Article courtesy of Edward J. McNeilly and David P. Simonds, each of Hogan Lovells US LLP
Bankruptcy Court Grants Attorney’s Fees to Debtor Who Prevailed in Assumption Motion
In In re Hawkeye Entertainment, LLC, 625 B.R. 745 (Bankr. C.D. Cal. 2021), the United States Bankruptcy Court for the Central District of California (the “Bankruptcy Court”) awarded attorney’s fees, pursuant to a California fee-shifting statute, to a chapter 11 debtor that prevailed on a motion to assume a commercial lease.
On July 17, 2009, Hawkeye Entertainment, LLC (the “Debtor”) entered into a lease agreement (the “Lease”) to lease four floors and a basement of a property in central Los Angeles (the “Property”). The Debtor filed a first bankruptcy case in 2013 and sought to assume the Lease. The motion to assume the Lease was ultimately resolved through a settlement agreement. The Debtor subsequently emerged from bankruptcy.
After several years of disputes, the landlord, Smart Capital, LLC (the “Landlord”), served a notice of default and three-day notice to quit on the Debtor. The Debtor responded by filing a second chapter 11 case, followed by a motion to assume the Lease and a sub-lease and to deem the Debtor and its sub-lessee not to be in breach of the Lease (the “Assumption Motion”). The Landlord opposed the Assumption Motion, alleging that the Debtor had defaulted under the Lease and was unable to provide adequate assurance of future performance, and sought denial of any modification of the sublease. Following lengthy discovery, the Court conducted a five-day trial, found that the Debtor was not in default of the Lease, and granted the Assumption Motion.
Before the trial on the Assumption Motion, the Debtor also brought several successful motions, including motions under section 363 of the Bankruptcy Code to use the Property for certain special events and a motion to obtain postpetition financing under section 364 of the Bankruptcy Code. The Landlord contested each of the motions. The Debtor’s counsel moved for an award of approximately $800,000 in attorney’s fees and costs against the Landlord for (i) the Notice of Default and Three-Day Notice, (ii) the commencement of the bankruptcy case and (iii) contesting the Assumption Motion and these other motions.
California Civil Code § 1717 authorizes courts to award attorney’s fees and costs in any action on a contract “where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, … either to one of the parties or to the prevailing party.” Here, the Lease provided for an attorney’s fee award to the prevailing party “[i]n the event that … either Landlord or Tenant shall institute any action or proceeding against the other relating to the provisions of this Lease or any default hereunder….”
The Bankruptcy Court denied the Debtor’s request for attorney’s fees relating to the Notice of Default and Three-Day Notice, finding that the notice was a precursor to an action or proceeding, not an action or proceeding itself. The Bankruptcy Court likewise found that the commencement of the bankruptcy case was not an action or proceeding against anyone, and the motions to use the Property and obtain postpetition financing were general motions relating to the administration of the bankruptcy estate, not individualized contract disputes against the Landlord or an action to enforce the Lease. The Bankruptcy Court, however, held that the Debtor was entitled to an award of attorney’s fees for prevailing on the Assumption Motion, ruling that it was a proceeding “on a contract.” The Bankruptcy Court noted that two questions are presented in motions to assume leases: (1) is there a default? and (2) if so, has the debtor provided the creditor adequate assurance? Determining whether there is a default pursuant to a lease requires courts to decide matters based on the language in a contract between parties while a determination of whether a debtor provided adequate assurance is based largely on bankruptcy law.
The Bankruptcy Court held that, where a debtor is clearly in default and the only real issue litigated in the motion to assume is whether the debtor has provided sufficient adequate assurance, the motion may not necessarily be considered a proceeding “on a contract.” However, in the case of the Lease, the dispute almost entirely turned on whether there was a default under the Lease, which was a contractual dispute that would otherwise have been litigated in a state court unlawful detainer action. As the Bankruptcy Court held that there was no default, it did not have to reach the bankruptcy-law specific question of adequate assurance. Accordingly, the Debtor, as the prevailing party, was entitled to an award of attorney’s fees with respect to the Assumption Motion.
The Debtor’s success in this case offers a powerful reminder of the additional leverage that an attorney’s fee provision may provide to a debtor in a dispute over the assumption of an executory contract or unexpired lease. Depending on the language of the contract or lease and the applicable state law, a debtor that prevails on an assumption motion may be able not only to assume (and, if applicable, assign) the contract or lease, but also to recover a significant attorney’s fee award. While the attorney fee provisions typically work both ways, even if a landlord or contract counterparty defeats an assumption motion, if the contract or lease is not ultimately assumed by the debtor, such landlord’s or counterparty’s attorney fee claim is likely to be treated as a prepetition unsecured claim, which will be paid in “bankruptcy dollars,” and may receive a minimal recovery.