Fiebelkorn v. Cooke

Dated: October 30, 2020 □□□ 1 r (fo □□ 2 Dent Daniel P. Collins, Bankruptcy Judge 3 UNITED STATES BANKRUPTCY COURT 4 DISTRICT OF ARIZONA 5 || Inre: ) Chapter 13 Proceedings 6 || GINA M. COOKE, ) ) Case No.: 3:18-bk-10014-DPC 7 Debtor. ) 8 || JON FIEBELKORN, Adversary No.: 3:18-ap-00519-DPC 9 Plaintiff, ) ORDER RE DEBTOR’S MOTION 10 y ) FOR ATTORNEYS’ FEES ) 11 || GINA M. COOKE, ) [NOT FOR PUBLICATION] 12 Defendant. [13] 14 Before the Court is Gina M. Cooke’s (“Defendant” or “Debtor’) motion! for an 15 ||award of attorney’s fees in the amount of $89,675 in connection with her successful 16 defense of the nondischargeability complaint brought against her by Debtor’s former 17 ||husband, Jon Fiebelkorn (‘Plaintiff’). For the reasons stated below, this Court denies 18 || Debtor’s Fee Motion and finds that, although Debtor has sustained her burden under 19 |} 11 U.S.C. § 523 (d),” Plaintiff has established that his pursuit of his claims in the Adversary 20 || Proceeding was substantially justified. No other statute or rule cited by Debtor supports 21 ||her request for fees.° [22] 23 I. BACKGROUND 24 Plaintiff's Complaint sought, under §§ 523(a)(2), (4), (5) and (6), to hold 25 ||nondischargeable Debtor’s obligations to him. These obligations are memorialized in the 26 The “Fee Motion.” See DE 92. “DE” means docket entry in this adversary proceeding No. 3:18-ap-00519-DPC (the “Adversary Proceeding”). “Admin DE” means docket entry in this administrative case No. 3:18-bk-10014-DPC (the 27 “Administrative Case’). 28 Unless indicated otherwise, statutory citations refer to the U.S. Bankruptcy Code, 11 U.S.C. $$ 101 — 1532. 3 This Order constitutes this Court’s findings of fact and conclusions of law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure. 1 parties’ May 2016 written marital settlement agreement (the “MSA” or the “Marital 2 Settlement Agreement”). The MSA was entered into in the State of Illinois in connection 3 with a marital dissolution proceeding (the “Divorce Case”) commenced in the 10th 4 Judicial Circuit of Illinois, Woodford County (the “Illinois Court”). 5 This Court partially granted Debtor’s motion for summary judgment and dismissed 6 Plaintiff’s § 523(a)(6) claim. The Court also then denied Debtor’s summary judgment 7 requests on Plaintiff’s § 523(a)(2) and (4) claims finding there existed genuine issues of 8 material fact, especially concerning Debtor’s intent. At the conclusion of the trial in this 9 matter, the Court dismissed Plaintiff’s § 523(a)(5) claim finding that Plaintiff’s claims 10 were not domestic support obligations owed to him. 11 On June 15, 2020, this Court entered its Under Advisement Order4 denying the 12 §§523(a)(2) and (4) relief sought by Plaintiff but also denying Debtor her requested fees. 13 Debtor then filed her Fee Motion. Although the Under Advisement Order ruled on 14 Debtor’s fee requests, the Fee Motion never mentions Bankruptcy Rules 9023 or 9024 or 15 FRCP Rules 59 or 60 or even the word “reconsideration.” Nevertheless, this Court will 16 address the Fee Motion as if it seeks this Court’s reconsideration of the Under Advisement 17 Order’s denial of Debtor’s fee request. 18 Plaintiff responded5 to the Fee Motion and Debtor replied.6 No judgment has yet 19 been entered in this Adversary Proceeding. [20] 21 II. JURISDICTION 22 This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 23 157(b)(2)(I) and 11 U.S.C. § 523 (d). [24] 25 III. ISSUE 26 Whether Debtor is entitled to an award of attorney’s fees against Plaintiff in [27] 4 DE 77. [28] 5 DE 98. 6 DE 101. 1 connection with her successful defense of Plaintiff’s nondischargeability complaint 2 concerning debts owed to him arising out of the parties’ Marital Settlement Agreement. [3] 4 IV. LEGAL ANALYSIS 5 Under the “American Rule,” a litigant in federal court is not entitled to an award 6 of attorneys’ fees and costs unless an applicable statute or enforceable contract provides 7 for such award.7 The Bankruptcy Code does not provide a general right to recover fees.8 8 Neither do 11 U.S.C. §§ 523 (a)(2) or (4) provide a statutory right to fees in favor of the 9 prevailing party. However, as the 9th Circuit indicated in Baroff, “a prevailing party in a 10 bankruptcy proceeding may be entitled to an award of attorney fees in accordance with 11 applicable state law if state law governs the substantive issues raised in the proceedings.”9 12 Moreover, § 523(d) addresses attorney’s fees in a nondischargeability case where the 13 claim at issue is a consumer debt. 14 The Court will address (a) state law cited by the Debtor, (b) the parties’ contract, 15 and (c) § 523(d). [16] 17 A. State Law Cited by Debtor 18 Debtor cites A.R.S. 12-341.01 for the proposition that she is entitled to an award 19 of attorney’s fees in connection with this Adversary Proceeding. That statute states: 20 A. In any contested action arising out of a contract, express or implied, the court may award the successful party reasonable [21] attorney fees. If a written settlement offer is rejected and the 22 judgment finally obtained is equal to or more favorable to the offeror than an offer made in writing to settle any contested [23] action arising out of a contract, the offeror is deemed to be the 24 successful party from the date of the offer and the court may award the successful party reasonable attorney fees. This [25] section shall not be construed as altering, prohibiting or [26] 27 7 Travelers Casualty & Surety Company of America v. Pacific Gas and Electric Company, 549 U.S. 443, 448 , 127 S. Ct. 1199 (2007). [28] 8 Heritage Ford v. Baroff (In Re Baroff), 105 F.3d 439, 441 (9th Cir. 1997). [9] Id. See also In re Bertola, 317 B.R. 95 (9th Cir. BAP 2004). restricting present or future contracts or statutes that may [1] provide for attorney fees. 2 B. The award of reasonable attorney fees pursuant to this section should be made to mitigate the burden of the expense [3] of litigation to establish a just claim or a just defense. It need 4 not equal or relate to the attorney fees actually paid or contracted, but the award may not exceed the amount paid or [5] agreed to be paid. 6 C. The court and not a jury shall award reasonable attorney fees under this section. [7] 8 Debtor is clearly the prevailing party in this Adversary Proceeding and the MSA is 9 a written contract between the parties and that MSA gives rise to Plaintiff’s claims against 10 Debtor. However, the MSA was entered into in Illinois and was approved by the Illinois 11 Court in the Divorce Case. The events leading up to execution of the MSA occurred in 12 Illinois and, at all relevant times, the parties were Illinois residents. Performance under 13 the MSA, especially the refinance or sale of the Illinois residence, was to occur in Illinois. 14 All the relevant facts and allegations asserted in Plaintiff’s Complaint pertained to events 15 that occurred in Illinois before Debtor’s August 18, 2018 bankruptcy filing (“Petition 16 Date”). Debtor points to the Divorce Case’s Illinois judgment having been domesticated 17 in Arizona on January 18, 2019, but that was nearly a year after the Petition Date and over 18 one month after commencement of this Adversary Proceeding. The Arizona judgment 19 domestication does not make the MSA or the Illinois judgment an Arizona contract nor 20 does it give rise to Debtor’s claim for contractually driven attorneys’ fees. A.R.S. § 1221 341.01 is inapplicable to the case at bar. To use Debtor’s words, the “center of gravity” 22 in this conflict of law question is in Illinois, not Arizona. 23 Debtor cites the Arizona Court of Appeals unpublished case of Marriage of 24 Orinski10 in support of her proposition that the domestication of a California divorce 25 judgment in Arizona invokes Arizona’s attorney fee statute, A.R.S. § 12-341.01. 26 Orinski, however, involved a request for fees in Arizona where, subsequent to the 27 domestication of the California judgment in Arizona, the parties litigated requests to [28] 10 In re the Marriage of Sharon Orinski v. William Orinski, 2011 WL 683756 (Ariz. App. 2011). 1 modify spousal maintenance in Arizona courts. In the case at bar, the parties litigated the 2 dischargeability of debts incurred and actions taken in Illinois, all prior to the Petition 3 Date. Orinski is inapplicable to this case. 4 Illinois law has not been cited by Debtor nor has this Court independently sought 5 to review Illinois law to see what it might provide to support Debtor’s request for fees. 6 Since Arizona law is inapplicable to this fee issue and since no other statute or case law 7 has been brought to this Court’s attention, the Court must find another basis to support 8 Debtor’s fee request. [9] 10 B. The Contract Between the Parties 11 Debtor points to the MSA as the contract pertinent to her Fee Motion. The Court 12 finds the MSA is a contract between the parties but, significantly, Debtor does not cite to 13 any provision within the MSA itself which might support Debtor’s claim for attorney’s 14 fees nor does this Court read the MSA to provide for fees in the event of litigation 15 pertaining to the MSA. Just the contrary. Paragraph V of the MSA states “[e]ach party 16 shall pay their own attorney fees.” 17 Arizona law is not applicable to Debtor’s Fee Motion. The MSA itself does not 18 supply a basis for an award of fees to Debtor. Debtor’s fee request may only be granted 19 if § 523(d) supplies the basis for the requested fees. [20] 21 C. Section 523(d) as a Basis for An Award of Attorney’s Fees 22 The only federal statute cited by Debtor in support of an award of her fees in this 23 Adversary Proceeding is the statute first mentioned in the Debtor’s papers after entry of 24 this Court’s Under Advisement Order.11 In Debtor’s Fee Motion she, for the first time, 25 references § 523(d) which provides: 26 11 In the Court’s Under Advisement Order at page 29, the Court denied Debtor’s request for attorney’s fees noting: “Defendant has not argued that this Adversary Proceeding concerns the question of dischargeability of a consumer [27] debt. Defendant has not demonstrated that an award of attorney’s fees is justified under Federal Rule of Bankruptcy Procedure 7054. Defendant has suggested Bankruptcy Rule 7068 provides a basis for awarding her fees in this [28] Adversary Proceeding. That Rule, however, pertains to offers of judgment and then only to an award of costs if the ultimate judgment is more favorable to the offeror. Defendant does not point to having made an offer of judgment [i]f a creditor requests a determination of dischargeability of [1] a consumer debt under subsection (a)(2) of this section, and 2 such debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney’s fee [3] for, the proceeding if the court finds that the position of the 4 creditor was not substantially justified, except that the court shall not award such costs and fees if special circumstances [5] would make the award unjust. [6] 7 The Ninth Circuit Bankruptcy Appellate Panel in Stine12 quoted the following: 8 Section 523(d) was intended to discourage creditors from [9] initiating meritless actions based on § 523(a)(2) in the hope of obtaining a settlement from an honest debtor anxious to 10 save attorney’s fees [citation omitted]. However, this concern 11 must be balanced against the risk that imposing the expense of the debtor’s attorney’s fees and costs on the creditor may 12 chill creditor efforts to have debts that were procured through 13 fraud declared nondischargeable. In re Carolan, 204 B.R. at 987. [14] 15 Stine went on to say: “However, there is no presumption that the creditor was not 16 substantially justified simply because it did not prevail.”13 17 “In order to prevail on a motion for attorney’s fees under § 523(d), a debtor must 18 prove that: (1) the creditor requested a determination of the dischargeability of a debt, 19 (2) the debt is a consumer debt, and (3) the debt was discharged.”14 20 1. The Harvey Factors 21 Debtor satisfies this first factor since Plaintiff’s complaint in this Adversary 22 Proceeding was entirely focused on his allegedly nondischargeable claims against Debtor. 23 As to the second Harvey Factor, § 101(8) defines a “consumer debt” as a “debt incurred 24 by an individual primarily for a personal, family, or household purpose.” Debts related to [25] nor has she identified the costs incurred by her in this action. Having supplied the Court with no legal basis to grant [26] Defendant her attorney’s legal fees in this Adversary Proceeding, the Court hereby denies Defendant an award of legal fees.” 27 12 In re Stine, 254 B.R. 244 (9th Cir. BAP 2000). [13] Id. [28] 14 In re Harvey, 172 B.R. 314, 317 (9th Cir. BAP 1994) (quoting In re Kullgren, 109 B.R. 949, 953 (Bankr. C.D. Cal. 1990)). These three factors are hereinafter referred to as the “Harvey Factors.” 1 housing fall under the category of “consumer debts.”15 “It is settled in [the Ninth Circuit] 2 that the purpose for which the debt was incurred affects whether it falls within the statutory 3 definition of ‘consumer debt’ and that a debt incurred for business ventures or other profit4 seeking activities does not qualify.”16 Generally, marital dissolution debts are considered 5 to be consumer debts if they are not incurred with a profit motive or in connection with a 6 business transaction.17 A property settlement agreement in the form of a lump sum award 7 in a divorce proceeding is a consumer debt.18 8 Plaintiff argues that Debtor’s obligation to him “was to account for the couple’s 9 investment in the real property and the increase in value in that home.” The home, when 10 acquired, was for a very fundamentally “household purpose.” It was where the parties 11 lived and raised their child. When the MSA created Debtor’s debt to Plaintiff it was in 12 recognition that the parties needed to divide these household assets and liabilities. This 13 MSA-created debt was a consumer debt owed by Debtor to Plaintiff. Plaintiff’s valiant 14 efforts to distinguish the holding in Palmer19 and to persuade this Court that the MSA 15 created something other than a “consumer debt” is to no avail. 16 This Court finds that Plaintiff’s complaint in this Adversary Proceeding concerned 17 a consumer debt owed to Plaintiff by Debtor. 18 The third §523(d) Harvey Factor that the Debtor must prove is that the “debt is 19 discharged.” Debtor is in a chapter 13 proceeding. Her chapter 13 plan has not yet been 20 confirmed so, of course, she has not yet received a discharge in this chapter 13 case. 21 Bankruptcy Judge Madeleine Wanslee had occasion to discuss the applicability of 523(d) 22 in the context of a case where a debtor’s chapter 11 plan was confirmed and a final decree 23 was entered but no discharge had yet been granted because the confirmed plan had not yet 24 been fully performed. In the Livdahl20 case, Judge Wanslee held “[t]his Court agrees with [25] 26 15 In re Stoltz, 286 B.R. 283 (Bankr. D. Vt. 2001). 16 In re Hill, 268 B.R. 548, 552-53 (9th Cir. BAP 2001) (discussing “consumer debt” in § 1322(b)(1)). 27 17 In re Kestall, 99 F.3d 146 (4th Cir. 1996); In re Steward, 175 F.3d 796 (10th Cir. 1999). 18 In re Palmer, 117 B.R. 443, 446 (Bankr. N.D. Iowa 1990). [28] 19 See FN 1 in Debtor’s Response at DE 98, page 3. 20 In re Livdahl, 2019 WL 1077268 (Bankr. Ariz. 2019). 1 both Malone21 and Baptiste22 and concludes that the lack of a discharge in this case does 2 not prevent the Court from making the determination on whether fees and costs should be 3 allowed under § 523(d). Payment of the fees and costs can be conditioned upon the entry 4 of discharge.” This Court agrees with Judge Wanslee’s ruling as well as the holdings in 5 Malone23 and Baptiste. 6 Since Debtor satisfied two of the three § 523(d) Harvey Factors and may someday 7 obtain a bankruptcy discharge (thereby satisfying the third Harvey Factor), the burden 8 then shifts to Plaintiff to demonstrate his actions were substantially justified.24 A party 9 attempting to demonstrate its actions were substantially justified must show that there was 10 a reasonable basis for the facts asserted, a reasonable basis in the law for the legal theory 11 proposed and support for the legal theory by the facts alleged.25 12 2. Special Circumstances 13 If Plaintiff is unable to demonstrate his actions were substantially justified, the 14 Court is required26 to award Debtor her costs and a reasonable attorney fee for his 15 proceeding unless the Court finds that “special circumstances would make the award 16 unjust.” 17 Plaintiff argues that “special circumstances” exist in this case because Debtor acted 18 in bad faith by filing her bankruptcy primarily to shed her obligations to Plaintiff but only 19 after she spent off the home sale proceeds by paying certain other creditors and incurring 20 certain expenses Plaintiff considered frivolous. This Court rejects Plaintiff’s contention 21 that Debtor’s pre-petition conduct evidenced her bad faith filing in this chapter 13 case. 22 Preferring one creditor over another might give rise to avoidable transfers under § 547 23 but, in the context of this case, it does not demonstrate Debtor acted in bad faith in filing [24] 25 21 In re Malone, 2011 WL 3800121 , at *4. 22 In re Baptiste, 2010 WL 3834607 , at *1. 26 23 Malone, like the case at bar, involved a §523(d) fee request by a chapter 13 debtor who had not yet obtained their chapter 13 discharge. 27 24 In re Harvey, 172 B.R. at 517 . See also In re Stine, 254 B.R. 244, 249 (9th Cir. BAP 2001)(citing Harvey with approval). [28] 25 In re Hunt, 238 F.3d 1098 (9th Cir. 2001). 26 § 523(d) says the “. . . court shall grant judgment in favor of the debtor . . . .” 1 her chapter 13 case. Moreover, the Debtor’s use of some of the home sale proceeds for 2 such things as fingernail grooming and other personal uses does not, in this case, 3 demonstrate this case was filed in bad faith.27 4 3. Substantial Justification 5 Since this Court finds no special circumstances exist to make an award of fees 6 against Plaintiff unjust, the Court must determine whether Plaintiff carried his burden of 7 demonstrating that his actions in this Adversary Proceeding were substantially justified. 8 Arguing that Plaintiff’s actions in this Adversary Proceeding were not substantially 9 justified, Debtor contends that, when the Illinois Court found in July 2017 that Debtor’s 10 refinancing efforts were proper, this was a clue to Plaintiff that Debtor was acting in 11 accordance with the MSA and Divorce Case judgment. This contention, even if correct, 12 misses the point of Plaintiff’s Complaint, namely that Plaintiff was defrauded, and that 13 Debtor breached her fiduciary duty to Plaintiff when she failed to pay Plaintiff upon sale 14 of her residence. 15 Debtor next argues Plaintiff insisted that a fraud occurred before and at the Illinois 16 Court’s May 2016 trial. Although Plaintiff contends in this Adversary Proceeding that 17 Debtor never intended to pay Plaintiff amounts set forth in the MSA, Plaintiff’s fraud and 18 breach of fiduciary duty claims were more urgently focused on what Debtor did and failed 19 to do once she sold the home in 2018, long after the parties battles in the Illinois Court. 20 The Court rejects this “no fraud in 2016” argument by Debtor. 21 Finally, Debtor argues that Plaintiff should have discontinued his efforts in this 22 Adversary Proceeding once he saw the communications between Debtor and her lawyer 23 concerning Debtor’s home sale and use of the sale proceeds. These documents were 24 shared with Plaintiff just before trial. While these documents were not the “smoking gun” 25 Plaintiff hoped to find and while this Court had doubts about whether these documents 26 established fraud by the Debtor, Plaintiff acted reasonably in pressing on with the trial to 27 27 In addition to the foregoing, in this Court’s Under Advisement Order at FN 98, this Court held: “The Court is unwilling to find Plaintiff’s litigation in this Court to have been unjustified or vexatious. While the Court is denying [28] all of Plaintiff’s causes of action in this Adversary Proceeding, the Court finds his positions in this proceeding to have been fairly debatable and brought in good faith.” 1 test, through cross-examination of the Debtor, what these communications really meant in 2 the context of Plaintiff’s § 523(a)(2) and (4) claims.28 3 Plaintiff argues his pursuit of this Adversary Proceeding was reasonably justified 4 because (a) denial of Debtor’s motion for summary judgment demonstrated that the Court 5 found a genuine issue of material fact remained on the question of Debtor’s fraudulent 6 intent, (b) Plaintiff failed to carry his burden of proof on only two elements of fraud 7 (fraudulent intent and reliance) but did prove the rest of the elements of Debtor’s fraud 8 and (c) Plaintiff did introduce numerous documents and testimony tending to support 9 Plaintiff’s claims of Debtor’s fraudulent intent and reliance on Debtor’s representation.29 10 The Court agrees with each of Plaintiff’s arguments. The Court finds that Plaintiff’s 11 pursuit of this Adversary Proceeding was based on claims that had a reasonable basis in 12 both fact and law. 13 V. CONCLUSION 14 Based on the foregoing, this Court denies Debtor’s Fee Motion. Debtor has not yet 15 demonstrated she is entitled to fees under § 523(d) because she has not yet been granted 16 a discharge in her chapter 13 case. More importantly, if and when she does receive a 17 discharge, Plaintiff has demonstrated to this Court’s satisfaction that pursuit of his 18 complaint in this Adversary Proceeding was substantially justified. Further, this Court 19 finds there are no contractual terms in the parties’ MSA supporting Debtor’s Fee Motion 20 nor is Arizona law applicable to this matter nor has any other legal basis been supplied to 21 this Court by Debtor. §523(d) and the American Rule on attorney’s fees determines this 22 Court’s outcome. Debtor’s Fee Motion is denied. 23 Plaintiff’s counsel is directed to lodge a form of judgment consistent with both this 24 Order and the Under Advisement Order but only after sending to Debtor’s counsel a draft 25 of the form of judgment for his review. 26 DATED AND SIGNED ABOVE. 27 28 Without necessarily needing to resolve the issue of the reasonableness of Debtor’s fees, it has not escaped the Court’s attention that Debtor’s fee request totals $89,675 on a non-dischargeable claim sought by Plaintiff in the [28] amount of $68,925. 29 DE 98, page 4.