Lender attorney fees in bankruptcy: BAP reads loan fee clauses narrowly and sends Civil Code 1717 award back

Whether a lender recovers attorney fees in bankruptcy depends on the exact words of its loan documents. In In re San Francisco Care Center, L.P., the Ninth Circuit Bankruptcy Appellate Panel held that narrow fee clauses barred most of a lender's $419,266.94 fee claim, allowed fees for its bankruptcy work to be considered on remand, and vacated the borrower's reciprocal fee award under Civil Code section 1717.

What happened

In 2002, San Francisco Care Center, L.P. (SFCC) borrowed up to $23,108,000 to finance a senior health care facility in San Francisco. The loan was documented by a note, a deed of trust and a security agreement. Lenox Mortgage IX LLC acquired the loan in 2006.

SFCC defaulted in 2006 or 2007. Lenox recorded a notice of default in 2008, and SFCC paid the cure amount. SFCC then sued Lenox in state court to compel release of construction funds, and later dismissed that suit voluntarily. In 2024, SFCC stopped paying again. Lenox recorded a notice of default and scheduled a foreclosure sale for January 14, 2025. SFCC filed a chapter 11 petition that day.

In the bankruptcy, the court approved a sale of the property under 11 U.S.C. section 363(b) for $27,750,000, with disputed payoff amounts held in escrow. Lenox's payoff demand included $419,266.94 in attorney fees, which it attributed to the first default, the state court action, the second default, and the chapter 11 case and the dispute over its payoff demand. SFCC disputed the $419,266.94 in attorney fees. The bankruptcy court (Judge Dennis Montali, N.D. Cal.) sustained SFCC's objection and denied the fees, then awarded SFCC its own fees and costs under Civil Code section 1717 as the prevailing party. Lenox appealed both orders. The case was later converted to chapter 7, which the panel said did not affect its analysis.

Can a lender recover attorney fees under the loan documents in bankruptcy?

Lenox claimed the fees under 11 U.S.C. section 506(b). Whether California law allowed them depended on the loan documents, and the panel read each one closely. "The language in the Loan Documents is unambiguous and strictly limits Lenox's entitlement to recover attorneys' fees."

• The note provided for fees in an action on the note, in "such sum as the Court may adjudge reasonable." No court ever awarded fees in the state court action, so the note did not support them.
• The deed of trust covered appearing in or defending an action or proceeding affecting the security. The state court action did not challenge the validity of the note or Lenox's enforcement of it, and notices of default and a scheduled sale are nonjudicial remedies, not appearances in an action or proceeding.
• The security agreement was narrower still: it "authorized payment of attorneys' fees from a single source: foreclosure sale proceeds." There was no foreclosure sale. "The Property was sold through the bankruptcy court pursuant to § 363(b), not pursuant to a foreclosure sale."

The panel affirmed the denial of fees for the state court action and both defaults. It noted that the bankruptcy court erred in finding the state court action was not instituted on the note, but held the error harmless.

Fees for the lender's work in the bankruptcy case

The bankruptcy proceedings were different. The bankruptcy court had not separately addressed those fees. The panel held that Lenox appeared in the bankruptcy to protect its security interest under the deed of trust, including through its proof of claim and its efforts to make the sale order consistent with the loan documents. And the litigation over the payoff demand was an action on the note, as both sides had treated it. SFCC could not have it both ways: if that litigation was "on a contract" for its own section 1717 request, it was on the contract for Lenox's fee claim as well.

The panel reversed on that category and remanded for the bankruptcy court to decide the reasonableness of those fees.

Who is the prevailing party under Civil Code section 1717 after a mixed result?

Section 1717 makes a one-sided contractual fee clause reciprocal in an action on the contract, and the prevailing party is the one that recovered greater relief on the contract. When results are mixed, the trial court has discretion to decide who prevailed, or that no one did. Because the panel partly reversed the ruling on Lenox's fees, the basis for SFCC's award changed. The panel vacated the fee award and remanded for the bankruptcy court to decide whether SFCC still prevailed.

The disposition affirmed the denial of fees for the state court action and the two defaults, reversed and remanded as to fees for the payoff-demand litigation and the bankruptcy proceedings, and vacated and remanded the fee order.

The memorandum is unpublished and has no precedential value. For how we approach appeals from rulings like this one, see our appeals and writs page.

Why this case shows the value of appellate counsel

For a lender or borrower facing a fee ruling in bankruptcy, this decision shows how much depends on the precise text of decades-old loan documents, and on how each category of fees is tied to a specific clause. It also shows how a fee award to one side can unravel when the ruling on the other side's fees changes on appeal. Appellate review of a fee ruling mixes de novo questions of state law with discretionary calls on reasonableness and prevailing party, and framing which is which, category by category, is work for appellate counsel.

Facing a ruling you may need to appeal or challenge by writ? Yisrael Gelb · yisrael@gelblawapc.com · (323) 632-6864

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