United States Bankruptcy Appellate Panel of the Ninth Circuit
In re: MICHAEL ALLEN ZITO and ELIZABETH ZITO, Debtors.
DOUGLASS ENTERPRISES, LLC, Appellee. MICHAEL ALLEN ZITO; ELIZABETH ZITO, Appellants,
and Submitted on July 18, 2019 at Phoenix, Arizona
from the United States Bankruptcy Court for the District of
Arizona Honorable George B. Nielsen, Jr., Bankruptcy Judge,
Appellant Michael Allen Zito argued pro se.
J. Giles of Allen Barnes & Jones, PLC argued for Appellee
Douglass Enterprises, LLC.
Before: BRAND, FARIS and LAFFERTY, Bankruptcy Judges.
Enterprises, LLC sued debtors Michael and Elizabeth Zito in
Arizona state court to recover on a personal guarantee. The
Zitos returned to the bankruptcy court and sought an order
that the debt was discharged in their previous chapter
bankruptcy case despite § 523(a)(3)(A). After the
bankruptcy court determined that the Zitos' debt to
Douglass Enterprises was not discharged, Douglass
Enterprises, as the prevailing party, sought and obtained a
judgment from the bankruptcy court awarding attorney's
fees and costs for defending the discharge action. The Zitos
now appeal the post-judgment award of attorney's fees and
costs to Douglass Enterprises. Although we agree that
Douglass Enterprises, as the prevailing party in this action,
would be entitled to reasonable attorney's fees and costs
in the event that it ultimately prevails in its personal
guarantee action, the bankruptcy court erred by awarding fees
and costs prematurely. Accordingly, we REVERSE.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
Zitos owned and managed BySynergy, LLC, a Delaware limited
liability company in the business of real estate development.
Prior to 2008, BySynergy was developing a 106 single-family
home project in Arizona. To help fund the venture, BySynergy
obtained a $200, 000 loan from Douglass Enterprises, which
was evidenced by a note and a second-position deed of trust
against the project property in favor of Douglass
Enterprises. To further secure repayment, the Zitos executed
a Personal Guarantee for the amounts owed to Douglass
Enterprises under the note. The Personal Guarantee was
governed by Arizona law and contained an attorney's fees
clause providing for reasonable attorney's fees to the
prevailing party in any suit "to enforce any of its
2008, BySynergy filed a chapter 11 bankruptcy case, which was
later converted to chapter 7. Ultimately, Douglass
Enterprises's second-position lien was wiped out by a
senior lienholder and it received nothing on its unsecured
Zitos then filed their individual chapter 11 bankruptcy case
on October 13, 2009. They did not list Douglass Enterprises
or the Personal Guarantee debt on their bankruptcy schedules.
They received a discharge on October 9, 2012.
April 2013, Douglass Enterprises filed suit against the Zitos
in the Arizona state court for breach of the Personal
Guarantee. The Zitos reopened their individual chapter 11
case and sought a determination from the bankruptcy court
that the Personal Guarantee debt had been discharged. After
trial, the bankruptcy court found that the Zitos had failed
to establish that Douglass Enterprises had notice or actual
knowledge of the case in time to file a timely proof of
claim. Accordingly, the debt was not discharged under §
523(a)(3)(A). A judgment was entered to that effect on
September 7, 2018, which the Zitos appealed.
Enterprises then moved for $207, 210.85 of attorney's
fees and costs incurred in the § 523 action ("Fee
Application"). Douglass Enterprises maintained that it
was entitled to such an award because the Personal Guarantee
provided for the recovery of attorney's fees and costs to
the prevailing party. The Zitos opposed the Fee Application.
They argued that, because the § 523 action involved only
a question of bankruptcy law - i.e., whether the debt owed to
Douglass Enterprises was discharged under § 523(a)(3)(A)
- and did not address the enforceability of the contract
under state law, attorney's fees were not recoverable
under the Personal Guarantee or Arizona law. Because the
underlying contractual ...