Banner Bank v. Smith

25 F.4th 782

BANNER BANK, successor by merger of American West Bank which formerly did business in Utah as Far West Bank, Plaintiff Counter Defendant – Appellant,

v.James M. SMITH, a Utah resident; Loree C. Smith, an individual, Defendant Counterclaimants – Appellees.

No. 19-4131

United States Court of Appeals, Tenth Circuit.

FILED February 7, 2022

Steven W. Call, Ray Quinney & Nebeker P.C., Salt Lake City, Utah (Jonathan A. Dibble, Ray Quinney & Nebeker P.C., Salt Lake City, Utah, with him on the briefs), for Plaintiff Counter Defendant - Appellant.

Robert D. Drummond, Jr., Robert D. Drummond, Jr. Law Office, Fairhope, Alabama (Dallis Nordstrom Rohde, Carman Lehnhof Israelsen LLP, Salt Lake City, Utah, with him on the briefs), for Defendant Counterclaimants - Appellees.

Before HARTZ, PHILLIPS, and EID, Circuit Judges.

EID, Circuit Judge.

Banner Bank ("Banner") provided a multimillion-dollar loan to James and Loree Smith and their business entities.¹ As collateral, James Smith pledged several properties. Banner later contracted to release Loree Smith from all actions associated with the loan. When the loan entered default, Banner named Loree in this diversity action to foreclose on the collateral, notwithstanding the release. Loree brought a successful breach of contract counterclaim and recovered attorneys’ fees through Utah's bad-faith fee-shifting statute. See Utah Code Ann. § 78B-5-825. After finding Loree satisfied every statutory requirement, the district court issued a judgment awarding $105,550 in fees to Loree. Banner appeals, arguing that every prong of the bad-faith statute is unmet and the fee award was unreasonable. We also asked the parties to brief the question whether the judgment below is final. Finding that it is, we exercise our jurisdiction under 28 U.S.C. § 1291. We do not reach any of Banner's specific statutory arguments but reverse the fee award for a more fundamental reason. Section 78B-5-825 is a procedural attorneys’ fees statute, so it cannot be used to recover fees when a federal court sits in diversity.

I.

James Smith owned a business: Real Estate Investor Support ("REIS"). James Smith also owned real and personal property across the United States, some of which his ex-wife Loree Smith co-owned. Banner's predecessor loaned money to REIS. As part of the agreement, REIS gave Banner a promissory note worth $2.3 million in July 2009. James personally guaranteed the loan and signed a Deed of Trust that put up several properties in Oregon (eleven parcels of land, called the Eleven Parcels, and a condominium, called Unit 7) as collateral. The Eleven Parcels were solely owned by James, while Unit 7 was at that time jointly owned by James and Loree.

James signed the document but Loree refused. Banner accepted the deed anyway and tried to record it in Oregon. The county recorder's office rejected the filing because Loree had not signed it.

Banner revised the trust deed in September 2010 to remove Unit 7 from the property securing the loan and delete Loree's name and signature block. James signed the revised deed but only sent Banner an electronic copy of the signature page, retaining the original. Banner did not receive or record the revised deed of trust.

Meanwhile, in December 2010, REIS, James, and Loree sold REIS's assets to Real Estate Investor Education ("REIE"). REIE agreed to assume the Banner loan. It also agreed to release Loree from any lawsuits that might arise in connection with it. The release states:

In consideration of this Agreement, the Borrower and Lender, on behalf of themselves, their successors, assigns, legal representatives (collectively and individually, the "Releasing Parties "), hereby fully, finally and completely RELEASE and FOREVER DISCHARGE Loree Smith of and from any and all claims, controversies, disputes, liabilities, obligations, demands, damages, debts, liens, actions and causes of action of any and every nature whatsoever relating to the Loan.

Aplt. App'x Vol. I at 150.

REIE defaulted in March 2011. James, the guarantor, did not make any payments on the loan. Banner's only recourse was the property James pledged, so it "determined that it needed to record the defective Deed of Trust." Aplt. App'x Vol. IV at 846. Through counsel, Banner made multiple changes to the original, defective deed using pen, pencil, and white-out. In July 2011, Banner recorded the altered document.

In August 2012, Banner filed this action against REIS, REIE, JMS Marketing, James, Loree, and ten John Does to enforce the loan and foreclose on James's interest in the Eleven Parcels and Unit 7.² To foreclose on solely James's interest, Banner sought a declaratory judgment that Loree did not hold any interest in the collateral. Loree, as a third-party beneficiary of the release, brought several counterclaims, including breach of contract, against Banner. James also brought counterclaims. Banner attached a copy of the trust deed to its complaint, but the copy did not contain the alterations described above. The alterations were likewise not visible in the copy certified by the Oregon county, or in any copy provided during discovery.

The district court ruled that all defendants except Loree were liable for the loan amount. In 2014, the court entered default judgments against REIS, REIE, and JMS Marketing. Then, in 2017, the district court entered summary judgment against James, holding him liable for the same sum. However, the court declined to enter summary judgment on the issue of foreclosing on the Oregon property because of factual disputes concerning the altered deed. In that same order, the district court rejected all counterclaims brought by James and Loree except Loree's counterclaim for breach of contract, on which it reserved judgment.

In December 2014, Loree obtained sole ownership of Unit 7 pursuant to a final order entered in the Smiths’ Florida divorce case. In 2017, Banner released its interest in Unit 7, so the sole pending claim against James concerned only the Eleven Parcels he owned in full. The other claim remaining at that point was Loree's counterclaim for breach of contract.

The district court held a three-day bench trial on the two remaining claims in June 2017. Banner produced the altered version of the trust deed for the first time in this litigation on the second day of trial. The parties submitted written closing arguments and the court scheduled a hearing for October 2017. On September 5, 2017, James filed for bankruptcy. As a result, the district court stayed the case. See 11 U.S.C. § 362(a). Later, as the court explained in a 2019 order, "the Trustee in James's bankruptcy proceeding abandoned the Oregon Properties, thereby mooting Banner Bank's request for an order to foreclose on the Eleven Parcels." Aplt. App'x Vol. IV at 842. With the foreclosure claim moot, that left only one cause of action: Loree's counterclaim for breach.

The district court ruled that Loree prevailed on her breach of contract counterclaim because Banner sued her despite their unambiguous release agreement. The court explained that "[w]hile Banner Bank [wa]s certainly within its legal rights to foreclose on property for which it ha[d] a secured interest[,] ... the existence of this right does not negate the legal consequences to Banner Bank for violating its promise to release Loree from such a controversy." Id. at 853.

Although Banner's notice of appeal encompasses the district court's decision on Loree's counterclaim, Banner does not directly challenge that ruling. Instead, Banner challenges the attorneys’ fees Loree recovered under Utah's bad-faith fee-shifting statute. See Utah Code Ann. § 78B-5-825. The statute requires awarding "reasonable" attorneys’ fees to a "prevailing party if the court determines that the action or defense to the action was without merit and not brought or asserted in good faith." Id. § 78B-5-825(1). The statute contains exceptions that are not relevant to this appeal.

Loree's breach of contract counterclaim is governed by Utah law. Utah follows the American Rule that attorneys’ fees are typically not recoverable, win or lose, unless law or contract provides otherwise. See USA Power, LLC v. PacifiCorp , 372 P.3d 629, 662 (Utah 2016). The Utah Supreme Court has not, it seems, addressed whether and when fees may be recovered as damages for breach of a release agreement, which some jurisdictions treat differently. See Sonja A. Soehnel, Annotation, Recovery of Attorneys’ Fees and Costs of Litigation Incurred as Result of Breach of Agreement Not to Sue , 9 A.L.R. 5th 933 (1993) (surveying different approaches).

Leading up to trial, Loree sought to recover attorneys’ fees as direct damages for Banner's alleged breach of the release. See Defs.’ Resp. in Opp'n to Banner Bank's Mot. to Alter and Amend at 4, Banner Bank v. Real Estate Investor Education, LLC, et al. , No. 2:12-CV-00763-CW (D. Utah) (May 11, 2017), ECF No. 219 ("[A]ttorney's fees, as well as other costs and expenses, incurred by Loree Smith are the damages as a result of a Breach of the Consent, Waiver and Release Agreement and are recoverable ... because they are in and of themselves, in part, the damages as a direct result of Banner's breach.").³ Loree's pretrial brief likewise said nothing about claiming fees under the Utah statute. See Aplt. App'x Vol. IV at 796. At trial, however, Loree suggested she sought fees under both Utah statutory law and the district court's inherent powers. See Redacted Tr. at 13, Banner Bank , No. 2:12-CV-00763-CW (Aug. 8, 2017), ECF No. 251. In her closing brief, Loree formalized this request by invoking § 78B-5-825. See Loree Smith's Br. as to Closing Arg. at 3, Banner Bank , No. 2:12-CV-00763-CW (Aug. 10, 2017), ECF No. 254.

The district court awarded attorneys’ fees under the Utah statute, concluding that Banner's action against Loree was both meritless and brought in bad faith. In a later order, the court rejected Banner's argument that Loree was not a "prevailing party"...