In a Lawsuit Over a Line of Credit Disagreement, How Is the Fee-Shifting Provision for Attorney Fees Interpreted?

The Colorado Court of Appeals took on this question in a drama-filled dispute among former friends in Klein v. Tiburon, (2017 COA 109).

In 2005, the Kleins, the Kings, David Sell and his brother each put in money to form an LLC, “Tiburon”, to build the group a vacation home in Costa Rica. The Kleins, the Kings, Sell, and his brother each owned 25%. In 2011, Tiburon bought a Costa Rican corporation that owned a vacation home (“VC5”). The partners agreed to split the operating costs for VC5 in proportion to their shares in Tiburon. The operating plan incorporated a Line of Credit (“LOC”) Agreement to pay for furnishing VC5. Under the LOC, the Kleins and the Kings each loaned Tiburon $15,000, with interest. Disagreements between the partners arose when they began decorating VC5. In December of 2012, the Kleins bought their own vacation home in Costa Rica and stopped using VC5. Then the Kleins asked to be paid back by Tiburon. Tiburon owed the Kleins almost $5000, which it paid. In August of 2013, the Kleins stopped paying their share of Tiburon’s operating costs and sued Tiburon, requesting a judicial dissolution, an independent accounting, for breach of the LOC, and for civil theft. The Kleins also sued Sell for civil theft. Tiburon counterclaimed for 25% of VC5’s operating costs, alleging that the Kleins had stopped paying. All parties requested awards of attorney fees and costs.

While the case was pending, the lower court dismissed the request for a judicial dissolution of Tiburon, for the Kleins had forced an extrajudicial dissolution. After trial, the lower court ruled Tiburon did not breach the LOC by offsetting the members’ capital contributions against the outstanding balance. However, it ruled Tiburon breached the LOC by not paying the Kleins interest on the loan. The Kleins did not prove actual damages for this breach; the court awarded them one dollar. The lower court said an independent accounting was unnecessary and that the theft claims were meritless. The lower court ruled that the Kleins had breached the operating plan by not paying their share of VC5’s operating costs. The court awarded Tiburon $2510 — 25% of VC5’s operating costs since August 2013 and the court awarded costs to Sell and Tiburon as the prevailing parties, but did not award attorney fees.

The Kleins filed a motion for amendment of the court’s findings and judgment or, in the alternative, for a new trial and for an award of attorney fees and costs. The motion was denied as was the request for attorney fees and costs. The Kleins appealed again and also asked for the judge to be removed. All motions were denied and the lower court awarded Tiburon and Sell attorney fees and costs and called the Kleins’ behavior ‘vexatious and improper’.

The Kleins raised three claims on appeal. First, the Kleins contended that the district court erred in denying their request for attorney fees, arguing that the fee-shifting provision in the LOC entitles them to attorney fees and costs incurred to enforce the interest provision of the LOC, as they sought to do through their third claim for relief. Second, the Kleins contend that the district court erred in awarding Sell the attorney fees he incurred in seeking an award of fees because Sell failed to carry his burden to prove that the Kleins’ defense to his fees motion lacked substantial justification. Third, the Kleins contend that the district court’s award of fees to Sell unreasonably included fees Sell incurred to respond to portions of the post-trial motions that were not relevant to the Kleins’ claims against Sell.

The Court of Appeals examined the fee-shifting provision of the LOC, and determined that it is not a ‘prevailing party’ provision. Instead, it entitles the Kleins, the ‘Lender’ to recover all their fees, regardless of whether they prevail and no matter their conduct in the proceedings. According to the lower court and the facts and findings in the case, the Kleins did not prevail—as a matter of fact, the lower court said the Kleins needlessly expanded the proceedings likely to run-up their opponent’s costs. The Kleins’ behavior warranted sanctions—which were imposed. The Court of Appeals stated it would be antithetical to enforce this provision in their favor given the sweep of the sanctions imposed against them. The Court of Appeals concluded that enforcing a fee-shifting provision in favor of a non-prevailing party that itself was sanctioned for frivolous and vexatious conduct would violate public policy.

Next, the Court of Appeals looked at the lower court’s award of attorney fees to Sell. The party seeking attorney fees bears the burden of proving his entitlement to the award. The Court concluded that the district court’s amendment of its initial fee award to include fees Sell incurred in seeking fees was error. The Court stated that Sell did not satisfy his burden of proving his entitlement to fees satisfy this requirement. Further, because the record does not show any agreement between the Kleins and Sell that satisfaction of the initial fee award would preclude any later appeal, the partial payment of Sell’s fees incurred in seeking fees thus does not waive any portion of the Kleins’ claim on appeal. The Court reversed the lower court’s order amending the judgment amount awarded to Sell for attorney fees and direct the court on remand to subtract the amount of those fees from the award.

Finally, the Court of Appeals examined whether the determination by the lower court of what constitutes reasonable attorney fees is an abuse of discretion. The Court says it will not disturb a ruling unless it is patently erroneous and unsupported by evidence. The Court of Appeals determined that Sell did not breach his duty to mitigate fees and the lower court’s decision was supported by the facts. The Court of Appeals denies claims one and three from the Kleins and remands claim two to the lower court with instructions.

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