one of the plaintiffs. Acting pro se, plaintiffs sued the secured creditor, among others, in federal district court, seeking to set aside the foreclosure sale and damages for fraud, breach of contract, conspiracy, and a violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"). The RICO claim was dismissed with prejudice. All other claims were dismissed without prejudice. Abdallah at 1105.
Two days later, the plaintiffs filed a complaint in state court against the same defendants, asserting all of the claims previously asserted in the complaint filed in federal court, including the RICO claim. The defendants filed demurrers to the complaint which were sustained without leave to amend. In addition to dismissing the action, the state court ordered the plaintiffs to pay the defendants' attorneys' fees. Abdallah at 1105.
On appeal, the plaintiffs argued that the fee award should be reduced by two-thirds because the defendants were only entitled to fees on the contract cause of action. The appellate court found no abuse of discretion in the trial judge's failure to apportion the fees. It found that the trial could reasonably have found the issues on all causes of action to be "`inextricably intertwined'". Id. at 1111 (quoting from Finalco, Inc. v. Roosevelt, 235 Cal. App. 3d 1301, 1308 (1991)).
Thus, on remand, the Court must decide whether, as in VSL andFinalco, the issues presented in connection with the objection to the Pre-Petition Claim were "inextricably intertwined" with the issues presented in connection with the objection to the Administrative Claim. To do so, the Court has reviewed the December 2003 Memo.
As set forth in the December 2003 Memo, originally, both the Pre-Petition and Administrative Claims asserted only contractually based claims. They were both based on the provision in the SDA requiring the Debtor to pay Momentum royalties based on the sale of products incorporating software developed by Momentum. The Pre-Petition Claim asserted a claim for royalties based on alleged pre-petition sales. The Administrative Claim asserted a claim for royalties based on alleged post-petition sales. On October 26, 2001, the Court sustained in part the Debtor's objection to the Administrative Claim. On November 7, 2001, the Administrative Claim was amended to substitute for the disallowed contract claim a claim for tort damages in an unspecified amount based on the alleged inclusion of Momentum's software in the sale of the Debtor's assets to Creative. Thus, there is no need to apportion the fees sought for any work performed through November 7, 2001.
However, apportionment does appear warranted with respect to services performed thereafter. The Pre-Petition Claim asserted a right to royalties based on a "release" of a product containing Momentum's software. In ruling on the objection to the Pre-Petition Claim, the Court's analysis focused on whether any such product had been released. The Administrative Claim, as amended, asserted a right to tort damages based on the sale to Creative of Momentum's software. In ruling on the objection to the Administrative Claim, the Court's analysis focused on whether any such software had been included in the sale to Creative. As the discussion in the December 2003 Memo makes clear, different evidence was considered by the Court in determining each issue. Thus, the two issues do not appear "inextricably intertwined" within the meaning of the cases cited above.
The Court has reviewed the time sheets submitted by the Estate Attorneys in support of their fee request to determine how to apportion the fees. Its conclusions are as follows:
Luce's Fees:
None of the time spent by Luce was spent prior to November 7, 2001. Of the time spent thereafter, the Court has located three time entries (on 7/1/03, 7/2/03 7/29/03) that include a description of services provided in connection with the Administrative Claim totaling $1,302.50 in fees. Thus, Luce's fee award will be reduced by this amount. The Court previously allowed Luce's fees in the amount of $12,758. This award is reduced to $11,455.50.
Bingham's Fees:
Bingham's time sheets reveal that Bingham incurred $2,403.50 in fees prior to November 7, 2001, all of which is recoverable. Of the work performed thereafter, the Court could find only one time entry (on 5/9/03) relating to the Administrative Claim generating fees in the amount of $380. The Court previously allowed Bingham's fees in the amount of $22,020. This award is reduced to $21,640.
Hennigan's Fees:
The Court previously allowed all of Hennigan's requested fees which totaled $136,834. Hennigan's time sheets reveal that Hennigan incurred $12,666 in fees prior to November 7, 2001, all of which is recoverable. Of the remaining $124,168 in fees, it appears that only $2,817.50 of the fees are based on work performed in connection with the Administrative Claim: see time entries on 10/19/01 (2), 10/22/01 (4), 5/12/03, 5/22/03 (3), 5/26/03, 6/4/03, 10/15/03, 10/27/03, 11/3/03, 11/18/03, 12/9/03 12/11/03 in Claims section and time entries on 8/23/01 and 2/5/02 in Discovery section. Thus, the Court will reduce Hennigan's $136,834 fee award to $134,016.50.
In sum, the total fee award for the Estate Attorneys is $167,112. Counsel for the Estate Attorneys are directed to submit a proposed form of order in accordance with this decision.