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Atkins v. Calypso Systems Inc.

United States District Court, D. Arizona

March 16, 2017

Barry M Atkins, Plaintiff,
Calypso Systems Incorporated, et al., Defendants.


          Neil V. Wake Senior United States District Judge

         Before the Court is Defendant's Motion for Recovery of Attorneys' Fees and Costs (Docs. 82, 85), Plaintiff's Responses (Docs. 90, 91), and Defendant's Reply (Doc. 96). The Court grants the motion in part and will award fees against Plaintiff. The Court denies the motion for fees and sanctions against Plaintiff's counsel.


         On November 16, 2016, this Court granted summary judgment for defendants Calypso Systems Incorporated and Eden Kim (“Calypso”) in an action filed by plaintiff Barry Atkins. (Doc. 80.) That action alleged various contract and tort claims stemming from a 2008 conversion agreement between the two parties. The facts are discussed at length in that order. The following summary recaps those findings pertinent to the present motion.

         The saga began in 2007 when Atkins, a long-time financial investor, provided a bridge financing loan to Calypso, a Silicon Valley startup. (Technically speaking, the loan was furnished by “Adventure Ventures, ” a corporation owned and operated by Atkins and his wife. Atkins acted as an agent of Adventure during all times relevant to this case, and all of Adventure's interests in Calypso were transferred to Atkins personally prior to this action.) The initial loan was for $125, 000. Upon Calypso's request Atkins increased it to $137, 000 as of January 2008.

         In 2008, amid talks to merge with another company, Calypso reached out to all its investors and asked them to convert their outstanding debt interests into stock, essentially discharging Calypso from its debts to them in exchange for ownership shares in the company. Atkins was one such investor. During 2008, Atkins and Calypso exchanged and signed documents that, by their express terms, converted Atkins's loan debt into Calypso stock. A number of subsequent written communications between the two reflected that both parties believed this mutually. In 2014, however, Atkins demanded Calypso repay its loans after its merger efforts fell through. When Calypso refused because of the debt-to-stock conversion, Atkins filed this action alleging breach of contract and the torts of fraud, negligent misrepresentation, conversion, and unjust enrichment.

         In his complaint and subsequent affidavits, Atkins purported that Eden Kim, Calypso's founder and CEO, made a number of oral assurances to the effect that the conversion would not be final until the company actually merged and that Atkins's debt would eventually be repaid. Atkins maintained over the course of litigation that no one from Calypso ever told him they believed the debt had converted to stock. He further maintained that Kim “lulled” him into letting various statutes of limitation pass by repeatedly assuring him a merger was imminent. However, as discovery progressed, more and more evidence emerged that Atkins knew (and, until 2014, did not contest that) his loan debt had converted to Calypso stock pursuant to a contract he himself signed. In June of 2016, after moving for summary judgment but before submitting its brief in reply to Atkins's response, Calypso learned from a third party that Atkins had also been deposed in a separate 2009 proceeding but had not turned over the deposition transcript in the course of discovery. The deposition transcript showed Atkins admitting point blank that as of 2009, Calypso had in fact communicated to him their position that the loan debt had converted into stock.

         Calypso filed a motion to dismiss on March 2, 2015, which this Court granted in part and denied in part. The Court dismissed Atkins's claim of fraud, which was insufficiently pled pursuant to Federal Rule of Civil Procedure 9(b). The Court permitted the rest of his claims to move forward on the facts alleged. After several of the discovery revelations described above, Calypso filed a motion for summary judgment on May 3, 2016. This Court granted that motion in full.


         A. Legal Standards

         The default rule for an action seeking attorneys' fees is the so-called “American Rule”: regardless of the outcome, litigants pay their own fees unless a statute or contract specifies otherwise. Marx v. General Revenue Corp., - U.S. -, 133 S.Ct. 1166, 1175 (2013). However, it is well-accepted that “federal courts have inherent power to award attorney's fees in a narrow set of circumstances, including when a party brings an action in bad faith.” Id.

         In addition, Arizona provides a statutory basis for courts to assess attorneys' fees against a party “[i]n any contested action arising out of a contract, express or implied . . . .” Ariz. Rev. Stat. § 12-341.01(A). An action arises out of a contract “when the duty breached is ‘created by the contractual relationship, and would not exist but for the contract.'” Assyia v. State Farm Mut. Auto. Ins. Co., 229 Ariz. 216, 220, 273 P.3d 668, 672 (Ariz.Ct.App. 2012) (quoting Barmat v. John & Jane Doe Partners A-D, 155 Ariz. 519, 523, 747 P.2d 1218, 1222 (1987)) (internal quotation marks omitted). See also ASH, Inc. v. Mesa Unified Sch. Dist. No. 4, 138 Ariz. 190, 192, 673 P.2d 934, 936 (Ariz.Ct.App. 1983) (“[A]s used in A.R.S. § 12-341.01, the words ‘arising out of a contract' describe an action in which a contract was a factor causing the dispute.”).

         B. Analysis

         Beyond the Court's inherent sanctioning power, the parties were instructed to address in their briefing whether section 12-341.01 calls for attorneys' fees to be assessed against Atkins for both his breach of contract claims and his tort claims. (Doc. 88.) Calypso argues the statute does apply, but that the Court can and should award fees under its inherent power either way. (Doc. 96 at 2.) As Atkins correctly points out, this Court previously determined that he and Calypso chose California law to govern the contract out of which this dispute arose. (Doc. 43 at 15.) As a result, Atkins argues section 12-341.01 is inapplicable to his contract claims and does not justify an award for his tort claims. (Doc. 91 at 5.) He does not contest the Court's inherent power to assess fees generally but does insist fees are not warranted in his case.

         1. Contract Claims

         The applicability of section 12-341.01 to Atkins's contract claims is somewhat murky given the parties' contractual California choice-of-law provision. But the issue need not be decided here, because this Court also has the inherent power to “assess attorney's fees when a party has acted in bad faith, vexatiously, wantonly, or for oppressive reasons.” Chambers v. NASCO, Inc., 501 U.S. 32, 45-46 (1991) (internal quotation marks omitted). Among the circumstances in which this applies, a court may grant fees where it finds ‚Äúthat fraud has been ...

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