Key Equip. Fin. v. Cyr (In re Cyr)

IN RE: STEVEN JEFFREY CYR, Debtor.

KEY EQUIPMENT FINANCE, Plaintiff, v. STEVEN JEFFREY CYR and LEANN MARY CYR, Defendants.

CASE NO. 18-50102-CAG

ADVERSARY NO. 19-05008-CAG

UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF TEXAS SAN ANTONIO DIVISION

June 10, 2020

IT IS HEREBY ADJUDGED and DECRE ED that the below described is SO ORDERED.

CHAPTER 7

MEMORANDUM OPINION AND ORDER GRANTING STEVEN JEFFREY CYR'S MOTION FOR JUDGMENT ON THE PLEADINGS (ECF NO. 28)

On November 19, 2019, Defendants filed Steven Jeffery Cyr's Motion For Judgment On the Pleadings (ECF No. 28) (the "12(c) Motion"). On December 10, 2019, Plaintiff filed Key Equipment Finance's Response to Motion of Jeffrey [SIC] Cyr for Judgment on the Pleadings (ECF No. 29) (the "Response"). On May 20, 2020, the Court held a hearing on the 12(c) Motion, and took the matter under advisement. After considering the parties' pleadings and arguments presented, the Court finds the 12(c) Motion should be GRANTED.

JURISDICTION AND VENUE

As an initial matter, the Court finds it has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 157 and 1334. This matter is a core proceeding as defined under 28 U.S.C. § 157(b)(2)(J). Venue is proper under 28 U.S.C. § 1409(a). This matter is referred to the Court pursuant to the District Court's Standing Order of Reference.

BACKGROUND

On December 22, 2016—prior to the filing of the underlying bankruptcy case—Key Equipment Finance ("Key" or "Plaintiff") obtained summary judgment against Steven Jeffrey Cyr ("Debtor" or "Defendant") and Debtor's wholly owned entity, Orthopedic & Spine Institute, LLC ("OSI"). (ECF No. 35, at ¶ 7). Judgment was entered in Bexar County District Court, 166th Judicial District for the sum of $361,756.66, plus interest of $12,409.28 and attorney's fees in the amount of $35,558.00 (the "Judgment"). (Id.) On February 1, 2017, Key abstracted the Judgment under Document No. 20170020137 and recorded at Book 18338, Page 474-75 of the Real Property Records of Bexar County, Texas. (Id. at ¶ 8). After the Judgment was abstracted, Key and Debtor entered a Post Judgment Agreement ("PJA") to satisfy the Judgment. (Id. at ¶ 9).

On January 20, 2018, Debtor filed for bankruptcy in this Court (the "Main Bankruptcy"). (Case No. 18-50102, ECF No. 1). On February 25, 2019, Key filed its adversary complaint (ECF No. 1) (the "Original Complaint") against Debtor and his wife Leann Mary Cyr ("Ms. Cyr")(collectively "Defendants"). The Original Complaint contained four causes of action: (1) a claim under the Texas Uniform Fraudulent Transfer Act ("TUFTA Claim"); (2) a claim under 11 U.S.C. § 523(a)(2)(A).¹; (3) a claim under § 523(a)(2)(B); and (4) a claim under § 727 ("727 Claim"). On March 14, 2019, Key filed its Amended Complaint (ECF No. 6) (the "Amended Complaint"). On November 5, 2019, Key filed its Second Amended Complaint (ECF No. 25) (the "Second Amended Complaint") which abandoned the TUFTA Claim and the 727 Claim. On November 19, 2019, Debtor filed its 12(c) Motion seeking: (1) dismissal of Key's claim under § 523(a)(2)(A), and (2) dismissal of Key's claims for attorney's fees. (ECF No. 28, at p. 7). On December 10, 2019, Key filed its Response and abandoned its claim under § 523(a)(2)(A). (See ECF No. 29, at ¶ 1.02) ("the claim for relief asserted under § 523(a)(2)(A) is abandoned"). As a result, Key's only remaining claim in this adversary case is under § 523(a)(2)(B). Accordingly, the only issue left for the Court to decide under the 12(c) Motion is whether to dismiss Key's claims for attorney's fees. (ECF No. 28, at p. 7).

PARTIES' CONTENTIONS

Defendants alleges there is no basis for recovering Plaintiff's attorney's fees incurred during the prosecution of the above-captioned adversary proceeding because Plaintiff has pled no statutory or contractual basis for recovering attorney's fees. (ECF No. 28, ¶ 14). Notably, Defendant does not challenge Plaintiff's attorney's fees arising under the PJA—only Plaintiff's fees incurred while prosecuting this adversary proceeding.

In response, Plaintiff argues it is permitted to recover attorney's fees under Tex. Civ. Prac. & Rem. Code § 38.001 because "[t]he breach of the agreement, which would not have existed but for the material misrepresentations and omissions by [Defendant], forms the basis for the contractual collection effort evidenced by the pending dischargeability litigation." (ECF No. 29, ¶ 2.04).² Moreover, because creditor SNH NS MTG Properties 2 Trust has a pending claim under § 727 in Case No. 19-05009-CAG (the "SNH Adversary"), Plaintiff alleges that any determination regarding attorney's fees is premature and should be reserved.³ (ECF No. 29 at ¶ 2.05). Plaintiff argues that if Defendant is denied his discharge under the SNH Adversary, any benefits of protections under Title 11 are not available to Defendant and collection of all sums due and payable under applicable state law—including Tex. Civ. Prac. & Rem. Code § 38.001(8)—would be available to Plaintiff and Defendant's other creditors. (ECF. No. 29 at ¶ 2.05).

ANALYSIS

Allowance of attorney's fees and dischargeability of attorney's fees are different matters. Before determining whether attorney's fees are dischargeable, the Court must first consider whether Plaintiff has a legal basis for recovering its attorney's fees for prosecuting the case. Thegenerally accepted rule—referred to as the "American Rule"—requires each party pay its own attorney's fees arising out of litigation. Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 247 (1975). Nevertheless, contractual and statutory "fee shifting" exceptions exist. Id. at 263; Key Tronic Corp. v. United States, 511 U.S. 809, 819 (1994); Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 311 (Tex. 2006). Accordingly, for Plaintiff to recover its attorney's fees accrued in prosecuting this Adversary Proceeding, Plaintiff must have a basis for recovering fees under contract or statute. As set forth below, the Court finds Plaintiff lacks a contractual or statutory basis for recovering attorney's fees. Therefore, the Court finds Defendant's 12(c) Motion should be granted.

A. Legal Standards For Attorney's Fees Under § 523(a)(2)(B).

Generally, each party pays its own attorney's fees arising out of litigation brought under § 523 unless a contractual or statutory "fee shifting" provision states otherwise. Schwertner Backhoe Serv., Inc. v. Kirk (In re Kirk), 525 B.R. 325, 330 (Bankr. W.D. Tex. 2015). If a creditor has statutory or contractual grounds by which it can recover attorney's fees in a nondischargeability case, then such fees are are recoverable and nondischargeable if the fees "arise from" or "are on account of" the conduct resulting in a nondischargeable debt. Id. at 330-31 (citing Cohen v. de la Cruz, 523 U.S. 213, 223 (1998)). In Cohen, the Supreme Court held that nondischargeable "debt" in a proceeding under § 523(a)(2)(A) encompasses not only the debt created by a misrepresentation, but also punitive damages and an award of attorney's fees. 523 U.S. at 223. Specifically, in Cohen the Supreme Court reasoned that the language "[d]ebt for" as written in § 523 includes not only the nondischargeable judgment amount but also the "debt arisingfrom" and "debt on account of . . ." the misconduct giving rise to the judgment. Id. at 220. In other words, the word "debt" includes any form of loss or damage that can be causally linked to the conduct that gives rise to the "debt" that is excepted from discharge. Light v. Whittington (In re Whittington), Adv. No. 13-01121, 2014 WL 4163589, at *14-15 (Bankr. W.D. Tex. Aug. 20, 2014).

Although the Fifth Circuit case law on "fee-shifting" provisions pre-dates Cohen, it is entirely consistent. In Jordan v. Southeast National Bank (In re Jordan), the Fifth Circuit held creditors can recover attorney's fees if there is a contractual or statutory right to fees under state law. 927 F.2d 221, 226-27 (5th Cir. 1991) overruled on other grounds, Coston v. Bank of Malvern (In re Coston), 991 F.2d 257 (5th Cir. 1993). The court then held that the attorney's fees granted under a loan document were nondischargeable, stating: "[section] 523(a)(2)(B) excepts from discharge the whole of any debt incurred by use of a fraudulent financial statement, and such a debt includes state-approved contractually required attorney's fees." Id. at 227. The Fifth Circuit in Luce v. First Equip. Leasing Corp. (In re Luce) followed Jordan in holding attorney's fees could be awarded in a nondischargeability case if authorized by pre-petition agreement. 960 F.2d 1277, 1285-86 (5th Cir. 1992).

As noted, Jordan found fees recoverable by contract nondischargeable where the debt related to the contract was ruled nondischargeable. Jordan, 927 F.2d at 227. Similarly, in Horton v. Robinson (In re Horton) the Fifth Circuit stated that "[a]ttorneys' fees are non-dischargeable under section 523 when they 'stem from the same basis' as the non-dischargeable debt." No. 95-10023, 1996 WL 255304, at *5 (5th Cir. May 3, 1996). In Horton, the debt at issue wasnondischargeable as a breach of fiduciary duty, but the attorney's fees at issue were awarded for litigating a breach of contract claim. Id. Because the debt and the award of attorney's fees did not "stem from the same basis," the court denied dischargeability of the fees. Id. Although worded differently, this matches Cohen's requirement that the attorney's fees must be "aris[e] from" or be "on account of" the conduct resulting in the nondischargeable debt. Id.

Here, Plaintiff does not rely on a "fee shifting" provision provided by contract or a pled statute. Neither party disputes that the contract at issue in this case—the PJA—lacks a fee shifting provision. Moreover, the Bankruptcy Code is silent regarding attorney's fees incurred in prosecuting a nondischargability action under § 523(a)(2)(B). The issue then becomes whether Plaintiff can rely on Tex. Civ. Prac. & Rem. Code § 38.001(8)—a "fee...