First Am. Title Ins. Co. v. Smith (In re Smith)

605 B.R. 538

IN RE: Michael M. SMITH, Debtor.

First American Title Insurance Company and First American Title Company, LLC, Plaintiffs,

v.Michael M. Smith, Defendant.

Bankruptcy Number: 17-22743

United States Bankruptcy Court, D. Utah.

Signed September 5, 2019

Tim Dance, Matthew L. Lalli, Mark O. Morris, Snell & Wilmer, 15 W. South Temple, Suite 1200, Salt Lake City, UT 84101, for Plaintiffs.

Gregory J. Adams, Jeremy C. Sink, McKay Burton & Thurman, 15 West South Temple, Suite 1000, Salt Lake City, UT 84101, for Defendant.

MEMORANDUM DECISION RE: (1) ATTORNEY'S FEES AND COSTS AWARDED IN DISTRICT COURT JUDGMENT; (2) ATTORNEY'S FEES AND COSTS INCURRED BY PLAINTIFFS IN ADVERSARY PROCEEDING; AND (3) POST-JUDGMENT INTEREST

KEVIN R. ANDERSON, U.S. Bankruptcy Judge

First American Title Insurance Company and First American Title Company, LLC (collectively "First American") filed a nondischargeability complaint against Michael M. Smith ("Debtor") alleging breach of fiduciary duty under 11 U.S.C. § 523(a)(4) and willful and malicious injury under § 523(a)(6). Before going to trial, First American dismissed its cause of action for breach of fiduciary duty under 11 U.S.C. § 523(a)(4). On July 10, 2019 the Court entered a Memorandum Decision Finding that Defendant's Debt to Plaintiffs is Non-Dischargeable Under 11 U.S.C. § 523(a)(6)¹ and an accompanying Order.² The Order set a supplemental hearing on whether the following amounts should be included in a nondischargeable judgment pursuant to 11 U.S.C. § 523(a)(6) :³ (1) the amount of attorney's fees and costs awarded in the District Court Litigation; (2) post-petition post-judgment interest; and (3) attorney's fees and costs incurred by the Plaintiffs in litigating the Bankruptcy Court Adversary Proceeding.⁴ In the Order, the Court invited the parties to submit position papers, which they did on August 2, 2019.⁵

The Court held a hearing on August 8, 2019. Matthew Lalli and Mark Morris appeared on behalf of First American and Jeremy Sink appeared on behalf of the Debtor. No other appearances were noted on the record. The Court heard oral argument from the parties before taking the matter under advisement. The Court instructed First American to send the Court a spreadsheet by August 15, 2019 setting forth requested interest amounts based upon the judgment from the District Court Litigation. First American provided the spreadsheet to the Court and to opposing counsel on August 13, 2019.

Having carefully considered the parties' oral and written arguments and having conducted its own independent research of the relevant case law, the Court issues the following Memorandum Decision.⁶

I. JURISDICTION, NOTICE, AND VENUE

The Court's jurisdiction over this adversary proceeding is properly invoked under 28 U.S.C. § 1334(b) and § 157(a) and (b)(2).⁷ The Court's Memorandum Decision⁸ entered on July 10, 2019 provided that the Court would hold a supplemental hearing on the amount of the debt that is nondischargeable pursuant to § 523(a)(6). The Court entered an Order setting the supplemental hearing on August 8, 2019 and notice was provided to the parties' counsel via the electronic court filing system. Neither party raised a notice objection at the hearing. Therefore, the Court finds that notice of the supplemental hearing and the Court's consideration of the same was proper.

II. PROCEDURAL BACKGROUND AND RELEVANT FACTS

The disputes at issue are legal rather than factual in nature based on the parties' interpretation of the relevant caselaw. Therefore, at the supplemental hearing the Court did not receive evidence and only heard oral argument. However, the Court finds it helpful to set forth certain relevant procedural background facts which inform the Court's analysis of these issues. Pursuant to Federal Rule of Evidence 201, the Court takes judicial notice of matters not reasonably subject to dispute in the docket in the underlying Chapter 7 bankruptcy case and in the adversary proceeding.

1. On April 3, 2015, First American filed an action in the United States District Court for the District of Utah (the "District Court"), Civil No. 2:15-cv-00229 against the Debtor and others for, among other things, breach of contract, tortious interference with contract, breach of fiduciary duty, misappropriation of trade secrets, and unfair competition.⁹

2. In December 2016 the District Court held a three-week jury trial.

3. On December 30, 2016 the District Court entered a Judgment in favor of First American and against Michael Smith in the amount of $1,625,000.00 in compensatory damages.¹⁰

4. In addition, the District Court's judgment awarded post-judgment interest pursuant to 28 U.S.C. § 1961 to be calculated from the date of the judgment "at a rate equal to the weekly average 1-year constant maturity Treasury yield, as published by the Board of Governors of the Federal Reserve System, for the calendar week preceding the date the judgment is entered."¹¹

5. The District Court also awarded First American attorney fees and costs in the total amount of $3,141,122.23¹² comprised of the following: (1) $88,006.44 in attorney fees for Debtor's breach of fiduciary duty; (2) $2,802,344.52 in attorney fees for Debtor's breach of contract; and (3) $250,771.27 in costs.¹³

6. In this bankruptcy adversary proceeding, the parties submitted a Stipulated Pretrial Order that the Court entered on April 2, 2019.¹⁴

7. In the uncontroverted facts section, the Stipulated Pretrial Order provided: "The Court granted an award of attorneys' fees and costs to First American and against Mike Smith and others in the amount of $3,097,816.36."¹⁵

8. In the Memorandum Decision Finding that Defendant's Debt to Plaintiffs is Non-Dischargeable under 11 U.S.C. § 523(a)(6), the Bankruptcy Court relied on the parties' Stipulated Pretrial Order in finding that the "[District] Court granted an award of attorneys' fees and costs to First American and against the Debtor and others in the amount of $3,097,816.36."¹⁶

III. DISCUSSION

A. Attorney's Fees and Costs Awarded to First American by the District Court are Nondischargeable in the Amount of $3,097,816.36.

Is it undisputed that the nondischargeable judgment should include the attorney's fees and costs awarded to First American by the District Court.¹⁷ However, based on the pretrial order in the bankruptcy court litigation, the parties dispute the amount of attorney's fees and costs that are nondischargeable.

First American asserts that the nondischargeable amount of attorney fees and costs is the $3,141,122.23 awarded by the District Court.¹⁸ However, the Debtor argues that this amount should be limited to the $3,097,816.36 listed in the Stipulated Pretrial Order.¹⁹ The difference between the two figures is $43,305.87. At the hearing on August 8, 2019, Plaintiff's Counsel conceded that this discrepancy was the result of a mathematical error, and that it could be considered immaterial under the circumstances.²⁰

Pursuant to Fed. R. Civ. P. 16(e), as made applicable to bankruptcy matters by Fed. R. Bankr. P. 7016, a final pretrial order serves to "formulate a trial plan."²¹ As noted by the Tenth Circuit, "[f]inal pretrial orders encourage both sides to edit their scripts, peel away any pleading and discovery bluster, and disclose something approximating their real trial intentions to opposing counsel and the court."²² Local Rule 7016(h) provides that after the Court enters the final form of the pretrial order, "the order will control the course of the trial and may not be amended except by consent of the parties and the court or by order of the court to prevent manifest injustice .... The pleadings will be deemed merged into the order."²³ A pretrial order "is the result of a process in which counsel define the issues of fact and law to be decided at trial, and it binds counsel to that definition."²⁴

Essentially, First American is requesting a post-trial modification of an uncontested fact in the Stipulated Pretrial Order. The standard for modification of a final pretrial order is set forth in Fed. R. Civ. P. 16(e), which provides "[t]he court may modify the order issued after a final pretrial conference only to prevent manifest injustice."²⁵ "The burden of establishing injustice falls squarely on the moving party."²⁶ The standard for modification of a final pretrial order is high "to ensure everyone involved has sufficient incentive to fulfill the order's dual purposes of encouraging self-editing and providing reasonably fair disclosure to the court and opposing parties alike of their real trial intentions."²⁷

The Court sees no "manifest injustice" in holding First American to the facts stipulated to in the Pretrial Order, especially considering that First American's counsel felt that the $43,000 difference was not material under the circumstances of this case. Therefore, the nondischargeable amount of the attorney's fees and costs awarded by the District Court in favor of First American and against the Debtor will be the sum set forth in the Stipulated Pretrial Order of $3,097,816.36.

B. Under the American Rule, First American is Not Entitled to an Award of Attorney's Fees Incurred in the Prosecution of its Cause of Action Under § 523(a)(6) for Willful and Malicious Injury.

First American seeks to recover its attorney's fees and costs incurred in its successful prosecution of its nondischargeability action against the Debtor under § 523(a)(6) for willful and malicious injury. The "basic point of reference when considering the award of attorney's fees is the bedrock principle known as the American Rule: Each litigant pays his own attorney's fees, win or lose, unless a statute or contract provides otherwise."²⁸ In this case, neither the Bankruptcy Code²⁹ nor the Utah Code provides "explicit statutory authority"³⁰ to award attorney's fees to First American for prosecuting an action under § 523(a)(6).³¹ Consequently, First American asserts it is entitled to recover attorney fees pursuant to the...