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The decision to litigate a business dispute requires comprehensive cost-benefit analysis. This process typically begins with an evaluation of the potential recovery or, for parties defending the case, exposure to financial damages. A recent opinion issued by the United States Bankruptcy Court for the Central District of California in In re Hawkeye Entertainment, LLC[1] offers a stark reminder that this due diligence must include consideration of contractual fee shifting clauses. In Hawkeye Entertainment, a landlord that opposed relief sought by a bankrupt tenant was ordered to pay in excess of $600,000 in attorneys’ fees incurred by the tenant. While this issue arose in the context of a bankruptcy proceeding, the Hawkeye Entertainment Court’s opinion presents important lessons for all litigants.
Prior to its bankruptcy filing, Hawkeye Entertainment, LLC (“Hawkeye” or “Debtor”) entered into a lease agreement (the “Lease”) for commercial property in Los Angeles. The landlord issued a Notice of Default under the Lease which, in turn, compelled Hawkeye to file for bankruptcy protection.
In its Chapter 11 proceeding, the Debtor moved to assume the Lease (the “Assumption Motion”) pursuant to Section 365 of the United States Bankruptcy Code. The landlord opposed the Assumption Motion on the grounds that Hawkeye was in default and unable to provide adequate assurance of future performance under the Lease as required under Section 365. The Debtor filed several other motions relating to the Lease[2] (the “Ancillary Motions”) all of which were granted over the landlord’s opposition.
Following extensive discovery and a five-day trial, the Bankruptcy Court held that the Debtor was not in default under the Lease and granted the Assumption Motion. Thereafter, the Debtor moved for an award of attorneys’ fees and costs against the landlord to recover over $800,000 in fees it incurred in litigating the various motions and the administration of the bankruptcy estate.
Significantly, the Hawkeye Court ordered the landlord to pay the Debtor in excess of $600,000 for attorneys’ fees incurred in connection with the Assumption Motion. The Court disallowed the fee requests relating to administration of the bankruptcy case and the Ancillary Motions.
The Court’s analysis commenced with the recognition that the general rule in litigation, known as the American Rule, is that the prevailing party is not entitled to recover its attorneys’ fees from the losing party. An exception to this rule exists where a statute or the parties’ contract authorizes the prevailing party to recover its fees and costs.
The applicable state law authorized the recovery of attorneys’ fees and costs in any action on a contract where the contract specifically authorized the prevailing party to recover its attorneys’ fees and costs. The Lease included a provision providing that if either the landlord or Hawkeye instituted any action or proceeding relating to the Lease or a default thereunder, the prevailing party would be entitled to recover its attorneys’ fees and costs.
The Court concluded that the litigation related to the Assumption Motion was an action or proceeding related to the Lease and, as such, the fees and costs incurred by the Debtor were compensable. Conversely, the Court found that the fees and costs incurred by the Debtor in the administration of the bankruptcy case, and litigating the Ancillary Motions, were not recoverable.
Presumably, the assessment of a $600,000 attorneys’ fee award was not within the landlord’s contemplation when it decided to oppose the Assumption Motion. Most parties in the landlord’s position, particularly in bankruptcy proceedings, assume that the downside to bankruptcy motion practice is limited to the party’s own attorneys’ fees.
The Hawkeye Entertainment opinion offers several important reminders for landlords and commercial parties alike. First, while seemingly benign at the contract negotiation stage, prevailing party provisions may come back to haunt landlords in litigation.[3] Parties with superior bargaining power would be well advised to make such provisions unilateral or avoid them altogether. Second, leases and contracts should specifically define “prevailing party” to eliminate any ambiguity or impediments to enforcement. Third, contractual parties should be mindful of whether an award of attorneys’ fees is covered under insurance policies or whether contractual assumptions of liability fall outside of coverage. Lastly, if a landlord chooses to oppose a bankrupt tenant’s motion in bankruptcy court, careful attention should be paid to the applicable state law and contractual language to ensure that it does not suffer the same fate as the landlord in Hawkeye Entertainment.
For more information, please contact John C. Kilgannon or the Stevens & Lee attorney with whom you regularly work.
This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.
[1] In re Hawkeye Entertainment, LLC, Case No. 19-BK-12102 (MT)
[2] The Ancillary Motions included a motion to hold lease payments in trust and a motion to use the leased premises for religious services and music events.
[3] Landlords, and other parties that typically enforce contractual defaults, may naturally assume that they will be the “prevailing party.”
